You see the addicted as you board the subway, co-workers on a lunch break sneak off for a quick fix. The addiction might even have affected a loved one in your own home. Curled up on the couch, the afflicted look for one last hit before bed. America is facing a Candy Crush epidemic.
The free-to-play game game has shot up sales charts on app stores. The maker of the game, King, is readying for an IPO that'll create the next wave of app millionaires.
Yet, Candy Crush Saga is far from the clear-cut champion as the world's top selling app. Its biggest competition comes from Japan, from a company that briefly surpassed the value of Nintendo earlier this year.
The world's best selling app might be Puzzles & Dragons, a relatively unknown app in America whose sales are putting past App Store hits like Angry Birds to shame.
How are games like Candy Crush and Puzzles & Dragons making so much money? More importantly for those in the video game industry, what's the revenue ceiling for the app store's most popular games?
The path to app success: in-app purchases
If you open up Apple's (NASDAQ:AAPL) App Store, you'll see a Featured apps menu. The Featured menu is extremely lucrative as it's the default view. However, the Featured menu frequently changes, meaning any boost from it can be short lived.
The real prize is staying atop the Top Charts menu. With 1.1 million apps available, the biggest challenge for app developers is getting visibility in front of consumers. Being near the top of any charts list provides visibility and the revenue that comes with it.
Yet, the past few years have seen a shift in which apps are making the most money. When the App Store started gathering momentum, games like Angry Birds that cost a small upfront fee (generally between $1 and $3) were the biggest hits.
Today, in-app purchases rule the day. The basic strategy is to create an addictive game and give it away for free. However, once players are in the game, offer either premium items or an ability to speed up gameplay for small sums of money. This past March, analytics company Distimo estimated 76% of all App Store revenue came from in-app purchases.
That figure continues to grow.
If you look at the top grossing apps in Apple's App Store, the top 15 right now are all free to download and offer in-app purchases. The top grossing app that costs money up front for less than $5? That'll be Angry Birds Star Wars II. It's just the 51st highest grossing app.
How much is Candy Crush making?
In the United States, Candy Crush Saga is the best selling app in Apple's App Store. It's also quite popular on Facebook and Android. Website Think Gaming made headlines in July when Slate published its estimate that Candy Crush Saga was pulling in nearly $636,000 per day. That's $231 million per year.
The headlines, which were astounded at the money Candy Crush Saga was making, didn't do the game justice. Think Gaming's estimates are only for U.S. revenue. That's a problem because Candy Crush Saga is a global phenomenon. App analytics site App Annie has Candy Crush Saga ranked as the number one grossing app on the iPhone in 60 countries -- from Argentina to Zimbabwe.
In reality, Candy Crush Saga is raking in significantly more than $231 million per year, but something less than a billion dollars. How do we know that? King filed for a kind of IPO that allows it to keep its financials under wraps for a period. It's the same kind of IPO Twitter recently used before finally unveiling its financial figures.
One of the requisite rules for filing this kind of confidential IPO is that businesses need to have less than a billion a year in revenue. Hence, we can get a very wide range on where Candy Crush developer King's revenues are.
Could Puzzles & Dragons be larger than Candy Crush?
Two facts are well documented. First, the vast majority of app revenue comes from Apple's iOS even if its global market share is a fraction of Android. iOS' app dominance has been declining, but according to IDC, 67% of app revenue in the second quarter still came from iOS.
Second, iOS has been doing very well in America. While Android is approaching 80% market share across the globe, Apple has been fighting back in America. Kantar pegged iOS' market share in the U.S. at just under 40% in the three months ending in August. With the release of the 5S and 5C in September, its market share will only rise across the holidays.
A fact that's not well-known is that the iPhone is actually doing better in Japan than in the United States. Kantar pegged the iPhone's Japanese smartphone market share at 47% in the same study, and that's before it got on the nation's largest carrier in September.
The big winner from Japanese consumers flocking to the smartphone platform with disproportionately high spending on apps has been GungHo Entertainment, the maker of the game Puzzles & Dragons. The game is a mix of an RPG on the top half of the screen, and a puzzle game similar to Bejeweled on the bottom.
The addictive gameplay has led to a reported 13 million-plus downloads, about 10% of Japan's population. On the back of Puzzles & Dragons budding success, the company recorded just shy of $300 million in sales in 2012.
In the first quarter of this year alone, the company recorded $328 million in sales, eclipsing the prior year's entire sales. In the second quarter of the year, GungHo brought in $440 million in sales.
With Puzzles & Dragons bringing in almost all of GungHo's sales, the game's last quarter implies an annual run rate of nearly $1.8 billion in sales. At its peak, World of Warcraft -- known as the cash king of PC games -- brought in about $1.2 billion in yearly sales.
A force to be reckoned with
We won't know for sure whether Candy Crush is close to GungHo's sales until the company formally files its financials as part of its IPO. However, there is ample evidence between it and Puzzles & Dragons that the biggest mobile games can make just as much money as big budget video games on consoles or PCs.
The trick to all this is consistency. Zynga fizzled out after its IPO once gamers became tired of tending to virtual crops. Whether or not gamers tire of Candy Crush Saga after King's IPO remains to be seen, but it's hard to imagine the game having the longevity of something like World of Warcraft, a game still immensely popular and approaching nine years of age.
Eric Bleeker, CFA owns shares of Facebook. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. 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.