Let me start by saying I like all kinds of video games. I like console games. I like PC games. I like shooters. I like RPG’s. Basically, I enjoy anything except sports games (and that’s really a comment about my attention span for professional sports rather than sports games themselves). I also like mobile games and free-to-play games. And I like F2P on mobile. I’ve had some great experiences with that combo when it’s done well. I still periodically dip back into Avengers Alliance*, and I had some great times with Hay Day and Tiny Trains.
My point is THIS IS NOT AN ANTI-F2P/ANTI-MOBILE/ANTI-MOBILE-F2P RANT.
The intention of this post is not to castigate mobile-F2P, but to point out a structural flaw in the current direction the market is taking. In general, it’s healthy for the industry to have a wide swath of business models, platforms, and vectors for people to games (or consume them, in business terms). There is a massive amount of potential in the mobile/F2P combo, but the market seems to be cannibalizing itself for short-term gains.
In my last article, “Competitive Advantage and the Productivity Frontier, Or Why Dark Souls is the Ikea of Game Development“, I mentioned a Harvard Business School professor named Michael Porter, and his creation of something called the “Five Forces Analysis”°. In short, it’s a tool to determine how large an impact the titular forces have or will prospectively have on profitability. The forces are rivals, supplier power, buyer power, new entrants, and substitutes. Performing a five forces analysis means looking at each one of those forces and estimating the impact it will have on profits. Let’s run the mobile-F2P industry through this particular prism, one force at a time.
Force #1: Incumbent Rivals
This one is pretty simple: more rivals = more competition. More competition = lower profits. The more rivals you have, the more you have to fight for every dollar of revenue. You can fight by developing a competitive advantage or you can fight on price. I’m guessing that’s pretty obvious. But, let’s break down the concept of rivalry further:
- Is there a large number of competing incumbent firms? Holy shit, yes there are. Mobile F2P studios, both independent and publisher owned are a dime a dozen.
- Impact on profits: Heavy
- Are the products homogenous? Again, hell yeah. For every Tiny Tower and Boom Beach, there is a horde or Candy Crush, Farmville, and Clash of Clans clones†. And then there’s the swarm of CCG’s. But, let’s digress for a moment: why are homogenous products so destructive to profits? The same reason toilet paper manufacturers make per-unit margins on the order of pennies: if your product is interchangeable, you have to compete on price. More specifically, you have to compete on consumer surplus: you need to give consumers more for their money and capture less surplus for yourself. In short, if you are making the same thing as everyone else, congratulations: you have commoditized your game. There is another, less obvious impact of lots of competition: it is really hard to standout on the App Store or Google Play. Unless you can convince Apple or Google to feature you, get ready for your customer acquisition cost to start eating your margin for lunch.
- Impact on profits: Heavy
- Do consumers experience low switching costs? Simply put, a switching cost is the cost (both accounting and economic) you absorb when you switch products or services. The easiest example is cellphone service. You are unlikely to switch from AT&T to Verizon as it requires some combination of paying an early termination fee and purchasing a new handset. F2P mobile games, by contrast, have a switching cost as close to zero as you could ever practically expect to get: the only cost is the time it takes to go back to the app store and download something else. A consumer can easily download four or five F2P apps at a time. And then four or five more. That’s the double edge sword of F2P’s low barrier to entry: it’s also a low barrier to exit.
- Impact on profits: Heavy
- Do you have diverse competitors? This is a little different than having lots of competitors: do your competitors come from diverse backgrounds? IE, does the fact that they have different perspectives make them unpredictable? It’s a little more abstract, but I would argue it has an impact. If you’re in the F2P-mobile market, you’re competing with teams from all over the world, particularly Korea and China. And let’s not forget the good folks in Finland.
- Impact on profits: Medium
There are a few other factors that impact incumbent competition but probably don’t hurt mobile-F2P too hard. Namely, inventory costs and capacity augmentation (which doesn’t really apply to a digital marketplace), high fixed costs (which is more of a concern for large-scale physical industries), and whether industry growth is slow (which is the opposite of what’s happening in mobile).
Conclusion: If you’re a mobile-F2P studio, then you’re in the middle of the largest barroom brawl in history. You either have to think strategically or you need to duke it out with everyone and leverage the living hell out of your analytics. Either way, competition is a huge threat to profits. Mobile-F2P is one of the purest examples of what economists call “perfect competition”, pushing price down to marginal cost (it’s free to replicate, hence it’s free to play). And we haven’t even touched the other four forces yet.
Overall threat to profitability: High
Force #2: Potential Entrants
What’s worse than lots of rivals? Lots more. And the democratization of game development has a big downside: everybody and her grandpappy can make and release a mobile game. Let’s walkthrough why:
- Are there economies of scale? Not in mobile development. In publishing maybe, but in development, once the game is made, it’s made. There is no marginal cost, so there are no economies or diseconomies of scale. In other words, a new guy is just as able to make and sell a product as everybody else.
- Does this deter new entrants? No
- Are there capital requirements? Again, not really. Yeah you need some hardware and an engine license, but those are relatively cheap. These days, you don’t need an office, task tracking software is free, and you can rent server space. The biggest cost is salary, but there are lots of creative ways for small teams to figure that out.
- Does this deter new entrants? No
- Is there limited access to distribution channels? Not at all. You release a game, you have the exact same distribution channel as Supercell and Gameloft. And so does everyone else. And her grandpappy.
- Does this deter new entrants? No
- Are there government regulations restricting market entrance? Nope.
- Does this deter new entrants? No
- Do any of the incumbents have a reputation for aggressively competing on price to deter new entrants? It’s difficult to have a price war when your product is already free.
- Does this deter new entrants? No
- Is there a learning/experience curve to achieve profitability: This is one area where incumbents have an advantage. Making money with a F2P product is really difficult. Despite what the fervor around F2P would have you think, putting out a mobile-F2P game is not a guaranteed profit. Learning how to effectively support and monetize a game in live service is its own skill set. That being said, does it deter new entrants? Probably not. It just might help thin out some of the heard once they’ve entered the market.
- Does this deter new entrants? No
- Do you need access to expensive proprietary technology? Not with the Unity revolution. Unity’s an awesome engine with a wonderfully indie-friendly business model. I love Unity. So do 2.5 million other people.
- Does this deter new entrants? No
Conclusion: Basically, other than some relatively low startup costs, the only barrier to entry is Apple’s certification process. So, if your current competitors hurt your profits, get ready for more of them. Lots more.
Overall threat to profitability: High
Force #3: Substitute Products
Okay, so you’ve got lot’s of rivals, and you know lots more are coming. It can’t get any worse, right?
Wrong. It’s not just your industry you need to worry about. You need to worry about all the other industries that could pull your customers away. The most obvious substitute product would be console or PC games, but I’d argue that mobile games are contested by different substitutes: social media, e-readers, and good, old-fashioned books. There are a lot of products that compete for a mobile user’s time in the context in which mobile games would seem to have an advantage. On the bus. Waiting in line at Starbucks. On the crapper.
Convincing a mobile gamer to monetize is a slow, difficult balancing act. Too much tutorial means too much friction. Too little and the player won’t understand how to monetize. Squeeze him for money too soon, and he’ll get frustrated and leave. Too late, and he’ll lose interest before the squeeze. Too little content and she’ll get bored. Too much, and she has no reason to monetize. It’s a delicate process of establishing a relationship with the player. And you have to manage it through a barrage of distractions. Texts. Tweets. Facebook likes. Viral content. Or maybe the player decides he would rather read the next chapter of his Ludlum novel.
Conclusion: Mobile gaming is targeted and paced for people on the move: quick bursts of content. But so is every other app on a mobile user’s device. And you need players to be actually looking at your game in order to pay you for it.
Overall threat to profitability: High
Force #4: Buyer Power
Most of the factors that impact buyer power are more relevant in a B2B context, and don’t apply to a consumer setting. But in the mobile space (as in many industries) consumers have a lot of power. If they didn’t, you wouldn’t be giving your games away for free. Again, mobile-F2P is an environment of perfect competition. Consumers don’t need you. Strictly speaking, they don’t need (in the survival sense) games at all. And the switching cost is zero. So, if you want their money, you need to offer them something they can’t get anywhere else or give them more value for their money than the competition.
Conclusion: Even though your consumers don’t have a lot of leverage over you (in the negotiating sense) they still have the ability to capture more surplus because they have lots of options and no switching cost.
Overall threat to profitability: High
Force #5: Supplier Power
Supplier power is a little tricky for digital goods. The most obvious suppliers are hardware makers and engine developers. But, for the sake of argument, let’s count Apple and Google as suppliers for mobile games. Okay, okay, throw Microsoft in there too. Do you, as a developer (or even a publisher) have power over your suppliers? Not a chance, Dancing Dixie.
- Are there few suppliers? Well, for engines, you’ve got Unity, and now Unreal and CryENGINE are doing more to support mobile and drop their rates within the price range of indie developers. But does that give you power over them? If there were fewer developers, maybe. But with the massive number of existing users, they’ll be under no pressure to negotiate with you. In fact, with that many users, they’re probably better off letting you walk than spending time negotiating. Any price drops are more a function of their own incumbent competition than your buyer power. As for Apple and Google, they’re flooded with products. You don’t like their terms? You want them to take less than 30%? Yeah, good luck with that.
- Threat to profits: Medium
- Are there few substitutes for input? Unless you want to develop your own engine or build your own mobile content delivery service, your stuck with the big players.
- Threat to profits: Medium
- Is it costly to switch suppliers? If you want to switch engines, that’s going to cost you months of productivity, if you’re lucky. Switching distribution channels, less so, but you still need to port the product which certainly isn’t free.
- Threat to profits: Medium
- Do your suppliers have lots of other customers? I’d call that a big yes.
- Threat to profits: Medium
- Are they more important to you than you are to them? Again, the answer is almost certainly yes unless you are a huge developer that single handedly makes them a lot of money. Activision and EA might be able to apply some leverage to Unity or Apple. Maybe. But in general, there are lots of mobile developers out there. You need an engine and a distribution channel, bit the reverse isn’t true.
- Threat to profits: Medium
- Can the supplier forward-integrate? In non-business-speak, can your suppliers make games? Unreal is made by Epic. CryENGINE is made CryTech. Unity is getting into game development. Google is getting into game development. I wouldn’t be surprised if Apple jumped in. So, yes they can forward integrate and they already have. So they are not dependent on you making games for them. But, they do need a critical mass of products in order to keep their platforms healthy, and they still stand to profit from you, even if you end up being a direct competitor in the marketplace.
- Threat to profits: Low
Conclusion: The market suppliers are dealing with enough game makers that they’re not going to squeeze you for more money. But that also means you can’t squeeze them. So, if you don’t like their prices, or their 30% cut is killing your profits, there isn’t much you can do.
Overall threat to profitability: Medium
Summary
Mobile-F2P has a reputation as the place you make products when you have no integrity and you just want to make lots of money. That first part is grossly unfair. There are developers who sincerely believe in F2P and want to make games that are genuinely appealing to a mobile audience and aren’t just Skinner boxes. Supercell regularly kills projects it doesn’t think are fun. NimbleBit takes a fun-first, profit-later approach to design. That’s why you might actually know their names in a sea of mobile developers. In business-speak, they are market leaders with differentiated products (in other words, they avoid the fast-follow, homogenous product, commoditization trap).
The second part, that mobile is where you go to make money, is simply false. It’s a messy, noisy, corporate brawl. There have been obscenely big successes, but that doesn’t make turning a profit in mobile any less difficult. It’s hard. Really hard. And a five forces analysis tells us why. It’s hard to get noticed. It’s hard to retain an audience. It’s hard to compete on something other than price.
It’s true that there is a counter pressure in that the market is continuously expanding, but that expansion has a theoretical limit. At some point, every potential mobile customer will have a device. Then what? It’s survival of the fittest, that’s what.
And that’s not a bad thing. As I said in the intro, this isn’t an anti-mobile or anti-F2P screed. It’s a healthy thing that some businesses will survive and some will fail. In theory, that means the best companies (though not necessarily the best games) will succeed, and everyone else will go out of business. The mobile market in general, and free-to-play specifically, is currently over-served. And that saturation will eventually force some developers out of the market onto some other platform. Competition on mobile will be a little less perfect, profits will be a little less skimpy, and supply will approach a balance with demand.
And that’s a great thing.
* Full disclosure: I worked on Marvel XP, a story extension platform that first appeared in Avengers Alliance °For more info, see Porter, “The Five Competitive Forces that Shape Strategy”, Harvard Business Review, January 2008 †Has anyone coined the term “Clash of Clones”? If not, it’s mine!