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Dependent on Digital Whales

It was very hard to find fault with anything that Facebook announced at F8 last week. Unlike their past developer efforts, which were all about pulling content onto Facebook, this year was about pushing Facebook’s infrastructure out into all kinds of mobile apps. The win for Facebook is that much more signal about their users, particularly about their app usage; the win for developers is being a part of the new Facebook Audience Network. The latter is a very big deal.

One of the key lessons I learned working with developers is that, at the end of the day, everything pales in comparison to the question: “How do I make money?” Developer tools are important, languages are important, exposure is important, but if there isn’t money to be made – or if more money can be made elsewhere – then you’re not going to get very far in getting developers on your platform.

Facebook, meanwhile, is crushing it when it comes to mobile revenue. In the last quarter, mobile ad revenue surpassed non-mobile ad revenue for the first time, bring in nearly $1.3 billion dollars. As I noted last week in a piece on Bloomberg View, “These ad units are largely purchased by free-to-play game publishers such as King (maker of Candy Crush Saga) and Big Fish Games, which leverage Facebook’s incredible demographic data to target the small percentage of players who will spend hundreds of dollars on in-app purchases.”

Both Google and Twitter are looking to edge in on Facebook’s territory; Twitter launched app install ads of their own last week, and Google is doing the same for search and YouTube, with the killer advantage of knowing exactly which apps Android users are already using.

Meanwhile, Google and Apple are both raking in 30% of every virtual sword and extra life, and Apple in particular isn’t shy about talking about it, continually bragging about the amount they have paid out to developers with nary a mention that 95 of the top 100 apps1 are free-to-play.2

So to recount, Facebook is going gangbusters because of ads for free-to-play games, developers are excited about the chance to cash in via Facebook ads, Google and Twitter are trying to mimic Facebook’s success, and Google and especially Apple are hanging their app store hats on the amount of revenue generated by in-app purchases.

App stores take 30% of in-app purchases; the remainder goes to free-to-play publishers like King. These publishers, in turn, drive the majority of Facebook mobile advertising, as that is the best channel to find more digital whales. And now, 3rd-party developers can get their piece.

App stores take 30% of in-app purchases; the remainder goes to free-to-play publishers like King. These publishers, in turn, drive the majority of Facebook mobile advertising, as that is the best channel to find more digital whales. And now, 3rd-party developers can get their piece.

In other words, billions of dollars in cold hard cash, and 20x that in valuations are ultimately dependent on a relatively small number of people who just can’t stop playing Candy Crush Saga.

  1. As of May 9, 2014
  2. Technically, not all are “free-to-play”, which means games; there are some freemium applications as well, but the overwhelming majority are games

18 thoughts on “Dependent on Digital Whales

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  2. Does Google also take a 30% cut from in-app purchases? I thought Amazon, etc. had in app purchases on Android but not iOS because Google did not take as much. Or is it only that Google, unlike Apple, allows third party purchasing APIs to function?

  3. Very interesting. Ben, have you seen data that would confirm this, such as percent of users who buy in-game upgrades? What share of overall app revenue is from in-game upgrades?

  4. Answered my own question: Re/code reports that a new study from app-testing firm Swrve claims that half of all in-app purchases are made by just 0.15% of mobile gamers, which is pretty stunning considering how lucrative in-app purchases have become for mobile game developers.

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