Business Platforms

Business Model combines Magic and Algorithms in Mobile Gaming

Two years ago, I stepped into the mobile games market when I joined Planeto in Malmö, Sweden. With more than 5 million downloads, Planeto is a leader in knowledge-based mobile gaming. The experience at Planeto has changed me as a product creator and marketer.

Like many of my Scandinavian tech colleagues, I come from the planet where they build mobile phones. One step up the software stack to apps did not seem like a huge leap, especially as Planeto develops games for smartphones. As it turns out, one of the most talented game designers in Southern Scandinavia took me to a planet that was significantly different.

This is the third and final blog of a three part series on battle insights by a mobile game CEO.

Mobile Gaming as a Business

[tweetable]Even today, game designers prefer the traditional model of being paid up-front for games[/tweetable]. This business model allows them to devote most time on what is important to them, namely the game and it’s magical game play loop. Our world of algorithms has, however, made Free-to-Play (F2P) the dominant business model for successful games. Free is very powerful as a digital marketing tool for skillful individuals who are able to combine great gameplay with algorithm-winning distribution and marketing.

Ad revenue and In-App Purchases (IAPs) are the two traditional revenue sources in F2P games. Developers mix the two in different quantities depending on the game genre and design. Let’s explore one by one, before we look at the next possible frontiers in the mobile games business.

Getting the User to Buy Everyday

In our first game, we had one item for sale, namely a premium upgrade. This is not a good business model when your game has strong retention. We still have customers today who played our games nearly three years ago… incredible! These users love our games and, in our original game, their maximum spend was $2.99. That was it for three years of entertainment. 🙂

By implementing lifelines, offering new question packs, and decoupling game boards from the premium upgrade, we have in subsequent games removed the limit on how much money you can spend. Our best customers now spend more and in return we offer more features and content. A much better relationship than the original fire and forget model.

Because of this ongoing relationship, we also have become much more generous. We provide the users with some in-game currency for free, so they can try the different lifelines and game boards. That drives up our conversion, as the users get familiar with our in-game currency early on. Contact to support also triggers free stuff!

Third, we actively work with conversion of users through campaigns where we make seasonable items available either free or at heavily discounted rates. We have had great success with our X-mas tree game board. 🙂

Finally, our lifelines are micro purchases offered at a time where the user is most willing to spend – very similar to the extra turns in Candy Crush Saga.

Good IAP design is hard, and it needs to be closely integrated with the core game play loop.

Advertising as an Ongoing Adjustment Process

As mentioned in “The Science of Mobile Game Marketing“, F2P games need an ad mediation layer to be successful in the advertising space.

First, you need a mix of different types of ads from incentivized video, over normal video, to static interstitials, and banner ads. The mix allows you to adjust the ad types over the lifecycle of the user. Advertising is not something users love, so you want to avoid intrusive ad formats, like forced video ads, early in the lifecycle of a user. Later they might make sense depending on your game.

It is also important to ensure you drive up your fill rate. You will not have sufficient video ad inventory from one network available at all times, and hence you should backfill with interstitials from other networks.

Finally, you need to be able to play the different ad networks against each other to ensure the best possible CPM. The ad intermediation layer allows the developer to switch between many different ad networks and adjust advertising volume by network. On top of the automated CPM-based adjustments made by the mediation layer, we adjust our volume by network each week to make sure we get the best CPM per country.

Each advertising network has its own logic when it comes to buying advertising space in games, but generally speaking we’ve also seen that ad networks take advantage of developers who are stale, i.e. developers who do not tweak the number of impressions per ad network. So if you leave your ad network distribution untouched for more than two weeks, expect your revenue to start declining.

Tweak and learn!

The Real World as a Revenue Opportunity

Game developers often use other brands for marketing. Whether it is Kim Kardashian, CR7, or FIFA, it is obvious that real world brands sell games. Integrating the real world into games does not necessarily need to be a royalty expense. In fact, this can be a great opportunity for business model innovation in the mobile games market.

Brands, people, and organizations are finding it increasingly difficult to engage with their stakeholders in a positive, meaningful way. Designed correctly, games can be one such path.

At Planeto, we have worked with brands to create question packs about a specific topic for TV stations. One TV station worked with us on a question pack on the Premier League – they wanted to engage their viewers on knowledge about the Premier League. Another TV station wanted 250 questions on fashion for the Copenhagen Fashion Week. Great fun for our users and excellent exposure for the brands.

Think about your game – how can the real world increase your revenue or extend the lifecycle of your game by bringing in brands, information, or other stuff that your users care about? Be creative – people care about more than just celebrities and TV shows – what about the city you live in? Nature? Politics?

Big Data as a Revenue Opportunity

As we live in a world of algorithms, game developers have more information about their users and their users’ behavior than any other industry out there. Where traditional industries are looking to build up data about their customers, it often feels like we have excessive amounts of data in the mobile games industry.

Taking advantage of user data requires a thorough understanding of privacy – both from a legal perspective, but also from a product perspective, i.e. what value do you bring to your users and when you decide to generate revenue from data? Privacy must have priority over any revenue considerations. There are, however, cases where the two can go hand in hand.

In the past, we have successfully offered our users a free upgrade in return of receiving an offer for a popular science magazine subscription. This is a reasonable trade-off for the user. They know an upgrade costs $2.99. They know they will be offered a magazine that aligns nicely with knowledge-oriented games that they are playing. For that, they are willing to provide an email or a phone number.

Aggregated knowledge about the users might also be valuable. If you have personal statistics, high score lists, or achievements, could other stakeholders get any value from them, if they were presented in a slightly different way?

I would love to throw a game designer and a big data entrepreneur in a room for a few days to build a truly innovative game where data is the core monetization source.

…and We Are Only Just Beginning

These are only two examples of frontier-type business models. There are many more.

Education: I am not a big fan of the 1st generation of brain training apps. They are generally not fun to use and need such a huge commitment that they are unlikely to have any effect for 99% of their users. In the end, I do believe we will become better at using games for education. We are just not there yet.

Media: The traditional media industry is going through a tough spell at the moment. Great games where entertainment is integrated at the core of the game could be the future for some magazines, newspapers, and TV stations. SMS voting is one step in the right direction, but there must be more revolutionary designs waiting to be discovered.

Social: Games are good at bringing people together around a common interest. “Play first, date later!” could be an interesting business proposition to pursue.

I believe the next generation of big mobile game innovators will find business models that integrated a magical gameplay loop in weird and wonderful ways with the world of algorithms. What other innovative gaming business models have you seen or would you love to see?


The Science of Mobile Game Marketing

Two years ago, I stepped into the mobile games market when I joined Planeto in Malmö, Sweden. With more than 5 million downloads, Planeto is a leader in knowledge-based mobile gaming. The experience at Planeto has changed me as a product creator and marketer.

Like many of my Scandinavian tech colleagues, I come from the planet where they build mobile phones. One step up the software stack to apps did not seem like a huge leap, especially as Planeto develops games for smartphones. As it turns out, one of the most talented game designers in Southern Scandinavia took me to a planet that was significantly different.

This is part two of a three part series on battle insights by a mobile game CEO.


Living in a World of Algorithms

In my first blog post, I addressed the development of the magical gameplay loop, a process that involves human beings at a very fundamental level working with basic needs like happiness, competition, and the urge to progress. In stark contrast, [tweetable]the marketing of mobile games hardly involves any human beings at all[/tweetable].

The mobile gaming market is at the extreme end of the digital revolution. In other industries, there is an existing physical distribution and marketing channel that gently slows down the product life cycle. There are fashion shows ever so often. There are retailers, who stock up on new items once in a while. In mobile game distribution and marketing, there are no physical inventories. There are just algorithms and a furious pace.

In a world of appfication, anyone involved in product creation and marketing needs to understand the basics of algorithm-driven marketing. That is where we are heading.

Starting with the App Store

Most people find apps by browsing the App Store or Google Play. A close second is recommendations from friends and family. People across the globe discover games in those two ways. It is as simple as that.

Apple and Google have not disclosed how their search algorithms work, but app marketers suggest the following parameters have an impact:

  1. Title
  2. Keywords
  3. Rating value & numbers
  4. Downloads over time

Title and keyword optimization is a topic on its own. Let us instead explore how rating and downloads can be improved.

Getting Your 4+ Star Rating by Beating the Algorithm

If you have read my first post about the magical gameplay loop, then you already know that perfecting the gameplay loop is crucial to creating a good game. In most cases, a good game does not automatically guarantee a good review. Customers will give you a one star rating for many different reasons: connection errors, strange chat messages from other players, tiny features that they do not like, etc. Often bad reviews do not contain any text – just a single star, a negative impact on your ranking, and a customer that rapidly moves on to the next app.

To avoid the info-less one star review, you need to take the pace out of the rating algorithm by implementing a funnel system that leads customers to the right place. The objective is to get only happy customers, who are willing to spend time on your app, to leave reviews. Unhappy customers, who are also willing to spend time on your app, send you an email with their issues instead. Quite a simple change that actually provides much more valuable info – you may find the details here.

Boom… first small victory against the algorithms. 🙂

Cross-promotion is a Friendly Face in the Sea of Algorithms

Once you have your ratings sorted out, the next step is to drive downloads. By far [tweetable]the easiest and cheapest way to drive downloads is to cross-promote in your existing games[/tweetable]. This is of course not an option for first-time developers, who instead should be thinking of including mechanisms to cross-promote the next game. Never think of your business as a one game business. We have successfully used Appboy in all our products, and it works wonders for us. Chartboost is another option.

Create your own friendly faces!

Living with the User Acquisition Algorithms

If you do not have a successful app already, then you need to follow the painful path of acquiring new users. No friendly faces here. It all comes down to math. The basic equation you need to be aware of is this:

Average Cost Per Install (CPI) < Average Life-Time-Value (LTV) * k-factor

LTV can be calculated in many different ways, but in simple terms, it can be thought of as Average Revenue Per Daily Active User (ARPDAU) * Average retention in days. K-factor is the number of users invited by each new player. If your CPI is $2, your LTV is $1, and each player invites another player (k-factor = 2), then you are break-even.

As such, the concept is simple, but it explodes rapidly. There are hundreds of different advertising channels to use and hence CPI never stands still. ARPDAU is easy to calculate on a given day for all your users, but as soon as you break it down into segments/cohorts (time, advertising channel, segments, geo, etc.) it becomes very complex fast.

Very few developers win in their fight with the UA algorithms. This is truly a scary beast. Experiment with UA, but do not get carried away, until you have a winning formula. In general, nothing is 100% guaranteed. The formula might work for one geographical area and might be totally inoperative for another.

Apple Recognizes the Challenges with Algorithms

Over the last couple of years, the big game developers and publishers have gotten bigger and customers struggle to find new games – however good they are. Apple has been trying to curb the negative side effects of the App Store algorithms by including more editorial content. The aim is to promote quality games by letting human beings select the games that gets most visibility in the App Store. That has sparked an entirely new set of recommendations on how to get featured by Apple. Google stays true to its roots and is still working to solve the quality versus quantity issue with algorithms.

In a market where there are only two relevant stores, I am not sure I feel completely at ease with the thought that the storeowners decide what goes on the shelves. It drives up the bargaining power of those storeowners to new heights.

Optimizing Your Advertising Revenue by Playing Algorithms Against Each Other

Getting plenty of downloads is only one-half of a successful game. The other half is revenue. Most first-time F2P (Free to Play) game developers make the mistake of implementing their own advertising solution with one or two advertising networks. This does not work and it will hurt you badly, if your game makes it through the noise and becomes successful.

You need an ad mediation layer from the get-go – an algorithm that allows you to fight all the other ad algorithms for you. More about revenue options in the third and final blog post of the series.

…and That is Only the Beginning of Mobile Game Marketing

I have not touched on keyword optimization, user engagement campaigns (i.e. how do you convert users from free to paying users), user acquisition tracking, k-factor optimization (i.e. how do you get users to invite other users), and retention funnels. For each of these areas, there are plenty of algorithms to learn and speak.

To make your apps successful you need to take on the algorithms that govern the marketing and distribution of games. As a rule of thumb (and to set your developers’ expectations right), it is reasonable to budget with 50% of a quality free-2-play game development project being on components (in-house or 3rd party) that does not relate to the actual gameplay loop.
We all love to work on the magical gameplay loop – it is truly rewarding – but the right infrastructure components allows you to take advantage of the algorithms. Do not underestimate the power of the algorithms.

Interested in part three of the series on mobile gaming? Read about Business Models here

Business Platforms

Mobile Gaming And The Pyramid Of Scarcities

Distimo - App Revenue Distribution

According to Distimo’s latest report, apps with “freemium” business models, i.e. free apps monetized by in-app purchases (IAP), have dominated revenue charts in 2013. This spurred me to take a deeper look at the “economics of free” and explore new opportunities for innovation in these business models.

The Economics of Free

Let’s begin by taking a brief look at the “Economics of Free” or the “Economics of Abundance”, as described by Mike Masnick. Here’s a short, 2 minute video introducing the concept:

Economics is essentially a social science that examines the best possible way to allocate “scarce” goods or resources, i.e. ones with meaningful marginal cost and limited supply. However, digital goods like apps are abundant because the marginal cost of creating an additional copy is zero. Given the nature of near-efficient competition in the digital world, price naturally approaches the marginal cost of zero.

This explains the decline in popularity of paid app downloads and the decline of numerous traditional business models. However, cheap or free content allows developers to reach a much wider audience which consequently increases demand for related scarce goods or resources. In the music industry, the advent of digital music precipitated a steep decline in US recorded music sales from $14.6 billion in 1999 to just $6.3 billion in 2009, but concert ticket sales grew from $1.5 billion to $4.6 billion over the same timeframe. In other words, digital music converted a scarce resource (recorded music albums) into an abundant resource (cheap, easily downloadable singles), which then increased demand for a related scarce resource, i.e. concert tickets.

  1. Marginal Cost – Cost of producing an additional unit
  2. Efficient Competition – Participants do not have the market power to set prices

The Pyramid of Scarcities

This particular study focuses on scarcity-driven monetization opportunities available to developers of free-to-play (F2P) games like Candy Crush Saga, Angry Birds, etc. As shown in the image below, the scarcities created by F2P games can be segregated into 3 categories, in order of increasing scarcity (or decreasing availability)

  1. Induced Scarcity
  2. Scarcity of Goods
  3. Scarcity of Time or Access

Pyramid of Scarcities

1. Induced Scarcity

Induced scarcity is one that does not exist in reality, but is created artificially — for example, in-app purchases of digital goods. The availability of these goods isn’t really in question and therefore, the value placed on each purchase or transaction is quite low. Consequently, effective monetization depends on maximizing transaction volume from these low-value digital goods, i.e. micro transactions. This strategy is most effective when scarcity is induced because of direct player engagement, and not when it is forced onto players. Game design plays a critical role here as in-app purchases need to be naturally blended into gameplay elements. King’s games like Candy Crush Saga are perfect examples as players pay for boosters to help them progress through difficult levels. In fact, King’s revenue is expected to top $1 billion this year, almost exclusively driven by micro transactions on Facebook and mobile games.

However, exclusive use of this monetization strategy also brings up some challenges. King’s “Games Guru”, Tommy Palm, recently said that 70% of the players on Candy Crush Saga’s final level “haven’t paid anything”. While this is a great sign for consumers, King seems to be losing out on monetizing their most engaged players and biggest fans (excluding a minority population of “whales”). The only reason these players haven’t become paying customers is because they don’t consider digital goods to be scarce enough. The solution isn’t to create “paywall” equivalents, but to explore additional monetization opportunities with even scarcer products.

2. Scarcity of Goods

Scarcity of goods refers to physical products that have a tie-in with an F2P game — for example, branded or licensed merchandise. Since physical goods aren’t as abundant as digital ones, the value placed on each transaction is automatically higher. However, this comes with the trade-off of lower transaction volume. Rovio’s Angry Birds franchise is a great example of a successful merchandising strategy. Led by sales of Angry Birds plush toys, merchandising and IP sales made up 45% of Rovio’s $195 million revenue in 2012. This year, Hasbro sold over one millionTelepod” figures within a month of Angry Birds Star Wars II’s launch. This year, King also dipped its toe into merchandising with a range of Candy Crush themed candies and socks.

These products are likely to appeal to fans of F2P games even if they have never purchased digital goods. However, the biggest fans and most engaged players may be looking for something even scarcer.

3. Scarcity of Time or Access

Scarcity of time or access can be leveraged through a direct connection with the most ardent fans — for example, events like gaming competitions or conventions. Conventions tap into scarcity of time from key personnel like game designers, while social gaming competitions tap into scarcity of access to exclusive benefits and direct competition with other “superfans”. The monetization opportunity from events is likely to be immense, even though the actual frequency may be low.

So far, very few game developers have utilized this particular strategy — a related example from the non-F2P space is Mojang’s Minecraft Convention or MineCon. 7,500 tickets to the event sold out in roughly 5 minutes, generating roughly $1 million in revenue. This may seem like small change for large gaming companies, but it’s important to keep in mind that Mojang may view MineCon as more of a promotional event. Expanded ticket sales and advertising partnerships could easily make gaming events a significant revenue opportunity. Given the competition in allied industries like mobile hardware, there will certainly be no dearth of advertisers.

Opportunity for Innovation

The monetization opportunities outlined in this post show that the free-to-play mobile gaming industry still has a lot of room for growth. Most publishers have focused on just one of these strategies and I have no doubt that we will see more business model innovation from these companies as we move forward.

Having said this, these strategies are only useful for companies if their games remain popular. The gaming industry has proved again and again that companies cannot rest on the laurels of a single mega-hit. Therefore, developers need to focus on continuous innovation across a wide catalog of games. What’s most important is to ensure that players have fun. After all, isn’t that the entire point of playing games?

– Sameer

This post was originally posted in Sameer’s Tech-Thoughts blog – you can find the original article here.

Sameer is a business strategy professional with expertise in mobile ecosystems, asymmetric business models and disruptive innovation. Over the last 6 years, he has held various roles in strategy consulting, investment management, M&A and venture capital. During this time, he has developed a keen interest in the intersection between technology, innovation and business strategy. You can follow his work on his blog at Tech-Thoughts, on Twitter @sameer_singh17 or on LinkedIn.