How the Mobile Games Business Make Money From Piracy

The collective knowledge what game developers thought they knew and could rely has gone out of date quicker than you can say Xbox One, PS4 and Wii U .

Lets face it the adverts “convincing” people that pirating digital content is theft simply fall on deaf ears of even the most middle class of families.

The New Digital economy is not about selling physical “atomic” discs of the olden days of say 3 years ago.. Then consumers saw value as they physically walked out of their house to purchase physical things made out of atoms at a physical place called the “high street”. Now all the effort a consumer has to make is to press a button and electrons move from wherever they were to be duplicated in magnetic form on his computer. At this point he assumes that because it has no mass and has had no effort to acquire it has no value.

Enter then the business model of Free to Play. This model embraces the concept that the customer sees the distribution of digital stuff as valueless. Its a high stakes game that has the developers of content staking their mortgage payments on knowing their customer so well that their players have an experience so good that they will choose to pay for it on their own volition.

The User Experience that the game devs gave in the olden days was considered to be an art form that was inherently understood by key members of a publishers “committee”. In these olden days, gnarly experienced designers and jaded journalists based what was “good” on a gut feeling based mainly on the fact that they were the target consumer. But the age of the all knowing guru has gone. Games are mainstream now not just for passionate teenagers and ladults.

As such games have had to embrace a more systematic UX approach. UX formalises in a fluffy way the concept that the developers are making stuff for a variety of different people. In a short it imagines a whole set of consumers even to the point of naming them. Their lives are constructed with a sense of their tastes, likes and dislikes as well as abilities. The development of the project is done trying to view it from the point of view of these individuals… more of this in another post me thinks.

Free to play turns UX a quarter turn more. It distills the actual experiences people have with the game into a series of numerical values that can be analysed. Those of a programming background will lap up its analytical approach. Its stacked with acronyms and totally new business concepts, but mastery of this subject is essential for a F2P game to succeed.

First mind blowing concept is the vast majority of players of a F2P game do so totally for free. Income is derived from those who are keen express their devotion by acquiring additional experience by making an In App Purchase (IAP)*. A conversion rate is the ratio of people paying to play game versus those freeloading. A conversion rate of 5% is considered good in this market and this is because the potential audience is amounts to tens if not hundreds of millions. A good conversion rate also means its a good game.

(*other mechanisms exist)

That’s not to say the freeloaders are valueless, each player is treated as a future customer and this quality of service developers hope will be advertised by them for free. They are vital for the “virality” of the game. This is the value attributed to how knowledge of the game spreads from player to player (like a virus). A value attribute to how “virussy” a game is called the K-Factor and has a whole heap of voodoo maths associated with calculating it too.

What I find fascinating is that other key game characteristics can attributed to numbers that in turn can be calculated. Just like a formula one racing car, the telemetry for the game can be monitored while it is being played and improvements made accordingly. Here we enter an acronym soup. Here that are some that are lobbed around by F2P analysts

DAU	Daily Active Users	the number of unique players who actively play the game in a day
MAU	Monthly Active Users	the number of unique players who actively play the game in a month
ARPU	Average Revenue Per User	the mean average taken from all the money made by the game for all players
ARPPU	Average Revenue Per Paying User	the mean average taken from all the money made by the game for all the players who pay for the service
ARPDAU	Average Revenue Per Daily Active User	the mean average income per day per player per day
ARPMAU	Average Revenue Per Monthly Active User	the mean average income per day per player per  month
LTV	LifeTime Value	The average profit made on each player in the game
CPA	Cost Per Aquisition	How much it costs to get a player playing the game.

Now with this sort of information the games can be monitored to see how well they are being received and furthermore how much should be being earned.

For example by monitoring the percentage of players that stay in the game for over a month the game design team can monitor retention. Conversely the percentage of those that leave the game each month is referred to as churn. Engagement is now another digital value that gives a numerical estimate as to how the public are receiving the game.It is calculated on a rolling month and is the ratio of the DAU/MAU. Adverse figures here mean that the team need to look again at what they are delivering as it evidences (dis)satisfaction with the game.

The bean counters on the other hand are closely monitoring how marketing is spending their budget. The CPA (cost per acquisition) is value that is calculated by reviewing the new users acquired each month and dividing by the monthly marketing spend. By having a figure to account for the Lifetime overhead (the amount of money to create and maintain the game) a value can be attributed to the LTV (Life Time Value):

So while some would argue that the art has been removed from the development of games, I’d argue that it’s subjective nature of reviews scores that were so powerful in the past has taken a Mario style hammer blow to the head. These Key Performance Indicators (KPI’s) give a democratic indication to the developers that is far better than some Metacritic average or the opinion of some dude with a ponytail from the publisher’s. They are a foundation on which the management and developers can converse with the players on to create a better and therefore more profitable experience. Done well they are reaping the developers an excellent living.

Your next investor : the bloke down the pub

Future shareholders?

In my career I have often been cornered by “froffing” individuals keen to explain to me his (its always a bloke) idea to make a ton of money with his XYZ idea on the creation of a new video game. The perception by these “blokes down the pub” is that as a game developer I am personally the gatekeeper to the development of video game content.

The reality was that in console development the gate keepers were generally amorphous committees at game publishers. They controlled the money to take the concept to commission. These guys came laden with personal likes and dislikes; burdened with business plans and overwhelmed with technical ambitions for their release schedule.

In the old development world publishers needed to be sure that the investments made in physical box product which amounted to $millions gave a return. Barriers to entry were made on purpose to slow the process to give time to control the market.

Now I am not smashing this concept it worked for twenty plus years. Money has been made in many multiple millions, but the landscape is now shifting. Games can no longer demand a $40 ticket.

The old committee mentality is the inevitable enemy of innovation. No exec is going to gamble his pay packet on the production of some concept that can be delivered by a drunk bloke. He’s more likely to give the thumbs up to a license or sports endorsed sequel.

My issue with this is that entrepreneurial innovation is never going  to occur in this regime. In the mechanism of trial by committee failure is simply not an option so the mantra of the new Internet entrepreneur “fail early fail fast” can simply not be invoked.

Ultimately the velocity at which apps are created coupled with the wafer thin margins available to the developers it is simply not practical to put the same barriers to entry as existed in the old world. The rate of change of audience tastes also means that it is impossible for any individual or group of individuals to work out what will succeed.

But there is an appetite for innovation: Angry Birds; Cut the Rope, Where’s My Water,Temple Run prove it.

New models of connecting with the audience therefore need to be devised that prove ideas quickly and harness the creativity and ENTHUSIASM of the “blokes” down the pub.

And this model exists: crowd funding.

What appeals to me this is the democracy of the approval process. The investors in content like this could be your biggest advocate, sales guy and ultimately seed the viral loop to make your application go big.

The biggest innovation however is that they could also be your best indication that your idea is going to fail therefore allowing the entrepreneur to “fail early; fail fast and fail with out too much expense”.