Who Will Build the Netflix of Mobile Games?

Sometime in 2016, free-to-play mobile games stopped dominating the App Store charts and a diverse group of non-gaming apps started rising up the revenue rankings.

As of 21st November 2018, Fortnite was the only game in the App Store Top 5, although there were four other games in the Top 10 highest-grossing mobile games. Pokemon Go was hanging in there at number nine, while Clash of Clans and Clash Royale had dropped out of the Top 10 altogether. This trend was less pronounced in the Google Play Store, but there were still three non-gaming apps in the Top 10; a situation which would have been unthinkable a 18 months ago.

Are mobile games losing their lustre?

There are some interesting market trends driving these changes. Firstly, the most lucrative apps are comprised by a more diverse range of categories, particularly in the App Store which typically attracts the most affluent customers. Video, music and dating apps are making more and more money.

Subscription models on the rise

The other common denominator among these non-gaming apps is that they all use subscription payments to monetise their user bases. Subscription business models have long been popular with investors focused on the desktop web, due to their predictability and stability. When a business can turn even a moderate number of users into customers who make regular payments, it becomes easy to calculate an average Customer Lifetime Value. In turn, understanding CLV means that marketers can calculate affordable customer acquisition costs.

Reduced fees in both app stores

One reason for the growth in subscription models is that in June 2016 both app stores reduced their fees for subscription payments in most app categories from 30% to 15% (this only applies with Apple after 1 year, giving developers an incentive to create quality apps with longevity). In 2017, Apple grew app subscription billings by 74% over 2016 to $2.7 billion, while Google has grown subscription spend by a factor of 10 over the last three years. The 15% fees are typically higher than alternative payment methods, but many companies report higher conversion rates which more than compensate the additional costs.

So how can mobile gaming companies benefit from this model? Free to play mobile games tend to generate volatile revenue patterns. New game launches can produce an earnings spike if they gain a good ranking in the app stores. This in turn incentivises publishers to crank out a high volume of new cookie-cutter games, rather than focusing on the long-term gameplay experience. I can picture two interesting approaches to using subscriptions in mobile games: 1) pay-to-win on individual titles, and 2) all-you-can eat services.

Pay-to-win on individual titles

Supercell’s Boom Beach tested a couple of ideas last year. “Endless Reserves” removed time constraints on training troops for $9.99/month. “Extra Builder” allowed a player to build two buildings at the same time for $2.99/month.

Heavy players of the game were reportedly happy with these options, but it seems that Supercell are still not prepared to test this model on their more popular titles Clash of Clans and Clash Royale. I’m sure a lot of heavy players would consider paying a monthly subscription to open all their loot boxes immediately, but would this jeopardise their huge casual player base? Supercell has traditionally preferred to make a little money from a lot of players, rather than publishers like Machine Zone who aim to maximise revenue from a smaller pool of higher-paying players – and that might just explain the longevity of their games.

All-you-can-eat catalogue access

Netflix and Spotify have proven that modern consumers expect access to all the TV, movies and music they want, and are prepared to pay a regular monthly price for the privilege. What might that model look like if we applied it to the mobile gaming world?

A Los Angeles company called GameMine raised $20 million in funding in 2017 in order to do exactly that. They secured deals with content creators like Nickelodeon, enabling them to sell mobile games featuring globally recognised characters like SpongeBob SquarePants and the Teenage Mutant Ninja Turtles. They also secured distribution deals with mobile carriers including Vodacom, Orange, and Telefonica.

GameMine CEO Daniel Starr said in a statement. “The diversity of our game library plus these partnerships’ expansion of territories where GameMine is available effectively skyrocketed our subscriber base, which pushed us solidly into profitability, so much so that we’re on track to do more than $20 million in profits before the end of 2018.”

If true, that is not a bad result for a company founded in 2017.

Another interesting spin on this model has emerged from India. The Rovio spinoff company Hatch believes that Spotify’s model creates a precedent for mobile gaming. There is a free version monetised via advertising, and a paid premium, un-disrupted experience.

Vesa Jutila, co-founder and Vice President of Content and Commercial Partnerships at Hatch Entertainment, believes that on-demand gaming is another crucial ingredient that will drive subscription payments growth. Hatch claims to be the currently available service solution which lets customers stream mobile games without the hassle of downloading, installing, or uninstalling large files. He believes the addictive allure of on-demand video will eventually transfer to the gaming industry.

Quality not quantity

Hatch currently offers games like Angry Birds, Crazy Taxi, and Monument Valley, with major game developers apparently slated to come on board. Quality control is critical for the company, and only a few select developers will be able to showcase their games. Technically, they offer a low bandwidth solution, meaning that 3.5G data connections should enable uninterrupted gameplay. And they are planning to launch on iOS soon.

Critically, they have big plans around social discovery. Over the last few months they have improved their in-app design to feature leaderboards and to promote sharing of gameplay footage. According to Jutila "Social discovery will be an important aspect on our platform because, as always, recommendations through your own friends are so much more powerful than what somebody else is recommending,". "Mobile gaming has become a very lonely experience. We want to turn that around with our social discovery features."

Lessons from console gaming

What seems clear is that the console gaming industry is way ahead of mobile games when it comes to subscriptions. Services from Sony, Microsoft, Amazon, Google, EA and others will offer access to a catalogue of games in return for a monthly payment.

This has shifted the financial dynamics for many publishers; instead of being able to create single-use games and charge up-front payments from consumers, they are increasingly forced to accept a flat fee from subscription services. Gamers are more highly motivated to pay for subscriptions than they are to pay for individual content items. But that doesn't have to be a bad thing for the quality of games in the future.

A golden age of gaming?

There is still a large market for massively-multiplayer online games offering in-game purchases and downloadable content drops, and the publishers who have mastered this model are doing very well. But games which offer around 2-10 hours of playable content are finding it harder and harder to compete unless they are available via subscriptions.

The positive side of this trend is that we have, since the introduction of Netflix, seen a ‘golden age of television’. Netflix understand that original, must-see content is the driving force of their business, and invest heavily into companies who create it. The same is increasingly true in console gaming where a clear winner is yet to emerge. And, due to the fact that subscription payments are such a recent introduction to the mobile gaming space, the race here has barely begun. The rewards for winning that race will be enormous.

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