Mobile game publishers are in a war over users. Japanese giants such as DeNA and GREE are attempting to lure as many players as possible to their respective social networks (Mobage or OpenFeint) so they can hit players with ads when trying to goose another game up the App Store charts. The widgets for Mobage and OpenFeint have viral features to suck in a few free users as an attempt to reduce acquisition costs even further. This is thought to be a cheaper long-term user acquisition strategy than buying users via banner ads, interstitials, and incentivized video trailer views that smaller publishers without a large network of games resort to.
The more users a publisher has, the more valuable they are. Users are the shelf space of the social gaming era. Companies like EA whose entire competitive advantage was down to domination of the retail channel are crumbling as physical shelf space becomes completely irrelevant. It turns out that the games aren’t the product, the users are.
How expensive have user acquisition costs made mobile games development? How much money do you have to spend to actually make a profit?
If your game is successful, you probably have a conversion rate of free to paid users at 5%. Recent estimates peg ARPPU (Average Revenue Per Paying User) at around $40. I’m sure companies like Kixeye and Kabam are seeing well beyond that. Let’s use $40 as our target for a core f2p mobile game.
We’re assuming a $250,000 development budget (which can be quite conservative for more elaborate games). How many users do you have to buy to make back your costs? Right now it’s safe to assume a user will cost you $2. Although Fiksu’s index reveals a lower cost per user, some companies are paying much more than this depending on factors such as how likely the user is to spend money in the game.
Let’s buy a million users. That costs $2 million. How much revenue do they generate?
1,000,000 * .05 = 50,000 paying users. That’s 50,000 * $40 of revenue for a total of $2,000,000.
So uh…we spent $2 million to make $2 million? Not a very good business proposition. In fact, take out Apple’s cut and you’re losing money.
If you can’t buy users profitably how can you make money? First you need additional sources of revenue. This means Tapjoy offer walls and advertising. In the glory days of incentivized installs, Glu Mobile reported 1/3 of their revenue was from offer walls. Zynga’s most recent (and disastrous) quarterly report showed that they bring in about 12% of their revenue from advertising. Let’s peg ad revenue at a generous 20%. Luckily, this revenue is untouched by Apple or Google’s take.
Now you’re going to get an extra 20% on top of that $2 million in revenue–congratulations, you spent $2 million to make $400,000 in profit.
You can further bring user acquisition costs down through viral ‘free’ user acquisition. All the users that come in through friend invites, clicking on wall posts, or Tweets are free and effectively lower your user acquisition costs. The glory days of k-factors in the 1.2-.7 range are long gone. Now I usually model a .1 k-factor–meaning for every 10 users, you get one brought in through viral channels. Perhaps doubling it to .2 is a good way to also guess at the amount of users brought in through organic traffic via App Store charts, PR, etc. Let’s go with that (yeah, this isn’t really an exact science).
So $2 million buys you 1,000,000 users + 200,000 viral users for a total of 1,200,000 users.
This equates to 1,200,000 * .05 = 60,000 paying users.
The amount of revenue generated from these users is estimated at 60,000 * $40 = $2,400,000.
Add in $2,400,000 * .2 = $480,000 for advertising and offer wall revenue.
That’s $2,880,000 back on a $2 million spend. Subtract the $250,000 you spent developing the game and you’re left with a $630,000 profit. If you take Apple’s cut into account, you’re actually taking a loss of $90,000. (30% of $2,400,000 in non-advertising revenue is $720,000 going to Apple).
Sure, your paying users hang around–so you might be able to get a few $40 months out of them. Still, churn is a harsh mistress–especially in mobile where user retention can be as low as a week. You need to keep bringing in users every month to generate a healthy revenue stream from your game.
So, do this every month factoring in the overhead of maintaining and operating the game and you can see why most mobile gaming firms have a relentless focus on driving up user monetization while finding ways to acquire users cheaply. As the old adage goes, you need to spend money to make money.