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Apple Wants More Engaging Arcade Games

By Evan Niu, CFA – Jul 1, 2020 at 4:00AM

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There are signs that Apple Arcade subscriber retention is poor.

Roughly nine months after launch, Apple (AAPL 1.19%) is now reportedly looking to mix up its strategy for Apple Arcade. The subscription mobile gaming service costs just $5 per month and includes a catalog of premium games that forgoes ads or in-app purchases. The offering is part of the company's broader push to grow its services segment, which is finally starting to see paid subscription growth accelerate.

Apple has never disclosed how many Apple Arcade subscribers it has, but the strategic pivot could imply that retention is weak.

Apple Arcade game displayed on an iPhone 11

Image source: Apple.

Apple wants users hooked

This week, Bloomberg reported that Apple is now trying to focus on games that have higher levels of engagement. Generally speaking, many mobile games tend to cater to casual gamers, but those types of users may not stick around after the free trial and start paying $5 per month. Some users have started receiving email offers for a second free trial month, suggesting that a lot of users are canceling without renewing.

Apple has now canceled development of numerous titles that third-party studios had been working on, according to the report. The Cupertino tech giant is paying out cash to those developers for milestones that have already been achieved but now those small companies are scrambling to mitigate the financial impacts, particularly as the COVID-19 pandemic continues to wreak havoc on the global economy and create massive macroeconomic uncertainty across many industries.

Apple reportedly pointed to Grindstone, developed by Capybara Games, as an example of the type of engaging game it's looking for. The puzzle game was released in October to critical praise and hooks users with an addictive gameplay loop that spans multiple levels. However, Grindstone isn't quite the blockbuster hit that Apple is looking for to drive subscriber renewals.

The iPhone maker has allocated "tens of million dollars" to funding the service, according to the report, which is far less than the $500 million budget that was previously rumored. While the exact size of Apple Arcade's budget is unclear, the company clearly needs to grow the subscriber base while minimizing churn to recoup those costs. Apple also offers a discounted annual subscription option as part of its efforts to encourage long-term subscriptions.

The road to 600 million

Arcade is one of a handful of new first-party services that Apple has launched over the past year as it seeks to grow a recurring revenue base with paid subscriptions, which reached 515 million last quarter. The company is aiming to hit 600 million paid subscriptions by the end of 2020, which should be easily achievable based on the 30 million to 35 million paid subscriptions that Apple adds every quarter.

Services is now a $50 billion business in terms of trailing-12-month (TTM) revenue, but antitrust scrutiny surrounding the App Store continues to intensify, and it could threaten that momentum.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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