Apple’s Accidental Secret Weapon

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Earlier this year we funded a mobile gaming company called Playdek.  Playdek makes a very popular iOS game called Ascension, which is sold through the App Store and has a few hundred thousand users.

For the past year Ascension was priced at $4.99, but last week, without any fanfare or promotion, the company lowered the price to $0.99.  The game immediately spiked up to #1 in card games, #1 in board games, and even cracked the top list of all paid applications.

I thought this was an interesting experiment in what economists call price elasticity – how consumers react to a change in a price.  It is clear that in the Apple store a small decrease in price makes for a giant increase in consumer demand.

The absurd part of this is that I have a lot of friends who will look at a $4.99 app and say out loud, “Wow, that is expensive” but the same friend won’t think twice about spending $4.99 for a glass of club soda at a restaurant.  This is the psychology of “anchoring”.  For instance, if I repeat the number 17 over and over – “17, 17, 17″ – and then ask you how many countries are in Africa you will likely respond with a number in the mid 20s.

If I repeat the experiment with the number 70 – “70, 70, 70″ – your response will likely be closer to the actual number of countries in Africa, which is 52.

About 80% of the content in the app store is free, which makes consumers expect that everything else should be free.  This is great for Apple, because in the mind of the consumer you get all this free stuff when you buy an iPhone.  It allows Apple to charge more for the hardware, at the expense of all the world’s content companies.  This is Apple’s Secret Weapon.

This is a genius strategy, and it happened by accident.  At first Steve Jobs bristled when publishers submitted free games to the App Store because he viewed them as low quality.  Yet that very content has created the pricing pressure to drive down everything else in the ecosystem.  This just highlights the importance of companies like Game Salad to the  App ecosystem (Game Salad is responsible for about 10% of all free-to-play iOS games).

You have to wonder why the traditional “console” companies (Playstation, Nintendo, and Xbox) have not pursued a similar approach.  I have given this some thought and believe it is a three part answer.  First, they were caught off guard.  The iPhone was the first game system that was developed without cartridges or hardware-linked content – everything is online.  That allows for free-to-play games, with mechanics to tax consumers on usage and in-game premiums.  The console companies ignored this trend.  The second reason is push back from the content companies.  Electronic Arts relies on franchise titles like “Tiger Woods 2012″ and “Madden Football 2012″ to make their earnings for Wall Street, but these games don’t exist in a free-to-play world.  Content companies have seen what happened in the App Store and are undoubtedly worried about what will happen when game prices go to zero.  The third and final reason is retail.  Consoles rely on retailers like Wal-Mart and GameStop to stock and ship their hardware.  If you threaten to go 100% digital they will retaliate by pulling your system off the shelves.  In the near term that would be disastrous for these businesses.

With all that said, the writing is on the wall:  it is just a matter of time before a version of the Playstation comes around with infinite, free-to-play titles.  It will be the last console you ever buy.  And if Sony doesn’t get its act together that system will be built by Apple.

4 comments
pvzed
pvzed

Good post. The growth of free to play games represents success in the development of diversity in business models and game types in the sector. It does not mean that one sector will necessarily disappear. There will be a sustainable market for high end AAA console and PC titles. Gamers will continue to demand this experience. The major console games are moving farther up the chain by investing in differentiating technology to deliver cinema like quality and narrative that other developers and publishers simply cant provide. Examples include Elder Scrolls, Gears of War etc. Pay to play PC and mobile games such as Minecraft demonstrate a continued willingness to pay for a differentiated game and community experience not related to development or IP licensing costs. Many free to play games such as Paper Toss and Angry Birds proves that their model can be highly lucrative as well. Free to play does not necessarily mean free. This trend demonstrates an industry innovating and maturing. The result is and will be more differentiation and segmentation amongst developers, publishers and gamers.

DavidLarkin
DavidLarkin

The unfortunate flip side of this is that consumers are increasingly perceiving the "correct" pricing of digital content to be close to zero.  This may work well for some types of content, but not for others, like movies for example, which actually cost a lot of money to fabricate the costs of which cannot be recouped through pre roll advertising.     The true cost of much digital media is greatly subsidized by VCs who are counting on being able to sell pre revenue companies that have a lot of user traction to larger companies who inherit the monteization problem, or by founders who "subsidize" the creation of Internet companies by underpaying themselves in hopes of being the next Instagram.     It's not necessarily a bad thing as lots of great innovation happens this way, but it is a mixed blessing and has unhealthy elements as well, IMO.

spcohn
spcohn

Good post Ian.  This is absolutely right.  This strategy/result has another benefit besides increasing the value of the device. By increasing the distribution of freemium products, they get a wider base to take their pound of flesh from the "-mium" revenue streams.  I am not an investor, and I don't know anything about Ascension's specific games, but I really don't understand why any app builder would charge anything for a download.  It seems there is overwhelming evidence that the better strategy is to build a large engaged audiences and monetize from there.

spcohn
spcohn

Good post Ian.  This is absolutely right.  This strategy/result has another benefit besides increasing the value of the device. By increasing the distribution of fre-mium products, they get a wider base to take their pound of flesh from the "-imum" revenue streams.  I am not an investor, and I don't know anything about Ascension's specific games, but I really don't understand why any app builder would charge anything for a download.  It seems there is overwhelming evidence that the better strategy is to build a large engaged audiences and monetize from there.