Juniper: Examining the state of the in-app purchase
Those operating within the mobile games space, or indeed wider apps space, will be well aware of the elusive "in-app purchase." Used by developers, publishers and app stores as a means of monetizing users, purchasing virtual currencies and in-game items has become commonplace and the practice features in many of the top grossing games.
From the developers perspective, an in-app purchase operates in a similar manner to offering a pay-per-download game--most app stores take a 30 percent cut of the user's money and the purchases are implemented via the app store's framework. The primary differences are that in-app purchases offer developers the chance to make more money, more easily. This is because the in-app purchase is not necessarily a one-off purchase, as games feature a vast number of weapons, character customizations and objects to enhance a user's game. In addition to this, it is much easier to persuade users to purchase items in-game than it is to get them to pay for a game at the point of download. PPD (Pay Per Download) apps account for a small minority of total downloads--just 3 percent of those downloaded on Google (NASDAQ:GOOG) Play, for example--and faced with the requirement to pay at point of download, the end user might simply opt instead for a similar free to download game. Subsequent to download, if he or she enjoys the gameplay, then there is the potential to upsell additional content.
However, this approach has its drawbacks. In 2011, Pennsylvania father Garen Meguerian filed a lawsuit against Apple (NASDAQ:AAPL), claiming that the App Store made it too easy for children to make in-app purchases. His 9-year-old daughter had spent $200 playing casual games such as Zombie Café, Treasure Story and City Story. These types of games rely on in-app purchases as a means of monetization, making it slow and cumbersome for users to progress without spending money. They often reach high levels of popularity though by integrating social functions into the games; users can post their achievements on social networking sites or ask their friends to set up a café in a neighboring spot. Apple is currently awaiting approval on a settlement for the case which would see U.S. customers refunded for their minors' in-app purchases to the tune of a $5 gift card, or a cash refund if they purchased more than $30 worth of goods.
Apple has since added further parental controls to their iOS software updates, but it's still possible for children to spend huge amounts within games. Parents often don't realise they're able to implement these controls until it's too late. Danny Kitchen's parents were shocked to find their 5-year-old had spent $2,500 playing Zombies vs. Ninjas. Whilst I could prattle on about the ethics of kids' games that feature in-app purchases or how daft parents must be to give a 5 year-old their iTunes password which is linked to their credit card account, I'd rather look at the wider state of the in-app purchase.
As I've mentioned previously, adding in-game purchases to an app is a no-brainer for most of the developers I spoke to whilst writing Mobile & Tablet Games: Discovery, In-App Purchases and Advertising. Consumers are accustomed to the freemium model, whereby they either download a free game featuring these purchases or a free version of a paid-for game with restricted gameplay--often termed a 'lite' game. The problem is that lite games aren't as successful, for two reasons. First, developers have to keep an eye on two games instead of one. That means bug fixes, updates and making a game compatible for multiple devices, which takes much more time. Furthermore, it is easier to convert a non-paying customer into a paying one by virtue of the in-app purchase, as the process is smoother and doesn't require the user to leave the game. It doesn't take a genius to realize that all this means pay-per-download games are becoming a thing of the past.
Iterating a well-known title or having a huge video games publisher developing the game is no longer enough to warrant charging for a game at the point of download, as evidenced by the recently release of Real Racing 3, by EA owned Firemint. Whilst the previous two versions cost between $2.99 and $4.99 to download when the latest version came out, the third edition of the iOS and Android game has adopted the freemium model. Offering free games with in-app purchases on mobile devices was first popular in social and casual games, which are often repetitive, don't require much skill and appeal to a mass audience. However, porting this model to racing games, played by a select hard-core audience, could prove problematic, as these gamers aren't used to being told they must either wait for their car to be serviced or pay to speed it up.
Offering in-app purchases is not limited to games. Free fitness app Jillian Michaels Slim-Down Solution offers different exercises at an additional cost and photo app Pic Stitch let users pay for extra frames, borders and effects. The in-app purchase model will certainly become more popular as people become accustomed to it, and with that the model will progress. GetJar, an alternative Android app store, offers its users free virtual currency to spend within a game if they download games through their store. Tutorials for games are likely to become more important, as developers focus on the "stickiness" of their games, or likelihood that users will return to their games. Most users don't return to a game only one day after installing it, representing a lost revenue stream to that developer.
And this potential is being embraced by many across the developer community. In 2012, the top 10 grossing apps on both Google Play and Apple's App Store were freemium games. While--as we have observed--there is still a market for the PDD app, in-app purchases in their various guises have most definitely conquered the app marketplace.
Siân Rowlands is a Research Analyst with Juniper Research. She has recently authored the latest edition of Juniper's Mobile and Tablet Games report. Her areas of focus include mobile content and applications.