Apple, Inc. Is Wary of Freemium iOS Games And You Should Be Too

Freemium games using in-app purchases have proven to be extremely lucrative for mobile developers. Despite getting a piece of the action, Apple would prefer users buy premium apps instead.

Aug 24, 2014 at 3:00PM

The freemium model has taken the mobile gaming market by storm, and Apple (NASDAQ:AAPL) is growing wary of it. That has potentially game-changing (pardon the pun) implications for companies who have built their fortunes on freemium titles, such as King and Glu Mobile, among others.

Without fail, nearly every title in the Top Grossing charts of the iOS App Store is free but offers in-app purchases. Apple gets its standard 30% cut of in-app purchases, so why is it fed up with the freemium model?

"Apple is frustrated."
Polygon recently interviewed Stoic, the small indie game developer behind The Banner Saga. The role-playing game was released on PC last year, but Stoic is now preparing to bring the title to iOS. Most of the technical work is already done, but now Stoic just has to figure out how to price the game.

The challenge is that the app market has become so competitive that consumers balk at premium app prices. For obvious reasons, this trend frustrates developers to no end, since it makes app monetization quite difficult. It turns out that Apple shares that frustration. Here's Stoic co-founder John Watson:

Apple is frustrated, along with everybody else, about the mentality that's gone rampant in mobile app markets, where people don't want to pay anything. They want to pay as little as possible. They think that four dollars is an exorbitant amount to pay for a game, which is very illogical considering most people's lifestyles. They'll spend $600 on an iPad, and $4 on a coffee, drop $20 on lunch, but when it comes to spending four or five dollars on a game, it's this life-altering decision. I'm frustrated with that too.

Apple has been advising Stoic on how to price The Banner Saga, and Stoic's other co-founder Arnie Jorgensen says that Apple is encouraging the developer to "go higher-end."

Candy Crush Saga crushes it, but King is getting crushed
Consider King's blockbuster hit Candy Crush Saga. The addictive freemium title accounted for 67% of King's total gross bookings in the first quarter. Gross bookings were $641 million during that quarter, putting Candy Crush's take at $429 million. Apple's cut of all those extra moves, extra lives, and lollipop hammers would depend on King's platform mix, which is not directly disclosed.

Candy Crush

Source: King.

King did say that 75% of total bookings came from mobile, without breaking out iOS and Android specifically. If iOS is just half of Candy Crush, then that's nearly $65 million for Apple from one freemium game in one quarter.

In the second quarter, King made some progress with diversifying, with Candy Crush Saga only contributing 59% of gross bookings. 

Kim Kardashian rakes it in
Shares of Glu Mobile soared in July, almost entirely thanks to its hit Kim Kardashian: Hollywood game. That jump was thanks to estimates that made headlines, pegging the game's annual run rate at approximately $200 million. Kim Kardashian herself is reportedly entitled to a 45% cut of the game's net profits, which similarly led to headlines of her grabbing $85 million after factoring in approximately $10 million in expenses.


Source: Glu.

However, that ignores the cut that goes to platform operators like Apple and Google. Google tends to share its portion with distribution partners, and again Apple's share would depend on platform mix. Still, Apple also stands to cash in alongside Kim Kardashian in a big way if the game can sustain its success. Shares have come back as the hype dies down.

Premium can't compare to freemium
Apple has a deep philosophical appreciation for good design. That includes product design along with software design. Apple has annual Design Awards for both iOS and OS X. One of the 2014 winners was Monument Valley, which Apple then featured prominently in the App Store. Monument Valley costs an upfront $4 on either iOS or Android, and does not offer in-app purchases.


Source: ustwo.

How well does an elegantly designed game with a premium price tag fare after getting various types of promotion from Apple? Developer ustwo recently disclosed that the title has sold 1 million copies. Before factoring a temporary price cut to $2 or the share to platform operators, that's upwards of $4 million in gross revenue. We do know that over half of those sales were on iOS (it sold 500,000 copies on iOS before the Android version was released), so Apple's share would be just over $600,000.

Revenue from promoted premium games can't compare to what freemium titles bring in.

The dark side of freemium
There are several possible reasons why Apple may be tired of freemium. First off, it settled a class action lawsuit just last year over excessive in-app purchases made by children, offering refunds to parents. European regulators are even cracking down on both Apple and Google, prohibiting the companies from marketing apps as "free" if they offer in-app purchases.

Even beyond kids, in-app purchases largely succeed with games that are highly addictive rather than well designed. Most people would agree that addiction is negative, and perhaps Apple is morally opposed to profiting off addiction.

Apple encouraging premium games over freemium games doesn't mean it will stop supporting in-app purchasing. For now, freemium developers can still sell virtual goods to their hearts content, but eventually a day may come when freemium fatigue sets in among consumers.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information