How a Freemium Model Depends on Sticky Situations

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How do you wring revenue out of free games? Glu Mobile (Nasdaq: GLUU  ) does it by charging tiny fees for in-game advantages.

The company just reported third-quarter results. Revenue jumped 9% year-over-year to $16.9 million, driven by quadruple the year-ago period's smartphone-based sales. Smartphone games now make up 57% of Glu's total GAAP revenues. Above all, the quarter proved the value of the "freemium" business model, in which you give away the proverbial razor handle and charge for the blades of in-game goodies. Freemium sales made up 77% of smartphone revenues.

The trick is to make the games good enough that gamers want to spend money on doing better in the game world. The stickier the game, the bigger the trickle of spontaneous microbuys.

The bulk of Glu's smartphone sales come from the Apple (Nasdaq: AAPL  ) iOS ecosystem, but that's starting to change. From the second quarter to the third, the importance of Android sales doubled from 15% to 30% of the total smartphone take.

CEO Niccolo de Masi bemoaned the fragmented nature of the Android platform. Developers for Google's (Nasdaq: GOOG  ) platform must optimize their products "by handset manufacturer, by OS version and even by the storefront through which consumers discover games." Sounds odious, doesn't it?

That being said, de Masi thinks his company is better positioned than anyone else to handle this diverse market, which would turn the challenge into a business advantage. Among other strategies, Glu is a launch partner for the (Nasdaq: AMZN  ) Kindle Fire and its custom-made app market. I haven't yet seen any rebuttals to the "better than anyone" claim from Electronic Arts (Nasdaq: ERTS  ) or soon-to-go-public studios Zynga and Rovio, all of whom sport larger Android profiles than Glu does today. But it's always good to have goals, you know.

Glu is a powerful little arrow, aimed straight at the heart of the mobile gaming industry. The company aims to turn a profit in 2013, meaning that today's investors should brace themselves for a bumpy ride over the next year or so. Mr. Market rarely treats cash-burners like this one with much respect, no matter how large the payoff at the end of the tunnel.

There are many ways to skin a cat, and just as many innovative methods to turn a profit from the smartphone explosion. Glu is showing you one way. This Motley Fool free video report goes down a very different path. Watch it now to see how one largely unknown chip company is leading the charge in a very investable way. Did I mention that the report is totally free?

Fool contributor Anders Bylund owns shares of Google, but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and, and have also recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On November 07, 2011, at 9:46 PM, MHedgeFundTrader wrote:

    Analysts continue to be stunned by the rate at which cash is rolling into Apple (AAPL). At current cash flows, the company’s hoard is expected to grow from $81 billion to $120 billion by next June, an increase of nearly $200 million a day!

    Let’s face it. Apple has had a great, decade long run. Hundreds of my readers, many of them Apple employees, are faced with the enviable problem that, having ridden the stock up from $4 to $400, they have too much of their wealth concentrated in a single asset. That is never a good idea from a risk control point of view. But every time I look for reasons to sell Apple, I find three more reasons to buy it. It’s a case of the grass being greener on my side of the fence.

    It all reinforces my view that Apple shares will reach my long term target of $1,000 sooner than anyone thinks. It is already trading places with Exxon (XOM) as the world’s largest company and most profitable company on an almost weekly basis. At $1,000, Apple would boast a market value of $930 billion, accounting for 7.5% of total US stock market capitalization, and 40% of NASDAQ.

    What if multiples expand, as they should? Take Apple stock up to its past peak multiple of 36, and the company would be worth $2.8 trillion and rank 5th in the world in GDP, more than France, and just behind German. Wow!

    The Mad Hedge Fund Trader

  • Report this Comment On November 08, 2011, at 7:34 AM, GrandSlammer wrote:

    While Glu Mobile is doing a great job in capitalizing on the growing smartphone and table market, it is still making losses. If you want to benefit from the iOS and Android boom, I'd recommend to look at G5 Entertainment which is listed in Sweden. Its casual games and time management games are successful on all platforms and the company has an EBIT margin of around 35%. Additionally, it is sitting on a net cash position. I like the GLUU story but I love the G5 story! more infos on for those of you who are interested

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