Smartphones are taking the world by storm. They appear to be the fastest growing technology we have ever seen. They slowly grew to a 10% adoption rate and then something changed everything: Apple launched the iPhone. 2 years later the adoption rate reached 40% in the US. Right now nearly half the adults in the US own a smartphone.
Tablets are not doing too bad either: 1 in 4 smartphone owners owns a tablet. The tablet market is expected to reach a 40% adoption rate in the US by 2016.
Mobile app stores
Apple pioneered a new way of looking at software distribution that has deep roots in Steve Jobs’ vision of “connected consumer”. With the launch of the App Store, Apple triggered a behavior based on instant software delivery and micro payments. The great thing about the system is the seamless integration between the devices and the central market. Payments are easy to make, software installation does not require any advanced IT skills and the iOS makes it easy to operate apps.
Apple app store market was a huge success. It now features more than 500 000 apps, 66% of which are paid. This apps generated over $3.4 billion revenues Apple paid to its developers. Google Play, the Android app store, paid “only” $240 million.
Google Play is actually not the biggest retailer of Android applications. The main challenger to Apple’s reign seems to be the Amazon App Store. According to mobile analytics company Flurry, Amazon generates 89% of iTunes App Store’s revenue.
Mobile Gaming is on the rise
“All work and no play makes Jack a dull boy”. Jack decided he would play a game on his smartphone and now the mobile gaming industry is expected to generate $7.5 billion dollars in revenues by 2015.
Established game developers such as EA, Gameloft, Ubisoft, talented new comers such as Zynga and Konami and independent game studios jumped the wagon. They had to learn the new rules and understand the mobile users behavior as the mobile gaming industry is a new breed, where concepts such as social gaming, micro payments and in-app purchase matter. The fast growing user base expects new releases, awesome graphics, multiplayer support and the gaming companies serve them well after a few past flops.
The top grossing games share a common feature. They’re freemium. That means they’re free to install and play and generate revenue from in-app purchases. I have discussed the model in the “Social Gaming Architecture” article but let’s go over the basics again:
users are free to install and play the game
they get incentives to help them understand and start playing the game on a daily basis
as the time passes the games are harder to play and game gratification is harder to obtain
by buying in-game upgrades the users can get upgrades, virtual coins etc.
The future of mobile gaming
We should expect mobile gaming to become mainstream. With better connectivity between tablets, smartphones and TV’s we will probably see a decline in gaming consoles popularity and sales.
Because the cost of entry in such a market is rather low for now the market will see new challengers to established gaming companies. Rovio was acquired by EA after the highly popular Angry Birds game went mainstream but Rovio is just one of the many studios just trying to get into the market. I expect mobile gaming, just like social gaming was, to have a disruptive effect on the overall gaming industry.
“Your friend sent you a request” says my Facebook notification. That must mean one of my Facebook friends is playing one of Zynga’s or Konami’s social games. You know the type – manage a farm, a city or something close to that. You’ve finished building a windmill – what an achievement – share it with your friends. Need your crops faster – oh, no – share it with your friends.
These type of games, however annoying are highly addictive (at least for a moderately short period of time), highly viral and for a while they seemed to be the grim future of the gaming industry. After a fast growth period Zynga reported a loss of $400 million dollars in 2011. Not because of how bad its games were doing (Zynga owns 2011 top 5 most played games on Facebook and its revenues were $1.14 billion dollars). No, they payed “stock-based compensation expense for restricted stock units issued to employees”. $510 million dollars in stock-based compensation it did not had to pay until it went public.
However bleak Zynga’s future might look they still own some of the most popular social games and they started to adapt to the rising trend of mobile-based gaming (tablets and smartphones).
Its main competitor, Konami, is not doing too bad, either. Actually Konami’s social gaming division reported a 77% increase in revenue. Given the sharp rise in Zynga’s and Konami’s revenue we can see clearly that social gaming is a great investment . What makes it so?
Social gaming is highly addictive
Social gaming makes use of some incentive design based on social activity and achievements. Social gaming companies use human psychology to create levels of addiction close to gambling and these games usually have slow learning curve, use many motivators to commit users to revisit the game (plant a crop, come back after 10 hours to use it) and use instant gratification to convince users to purchase upgrades.
Behavior economics in social gaming
Interestingly, most of behavior economics principles can be found in these type of games: from peer pressure to “doing the right thing” (don’t let your crops die) and clearly seeing the outcome of one’s action – all add up to a picture where behavior economics seem to be the baseline for virtual economic architecture in games such as Farmville.
The virtual life in social games
Reality perception is altered when such games are played and playing the game seems to be more of a daily task then entertainment. To understand the high interest users have in this type of gaming we must remember that in our day to day life few things seem to add up like the virtual life in social games does. Click a button – start building a farm. Click another – plant crops. Come back after a day and you can cash in your hard earned coins that you can reinvest. It is a little harder to do that in real life. Sometimes – no matter how hard we try achievements don’t seem to pup-up.
We expect an end to our actions. If possible a fortunate one. We have been planting crops and harvesting them for thousands of years. Our bed time stories always have an end. The movies we watch program us to expect an introduction, action and the grand finally. Our lives don’t usually have that and this is one of the causes of modern stress and depression. Having a secondary life where everything is simpler and more colorful is a reward in itself.
The architecture of social gaming
Most social games have a pretty simple story that gets you hooked. The first form of profitable social games were the MMORPGs (Massive Multiplayer Online Role Playing Games) where you played a character and took possession of his actions. Other players would join in and you would search for coins, artifacts and battle different monsters or other players.
What are the lowest common denominators of most successful social games?
1. The story – as we are used to stories from infancy we best deal with adopting a new concept if we receive it in a story. Weather you are living in a future where aliens are threatening to take over the universe, a village where your survival depends on how well you manage your farm or a fantasy world where elves and trolls are trying to get you – you need a story. Without a story no game-addiction can develop, there is no understanding of one’s actions and the game flops.
2. The setting – the environment is really important as that is the context for the players actions. If you are in a farm you don’t usually battle star ships. There is no need for extra mana to cast a spell and there are, usually, no monsters you have to slay.
3. The character – people play games to foster their imagination and to escape the usual reality. That’s the same reason we watch movies – we need alternate realities where we can embody some other character.
4. The economy – whether players are searching for extra stamina bottles, artifacts, coins or other incentives they do that because they understand the need for an alternate economy. Economics are so well embedded in us that social games that have no economic notion can never become mainstream.
5. The limitations – social games have to have limitations. Without limitations there are no achievements. Without achievements there is no psychological gratification. No limits – no endorphin.
6. The incentives – what makes users tick? Incentives. Search for an artifact and you can defend your castle. Develop more farms and you can buy more land. Upgrade your ship and you can win the battle you previously lost. Incentives makes people act. Just as the real world economics incentives are the carrot that works better than the stick.
7. The social features – imagine playing tag by yourself. It isn’t too fun, is it? We are deeply social animals and everything we do is based on how other people react to our actions. Social gaming evolved so fast that it makes it so easy for users to attract peers and develop common interests.
What social gaming lacks right now?
Most of what we now call social games have developed strong social ties, a great system of incentives, some kind of limitations, some kind of game economics but they lack the story and characters. It’s not all about the graphics. The user has to understand the back story and understand who is he in the game. Just like our real lives the most important things about how we relate to the world are the things that shaped us, who we are and who will we become.
Zynga’s social games lack the story and the characters which is not much of a problem right now but people will get bored with the shiny incentives and peer pressure. For a long term user retention social games need to develop personas and epic stories.
Thomas Metzinger, a German philosopher, stated in “The Ego Tunnel” that we understand reality through a scaled down replica of the reality surrounding us. He based his research on neurological research, human psychology studies and artificial intelligence tests. Why is that important for social gaming? If users are not fully immersed in the gaming reality – they can easily abandon games. The game world is not really a personal perception of reality. Social games are shifting the perception of what is real and what is not but only for a limited time.
In the future I expect social games to develop the social gaming worlds to an alternate reality and developing characters. It’s happening right now with World of Warcraft. There are 10.2 million paying subscribers, fully immersed in the story and characters Blizzard created.
In 2010 we wrote a study on Facebook Gaming. Most of the assumptions and predictions turned out to be right. Here is Gaming on Facebook .
Part two of this article will come soon and will focus on the economics of social gaming.
Physical stores have a greater conversion rate than online stores. Conversion rate for in-store traffic is 20% in fashion, 50% in electronics and 95% in groceries. Physical stores are therefore superior to online stores in terms of conversion rates where a 5% conversion rate is considered very good. Even though classic retailers benefit from a high conversion rate the traffic is way lower than online.
Shopkick gets traffic to brick-and mortar stores
Shopkick is a company based on a mobile product that works on iOS and Android mobile devices. It uses different in-store incentives (discounts, freebies) to reward potential consumers that choose to check in using the app in the partner stores.
The check-in, incentive redeem technology is quite impressive. It does not use, as one might expect, GPS features as these are not accurate enough. Founder Cyriac Roeding, explains just how accurate GPS on smartphones is: “It is so inaccurate that you could check into a Starbucks two blocks away”.
Instead Shopkick uses sounds inaudible to the human ear to check you into stores. The technology is patented worldwide and Shopkick founder says they are doing great with over 7000 large retail stores.
What is Shopkick after all?
Simply put Shopkick is a mobile based company. But if we think about it – Shopkick is much more than that. It is the bridge between online and offline retail. Its incentives increase real traffic in stores, increase revenue and all with a simple mobile solution.
Shopkick is doing way better than Foursquare in terms of growth acceleration and revenue per user. After all it has real, tangible discounts. While Foursquare offers you electronic badges and peer recognition (“Look buddy, I am the mayor of this place”) Shopkick’s incentives engage users and marketers even more. The numbers are clear on this: with 3 million monetize – able users Shopkick is here to stay.