Mobile game developers struggle to replicate Zynga's success

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Mobile game developers are competing in one of the most difficult of all mobile application markets. Although the mobile game market is full of promise, it does not offer financial success to the vast majority of developers. The market is also entering a period of change, which will intensify competition. 

Mobile games are played by 101 million people in the United States, according to a recent study by Newzoo. Worldwide, the revenues are substantial. Juniper Research recently projected that the global mobile games market will be worth $18.3 billion by 2016.

Some companies have found real riches in this market. Rovio's Angry Birds, for example, brought in $100 million in revenues last year, and Zynga pulled in $321 million. Yet, that type of success is the exception rather than the rule, as most game developers struggle to make meaningful revenues.

Streaming Colour Studios has found that the top 20 percent of iOS developers earn 97 percent of App Store revenues and that half of all mobile games distributed via Apple's (NASDAQ:AAPL) App Store produce less than $3,000 in revenues. The business is even more difficult for Google's (NASDAQ:GOOG) Android game developers, because Android apps are harder to monetize. According to the Newzoo study, iOS developers generate 84 percent of revenues from the top 200 grossing games in iPad, iPhone and Android stores.

Consolidation and increasing competition
Competition for the lucrative market is driving mobile game companies to consolidate and some are paying substantial sums to acquire hot startups.  Gree International, a Japanese mobile game company, just purchased Funzio Inc. for $210 million, and Zynga just purchased OMGPOP for $180 million plus $30 million in employee-retention payments.

Mobile game developers that seek to become future acquisition targets are ramping up their business strategies to increase their influence.

Topgirl

Crowdstar which makes Top Girl (pictured) recently raised $11.5 million in funding.

CrowdStar for example, which just raised $11.5 million in a recent funding round, has previously offered social games for the PC as well as mobile devices and its Top Girl and Social Girl titles have enjoyed top app store rankings in the past. The company recently abandoned its PC efforts to work exclusively in mobile. It believes the mobile game market is wide open right now and that it is time to make a move for a leadership position.  

"There is no single player that dominates the market, so anyone can emerge as the top player in the app store," said Suren Markosian, founder of CrowdStar. "We believe we can do that."

PC, console game companies look to mobile
Higher-end and major brands from the PC and console game industries are poised to expand their mobile strategies, and this could create competitive pressures as well as pricing impacts, according to Dave Durnil, director of advanced content and gaming at Qualcomm (NASDAQ:QCOM).

So far in this sector, major game franchises have licensed their intellectual property to mobile developers to create mobile versions of games after the games have launched on PC and console platforms. Durnil expects these brands to begin taking more of that work in-house as they create online multi-player games that allow game participants who are using different types of devices to play against one another. The brands will orchestrate game development so that the work on all platforms, PC, console or mobile, will take place in parallel and the titles for each platform will come to market at the same time. The strategies will begin with devices that run on Windows 8 and Windows RT, and then expand to Android and iOS products, Durnil said.

Suren markosian

Markosian: no single player dominates the market.

Durnil expects these brands to experiment with pricing. The intense loyalty that many customers have for their favorite games may allow these brands to avoid the freemium model and charge more than the usual download fees. Conceivably, this could favorably influence prices of games in general. At the same time, the brands may also find the in-app purchasing experience used in mobile to offer a new and enticing business opportunity that is new to these products.

"It will be interesting in the next couple years to see how they bring those titles over and what their pricing structure is," Durnil said.

Freemium model vs. paid apps
Monetization and distribution are generally challenging to game developers. The migration away from paid downloads to the freemium model is expected to continue and with that more and more developers will strive to monetize their games through in-app purchases and they'll use advertising more to acquire users and generate revenues.

Ilja Laurs, the founder and executive chairman of GetJar, said that 80 percent of mobile games are played only once and therefore customers will always be reluctant to pay for games. Developers do have real motivation to avoid paid apps, he said: For every game that is sold for a price, nine are distributed for free. And those customers who acquire their apps for free are actually much more valuable, often yielding in-app purchase and other revenues that are 10 to 50 times higher in value than the price of an app.

GetJar, which offers its app store and monetization services as well as advertising services for developers and advertisers, recently introduced a virtual currency system to simplify the micro-transactions featured in games. Laurs believes this approach will continue to gain traction and that within three years, half of the transactions in mobile games will employ virtual currency.

Laurs

Laurs: 80 percent of mobile games are played only once

Laurs also believes that the freemium model will motivate developers to create more engaging customer experiences. They will need to do this to promote ongoing usage that exposes customers to monetization opportunities. He believes this process will improve app quality and the mobile game market overall.

The freemium model does require developers to employ in-app networks and various other marketing and advertising techniques to acquire users and they need to derive income from advertising revenues. As a result, game developers are responsible for creating "one of the biggest spending categories among all advertisers" in the mobile marketing industry, Laurs said. 

Given the magnitude of the mobile game business, more vendors will emerge to serve the need for monetization and advertising solutions.  PlayHaven, which launched in September, is one of these. It has introduced a platform that developers can use facilitate in-app purchases, virtual currency, incentives such as product discounts, recommendation and advertising.

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