How to create compelling business models on the App Store
Now that Apple has created a level playing field with the iPhone and App Store, how can developers and publishers leverage business models that can take advantage of it and maximise sales of their games?
The current pattern appears to be to give away a free or Lite version of a game and then up-sell consumers to the paid-for version.
This certainly sits well when viewed against Chris Andersons 'freeconomics' model, which states that because the marginal cost (of serving one additional customer) for a digital product is zero then it can effectively be free.
The idea is that 99 per cent of consumers will go for the free version, but if the product is good enough then 1 per cent will pay for the premium version and this should be enough to cover the cost of development and make a tidy profit.
This contrasts with physical goods where producers give away 1 per cent of a run of a product as samples and aim to sell the remaining 99 per cent.
Alternatives to free
The downside of the free model is that the consumer is overwhelmed with an abundance of free content, and much like the PC downloadable market, they could effectively just download free apps forever, unless a title is so good that they must buy it.
Other key business models include ad-funded, donations and micropayments. In this context ad-funded models simply do not make sense, particularly when viewed from a consumer perspective, as they waste time and attention and provide no value.
Donations or pay-as-you-like models are not yet supported on the App Store and it is unlikely they ever will be. Similarly micropayments are not yet supported and neither is additional downloadable content - most likely because the last thing Apple probably wants is the equivalent of a mobile World of Warcraft where they do not have control.
The core elements of a new business model
Another way of looking at the business model is to go back to basics and try to understand the four elements of a successful business model.
At the core, there has to be a value proposition - something that enables consumers to economically and effectively do something that they desire.
In this case of mobile games, it has to be something that 'captures the moment', not necessarily a console game that has been ported to mobile. This explains why simple, innovative and niche titles can do so well: because there is an inherent value in being unique.
The second element is to deliver a profit formula. That is, to ensure that gross and net margins on revenue are sufficient to deliver the value proposition.
For example, there will be a multitude of free games that will never be downloaded at all, and there will be many that fail to up-sell by even 1 per cent.
This is why games using this model need to be specifically designed to maximise up-selling opportunities, and it is about more than just plastering up-sell adverts all over the game that annoy consumers.
The third element is resources, which if you exclude development, relates to publishing and marketing.
While there is a degree of marketing in simply having your title on the App Store, it is a huge advantage to maximise other points of presence on the Internet across a range of platforms with other game versions, videos, testimonials and of course direct links to the App Store.
The final business model element is to do with processes, and how all available resources (people and information) can be marshalled to deliver success.
The App Store provides information in near real-time, which enables prices to be set dynamically, versions to be updated rapidly, and feedback to be captured instantly.
This requires a new breed of developer/publisher because it has never been possible to manage and act on this information in real-time. The outfits that can harmonise processes with this information stand to gain major benefits
Great games are not enough
To conclude, there is a huge number of opportunities in this new mobile games industry that Apple has created and which others are sure to follow.
Creating unique and innovative games will help titles stand out, but sales will only be maximised by building organisations around a successful business model.
Moreover, we need to think beyond simply games in the traditional sense, because the iPhone is not a dedicated games console, and consequently consumers' patterns of behaviour and their expectations of what mobile entertainment should be are radically different to DS and PSP owners.
Those companies that can build such thinking into product development will be best placed to capitalise on the opportunities the App Store presents.
Nalin Sharma is a management consultant working in the mobile, games and online sectors delivering business and marketing strategy for clients. He previously founded PuzzleKings in 2001, which produced several games including the award-winning ZooCube. Nalin set up a blog at www.videomindgames.com all about digital thought leadership in these areas. You can contact him at nalin at videomindgames.com