Why Exclusive Apps Will Become Standard for Apple and Android

Content exclusivity has long been part of the gaming world and now it's becoming increasingly common on smartphone apps.

Apr 23, 2014 at 12:23PM

Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have been making deals with top app creators, offering prime placement in their app stores for new games in exchange for windows of exclusivity, Wall Street Journal reports.

The deals show the intense level of competition for the most highly anticipated top-tier titles between the two companies as Google's Android operating system continues to gain market share on Apple's once dominant iOS. As you can see from the chart below Apple's market share has dipped steadily, which has hurt its app store. And while Android has had a larger market share than Apple for quite some time, it's only in the last couple of years that any Android phones have held the same prestige as the iPhone. Today Samsung (NASDAQOTH:SSNLF) has challenged Apple with top-tier phones. 

With Android's huge numbers advantage and an end to the perception that it's a lower-end platform, that means Apple's app store has decidedly lost its status as the place for developers to launch their apps first. 

Smartphones

Emily Greer, head of Kongregate, a gaming service owned by retailer GameStop Corp., told the Journal that the contest was like an "arms race" for the best content.

"When people love a game, and it's not available on an alternate platform, they'll change platforms," she told the paper. "The level of attachment a person has to a game can exceed almost anything."

These deals are common in the console world

In the console world game developers making deals to release new titles exclusively on a single platform is a common practice. The most recent high-profile example is Electronic Arts' (NASDAQ: EA) Titanfall, which was launched exclusively on Microsoft's (NASDAQ:MSFT) Xbox One (it has since been released on Xbox 360 and Windows PCs, but not on Sony's (NYSE:SNE) competing PlayStation platform). 

Having exclusivity on highly desirable titles theoretically lures people to a particular platform, spurring console sales (and maybe even getting someone to switch or buy a second machine). Some titles get an earlier release date on one platform but are eventually released on others; some use the Titanfall model where one platform makes a deal to keep the title away from a rival.

The latter practice worked to a point. While Titanfall did not allow Microsoft to catch up to Sony in the next generation console race, it did help the company move some units. Sony announced recently that it has sold 7 million PS4s while Microsoft -- which has kept Xbox One sales numbers largely a secret -- announced it had shipped 5 million units to retail (not the same as selling them). That's a big gain in about four months over the 3 million the company said it sold in 2013, and Titanfall deserves some of the credit.

Titanfall was the top-selling game in March, according to Cowen analyst Doug Creutz, who said sales of the title were slightly above his estimate of 850,000 unit sales in the U.S. He also estimated that EA would sell "6 [million] to 7 million units of the game worldwide in its first 12 months." 

That's good news for Microsoft, which paid an undisclosed sum for exclusivity on the heavily hyped game, but this console war will not be decided by one title.

The number two game in March was Sony's Infamous Second Son, which is exclusive to its PlayStation 4 console.

Exclusivity clearly matters but in many cases it's a back and forth battle that both companies have to play, and that prevents there from being a clear winner. The same is likely to happen in the app world as the idea of content exclusivity becomes more common in the smartphone world.

How big is the app market?

Users spent $16 billion on mobile apps last year, according to a joint study by research firms IHS and App Annie. Videogames accounted for more than 70% of the total, according to App Annie estimates.

The battle for top apps may be even more intense because customers switch smartphones a lot more often than they buy a new gaming console. Whereas the previous generation of Xbox was released in 2005 and the PlayStation 3 in 2006, new high-end phones are released every year. Americans on average replace their phones every 21.7 months, according to research by Recon Analytics. 

That means that roughly every two years smartphone makers have the opportunity to woo customers to switch, and a hot game title can be as powerful as a new feature when it comes to selling people on making a move.

"Videogames are critical applications," Patrick Mork, a former director of global marketing for Google's app store, told the Journal. "Not only is it where people are spending their time and money, they also showcase the power of computing on their devices."

For game developers apps can also be incredibly lucrative, but standing out in the apps stores can be a problem even for well-regarded game companies. If apps don't have enough publicity or demand to show up on the various "top" lists in the stores, they can be virtually invisible. Making a deal that trades exclusivity for placement gives an app a better shot at being successful and breaking out of the pack.

This practice is bad for consumers

While it makes sense for Apple and Google to want exclusive content in general, these deals are bad for consumers. While people might be willing to buy both major consoles, very few people will maintain two smartphones just to have access to a favorite app. That means that people are either locked out from having certain games or at least must wait longer to get them. That might influence their next choice of phone, but overall it's frustrating for anyone used to having apps be platform-agnostic.

On the positive side having guaranteed promotion allows developers to approve bigger budgets and build better games because releasing them becomes less of a risk. 

Now that hot apps are a bargaining chip for companies looking to lure people to their smartphones, we're likely to see more exclusivity and a more clear delineation between the offerings in the two major app stores.

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Daniel Kline is long Microsoft. The Motley Fool recommends Apple and Google-Class C Shares. The Motley Fool owns shares of Apple, Google-Class C Shares, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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