Gaming app business faces questionable financial future

18 Mar 2014

The video-game industry is undergoing rapid change as of now, not as a single entity, but rather as two diverging but successful entities worth an estimated US$93bn in 2013, according to IT research and analysis provider Gartner.

On the one hand, there’s the ‘traditional’ gaming industry that includes the major gaming consoles, such as Microsoft‘s Xbox and Sony’s PlayStation, and on the other hand, there’s the mobile gaming industry, evidenced on consumers’ tablets and smartphones.

This latter industry is one that has Irish game developers popping up in increasing numbers, looking to create a game that can be an overnight success in the ways of Flappy Bird. At its height, Flappy Bird earned its creator, Dong Nguyen, an estimated US$50,000 per day in advertising revenue. Nguyen shut the app down last month, telling Forbes magazine it was causing him a lot of stress.

In game-development terms, US$50,000 per day is the equivalent of winning the lottery, as such success is few and far between in the sector.

What about Irish gaming companies?

So where does this leave Irish gaming companies looking to make a viable financial business that will make them stand out among the millions of other apps already available on Apple’s iTunes and the Google Play Store?

The prospects for many would appear worrying. Nearly all (99pc) of apps that exist today will be considered financial failures by 2018, according to Gartner.

As it stands, the abundance of freely available apps on the market means gaming companies, in particular, are looking to what is known as the ‘freemium’ model of revenue generation.

Going by this model, an app developer offers his or her app for free. The user is then given the option of making in-app purchases that will either improve the gaming experience or provide him or her with unique in-game items. For example, a user’s purchase can enable him or her to progress more quickly through a game, access new levels, make aesthetic changes, or receive special characters.

Criticism of the freemium model is rife from two conflicting opinions. The European Union (EU) said in February both Google and Apple need to crack down on companies offering the freemium model that makes up half of the apps available on the market today, according to the EU’s figures.

In the EU’s view, these games mislead children into thinking everything downloaded in a game is free when that is far from the case. “Games should not contain direct exhortations to children to buy items in a game or to persuade an adult to buy items for them,” the EU said in a statement.

According to Swrve, a marketing company with offices in Dublin that cater exclusively to the app industry, the freemium model actually offers little in the way of revenue.

Only 0.15pc of players of freemium games actually make an in-app purchase and of that percentage, 66.8pc spend no more than US$1-US$5 on in-app purchases, Swrve’s figures suggest.

Rocket Rainbow Studios’ model

JP Vaughan is co-founder of one of Ireland’s newest mobile gaming companies, Rocket Rainbow Studios. The company is trying to launch its own game Hay Ewe, on iOS and Android, by taking what it considers a much more suitable ‘premium’ model, whereby it offers the app for a one-time fee of between US$2-3 with no in-game purchases.

This model works similarly to traditional physically distributed games, whereby a company will have sales targets for a particular game and can only start making a profit once these targets are reached.

According to Vaughan, the freemium model is flawed because, from Rocket Rainbow Studios’ research, customers often find the model off-putting. “We found that the gameplay suffered and, as a result, the player did not have a fun experience within our game. We value gameplay above everything else so we feel that our players will appreciate this far more when deciding to make a purchase.”

For Irish game developers, the question remains whether either model, freemium or premium will be successful among Ireland’s gaming start-ups. Gartner’s 99pc failure rate figure is, said Vaughan, nothing short of “alarmist”.

“There is no doubt that it is easier than ever for someone to develop an app and release it to the world, but I don’t believe that any developers need to take a cautionary stance just yet,” Vaughan said.

“App customers are becoming more selective of what they spend their money on, so if you focus on the quality of the user experience and bringing a lot of value to the end user, then you will find customers who will make that purchase.”

A version of this article appeared in The Sunday Times on 16 March

Colm Gorey was a senior journalist with Silicon Republic