Rovio has picked up the pace of its game launches — Angry Birds Star Wars is the third major Rovio title to debut in seven months. And unlike most of its rivals, Rovio is not focused on maximizing game revenue. It’s after merchandising opportunities.
Three years ago, most app vendors had a simple goal: maximize the download number of apps priced at $1 or $2. In 2011, the number of free apps soared as some companies figured out that giving away apps and then luring consumers into paying for in-app purchases can generate more revenue.
As a result, 80% of the ten top-grossing iPhone apps in America are now free — and 85% of the Top Twenty. Top-grossing games like Rage of Bahamut offer a wide spectrum of in-app purchases ranging from $0.99 to $99.99. And the more expensive items often yield meaningful sales: a developer called Remedy has pointed out that in one of their games, the $40 God Mode makes nearly as much money as the $2 accelerator.
Case closed, right? The app market has evolved from paid apps to free apps and as it turns out, the free apps proved to be stronger revenue-generators. Except that it’s not quite that simple. There is another, rare category of apps — games as vehicles for merchandising and franchising deals. This requires hundreds of millions of downloads to build brand awareness to the level that persuades major retailers such as Toys R Us and Hot Topic to pledge marketing support.
Rovio, of course, is the leading player in this third category of app vendors. In Helsinki, it is widely assumed that merchandising revenue is set to top 40% of Rovio’s total revenue this winter. Rovio is thought to get roughly a 2% to 4% cut of the retail price of the merchandise sold under the Angry Birds banner — calendars, coffee mugs, baby clothes, etc. The company itself has only released year 2011 numbers, so visibility to its finances is limited.
In any case, the licensing fees growth explains a few puzzling things about Rovio’s strategy. Unlike most of its rivals, the company has not focused on in-game revenue generation. Rovio’s summer smash Angry Birds Space is still #7 in US download chart even as the new Bad Piggies reigns as #1. However, ABS has slipped to #77 in revenue generation while BP has dropped to #7.
Rovio is still focusing on maximizing download numbers – not game revenue. Why? The answer may lie in the download softness of the leading revenue generators. Rage of Bahamut, the #2 grossing app on iPhone , is ranked #591 in downloads. Over the past year, a new category top-grossing games has emerged – games that generate a lot of money from in-game purchases, but have relatively weak download numbers. Another example is the #1 iPad revenue blockbuster Clash of Clans — it ranks #77 in downloads. Ironically, Clash of Clans was made by Rovio’s cross-town rival, Supercell. Finland now has two major mobile app companies, and their revenue strategies are polar opposites.
A new wave of game vendors has figured out how to foster gradual growth of a loyal user base willing to pay for multiple upgrades inside the game. These games can generate massive revenue — Rage of Bahamut is rumored to be grossing more than $5 million a month even though the game does not even crack iPhone’s Top 500 in downloads.
But these lucrative high-loyalty games do not have the kind of mass market audience that fosters a compelling merchandising universe. They have a relatively narrow, fiercely loyal fan base. Rovio is going the opposite route, still trying to max out download numbers instead of in-app revenue generation. Retail chains love overexposure. Nerds may scoff at yet another Angry Birds spin-off product. But Toys R Us is selling to grandmas who have only peripheral knowledge of the game market. Only endless repetition of a brand cuts through.
And that gets us to the most fascinating question in the app industry today. What is the best way to maximize long-term revenue generation? Is it focusing on download numbers and creating a merchandising armada? Or is it by polishing the in-game purchase strategies to absolute brilliance until you can become a top-grossing app even if you are #500 in the download chart?
The traditional video game console market was essentially static for more than two decades, from early ’80s to mid-Noughties. The rapidly mutating mobile app market is an overclocked laboratory of capitalism.