Advice from the guy with two #1 AppStore freemium games: how to adapt to a changing app market

Eric Seufert is a partner at Heracles. He shares his expertise on analytics and freemium mobile products. Follow his reading list on Quibb.

Eric has had a long career in marketing and user acquisition, with a focus on the intersection between analytics and product, specifically as it relates to freemium mobile apps. Currently Partner at Heracles (his newly founded mobile marketing agency), he was previously VP of User Acquisition and Network Engagement at Rovio (the company that brought you Angry Birds), and Head of Marketing at gaming companies Wooga and Gray Area.

In the most recent episode of the What I Know Best podcast, we talked to Eric about the current state of mobile free-to-play games, what’s going on in the app stores, and why virality is so important.

The app gold rush is over

Marketing for mobile apps is harder — and more expensive — than ever. The total number of installs are down, app install and mobile ad prices are up, and indie game developers are having a hard time reaching new customers. “This difficulty is a reflection of the state of the app economy,” says Eric, “because it's reached a saturation point.”

For a long time, mobile app developers were riding the coattails of Apple and Google’s market growth. As more and more of the world bought smartphones, they also started downloading apps for them. But now, smartphone sales have slowed, meaning app sales have slowed as well:

“In countries in the West, penetration is over a hundred percent, with many people owning multiple phones. That persona of someone buying their first smartphone and discovering apps for the first time — it just doesn't exist. Smartphone sales now are based on replacement, and replacement cycles are growing longer because iPhones keep getting better. People have all the apps they need and they're just not seeking out new apps to download.”

In the “old days,” when the iPhone and other smartphones were THE new platforms, it was fairly easy for new developers with lower quality apps to gain a serious amount of traction with relatively little work or money. It’s a common characteristic of new platforms. But as the smartphone platform has matured and stabilized, so have acquisition prices and strategies. Many of the early inefficiencies to be exploited no longer exist. Is this a bad thing?

“I don't necessarily see it in terms of positive or negative,” says Eric. “It just is what it is - you adapt.” The app gold rush was not going to last forever, and now that the dust has settled, app developers are adapting to this new era — albeit one that Apple and Google still control.

App stores hold the keys to the kingdom

One big challenge is the power that Apple and Google hold over access and distribution. The Apple App Store and Google Play are dominated with ’most popular’ and ‘best seller’ charts, as well as apps that were handpicked by internal editorial teams. As Eric says, “Apple and Google want to control which apps become cultural phenomena.”  It’s not an open ecosystem, as many end users assume. The process of getting an app featured is notoriously murky, where the only recognized or understood mechanism is business development relationships, and perhaps a small dose of nepotism. It’s not that this was an overly intentional decision from day one, but it does showcase the power that the platform owners still wield when it comes to distribution and the complex system that you’re working within when your app exists on these platforms.

“I don't think there was a smokey room somewhere on the Apple campus where a bunch of people decided in 2009 to make the App Store inscrutable because it will be good for iPhone sales, but it is good for sales. I think that subconsciously that's the way things have unfolded because it makes more sense for them to have this editorial control and have this editorial impact through the featuring paradigm to be able to make apps big.”

To put it in perspective, Eric brings up Hollywood as an example:

“Imagine the Hollywood model, the agent model. If fans could directly just decide who they wanted to see in movies and who would become stars of these, well then you understand why there needs to be that filter and that mechanism for picking which apps get big.”

This can leave indie game developers at a disadvantage. How are they going to bring their app to Apple or Google’s attention? With leaderboards being one of the main ways to get large amounts of installs, how do you unwind and understand the inputs to this black box, the system that brings about the outcome you’re looking for? It’s a gamble.

Outside of being featured, the two other ways for mobile games to acquire users is either through buying them, or virality.

“The only recourse a developer has to get their apps distributed is marketing or virality. Virality is tough, it either exists as a consequence of the app's use case and the presentation of that app or it doesn't. There's not much you can do. You can't make an app viral if it's not.”

A new reality: The increasing cost of app marketing

While Apple and Google control the marketplace, the beauty is that it is a marketplace, and as Eric says:

“Marketplaces have two sides. They have buyers and sellers. We know what the consequence of prices going up from the buyer perspective is: people get priced out. But if you have a user base to expose ads to, then you're making a ton of money right now.”

So while it may be hard to get that initial user base, once a company does, they’re practically minting money. It’s happened before with freemium apps, and is happening now with hot game developer Supercell - which, just this week, we heard rumors of an acquisition by Chinese tech behemoth Tencent.

“There was an article a couple weeks ago estimating that Supercell will make three billion in revenue this year. They have a hundred and eighty something employees. Look, the stakes are high. Of course, it's competitive, and you'd expect that. Name me another industry where you can make three billion of revenues a year with less than two hundred people. It'd be weird if it was cheap to grow your user base.”

As the platform matures, and the systems to generate revenue from massive audiences develop, it’s looking like the days of small, under-financed games taking a leading position - and holding it for more than a short period of time - are over. With an initial bump from being featured and a super high-quality product, a small freemium app could get to a leading position. But without the ability to compete with others in the category with much deeper pockets, it’s unlikely for such an app to hold that position.

“Sure, marketing is getting more expensive because the supply of impressions isn't growing, because of the smartphone stuff, as fast as demand is and revenues aren't distributed very evenly because of the way the app economy was architected, and it's winner take all for most categories, so the leaders have a lot more money to spend than everyone else, even at the unit level, and so marketing is more expensive.”

That is the new reality of app store distribution, and mobile developers and marketers need to work within that.

The power of virality

For indie game developers with small or non-existent marketing budgets, Eric realizes that it can be a bit of the ‘chicken or the egg’ type problem. But he points to a few examples to show that it’s possible.

“A good example of that is Ketchapp. I wrote an article awhile back about how they cross promote users. Basically, as far as I know, they've grown exclusively through virality, to hundreds of millions of installs. They're just printing money on ad sales with a super small team, I think it's less than ten people.

Another great example is Crossy Road, which was produced by a really small indie developer in Australia. They released a data point a couple of months after Crossy Road blew up and they said they made ten million in ad sales, in a two person studio.

Another one is they had Dubsmash. I read that they've reached more than a hundred million installs. I don't think they spent a single cent on user acquisition.”

To Eric, these examples are encouraging. Through viral growth, these small companies were able to build a large user base and are now making enough money selling ads to support the entire company.

Listen to the entire conversation with Eric on the What I Know Best podcast.