App store sales = broken business model?

Neil Young (not the Canadian grunge musician) is a man who knows what he is doing. Like me he was involved in the Sinclair Spectrum game industry in Britain in the early 1980. This was a creative and commercial hothouse where much that we now take for granted about the game industry was invented. He subsequently spent 11 years at Electronic Arts rising to Group General Manager of the EA|Blueprint Studio group. And now he is the founder and CEO of ngmoco, one of the leading publishers of mobile phone games.

One thing he has always said is that the iPhone / AppStore gaming market is just like the Sinclair Spectrum market was. And here are a few reasons why this is so:

  • Very low barriers to entry. Download the SDK and you are away. This is a huge contrast to the established platform holders like Nintendo, Microsoft and Sony who make you jump through lots of hoops and invest in expensive hardware development kits.
  • Huge flowering of creativity. Anyone can have an idea, no matter how oddball, and realise it. Then (theoretically) in the Darwinian world of the AppStore the fittest succeed. New genres of game are being created without anyone realising it. It will take historians to unpick  because so much has happened so quickly.
  • Equally huge upsurge in new game publishing companies. I bet that more new game publishers were set up last 18 months than in the preceding 18 years. The problem here is that a publisher has three main functions 1) Editorial control 2) Finance 3) Marketing. Most of these new publishers don’t realise this yet. The ones that survive will be the ones that do.

So far all a reader will be seeing here is a rosy story. But the reality is that, just like the Sinclair Spectrum market before it, the AppStore business model is largely broken (as I predicted would happen in 2008), and for much the same reasons.

  • Piracy. People will mainly steal a game if they think they won’t get caught. The barriers to stealing iPhone games are very low. So more are stolen than bought.
  • The collapse of prices. Inexperienced marketeers use the price mechanism to gain competitive advantage. Experienced marketeers use the price mechanism to beat the game thieves. Together they drag prices down so there is no budget for marketing. This creates a downwards spiral so there is no money for development.
  • Imperfect market knowledge. The AppStore has happened so fast that the mechanisms are not in place to inform people properly what is on it. So a total gem of a product can be hidden from view because of all the dross that surrounds it. This is partially Apple’s fault for having an inadequate front end to the AppStore. It is partially the fault of the news media who are not reporting sufficiently in depth, the volume has overwhelmed them. And it is partially the fault of the users who mostly take a very casual attitude to their downloads and who would be massively rewarded if they did more research.

So the net effect is that you are lucky if someone finds your game, even if they do you have to sell it to them at an uneconomically low price. But even then they are most likely to just steal it from you.

Which brings us back to Neil Young. He has given up selling games on AppStore. Now they are free. Really he had no option, because of the broken business model. So instead he charges for in game stuff with micro transactions. And it works. He has already had two successes with Touch Dogs and Eliminate Pro. Both of these allow a daily amount of play time, over which you have to pay.

A measure of just how broken the pay before you play business model is on the AppStore is that Neil Young has just cancelled the latest iteration of one of his biggest properties, Rolando 3. It was just not worth throwing good money after bad. The IP isn’t dead though, obviously, it will just appear in a new micropayment form.

So the lesson here is that the AppStore is a broken business model for selling Apps. But you can still make money and do good business on iPhone, it is just a matter of selling a service instead of a product. This is a very big and very serious lesson for the whole future of gaming.


  1. We could say the same of game-a-day casual portals.

  2. I think Xbox Live has got this right. You pay for the service, this ensures the service is a good one, and what’s more the pirates are scared to pirate your game to play online because if they get caught, Microsoft are more than willing to brick their box or at least render it Live-useless.

  3. “But even then they are most likely to just steal it from you.”

    Er, that’s ill-informed rubbish.

    Just 10% of iPhones are believed to have been jailbroken, and according to analystics specialists Pinch Media just 40% of jailbroken iPhones are used for pirating apps (jailbreaking having many legitimate purposes). That means that just 4% of iPhone users – 1 in 25 – is likely to pirate apps.

    So if someone finds your app, they’re *24 times* as likely to buy it as they are to pirate it, and NOT “more likely to just steal it” as you ignorantly claim.

    We’re a small and quite new business and we do very nicely out of selling our iPhone apps. Why don’t you write about stuff you have a clue about?

  4. Those stories do nothing to support your point. All they prove is that the small proportion of pirates pirate a large number of apps, which makes no difference to anything since they’re pirates anyway.

    If one pirate copies every app that is released, it means that 100% of apps have been pirated, which is a good headline on a slow news day like the one Slashdot must have been having. But it’s still just one pirate, and it makes no difference at all to the amount of money we make from the 96% of people who don’t pirate.

    This sort of hysterical drivel doing down the most successful software market on the face of the planet is just attention-seeking nonsense.

  5. @iPhone developer: I think Bruce is basing his argument on the fact that for a lot of apps, more copies are pirated than bought (based on no. of copies phoning home versus sales data).

    Obviously where this argument falls down is in assuming that these are lost sales. There is a small proportion of the (insignificant, as you rightly point out) jailbroken user-base who pirate literally every app as it appears, and run most of them zero or one times. They even pirate the free applications! If we write them off as a lost cause, that still leaves tens of millions of people using the App Store legitimately.

    The “Rally Master Pro 3D” story is a particularly questionable example to pick. An unknown brand, sold on techy USPs that would pique the curiosity of technically minded iPhone users (the most likely to have jailbroken devices), offered at a premium price with no demo version, by a developer who were still umming and ahhing about using in-game payments at all. The examples in the other stories suggest similarly calamitous pricing strategies ($16 for an IM app?).

    Try telling EA, Rockstar, Gameloft, Clickgamer, Id, PopCap, etc. that nobody buys apps. One model works for them, another works for ngmoco and Tapulous. It’s not appropriate to class all iPhone apps as equal. It would be like lumping Call of Duty, World of Warcraft and FarmVille into the same pigeonhole because they all run on PC.

    The iPhone market is still far from perfect and has many pitfalls for the unwary. But piracy as yet is far, far down the list of priorities.

    (By the way, it’s very easy to detect if an app has been pirated, and indeed some now do this and pop up nag screens, etc.)

  6. @S.E.Gordon.
    The biggest ever, record breaking, iPod game and they are talking about just 300,000 units in 9 days. That is terrible. Just 1 sale per 200 iPod Touch and iPhone users.

    To put that in context Modern Warfare 2 sold 4.7 million units in the first 24 hours at a far higher price point.

  7. MW2 had tens of millions of dollars spent on marketing it for over a year before launch, and was released on three platforms, including two dedicated games consoles.

    There is no mechanism to preorder iPhone games. And they don’t generate virtually all of their full-price sales in the first few days like most console games do.

    So it’s a completely meaningless comparison, and an interesting definition of ‘terrible’.

  8. Apple’s App store is certainly not effective at handling 150,000 Apps, and most Apps don’t sell more than a few hundred copies. Yet I’d say Plants vs. Zombies is quite profitable, and worth emulating. The market is very different than other game markets, and it’s still developing and changing. It’s possible to make money there, but it requires both a good game and good marketing. There’s no clear winning marketing strategy that works in all cases for iPhone games. But I think it would be a mistake to skip this market just because it’s chaotic. There’s plenty of upside potential, especially if the iPad succeeds… those who can find winning strategies in this market will do very well indeed.

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