In-app purchases overtake mobile ad revenues on iOS

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JASON ANKENY

A funny thing happened on the way to the land of milk, honey and mobile advertising revenues: In-app purchases, not ads, now generate substantially more income for iOS developers, according to new data published by mobile application analytics provider Flurry. Based on a sample study comprising leading iPhone social networking apps and social games reaching an estimated 2.2 million daily active users, in-app sales of virtual goods now account for about 80 percent of developers' average monthly revenue per user--as recently as Sept. 2009, micro-transactions represented only about 15 percent of monthly app ARPU.

"Admittedly, the idea that consumers acquiring virtual swords, gold coins and respect points can outperform advertising seems counter-intuitive; however, this phenomenon is neither new nor unique to the iOS platform," writes Flurry VP of marketing Peter Farago. "In fact, virtual goods sales already represent the primary source of revenue for social gaming on Facebook. Michael Pachter, Wedbush Morgan Securities video game analyst, reports that social gaming has grown from approximately $600 million in 2008 to $1 billion in 2009. Further, he forecasts that social gaming will generate nearly $1.6 billion this year, and grow to more than $4 billion by 2013."

How can your app get in on this action? To start, you need to focus on the iOS platform--unlike Apple's (NASDAQ:AAPL) App Store, Google's Android Market doesn't support in-app transactions, at least not right now (although third-party firms like PapayaMobile offer their own Android monetization solutions). From there, follow the template established by Limbic Software's iPhone game Tower Madness, the subject of a new Fast Company profile. First introduced in May 2009, Tower Madness (priced at $2.99) earned positive reviews and even scored Featured App honors in the App Store, but downloads soon tapered off--in response, Limbic issued a Lite edition, which briefly rejuvenated the premium version's fortunes before it again fell off the consumer radar.

So Limbic tried again, this time with Tower Madness Zero, a full-featured, ad-supported free version. The third time was the charm: The publicity generated by the free release re-energized interest in the premium edition, vaulting it as high as number 22 on the App Store's countdown of most popular iOS applications. When Apple enabled micro-transactions a few months later, Limbic developed the first in a series of Tower Madness Zero "expansion packs"--according to the startup's co-founder and CEO Arash Keshmirian, revenues from in-app pack sales now outpace ad income by about four times over. And if Limbic adds up total revenue across all three versions of Tower Madness, mobile advertising accounts for just 5 percent of its haul. "Many of our in-app purchases, taken singly, have individually generated more revenue than our total ad revenue," Keshmirian states.

Not all apps are guaranteed to experience the same success as Tower Madness, of course, but the fundamental moral of the Limbic story--Keep throwing stuff at the wall until something sticks--is a lesson that's worth its weight in gold (whether real or virtual). But don't write off mobile ad revenues just yet, Flurry contends--with social games on iPhone, iPad and iPod touch devices now attracting more than 19 million users each day, a total equal to the number of viewers tuning into primetime television hits like Dancing with the Stars, NCIS and even Sunday Night Football, advertisers can't ignore the mobile platform much longer. "Over the next 18 to 24 months, Flurry predicts strong revenue growth from both virtual goods and advertising revenue from social gaming," Farago writes. The land of milk and honey is still on the horizon--but the smart, aggressive and creative developers are making money now. -Jason