So you've decided to become an independent developer. In my case that's a fancy way of saying "I'm going to make a video game." Also in my case there's the subtext "and not get a paying job this summer." So you're faced with the reality that if you want to develop games as anything more than a hobby, you're going to have to find a way to make money off of your game. There are a number of ways to monetize, but for now I'm going to focus on the old fashioned way, convincing people to buy it.
There are a ton of decisions that go into making a game, but this post is about economics so I'm going to focus on how economics has influenced my decisions. I knew from the beginning that I wanted to make a game that would be more complex than what the casual gamer would be looking for. This narrows my particular market to one of the 2.5 included in the post below that are non-casual. I've always wanted to make an RPG so I decided that that would be the type of game I'd make. In my opinion this limits my market to really just the last two discussed in the below post. As an indie developer I already would have had a hard time reaching the Big Name gamer, RPGs are a genre that I think are doubly hard to reach the Big Name gamer with so I decided to just forgo that market.
Now I'm left deciding between the core gamer market and the iOS gamer market. In pure numbers, I feel that the core gamer market is larger than the iOS gamer market. I also feel that there is a lot more competition in the core gamer market. This was a decision that took me a little while so I'm going to go deeper into my thought process.
In a competitive marketplace, manufacturers are successful by differentiating their product. This differentiation provides a sort of monopoly power in the marketplace. Think if you were the only company making chocolate ice cream. The market for ice cream may be competitive, but if someone wants chocolate, you're the only game in town. So how can you differentiate a game in the App Store? One way is by having brand cachet, but as a new developer you're not going to have that. A second way is genre differentiation. Tower defense games have been really popular on the App Store and have gained fans of the genre. Therefore just by making a TD game, you're appealing to a group of fans.
Another is innovation. Innovation in games can be a double-edged sword. You might have something new, but if it's not accessible, or interesting, or fun it doesn't matter. For this reason it's hard to set out to innovate. Innovation is also something that I think many developers would like to believe they have in spades. I'd certainly like to believe that about myself, but I also want to be realistic. There are certainly things I consider innovative in The Epic of Roderick, but I don't want to kid myself into thinking that they will be heralded as the next revolution in gaming. I hope they will be, but I'm not banking on that.
There are other ways to differentiate, but the one I came back to, I'm sure because of my background in retail, was customer service. Was there a way that I could make a game that provided better customer service? In a way this is a model that many developers have gone with their games. Updates and additional (free) content could certainly be considered customer service, and it seems that apps that are focused on this are able to differentiate themselves and become more successful. While we will certainly have updates and additional content (provided we get enough downloads to support it), I wanted to try and take customer service differentiation one step further.
When I asked myself what that step would look like, I had to go back to considering my potential customers, core gamers and iOS gamers. Was there a customer need or want that was not being met enough on the App Store. When looked for what core gamers would be most want in an RPG on their iPhone, it seemed the biggest thing they were missing on the App Store was a really deep, engrossing and rich RPG experience. While I would love to some day design a 100 hour epic, I felt that would be a bit much for my first foray into game development. When I looked for what iOS gamers wanted out of an RPG, it was much clearer. The game had to be native. That was something I thought I could deliver on (and I'll talk about much more as we get closer to release time).
So now I had my market, the iOS gamer. Yes in my opinion it's the smallest gaming market on iDevices, but I feel it's the market with the least amount of competition and the most potential for growth.* I cannot stress the importance of deciding on my market enough. I had decided to differentiate my product through providing excellent customer service. I had to know my customers. My goal was now to not only make a great game, but also make a product specifically tailored to the wants and needs of the iOS gamer. Awesome!
So what does any of this have to do with the economics of the App Store? Well a market consists of producers and consumers. These two groups are linked by products and prices. I wanted to write down some thoughts as a producer on how these have come together in this instance.** Consider it micro-microeconomics. I also wanted to show how economics can play into design decisions. I'm still keeping my specific design decisions close to the chest, but all of my design decisions were made with my potential customers in mind. I was always asking how The Epic of Roderick could be more appealing to iOS gamers. That was based on a desire to differentiate my product through customer service, a desire I had because I want my product to be viable in a competitive market place that does not have price as a signal and has poorly developed stratification amongst consumers.
Next post I'm going to talk more about monetization and how it plays out on the App Store, and how I see it playing out in the long run. I'll also talk more about where I see the future of iOS gaming taking us with a focus on economics. Remember to follow us on twitter @InstantLazer and let me know that you're reading.
Wednesday, August 10, 2011
Wednesday, August 3, 2011
The Economics of The App Store part 2
In the first post of this series, I spoke a little of how price is not a signal on the App Store. In this post I want to talk a little bit about what effect this has on consumers of apps. In my opinion there are 3.5 kinds of consumers of games on the App Store, the casual/non-gamer, the "Big Name" gamer, the core gamer, and the 0.5 is for a new brand of gamer I'll dub the iOS gamer. I'm going to talk about these three and a half types later, but first I want to talk about price signaling and consumers in general.
Let's take a completely separate industry that many people have experience with as an example, the market for gasoline. If you're like most consumers of gas, you know that there are different octane levels, but you don't have a clue what that means. You pick the octane level you're comfortable with, let's say Regular, and every time you get gas, you get Regular. Now let's say you're driving along and you come to a corner with two gas stations. What difference in price would there need to be for you to turn left instead of right? Two cents, I'm still turning right. Five cents and now I'm thinking about turning left. Why? Because price is not indicating anything of meaning to me as a consumer. A five cent increase in price doesn't indicate anything because gas is gas right? I'm picking whatever's cheapest.
Now let's say that one of those stations is selling Regular for two dollars more than the other station. Now maybe there's something going on. So you go and ask the attendant why the gas costs two dollars more. They let you know that it improves the performance of your differential flange, PVC, and EGR valves. If you're a mechanic, or otherwise knowledgable about cars, then you might know whether or not that is worth two dollars. If you're not knowledgable, however, the attendant might as well have said that it reenergizes your flux capacitor. You have no idea whether that's worth two dollars or not so why would you pay 50% more for a gallon? This is a key point in markets where price is not a signal, a difference from the standard price level needs to be qualified with information, but for a product to be successful that information needs to be meaningful to consumers. That's how you introduce price signaling into a market that is lacking it.
Now keep in mind the need for meaningful information as we discuss the different consumers of the App Store. First up is the casual/non-gamer. This is the consumer that didn't really play games until very recently, and doesn't really play games now, they have some games to waste some time with but won't go out of their way to get anything else.
Let's say that you're not a wine drinker, but you go to a friend's party and they have a merlot that you really like. You ask them what it is and the next time you go to the store you pick up a bottle. Now, you've enjoyed one wine so you decide to see if there are other wines that you like. You don't know all that much about wine, but you figure there's got to be some other good ones out there. So you head to the store and pick up (over multiple trips usually) a white wine, a different kind of red wine, and a more expensive merlot because those are the three different options from your perspective. Now, if none of them are as good as your merlot what are the chances that you will buy a different wine again? You have found the brand you like, you've tried others and they're not as good, so you buy that wine whenever you need a bottle and that's that.
This is our casual/non-gamer's experience. They got Angry Birds because a friend let them try it and they liked it. They may have tried a couple of other games, but they weren't as fun as Angry Birds so they stopped buying different games and just kept Angry Birds. Now back to our wine drinker. Your friend is having another party and now they have a new wine that you try and like. Now you have a second brand that you purchase and since you've been drinking the same thing for a year, you switch to the new wine. Now as a wine consumer this is how you make your purchasing decisions, you wait for your friend to let you try a new brand and then if you like it you buy it. This is how the casual/non-gamer looks at game purchasing. They get recommendations from friends (or the New and Noteworthy) and will never go combing through genres and sub-genres looking for something in particular.
The second kind of gamer is what I call the "Big Name" gamer. This is the gamer that has a console, and views games as something to do beyond just killing some time. They tend to consume well-known games, and games in particular series that they know they like. They play plenty of games, but it will take a little bit to get them to take the plunge on a game from a small or unknown developer. For these gamers, purchasing a game from the App Store is like looking for a sock in a pile of laundry. You rummage around for a bit and if you find the sock then awesome! If you don't find it after a little while you stop looking, grab the closest sock you find, and worry about matching socks another day. Of course once the laundry is separated and put away, finding the sock is no problem.
How does this analogy translate? Well let's say the Big Name gamer feels like purchasing a game. They've been playing a lot of Call of Duty so they search for call of duty in the App Store, find they can shoot zombies and boom CoD: Zombies is being downloaded. This is the laundry separated. Next they've been playing Dragon Age and are wondering if there's something RPGesque with some nice graphics to do some battling. They do a google search for iPhone games with nice graphics and swords. They've heard of Gears of War so Epic sounds legit and boom, Infinity Blade is downloaded. This is rummaging for the sock and finding it. Finally, they've been playing a bunch of LittleBigPlanet so they go searching for a platformer, a google search shows that there's eleventh-billion platformers for iOS. This gamer clicks a few links, decides it's not worth it, downloads whatever platformer's on the front page, and whatever's in New and Noteworthy gets downloaded. The point is, this gamer isn't going to go out of his/her way to find a game to play. If they don't find it, they either download something from the front page or nothing at all because their iDevice is not one of their primary gaming devices.
The third type is the core gamer. This is the consumer that follows the gaming industry and knows what's out there. The thing is, they don't have an iDevice for gaming. That's what their consoles and PSP/DS is for. This gamer is informed and will purchase games for their iDevice should they fit their particular gaming tastes. They are like the mechanic purchasing the expensive gas. You can give them esoteric information about games and let them make an informed gamer opinion on purchasing. But the key is that when they are looking to spend their gaming dollars, they look first to their other gaming systems. Like the Big Name gamer, iOS is secondary to their more dedicated gaming devices.
Finally there is a new breed of gamer that is developing, and that is the iOS gamer. This gamer is informed like the core gamer, but one of their primary systems is their iDevice. This is the group that downloaded Sword and Sworcery on day one. They know their ranking on GameCenter and have AppShopper installed on their phone with notifications on. Their home page is TouchArcade. This is a slowly growing group of gamers, and is absolutely essential to the future success of gaming on iDevices. They are the friend that keeps throwing parties with wines you like.
Now the reason I presented these 3.5 types of iDevice game consumers in this order is because I think that's the order that they are represented in terms of number of consumers. By far and away the largest number of iDevice owners are casual/non-gamers, followed by Big Name gamers, followed by core gamers, and finally by iOS gamers.* This has lead to a ridiculous information gap where games are being developed and marketed towards the last two demographics with expectations of selling them to the first two demographics. If a casual gamer (i.e. the majority of iDevice users) asks you why your $3 game is worth two dollars more than Angry Birds, and you answer, "because it's an isometric hack 'n slash with randomized dungeons." you've definitely lost a potential customer.
BUT, and here's the key, if you've made an isometric hack 'n slash, your potential customers are not casual gamers. This is where I think the hope is for the future of gaming on the App Store, and also why I don't think that there's a race to the bottom going on. For the very limited history of the App Store, most developers have viewed it as one giant gaming market of iDevice users. In actuality there are two markets. One is the market of all iDevice users, the other is the market of core gamers that have iDevices. Plenty of developers have tried to bridge these two markets, whether intentionally or unintentionally, and few have met with success. Without price as a signal, there simply is no way to provide enough information to the casual/non-gamer to differentiate a game to warrant an increase in price. But for the consumers that are informed, core gamers and iOS gamers, you can charge more than a dollar because they will understand what the increase in price is for.
The casual/non-gamer market has established its price standard as $1. This is hardly surprising since the casual/non-gamer would simply not purchase anything if games were more expensive. What we don't have yet is the price standard for the second market of core gamers. One simple reason is that we have no good idea how large that market is. If it's 10% of iDevice users than a reasonable price standard may be $10, but who knows what that percentage actually is.** For a business, few things could be riskier than producing a product for a nebulous market of unknown size. Few developers seem to even think that there is a secondary market of core gamers, but even if they did the markets for core gamers are almost certainly larger on dedicated handhelds and is certainly larger for consoles. If you have the capital to develop a game for core gamers, why would you choose the platform with the smallest market?
This has been a long post, but if you take only one thing away from it regarding the economics of the App Store let it be this. We do not have a market with a race to the bottom occurring with games on the App Store. Instead we have a much larger casual gaming market obscuring a smaller core gaming market. A race to the bottom would imply that developers could make Angry Birds-like profit off of increasingly inferior products. If anything, the opposite is true. The amount of value demanded by the casual gamer for $1 increases. This is exactly as it should be in a competitive market. But the value added needs to be understandable by a casual gamer.*** If you have a 100 hour-long srpg with a deep skill tree and extensive leveling system with customizable everything, you can price it at a dollar, but it isn't going to resonate with the casual gamer. Every core gamer that likes long srpg's will recognize the value for a dollar and will purchase it, but those gamers would probably buy it at $3, or $7, or maybe even $16. As a developer you gain nothing by pricing a game like that at $1, and the only reason you would is by not understanding the difference between the casual gamer and core gamer markets.
This post is already way too long so I'm going to wrap it up. Next post I'm going to talk about some specific decisions I've made while designing The Epic of Roderick with concerns to the economics of the App Store. I'll also talk a little bit about the economics of some of the unique economic aspects of the App Store such as IAP, freemium, free-with-adds, etc. And I'll also talk more about where I see the future of game development on iOS going with an eye towards economics. Remember to follow InstantLazer on Twitter @InstantLazer, and let me know if you're reading.
*I have no numerical evidence to back up this claim as I don't believe any data exists. This is purely my impression through being involved in the iDevice community and looking at people I know with iDevices.
**Price levels have a huge number of factors that aren't done justice by this simplistic "one-tenth the size means ten times the price" statement. It is offered only as a very quick reference point for the discussion.
***Just as an aside, I see a number of developers on sites complaining about the fickleness of iDevice consumers when their game doesn't sell a gajillion copies. If you're selling a casual game that is not as much fun and as polished as Angry Birds, or Fruit Ninja, or Doodle Jump, or Cut the Rope, and you priced it at $2, you should be celebrating selling even one copy. If you priced it at $1 then you've brought an inferior product to a competitive market. How many carrots would you sell at market price if they were cut in half? If you're selling a complex and/or deep game, then your market is much smaller than the totality of iDevice owners and you need to change your expectations of success.
Let's take a completely separate industry that many people have experience with as an example, the market for gasoline. If you're like most consumers of gas, you know that there are different octane levels, but you don't have a clue what that means. You pick the octane level you're comfortable with, let's say Regular, and every time you get gas, you get Regular. Now let's say you're driving along and you come to a corner with two gas stations. What difference in price would there need to be for you to turn left instead of right? Two cents, I'm still turning right. Five cents and now I'm thinking about turning left. Why? Because price is not indicating anything of meaning to me as a consumer. A five cent increase in price doesn't indicate anything because gas is gas right? I'm picking whatever's cheapest.
Now let's say that one of those stations is selling Regular for two dollars more than the other station. Now maybe there's something going on. So you go and ask the attendant why the gas costs two dollars more. They let you know that it improves the performance of your differential flange, PVC, and EGR valves. If you're a mechanic, or otherwise knowledgable about cars, then you might know whether or not that is worth two dollars. If you're not knowledgable, however, the attendant might as well have said that it reenergizes your flux capacitor. You have no idea whether that's worth two dollars or not so why would you pay 50% more for a gallon? This is a key point in markets where price is not a signal, a difference from the standard price level needs to be qualified with information, but for a product to be successful that information needs to be meaningful to consumers. That's how you introduce price signaling into a market that is lacking it.
Now keep in mind the need for meaningful information as we discuss the different consumers of the App Store. First up is the casual/non-gamer. This is the consumer that didn't really play games until very recently, and doesn't really play games now, they have some games to waste some time with but won't go out of their way to get anything else.
Let's say that you're not a wine drinker, but you go to a friend's party and they have a merlot that you really like. You ask them what it is and the next time you go to the store you pick up a bottle. Now, you've enjoyed one wine so you decide to see if there are other wines that you like. You don't know all that much about wine, but you figure there's got to be some other good ones out there. So you head to the store and pick up (over multiple trips usually) a white wine, a different kind of red wine, and a more expensive merlot because those are the three different options from your perspective. Now, if none of them are as good as your merlot what are the chances that you will buy a different wine again? You have found the brand you like, you've tried others and they're not as good, so you buy that wine whenever you need a bottle and that's that.
This is our casual/non-gamer's experience. They got Angry Birds because a friend let them try it and they liked it. They may have tried a couple of other games, but they weren't as fun as Angry Birds so they stopped buying different games and just kept Angry Birds. Now back to our wine drinker. Your friend is having another party and now they have a new wine that you try and like. Now you have a second brand that you purchase and since you've been drinking the same thing for a year, you switch to the new wine. Now as a wine consumer this is how you make your purchasing decisions, you wait for your friend to let you try a new brand and then if you like it you buy it. This is how the casual/non-gamer looks at game purchasing. They get recommendations from friends (or the New and Noteworthy) and will never go combing through genres and sub-genres looking for something in particular.
The second kind of gamer is what I call the "Big Name" gamer. This is the gamer that has a console, and views games as something to do beyond just killing some time. They tend to consume well-known games, and games in particular series that they know they like. They play plenty of games, but it will take a little bit to get them to take the plunge on a game from a small or unknown developer. For these gamers, purchasing a game from the App Store is like looking for a sock in a pile of laundry. You rummage around for a bit and if you find the sock then awesome! If you don't find it after a little while you stop looking, grab the closest sock you find, and worry about matching socks another day. Of course once the laundry is separated and put away, finding the sock is no problem.
How does this analogy translate? Well let's say the Big Name gamer feels like purchasing a game. They've been playing a lot of Call of Duty so they search for call of duty in the App Store, find they can shoot zombies and boom CoD: Zombies is being downloaded. This is the laundry separated. Next they've been playing Dragon Age and are wondering if there's something RPGesque with some nice graphics to do some battling. They do a google search for iPhone games with nice graphics and swords. They've heard of Gears of War so Epic sounds legit and boom, Infinity Blade is downloaded. This is rummaging for the sock and finding it. Finally, they've been playing a bunch of LittleBigPlanet so they go searching for a platformer, a google search shows that there's eleventh-billion platformers for iOS. This gamer clicks a few links, decides it's not worth it, downloads whatever platformer's on the front page, and whatever's in New and Noteworthy gets downloaded. The point is, this gamer isn't going to go out of his/her way to find a game to play. If they don't find it, they either download something from the front page or nothing at all because their iDevice is not one of their primary gaming devices.
The third type is the core gamer. This is the consumer that follows the gaming industry and knows what's out there. The thing is, they don't have an iDevice for gaming. That's what their consoles and PSP/DS is for. This gamer is informed and will purchase games for their iDevice should they fit their particular gaming tastes. They are like the mechanic purchasing the expensive gas. You can give them esoteric information about games and let them make an informed gamer opinion on purchasing. But the key is that when they are looking to spend their gaming dollars, they look first to their other gaming systems. Like the Big Name gamer, iOS is secondary to their more dedicated gaming devices.
Finally there is a new breed of gamer that is developing, and that is the iOS gamer. This gamer is informed like the core gamer, but one of their primary systems is their iDevice. This is the group that downloaded Sword and Sworcery on day one. They know their ranking on GameCenter and have AppShopper installed on their phone with notifications on. Their home page is TouchArcade. This is a slowly growing group of gamers, and is absolutely essential to the future success of gaming on iDevices. They are the friend that keeps throwing parties with wines you like.
Now the reason I presented these 3.5 types of iDevice game consumers in this order is because I think that's the order that they are represented in terms of number of consumers. By far and away the largest number of iDevice owners are casual/non-gamers, followed by Big Name gamers, followed by core gamers, and finally by iOS gamers.* This has lead to a ridiculous information gap where games are being developed and marketed towards the last two demographics with expectations of selling them to the first two demographics. If a casual gamer (i.e. the majority of iDevice users) asks you why your $3 game is worth two dollars more than Angry Birds, and you answer, "because it's an isometric hack 'n slash with randomized dungeons." you've definitely lost a potential customer.
BUT, and here's the key, if you've made an isometric hack 'n slash, your potential customers are not casual gamers. This is where I think the hope is for the future of gaming on the App Store, and also why I don't think that there's a race to the bottom going on. For the very limited history of the App Store, most developers have viewed it as one giant gaming market of iDevice users. In actuality there are two markets. One is the market of all iDevice users, the other is the market of core gamers that have iDevices. Plenty of developers have tried to bridge these two markets, whether intentionally or unintentionally, and few have met with success. Without price as a signal, there simply is no way to provide enough information to the casual/non-gamer to differentiate a game to warrant an increase in price. But for the consumers that are informed, core gamers and iOS gamers, you can charge more than a dollar because they will understand what the increase in price is for.
The casual/non-gamer market has established its price standard as $1. This is hardly surprising since the casual/non-gamer would simply not purchase anything if games were more expensive. What we don't have yet is the price standard for the second market of core gamers. One simple reason is that we have no good idea how large that market is. If it's 10% of iDevice users than a reasonable price standard may be $10, but who knows what that percentage actually is.** For a business, few things could be riskier than producing a product for a nebulous market of unknown size. Few developers seem to even think that there is a secondary market of core gamers, but even if they did the markets for core gamers are almost certainly larger on dedicated handhelds and is certainly larger for consoles. If you have the capital to develop a game for core gamers, why would you choose the platform with the smallest market?
This has been a long post, but if you take only one thing away from it regarding the economics of the App Store let it be this. We do not have a market with a race to the bottom occurring with games on the App Store. Instead we have a much larger casual gaming market obscuring a smaller core gaming market. A race to the bottom would imply that developers could make Angry Birds-like profit off of increasingly inferior products. If anything, the opposite is true. The amount of value demanded by the casual gamer for $1 increases. This is exactly as it should be in a competitive market. But the value added needs to be understandable by a casual gamer.*** If you have a 100 hour-long srpg with a deep skill tree and extensive leveling system with customizable everything, you can price it at a dollar, but it isn't going to resonate with the casual gamer. Every core gamer that likes long srpg's will recognize the value for a dollar and will purchase it, but those gamers would probably buy it at $3, or $7, or maybe even $16. As a developer you gain nothing by pricing a game like that at $1, and the only reason you would is by not understanding the difference between the casual gamer and core gamer markets.
This post is already way too long so I'm going to wrap it up. Next post I'm going to talk about some specific decisions I've made while designing The Epic of Roderick with concerns to the economics of the App Store. I'll also talk a little bit about the economics of some of the unique economic aspects of the App Store such as IAP, freemium, free-with-adds, etc. And I'll also talk more about where I see the future of game development on iOS going with an eye towards economics. Remember to follow InstantLazer on Twitter @InstantLazer, and let me know if you're reading.
*I have no numerical evidence to back up this claim as I don't believe any data exists. This is purely my impression through being involved in the iDevice community and looking at people I know with iDevices.
**Price levels have a huge number of factors that aren't done justice by this simplistic "one-tenth the size means ten times the price" statement. It is offered only as a very quick reference point for the discussion.
***Just as an aside, I see a number of developers on sites complaining about the fickleness of iDevice consumers when their game doesn't sell a gajillion copies. If you're selling a casual game that is not as much fun and as polished as Angry Birds, or Fruit Ninja, or Doodle Jump, or Cut the Rope, and you priced it at $2, you should be celebrating selling even one copy. If you priced it at $1 then you've brought an inferior product to a competitive market. How many carrots would you sell at market price if they were cut in half? If you're selling a complex and/or deep game, then your market is much smaller than the totality of iDevice owners and you need to change your expectations of success.
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