Posted by Josh Townsend on February 9, 2018.
Gaming is a technology-based market, and tech markets are no strangers to economic bubbles and the effects of them bursting. The market recession of the early 2000s, most commonly known as the Dotcom Crash, is probably the biggest and most influential ‘burst bubble’ of the internet era. The Dotcom Bubble was characterised by an assumption on the part of investors that any internet business was bound for success, and the market crashed due to investors losing sight of sound business fundamentals and over-investing in new web-based businesses.
With the internet opening new possibilities for commerce and business, there was a rush of entrepreneurs to create new online enterprises, with a corresponding rush of investors and venture capitalists to buy into them. Blind optimism fuelled excessive speculation, and though it created a brief period of prosperity, the over-investment in businesses and start-ups that weren’t able to succeed in the long term brought the market sharply back down to earth.
It’s fair to say that what enabled the irresponsible investment of the Dotcom Bubble was a tacit perception that the usual rules and best practices of good business did not apply to e-commerce. Investors and entrepreneurs both seemed to act under the belief that their online business would be successful even without sustainable business strategies and good planning; “go big or go home” was the motto that inspired business to seek customers and exposure, even it meant operating at a loss.
If mobile gaming is a bubble, then it’s a very big bubble. In 2017, Newzoo estimated that mobile gaming – across smartphones and tablets – accounted for 42% of the gaming industry’s $99.6 billion value. Their report estimated that this figure would grow to 50% by 2020. This was even greater than the previous year’s report, which had expected mobile gaming’s market share to reach only 40% in 2017.
The strength held by mobile games today is backed up by a long, sustained period of steady growth. Mobile gaming significantly predates smart phones and has been growing since 1994 when the Hagenuk MT-2000 came with a preinstalled version of Tetris. The games on the earlier mobile phones ensured there was already a modest audience for the first gaming apps when the iPhone and Android were introduced. This seems to be a stark contrast to the Dotcom Bubble, which spiked and then plummeted in the space of just a few years. The history of mobile gaming shows an industry that, on the surface, has been avoiding the symptoms of a bubble economy, and building sustainable market strength founded on consumer demand. It’s only in the most recent years that certain signs and symptoms of a flawed market have been appearing.
It would be easy to assume that such a strong, steadily-growing market must be a metaphorical gold-mine for mobile app developers and publishers. The developers and publishers certainly seem to think so, as the market has been saturated with products since December 2015. From then over 2016, Apple’s iOS store has seen over 500 new mobile games submitted every day. While this number reduced significantly over 2017, the App Store sill received multiple thousands of new games every month.
Looking at some basic metrics on the top-grossing iOS games offers little to help predict which mobile games are successful and which are not. The top 50 games on the list have examples from prolific mobile developers like King and Big Fish, big multi-platform publishing companies such as EA and Bandai Namco, and other lesser-known names. Pokémon Go, with an estimated development cost of over $1,000,000 and released in July 2016 sits near the top of the list but is outranked by the much older and lower-cost Candy Crush Saga (April 2012), estimated to have cost between $90,000 and $110,000 to develop.
A bigger budget doesn’t guarantee bigger success, and neither does being well-known in the industry. Marketing helps, but for many developers with lower budgets, the only hope of a significant marketing push is to have an arbitrary decision from Apple or Google to advertise the app on the App/Play Store’s front page. For new mobile developers, a high failure rate should be expected; one of the iconic money-spinners of mobile gaming, Angry Birds, was Rovio’s first app to see financial success – but the 52nd game the studio developed.
App development agency Team Cooper estimates that even a simple mobile app costs a minimum of £5,000 (about $6,900) to develop. If we assume that many of the apps uploaded to the App Store are not professionally made – using cheap or open-source assets, etc. – we can ballpark a figure of $3,000 to account for general expenses over the development period. If we round down to an average of 2,500 games uploaded to the app store every month in 2017, this means that at least $7,500,000 (About £5,300,000) is spent on developing mobile games every month. The actual figure, however, will be much, much higher than this, given that mobile games of a larger scale cost upwards of £250,000 to develop.
In 2014, Gartner estimated that less than 0.01% of mobile apps – games or otherwise – will be financially successful by the end of 2018. For estimation purposes, since games usually perform a little better than functionality apps, we can increase this to 0.1% – in line with Businessinsider’s estimation – for gaming apps. Even with the very conservative estimate of $7,500,000 being spent on developing mobile games per month, this leaves a bare minimum of $7,492,000 being poured into a black hole on a monthly basis over 2017, a year which saw a drastic reduction in mobile game releases.
Mobile gaming has grown under completely different circumstances to console and PC gaming because of the hardware involved. With gaming PCs and consoles, the device is dedicated to the purpose of gaming – even in the case of PCs, primarily work devices, running high-end games requires specialised components, tailored to the purpose of gaming. Mobile gaming caters to devices which are ‘weaker’ in terms of graphical and processing power, but more standardised in functionality and considered more of a necessity to have in daily life.
This creates two distinct audiences: people who have paid for and set up a piece of dedicated hardware for games will likely be willing to spend more time, pay greater attention and spend larger single-transaction amounts on their games, but will be expecting deeper, carefully-crafted content in return; mobile gamers will be using their device for multiple other purposes, are more likely to want simple entertainment as a diversion in between other tasks, and have lower expectations in terms of presentation and depth. However, the customers for mobile games expect their products to be significantly cheaper and will often barely interact with a game before deleting it. Gameindustry.biz estimates that just under 98% of players will not monetise a gaming app at all.
Developers must try to recoup their costs somehow and this has given rise to the unique “whales, dolphins and minnows” approach to mobile players. We’ve gone into more depth on this subject previously, but the short version is that more than 85% of a game’s revenue is generated by less than 1% of its players – the “whales” – who will spend large sums on in-app purchases, often more than a console/PC gamer would pay for a new game.
It’s clear that in-app purchases are the foundation of the mobile gaming market, but players and legal regulations are constantly fighting against them. A 2016 report on gamers’ preferred method of paying for their games revealed that only 11% liked to use in-app purchases over the standard “buy once to own” model or being exposed to in-game advertisements. Apple, Amazon and Google have been faced with several court cases over children making in-app purchases without their parents’ knowledge, with the result that free-to-download games which include in-app purchases are no longer advertised as “free” on mobile storefronts.
The mobile gaming market is huge, and still growing, but is beginning to show the kind of blind enthusiasm that characterised the Dotcom Bubble. Independent developers and large companies are eager to claim a share of the industry, but while the huge profit margins of Angry Birds, Candy Crush and the famous mobile money-spinners take all the attention, the thousands of failed apps released every month, and the millions of dollars lost on making them, are ignored. In-app purchases are such an intrinsic part of the market that mobile gaming could not survive without them, but a business model can only last for as long as the audience is willing to tolerate it. With microtransactions so unpopular with their own consumers, all it will take to burst mobile gaming’s bubble is for consumers to finally lose their tolerance.Submitted in: Expert Views, Josh Townsend |