April 04, 2011

App Monetisation Secrets (Part 2)

By Romulo “Je” Alipio, Executive Producer, Games

At the turn of the millennium (which sounds very cool to say, but was really just a little over a decade ago), app developer houses were popping up all over the place. 
Large developers made money by selling content directly to phone manufacturers like Nokia.  Sometimes they received one-off payments, but more often revenue sharing was the preferred model.  Garage developers, meanwhile, struck deals with bigger companies, which could bundle their content for sale to the Nokias and Ericcsons.

But as the number of development houses mushroomed, margins became smaller and smaller and it just became too difficult to turn a profit. Pay-per-download seemed the way to go, but like the other models, this revenue stream was highly dependent on the carriers, which created a number of problems for developers.

Revenue Issues

1. Disproportionate Revenue Shares
Game developers – and smaller companies in particular – were really at a disadvantage under this model. Carriers generally kept 70% of revenues, but sometimes their take could rise to 80%.

2. Even More Disproportionate Revenue Shares
SMS and WAP charging are controlled by the carriers, but since the mid-2000s, carriers only work with Master Content Providers (one or two per carrier). Everyone else goes under them. So smaller developers wouldn't even make 20% from a revenue share deal, as they relied on better-connected firms to distribute their content and had to share their portion with them. Figure that it cost US$20-30k to design and develop a game. There just weren't enough downloads to cover costs, much less make money.

3. Late Payouts
An age-old problem faced by vendors in many industries. Carriers often paid developers three to four months later than the designated payout date. For February payments, for example, developers would be lucky to receive their money by June.

4. Disagreements over Generated Revenue
Just how many consumers downloaded an application? You would think this would be a straight-forward question, but the numbers were always a source of contention, particularly in developing markets. Developers inserted tracking systems into their games. But carriers said that many downloads were not paid. In some countries, the discrepancies could be as high as 40 percent. Were the carriers honest? Were there flaws in their systems? We don't know. But most developers couldn't do anything about it. Only the biggest houses with the most popular games had any bargaining power with the telecoms.

Dark Ages & Rennaissance?
At this point, it's also worth remembering that the mobile industry was fragmented. Thousands of devices had flooded the market and choosing which platform or platforms to target was daunting.

All this led to a 'Dark Age' for developers. Few companies had postive cash flow or annual profits. From 2005 – 2007, investment in gaming and mobile applications fell to an all-time low.

Fortunately this period was short-lived.

In 2007, Apple launched the Apple App Store, paving the way for new business models (did someone say FREEMIUM?) and enabling developers to market directly to consumers, bypassing carrier portals and payment systems. But, of course, not everything is rosy . . . and in the next part of this series, we'll look at the issues faced by app developers in the market today.

For more about the early days of app monetisation, please check out my first entry in this series. In Part III, I explore the diversity of "freemium" models and in Part IV, we look at the success of various monetisation models in different markets.