ALMA MATER STUDIORUM – UNIVERSITA’ DI BOLOGNA

SCUOLA DI ECONOMIA, MANAGEMENT E STATISTICA

SCHOOL OF ECONOMICS, MANAGEMENT AND STATISTICS

Corso di Laurea

First Cycle Degree

in

BUSINESS AND ECONOMICS

THE MOBILE GAMING MARKET:Consumer Interaction with Online Platforms and

Development of New Businesses.

PRESENTATA DA DEFENDED BYFederico Caiulo

601091

Sessione: Terza – Graduation Session: Third

Anno Accademico – Academic Year 2012/2013

Table of Contents

ABSTRACT.......................................................................................................................................... IMethodology.....................................................................................................................................I

SECTION 1: THE MOBILE GAMING MARKET.............................................................................1Evolution of the value chain............................................................................................................ 2

1994-2000: The Early Days Value Chain...................................................................................22000-2008: WAP and the Distribution of Downloadable Games...............................................22008-2010: The Apple App Store Changed Everything..............................................................42010-2014: In Today's Value Chain Small Developers Strive to Survive ..................................5

State of the Industry: Year 2013 in Review..................................................................................... 72013: Google Play and Apple App Store Revenue Shares..........................................................72013: Consumers Average Spending.......................................................................................... 92013: The Top Grossing Mobile Games Were Free-to-play....................................................... 9

Industry Forecasts and Growing Opportunities............................................................................. 10Factors Favouring Growth ...................................................................................................... 12

SECTION 2: 5Ws CONSUMER ANALYSIS................................................................................... 14Why — Main Factors Driving Consumers Adoption of Mobile Games....................................... 15

Maslow's Hierarchy of Needs in Mobile Gaming.....................................................................17Who — Players vs Payers..............................................................................................................20

Who Plays — Most Millennials are Mobile Gamers................................................................ 20Who Pays — Men Pay, Women Play.........................................................................................22

What — Gamers' Age and Retention as a Function of Game's Mechanics.................................. 23Where — Tablets vs. Smartphones and the Issue of Fragmentation.............................................25

Where Plays: Tablet vs. Smartphone........................................................................................ 25Where Pays: The Issue of Market Fragmentation.................................................................... 26

When — Christmas Spending Slows as the Market Matures........................................................27

SECTION 3: THE ARM MONETIZATION FUNNEL.....................................................................30Customer Lifetime Value (LTV).................................................................................................... 32

LTV: Numerical Example..........................................................................................................33

CONCLUSIONS................................................................................................................................ 34

Thank you for showing interest in my final dissertation.

If you want to get in touch, please send your feedbacks at the following e-mail address:

federico.caiulo@gmail.com

ABSTRACT

The mobile gaming market is defined as the ensemble of companies that support the production,

development, advertisement and distribution of video games to be played on non-traditional

handheld devices. Three important steps in the history of the mobiles games value chain

jeopardized many companies' ability to monetize their games. Even though the mobile gaming

industry is relatively young, figures from year 2013 show that global revenues are large. Moreover

the rising digitization of the products, coupled with a strong democratization of the Internet and an

increase in the smartphones and tablets' penetration is stimulating market growth. Another factor

favouring growth is the exponential diffusion of free-to-play games effectively transforming the

mobile gaming market from a product into a service industry. This thesis wants to convey to the

reader that companies in the industry need to adapt to the market's rapid transformations by quickly

converting their business model as to include consumer analysis and big data analytics.

Methodology

This paper is structured as to include three separate sections:

• SECTION 1 follows the historical evolution of the mobile games industry value chain. First

I have tried to uncover the issues and opportunities coming from the entrance of new players

in the market. Secondly I used secondary sources of information to develop a review of the

industry's revenue and growing opportunities from year 2013.

• SECTION 2 wants to profile the mobile games consumers' demographic and purchase

behaviour. I have unfolded a consumer analysis trying to answer the 5Ws questions that,

according to Russ Winer, are important to every marketing consumer analysis.

• SECTION 3 tries to describe the concept of the ARM monetization funnel and why

companies should implement it into their business strategy to monetize free-to-play games.

An overview of the Customer Lifetime Value (LTV) with a numerical example is also

provided in order to highlight the importance of retaining mobile game consumers.

All data presented in this paper have been personally extrapolated from market researches

developed by professional service networks. Some of them are industry specific (Distimo, Newzoo,

Applift to name a few) while some others are globally renown multinationals (PwC, Gartner).

I

SECTION 1: THE MOBILE GAMING MARKET

I'd like to start my dissertation giving a more precise definition of how we would define mobile

games. Broadly speaking, mobile games are video games operating on any portable device who is

capable to connect to the internet either via wifi or through a mobile network operator. With the

introduction of smartphones and tablets analysts and researcher have segmented the mobile games

industry even further as to include only games to be played on non-traditional handheld devices.

The products falling into this category are: cellular phones, feature phones, smartphones and tablets

[49]. Thus portable consoles such as the PS Vita or the Nintendo 3DS are not considered as part of

the mobile gaming market.

Mobile gaming falls in the broader category of interactive mobile entertainment. According to

Moore and Rutter [41], a primary difficulty when researching mobile entertainment is that of

definition. The mGain study project (whose focus is understanding mobile entertainment concepts

and culture, including the legal and social aspects of the industry [24]) says that mobile

entertainment includes any leisure activity undertaken via a personnel technology, which is, or has

the potential to be, networked and it facilitates transfer of data over geographic distance either on

the move or at a variety of discrete locations [24]. According to this definition we can say that two

different industries make up for the mobile entertainment industry: entertainment and

telecommunication. As a byproduct of mobile entertainment, also mobile gaming is created as the

convergence of both the entertainment and telecommunication industries. As a matter of fact mobile

gaming is also an example of mobile commerce (m-commerce) application [38]. Mobile commerce

can be viewed as a subset of e-commerce and it refers to any transaction with monetary value that is

conducted via a mobile network [6].

In this chapter I would like to present how the evolution of the value chain has transformed the

mobile gaming market from the late nineties until the more recent introduction of application stores.

Thereafter I will expose secondary market researches from Distimo [50], Newzoo [27] and

PricewaterhouseCopper [36] to uncover what was the state of the mobile gaming industry in year

2013 and what are the growing opportunities for the years to come.

1

Evolution of the value chain

For several years now, the video game industry has experienced significant changes in its mode of

distribution and contents. Today choices are endless as any interactive entertainment, computer, or

electronic device that has a screen could potentially be used to play a game. The analysis of the

evolution in the history of the mobile games value chain explains the many reasons why

competition in the market is so fierce nowadays. Moreover it highlights the importance of

developing a consumer behaviour analysis to avoid the problem of market fragmentation.

1994-2000: The Early Days Value Chain

The mobile games industry is very young. Video games running on a portable handheld are popular

ever since 1989, when Nintendo launched on the Market its first portable gaming console. The

NIntendo Game Boy was a big hit: to date, Nintendo has sold over 118.69 million units of this

handheld console system worldwide [4]. Even though this milestone in the history of gaming

certainly helped to justify the recent popularization of games such as Candy Crush, people had to

wait five more years before they could play a video game from their mobile phones.

The first mobile game in history was a Tetris game on the Hagenuk MT-2000 device back in 1994.

Then in 1997 a team of Nokia engineers embedded onto the handsets the now-famous Snake game.

This marketing strategy changed the way mobile companies looked at mobile games forever. The

game was so popular that it was considered by many consumers as a driving factor for the adoption

of a new Nokia handset. Snake also revealed to the world the commercial potential of mobile

games, with more and more consumers becoming addicted to the playful activity.

The early value chain consisted primarily of developers working for mobile phones manufacturers

that wanted to embed games on their new handsets. As a matter of fact despite being a value adding

service (VAS) that may (or may not) drive the sales of new handsets, mobile games themselves

weren't making any money to the handset manufacturers nor to the mobile network providers. Even

though Nokia states that Snake could be found on more than 350 millions phones [31], the game

itself didn't generate any profit to the company. It was a completely free-to-play game not supported

by any monetization strategy.

2000-2008: WAP and the Distribution of Downloadable Games

In the early 2000 the wireless application protocol (WAP) was consolidated and mobile phone

2

network operators entered the value chain distributing games to the feature phone owners via their

WAP browser. The first downloadable contents arrived in 2000 and emerged in Europe – the “Les

Games” portal from Orange France, run by In-fusio. At this stage mobile games could be developed

with limited resources and the incumbents were not the large publishers that dominate the market

nowadays. So the barriers to entry were low and many developers entered the scene with small

budgets and great hopes.

Fig 1.1 shows the early 2000 value chain.

The value chain was rather linear and operator-centric and two more actors entered the scene:

• Publishers

Video game publishers are responsible for the development and marketing of mobile games,

including market research and all aspects of advertising. They also own the IP and work

with external developers to create games based on that IP [32].

• Aggregators

Mobile games aggregators are similar to publishers but they do not outsource the

development of games to third party studio. Rather, an aggregator role involves developers

coming with a title already created to leverage the aggregator’s relationships with

distribution channels to reach the market. Aggregators do not own the IP [32].

Game developers had to customize their games for almost every new handset and there were mainly

three means for them to reach consumers [44]:

1. Get preloaded on a handset:

Many games reached out to handset manufacturers to get preloaded so they could offer an

out-of-the box experience for consumers. This distribution channel earned developers a flat

fee from the device manufacturer, replicating the early days value chain. However, cycle

times were long as the game had to wait until handsets launched on the market.

2. Sign up a deal with an aggregator so that the game could be featured on a web portal:

As previously said, the aggregator role consists in taking finished games from the

3

Fig. 1.1 – Value Chain I ( 2000-2008)

Source: Game Arch Project [32]

developers and leverage the aggregator’s relationships with distribution channels to reach

the market with a game. In exchange for this service the aggregator shares around 50 percent

of the end user revenues with the game developers. Aggregator were viable distribution

channel that overpassed the issue of complicated game discoverability. However the market

segment of consumers browsing the web to discover new games was so small that

aggregators were not a common way to reach consumers.

3. Get featured on the mobile network operator's WAP portal

The operator portal was the go to platform for the vast majority of publishers and developers

first for its big share audience, secondly for the easy to use approach.

It is now clearer why operators had the upper-hand. They were the only players who could give

mobile game companies the means to reach a vast audience easily and quickly. Nevertheless

operators were not keen on handling potentially hundreds of relationships via a small developers'

team. Publishers and aggregators became the only external parties that were allowed access to the

operators' buyers. Developers were re-directed to contact them instead, effectively mirroring the

“traditional” video games industry value chain where publishers and aggregators handle retail

relationships.

2008-2010: The Apple App Store Changed Everything

The market for mobile games changed radically with the launch of the Apple App Store in 2008

[32]. The launch of the iPhone's on the global market began the diffusion of the smartphone

technology. Immediately after the introduction of the Apple App Store changed forever the way

mobile games are distributed. Within just 10 months of its launch, the Apple’s App Store had

reached 1 billion downloads [37]. Furthermore the App Store acting like a clearing house to process

m-commerce transactions made it possible to monetize every kind of mobile games.

It was now clear that mobile games weren't just a childish diversion but some serious business that

could generate large revenues.

The Apple App Store's revenue sharing program and its ease of use threatened the dominant

position of the operators. Since developers and publishers could now self-publish their games

signing a 70/30 revenue split agreement with Apple, there was no longer the reason for them to

reach out to consumers via the operator's network. The Apple’s 70/30 split in favour of developers

rapidly became the industry norm, even amongst the operator community [32] making developers a

bit richer than before. Moreover bypassing the operator, comapnies could now market their games

4

faster without the need to carry out some lengthy negotiations.

Fig. 1.2 shows the Mobile Game Arch project's redesigned value chain.

We can notice that the third stage, which was first acted by operators alone, it is now threefold.

Many big companies such as Google, Amazon and Windows as well as other small businesses like

Getjar, started listing games on their own application store making the market extremely

fragmented. This multiple layers of fragmentation can be positive from a marketing point of view,

in the sense that developers could now distribute their games to a larger and more varied audience.

However from the financial perspective developers bear the risk of fragmentation. Market the same

mobile game on multiple channels at once may lower companies ROI [32]. Moreover with

hundreds of titles published daily, mobile games discoverability started becoming increasingly

difficult. Last but not least consumers gained more bargaining power from this situation as they

benefit from a greater choice of where to download games.

2010-2014: In Today's Value Chain Small Developers Strive to Survive

The launch of the Apple App Store was like the rolling stone that started an avalanche [32].

In 2010 the market lifecycle got another push by the increasing popularity of free-to-play games

and the introduction on the market of a new product segment. Apple did it again. The Cupertino

company in 2010 launched the iPad effectively creating a new product segment: tablets. Developers

could still go D2C (direct to consumer) bypassing publishers and operators, sharing 70/30 of

revenues with Apple, plus they had a new mobile hardware where to market their games and

hopefully catch a new cohort. A 2011 study from comScore [40] shows that the average age of the

mobile game consumers has moved slightly up since the introduction of the iPad.

5

Fig. 1.2 – Value Chain II (2008-2010)

Source: Game Arch Project [32]

However the more the market becomes open to consumers the greater the amount of large

companies that will enter the market. Starting 2010 the entrance on the mobile games market of

large publishers, such as Zynga, coming from the social games market, signed an exponential

increase of free-to-play games. If it was good on one side because it allowed more people to play

games, efficiently expanding the consumers audience, a side effect was that a larger developer

community and big publishers acting as super-developers led to intense price competition. With the

vast majority of companies offering free-to-play mobile games it is increasingly difficult for small

developers to be successful if they go on the market without enough money to pay for

advertisements and the adequate marketing knowledge to retain and convert large players into big

payers.

Nowadays publishing successful mobile games has become more complex, development costs are

through the roof and success is not guaranteed. A 2011 survey conducted by the indie developer

Owen Goss [17] on 252 iOS games found out that the top 20% developers earned 97% of the total

revenue, with only the top 1% earning 36% of the revenue [17]. This result helps to explain the

recent addition of four new players in today's mobile gaming value chain. Middleware,

advertisement, metrics and social discovery's companies are all adjacent actors that offer their

services to improve developers, publishers and application stores' profitability.

Fig. 1.3 shows the last transformation of the mobile games industry value chain:

Developers and publishers should not underestimate the importance of outsourcing to third party

players. Social discovery and advertising, for instance, may be costly but if they used correctly and

matched with metrics they can greatly boost the profitability of mobile games.

6

Fig. 1.3 – Value Chain III (from 2010)

Source: Game Arch Project [32]

State of the Industry: Year 2013 in Review

Findings from Distimo [50], Newzoo [27] and IHS's [20] market researches, might help us to

understand the scale of the industry and the size of the revenues in 2013. With those figures in mind

companies in the business could decide to reroute their business strategy accordingly.

2013 was a great year for the app industry as a whole. Gartner [14] said mobile app stores will see

annual downloads reach 102 billion in 2013, up from 64 billion in 2012. Total revenue in 2013 will

reach $26 billion, up from $18 billion in 2012 [14].

This positive trend was driven primarily by an excellent performance of the mobile game app

category for both Apple and Google application stores. In 2013 almost one in three app downloads

were games and two thirds of all mobile app spending was on gaming [27].

2013: Google Play and Apple App Store Revenue Shares

Overall the mobile games market revenue grew by 35 percent to reach $12.3bn in 2013. On a global

scale in September 2013, 48 percent of Google Play 400's top grossing apps were games. When

compared against the total revenue from apps, mobile games generated 92 percent of the revenue to

Google. Similarly, for the Apple App Stores (average of iPhone and iPad), 52 percent of the top 400

grossing apps were games and these games generated 79 percent of the revenue [50].

Notwithstanding the fact that in 2013 mobile games were popular all across the globe, revenue

shares by games were very much dependent on countries and regions. This is a fact that should be

taken into account by mobile gaming companies when marketing their games. The presentation of

the following data might help them to pursue the most profitable geographic segment.

7

Fig. 1.4 – 2013: Revenue Share - App Store vs. Play Store

Source: Distimo [50]

Fig. 1.4 sets out the revenue shares of games by country for the Apple App Stores (iPhone and iPad

combined) and the Google Play. Countries are ordered by the average revenue share of both stores

combined. In general, Asian countries had a higher revenue share for games compared to Western

countries [50]. In 2013 Revenues from mobile games were expected to reach $5.9bn in Asia

Pacific, $3bn in North America and $2.3bn in Western Europe [1].

Taiwan led the pack when it came to games in terms of combined revenue share. Respectively 89

percent and 84 percent of Google Play and Apple App Store's revenues were earned by games. It is

important to notice that a legal dispute with the Taipei's government [53] had costed Goggle a 20

months ban from offering paid contents. The Taiwanese consumers’ protection laws demanded a 7-

days trial period, while Google only offered a 15-minutes trial period. The ban has been lifted in

January 2013.

Korea ranked second in combined revenue share in the Apple App Store and Google Play. Even

though in November 2011 the Korean government banned this category to combat video games'

addiction [5], with fast mobile networks (Korea has the highest 4G penetration) and the greatest

digital contents spend per capita [20] this Asian country is something companies should become

aware of.

China is the third largest country when it comes to iPhone and iPad games' spending [26].

North America was the second most important geographic region in terms of combined revenues by

mobile games.

When we look at European countries Germany performed the poorest in terms of revenue share by

games. The United Kingdom has the upper hand in terms revenues generated by mobile games [50].

Italy wasn't covered in Distimo's research but a research from Newzoo [25] developed at the end of

2013 shows that the Italian market for mobile games looks quite promising. Worldwide Italy ranked

ninth in terms of revenues generated by video games [25]. By far the largest share of game revenues

goes to console gaming and mobile games are the second biggest platform in Italy [25]. Italy has 21

million gamers and almost one quarter of them (5.4 million [25]) plays games from their tablets.

Smartphones and tablets are complimentary with 7 percent of gamers, with 0.7 million Italians

playing games from both screens.

8

2013: Consumers Average Spending

The average monthly spend per paying mobile gamer is highest in Western Europe with $4.40.

Even if in North America this figure stands at $3.87 this is the region with highest share of payers

amongst players (45 percent) [1].

Asia-Pacific's average spend per paying user ranged just about $2.86. However with almost twice as

much the user base of Western Europe and North America combined, the APAC region still proved

to be the highest revenue generating part of the world.

Costs of acquisition for loyal mobile gamers ranged from $1.11 and $0.74 on iOS and Android

respectively in smaller Latin American countries to $3.70 and $1.71 in mature APAC markets such

as Japan, South Korea and Australia [1].

2013: The Top Grossing Mobile Games Were Free-to-play

2013 was the year of Free-to-Play (F2P) games [50]. Free-to-Play (F2P) is a revenue model usually

consisting of freemium, microtransactions, and some sort of virtual economy [13]. Generally

speaking freemium models consist of giving a full game for free, then offer a premium version of it

which usually needs to be subscribed to. Microtransactions involve transactions of small value, and

this is usually the main source of revenue for free-to-play mobile games.

The free-to-play monetization strategy (free games with in-app purchases) continued to be

9

Fig. 1.5 – 2013: Consumers Average Spending

Source: AppLift [1]

successful throughout 2013 as the revenue share of this business model increased.

Fig. 1.6 summarizes the findings of a 2013 study conducted by Statista [45].

The key takeaway is that in the Apple App Store 90% of the revenue generating games were free-to-

play. Gartner also seems to acknowledge this trend estimating that in 2013 there will be 81.4 billion

downloads of apps and 90 percent of these will be free apps [14].

Clash of Clans, a free to play game by Supercell was the top revenue generating app globally,

making Supercell the most successful developer in 2013 in terms of mobile app revenue.

The second most profitable app was another free-to-play game. Candy Crush Saga in 2013 made

King Digital Entertainment richer of one million dollars per day [3]. After the United States, Japan

was the greatest revenue generating country for Candy Crush Saga on the Google Play Store [50].

This achievement was mainly due to the fact that King developed a TV advertising campaign

targeting Japanese consumers, that moved Candy Crash to the top position of the application stores

[3]. This accomplishment makes King a successful cross-cultural publisher. Moreover King proved

to the world that old fashioned TV advertising still proved to be successful even for the mobile

games industry.

Industry Forecasts and Growing Opportunities

PricewaterhouseCooper 2013's “Global entertainment and media outlook: 2013-2017” says it

clearly: the mobile gaming industry will grow fast [35].

10

Fig. 1.6 — 2013: Revenue Share - Revenue Models

Source: Statista [45]

Fig. 1.7 shows PwC's global mobile gaming revenues and shares of total video game segment from

2008-2017:

Mobile games will be the fastest-growing video games sector over the next five years, with

revenues increasing from $8.8bn in 2012 to $14.4bn in 2017 and a compound annual growth rate

(CAGR) of 10 percent [36].

Fig. 1.8 shows the video game industry growth from 2012 to 2016 divided by segments. According

to Distimo and Newzoo [28] globally the video game industry revenues will grow at a compound

annual growth rate (CAGR) of 6.7% to hit $86.1 billion in 2016. Smartphones and tablets show the

highest growth rates when compared to the remaining segments. Both screens combined are

expected to take 27.8% of the video game market in 2016 [28].

Tablets have shown faster adoption rates than smartphones [19] and this trend isn't going to stop

11

Fig. 1.7 — 2008-2017: PwC Revenue Forecast

Source: PricewaterhouseCoopers [36]

Fig. 1.8 — 2012-2016: Distimo & Newzoo Revenue Forecast

Source: Newzoo [28]

anytime soon. According to Newzoo and Distimo from 2012 tablet gaming is expected to grow 400

percent to reach $10 billion in 2016 [28]. Developers and publishers should take advantage of the

findings from this study by developing refined tablet's version of their mobile games.

Also in the coming years Western Europe, North America and Asia-Pacific will remain the most

appealing markets for mobile games companies [1]. Western & Eastern Europe will be the fastest

growing market with a CAGR of 33 percent. The Asia-Pacific instead will be the biggest revenue

generator accounting for 48 percent of global revenues [1].

Factors Favouring Growth

According to Applift's reports the rapid growth of the mobile gaming market is fueled by an

increase in the number of players, payers as well as a higher average spend per paying mobile

gamer [1]. Today 368 millions consumers worldwide spend a monthly average of $2.78 on or in

mobile games. By 2016, these figures will amount to, respectively, 50% and $3.07 [1]. Moreover

the increasing rate of penetration of free-to-play games on the market is likely to expand the

consumers audience facilitating market growth. As a matter of fact a study conducted by Statista

[45] has shown that consumers valued “more free games available” as the main driving factor that

has influenced the adoption of mobile games (70 percent of respondents).

Having said that secondary sources of information from PricewaterhoseCooper, IHS and

AppAnnie's market researches gave me the right to assume that the growing trend of the mobile

gaming market is also assisted by a growing digitization of the products, coupled with a strong

democratization of the Internet and an increase in the smartphones and tablet penetration's rates:

12

Fig. 1.9 — Factors Favouring Growth

Source: Statista [45]

1. Growing Digitization of the Product

Consumer spending on entertainment and media (E&M) contents keeps shifting away from

physical purchases and the largest amount of consumer spending on digital products is

digital gaming [20]. In 2008 spending on physical products constituted 88 percent of total

spending, which has dropped to 73 percent today and it will continue to fall. By 2017,

physical purchases will represent just 53 percent of global spend [35].

2. Democratization of the Internet

Great growing opportunities for the mobile games industry come from the fact that mobile

and fixed-broadband Internet is becoming faster and more present all across the globe.

According to PwC in 2014 mobile internet revenues at $259bn will account for more than

50 percent of total Internet access spend, overtaking those from fixed-broadband [35]. It

comes as no surprise that Facebook has decided to buy drones to connect Africa [48].

Imagine the possibility of adding a new target demographic to the market.

3. Increasing Penetration of Smartphones and Tablets

When and where the Internet arrives smart devices follow, and the same goes for mobile

games. Moreover mobile devices have been the fastest adopted consumer products of all

time with more mobile phones shipped annually than automobiles and PCs combined [6]. A

study conducted by BI Intelligence [19] says that at the end of 2013, global smartphone

penetration will have exploded from 5% of the global population in 2009, to 22%. That's an

increase of nearly 1.3 billion smartphones in four years. On average, there will be two

smartphones for every nine people on Earth, or 1.4 billion smartphones, by the end of 2013.

According to the same study in 2013 6% of the world's population was expected to own a

tablet. It got almost six years for smartphones to achieve that very same rate of penetration

that tablets accomplished in just three. Thus empowering the hypothesis that tablet gaming

will grow faster than smartphone's.

13

SECTION 2: 5Ws CONSUMER ANALYSIS

Developers and publishers must consider a key external constituent when developing a business

plan or a marketing strategy to monetize their games, namely the customers. Studying consumers

readiness to accept the mobile games market rapid transformations is trivial to identify new

potential market segments and provide useful insights into factors motivating consumer purchase

behaviour on a global scale.

I will try to examine the mobile game consumers behaviour developing a Five Ws consumer

analysis as presented on Chapter 4 of Winer's “Marketing Management” book [52]. The 5W's (i.e.

Why? Who? What? Where? When?) are the elements of information needed to get the full scenario,

whether it's a journalist news story, or a customer service representative trying to resolve a

complaint. The objective of the second chapter of my thesis is to develop a complete picture of the

consumer behaviour in the mobile gaming market.

14

Why — Main Factors Driving Consumers Adoption of Mobile Games

The starting point of any consumer analysis is providing an answer to the question:

"Why do customers use/buy the product or service?"

Answering this question, the first step is understanding the many reasons why people may want to

play a mobile game in the first place. A study made by XEO Design in 2004 [22] attempted to

deduce the reasons for which people play video games. The research study was conducted on a

sample of 15 casual gamers, 15 hardcore gamers and players 15 non-players. The results revealed

that people played games for the experience that video games convey. The sample analyzed wanted

to feel challenged, absorbed, accomplished and they enjoy the excitement and pleasure that result

from a good gaming session. Consumers also value video games as the appropriate relief from

every-day worries [22]. The collection of these feelings and emotions is often described by the

game industry people in one word: “fun”. Thus the ultimate goal of mobile games developers and

publishers should be creating “fun games”.

Going through the academic literature I have understood that the most popular way to describe the

factors driving the consumers adoption of a new technology is developing a marketing research that

relies upon conjoint analysis and the validation of a Technology Acceptance Model (TAM) [10].

The TAM model assumes that when consumers are presented with a new technology, a number of

factors influence their decision about how and when they will use it. The purpose of this model is to

predict the acceptability of a technology and to identify the modifications which must be brought to

the system in order to make it acceptable to users [10]. This model suggests that the acceptability of

an information system is determined by two main factors :

• Perceived “Usefulness” defined as “the degree to which a person believes that using a

particular system would enhance his or her performance [10]”.

• Perceived “Ease of Use” defined as “the degree to which a person believes that using a

particular system would be free of effort [10]”.

In 2004 a team of researcher from the university of Bocconi (Pagani, 2004) conducted a research

using the TAM model to study the motivations and barriers to the adoption of third generation (3G)

mobile multimedia services [33]. This study was intended to help managers to design training and

marketing interventions targeted at populations of consumers that may be less inclined to adopt and

use new multimedia mobile services [33]. In 2004 mobile gaming was still far from the mass

market exposure that had begun with the introduction of the Apple App Store. Nevertheless I

15

thought it might be important to shed some light upon the main findings of this academic study

because: first mobile games fall in the category of mobile multimedia services; secondly it is an

Italian case; last but not least the results from this academic paper will be further validated by

another research that used the TAM model to study the main factors driving consumers adoption of

mobile and social games.

The methodology of the Pagani's study consisted of a qualitative and quantitative marketing

research on a population of 1,000 Italian mobile users. Italy was selected because it was, and it still

is, one of the European countries with highest penetration of mobile phones [33].

The results show that perceived "usefulness", "ease of use", "price", and "speed of use" were the

most important determinants of consumers adoption of 3G multimedia mobile services. Conjoint

analysis revealed that “usefulness” was the most significant factor in the adoption process of third

generation multimedia services. “Ease of use” was the second most important adoption factor.

Furthermore the study anticipated what now is clear to most companies in the mobile games

market: price and payment options are two variables that if managed properly can positively impact

the consumer adoption of 3G multimedia service [33].

A similar study was conducted in 2013 at the graduate school of innovation and technology

management in Korea (KAIST) [34]. The study's objective was to investigate the psychological

aspects that contribute to consumers adoption of mobile-social network games (M-SNGs) [34]. A

survey was conducted on a sample of 20 undergraduate students (12 females and 8 males) from

different departments. All students had more than two months of experience using M-SNGs.

Students from the Millennials cohort were interviewed because, as I will expose later, they

represent the sweet spot demographic of the mobile game consumers.

Eunil Park and his colleagues designed a Technological Acceptance Model for M-SNGs [34]. The

model was then compared with statistical data from an online survey of mobile and social game

players.

The results demonstrated that the proposed research model was a valid and effective scientific

method to study the consumers behaviour and why people engage with M-SNGs [34]. The

conclusions of this paper were similar and complementary to the ones of the Bocconi's research.

“Usefulness” was once again recognized as a determinant variables of consumers intention to adopt

3G mobile multimedia services such as mobile games [34]. A second factor of consumers adoption

of mobile games was proved to be “perceived enjoyment” [34].

The end results from Bocconi and KAIST's studies may give companies in the industry some

16

powerful insights about why consumers play games and what could be the facilitating factors

facilitating the adoption of new mobile games. If we combine the core findings of both studies

together we can conclude that consumers play mobile games because of the enjoyment this activity

delivers. Moreover consumers are more likely to interact with mobile games that they perceive as

useful, enjoyable and not very difficult to pick up and play.

While the “enjoyment” and “ease of use” aspects of this assumption may be quite intuitive to

understand, the same can't be said for the “useful” part of the statement. Where the usefulness of

other softwares such as messaging or productivity's apps is evident (i.e. they are designed to serve

as a tool), the same cannot be said for mobile games. The usefulness of mobile games must be

found within the game itself. Mobile games are usually more useful to the person who is playing

them than to others and they do not serve to achieve any specific purpose. So far developers have

tried to convey to the player this sense of “Usefulness” by means of in-game rewards, social sharing

and online leaderboards. For many players, the reward for completing a task or earning a trophy

sure is an important thing, however I would suggest developers and publishers to join forces and try

to explore new and creative marketing solutions that will allow players to touch with hands the

results of the time and effort they have put in the game. Rewarding the best players by offering

them concert tickets to the company's target cohort favourite artist, may be a simple yet practical

solution to retain and monetize more players. Moreover the importance of “Usefulness” related to

the adoption of third generation mobile services and MSGNs also revealed the need for information

about mobile games that marketers should fulfill via alternative channels such as television (just

like King.com did [11]) or magazines.

Maslow's Hierarchy of Needs in Mobile Gaming

The TAM model [10] excels in scientifically explaining the factors that facilitate the consumers

adoption of new technologies thus providing some valuable insights about why consumers play

mobile games. Nonetheless with free-to-play games dominating the mobile gaming market,

capturing new customers doesn't necessarily means earning more revenue to the companies. For the

sake of this consumer analysis it is also important to provide some answers to the question of why

consumers pay to play mobile games.

The buying process for costumers is complex. A simplified model of the process is that consumers

search for alternatives that satisfy the motivation for buying, develop a consideration or evoked set

of acceptable brands from which the purchase will be made, evaluate the options in the

consideration set, and exhibit post purchase behaviour in terms of satisfaction that feed back into

17

the customer's information set [52]. According to Winer's book, the basis of understanding why

customers buy is knowing what needs consumers are looking to satisfy because the sole reason for a

consumer to purchase is to obtain the benefits the purchase delivers [52].

The model that best describes why people buy games is the application of “Abraham Maslow's

Hierarchy of Needs [23]“ to the mobile gaming market.

Mobile games achieve in successfully satisfying all levels of the pyramid:

1. “Physiological” needs are the physical requirements for human survival. Indeed those are

per definition brought to completion also when consumers play mobile games.

2. “Safety” needs are also achieved since consumers don't feel armed when playing games and

the sense of morality is either non-existent or monitored by the games' community.

3. The third level of human needs is interpersonal and involves feelings of belongingness. With

the entrance of social discoverability in the value chain this category of needs is now more

fulfilled then ever before. People play and share scores and/or gameplay session at the same

time. Thus allowing them to make friends. “Sexual Intimacy” cannot be found within the

game itself. Nevertheless it is not uncommon that, by means of social interaction and co-op

sessions, consumers can find a partner when playing mobile games.

4. The fourth level of the pyramid is “Esteem”. It represents the typical human desire to be

accepted and valued by others. Players often buy mobile games to gain recognition of their

high score or gaming performance. Furthermore “Confidence” and “Self-esteem” come

easily when there is a screen filtering the judgement of other people. The sense of

achievement conveyed to the consumers by mobile games, is probably the main reason why

people buy mobile games. Publishers and developers should focus very much to enhance

this rich tier of the Maslow's pyramid.

5. The last level of the “Hierarchy of Needs” is “Self-actualization”. Maslow describes this

level as the desire to accomplish everything that one can, to become the most that one can be

[23]. This category of needs is pursued by consumers and rewarded by mobile games.

Creativity and Spontaneity are most easily achieved. Different mobile game genres allow

the players to do almost anything they want, anytime, anywhere. There are games such as

“Minecraft-pocket edition” where players can create virtually an entire world from scratch.

Others such as “MARVEL – War of Heroes” where consumers can act like demigods with

superhuman powers. Moreover even if laws of morality do not really apply in the virtual

world, they are commonly associated with the laws of the real world morality.

18

Having said that it should be noticed that, with mobile gaming being a form of leisure activity, or

entertainment, most mobile games suffer the problem of threats from a plethora of substitute

products or services. Anything from going at the movies to playing darts with friends, could

potentially distract the consumer from playing mobile games. That is why companies should try

their best to pursue and satisfy consumers needs by means of in-game mechanics that positively

incentivize players to keep coming back to the game. The book “A Theory of Fun for Game

Design” [21] states that: “the design and production of games involves aspects of cognitive

psychology, computer science, environmental design, and storytelling” [21]. Thus many companies

in the mobile games industry should possess all the theoretical and technological instruments that

would allow them to build game mechanics that would reward all the different tiers of Maslow's

pyramid. As a matter of fact Ste Grainer [18], a mobile game designer from Virginia, successfully

managed to adapt “Maslow's Hierarchy of Needs [23]” to the video game industry. Its main

objective was to provide other companies with a systematic approach on how to develop game

designs that awarded all categories of consumers' needs. The results of its work are presented in the

picture below, right next to the original pyramid theorized by Abraham Maslow:

1. Maslow's “Physiological” needs → Grainer's “Survive” game mechanics

i.e. “Can the player navigate the game world and still survive?” [18]

It is more likely that consumers will spend money on or in mobile games where the

gameplay is not excessively sadistic. Games where the in-game avatar of the consumer does

not “die” too often are easier to monetize.

2. Maslow's “Safety” needs → Grainer's “Progress” game mechanics

i.e.“Can the player improve?” [18]

Gamers should also be given the opportunity to feel the progress of the story. Anything from

better gears to a good and coherent storyline will fulfill this category of needs and motivate

19

Fig. 2.1 — Maslow and Grainer' s “Hierarchies of Needs” Compared

the players to keep playing the game.

3. Maslow's “Love/Belonging” needs → Grainer's “Socialize” game mechanics

i.e. “Can players share experience with others?” [18]

As we said, games are now more social then ever before. Mechanics that allow players to

social interact amongst them should be built into mobile game.

4. Maslow's “Esteem” needs → Grainer's “Achieve” game mechanics

i.e. “Does the player feel rewarded by the game and respected by others?” [18]

Again giving the players a reward for the time they have invested in the game is most

important. Leaderboards, trophies, in-game currencies are all features that every profitable

game should have. Achievement also connects to what we said before. Namely that

“Usefulness” if one of the driving factors driving consumers adoption of mobile games.

5. Maslow's “Self-Actualization” needs → Grainer's “Create” game mechanics

i.e. “Can the player influence the world of the game around themselves? Do their actions

make a permanent and lasting impact? Can they tell new stories in the game world?” [18]

Consumers should also be given the possibility to express themselves and navigate freely

the virtual world around them.

Who — Players vs Payers

In understanding who mobile game consumers are, companies need to collect descriptive

information about them and their buying behaviour. It is important to develop links between the two

in order to identify the most profitable cohort to target [52]. Marketers typically describe segments

based on customer characteristics. However with the free-to-play revenue model becoming the

norm in the mobile games industry, it is also important to separate the characteristics of those

consumers who play, against the characteristics of those consumers who pay. I would try to describe

who are the mobile game consumers in terms of their inherent characteristics (demographic,

geographic and psychographic descriptors) and then link those variables to the consumer purchase

behaviour to better understand the two typologies of mobile gamers.

Who Plays — Most Millennials are Mobile Gamers

In 2013 the mobile gamers population accounted for 78 percent of all 1.2bn gamers worldwide. The

end result is that 966 millions people were playing mobile games in 2013 [1]. The vast majority of

mobile gamers reside in Asia-Pacific: 412 millions players. Almost double the amount of players

20

that live in the North America (129mln) and Western Europe (146mln) combined. Amongst the

Asian countries, mobile gaming is more popular in China than everywhere else with 86.7% of all

gamers playing from their smartphones or tablets.

Newzoo, Distimo [28] and Flurry [8] 2013's market researches all converge to the result that

consumers from the age of 20 to the age of 35 are more likely to play mobile games. The

demographic cohort that belongs to this age interval is called “Generation Y” or “Millennials”.

The conclusion that most mobile gamers are for the vast majority Millennials can be further

clarified if we think that, it is certainly true that mobile games are more appealing to Generation Z,

but most consumers belonging to this cohort are too young to have the budget either to own a smart

mobile device or to spend money on games. On the other hand generation X consumers might have

the money, but are less likely to see mobile games as a useful or relevant activity to them. Members

of Generation Y instead are young enough to value mobile games and old enough to be able to buy

them. In a nutshell Millennials are creative yet educated consumers who were born between 1977

and 1995. Those individuals value authenticity, they care about the planet and support social causes.

Millennials are also deal shoppers and they are tethered to their smartphones, tablets and social

media more than anybody else [30]. According to Nielsen [29] Millennials are 77 millions

worldwide. These data represents significant opportunities for publishers and developers that

understand generation Y's behavioural patterns and can relate to their specific needs.

An old industry misconception was that females are disinterested in video games and therefore

should be considered a secondary market. Whilst males still dominate the home console market, the

same cannot be said for mobile games. In Europe, Asia and United States almost 50 percent of

mobile games players are females. Developers and publishers can't ignore a 50/50 split across

genders and they must market also the female consumers to stay competitive [28].

In “SECTION 1” we discussed that mobile games sold on the Apple App Store generated more

revenue than in every other application store. Examining the demographic of the Apple iOS and

Google Play Store's gamers, we can better understand the main rational of this revenue share.

According to a 2013's Newzoo study [27], iPhone and iPad owners are wealthier users. Almost 50

percents of iOS gamers are in full-time employment while that percentage decreases to 38% for

full-time employed Google Play gamers. iOS gamers also boast higher incomes, with 28% in the

Newzoo's “High Income” category, compared to 17% of gamers who use Google Play [27].

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Who Pays — Men Pay, Women Play

Companies in the business adopting the the free-to-play revenue model to market their games, start

making profit if they are able to convert players into payers. About conversion rates between 3.5%

and 10% of free-to-play game players is expected to convert into payers and those who pay spend

from $8 and $15 per month [46].

Recent findings from the American consulting firm Swrve [47] indicate that in January 2014 only

1.5 % of the active players surveyed made an in-app purchase and 50% of revenue was derived

from the top 10% of those payers. Expressed as a percentage of total players, this group of payers

represents a 0.15% of the total players in any given month. If we exclude the revenue from in-game

advertising, this means that the vast majority of players delivered no revenue to the companies.

From here the importance of developing strategies to acquire and retain “whales” (i.e. big

spenders). The perfect testimonial of the “whale” category is Shaquille O’Neal. He confessed The

Wall Street Journal’s Evelyn Rusli he spends on average $1000 per week in mobile games [51].

Another important finding is that mobile games payers account only to the 32% of the global

consumers population [27]. However according to Newzoo and Distimo, the fastest growing key

performance indicator (KPI) behind the growth of the smartphone and tablet games market is the

absolute number of paying gamers [28].

Fig. § shows the percentage of players and payers across the most profitable geographic areas.

Asia, as aggregate of China, Japan, Korea and Taiwan, has the highest percentage of mobile players

that also pays for games at 47%. Of those payers, 4% are “whales”.

In Europe the share of paying gamers is lower at 34%. The UK leads the field with 38% of mobile

gamers actually spending money. Italy follows closely behind, with at least 35% of consumers

paying to play mobile games [27].

In the US 45% of gamers pay for and in mobile games and 5% of those payers are big spenders.

The United States also has the highest amount of consumers spending an “average” amount of

money (33%), followed by Europe (23%) [28]. Asia has the highest amount of minor spenders at

77% [28].

The 50/50 split across different genders, doesn’t hold up when we examine paying consumers. Men

are more likely to pay for their gaming experience, making up 61% of all payers in the US. This

trend is even more salient in emerging markets such as Turkey and Poland, where 70% of all paying

mobile gamers are men [27].

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What — Gamers' Age and Retention as a Function of Game's Mechanics

Within the application stores' ecosystem, mobile games are grouped into game categories. The most

successful companies in the mobile game market, from Electronic Arts to Zynga and Mobage to

Supercell, deeply understand consumer behaviour differences across game genres. For developers

and publishers is vital to understand what are the trending game categories so they can focus their

time and monetary resources on the development of game genres that are most likely to retain and

convert the vast majority of consumers.

According to Distimo the top 3 revenue generating categories in 2013 were respectively:

• role-playing, strategy and action games for the Apple App Stores (iPhone and iPad together);

• arcade, casual and puzzle games for the Google Play Store [50].

These findings however do not tell us much about how different game mechanics and design

choices linked to consumers behaviour. A 2013 market research from Flurry [8] leveraged more

than 200 of the most successful free-to-play iOS games, with a total audience of more than 465

millions Monthly Active Users (MAU). The study's objective was to investigate the consumer

behaviour differences by game usage per demographics for the top 14 game genres in mobile

gaming. The results are shown in the matrix below:

The matrix plots game types by age and gender. On the x-axis there is what percentage of the game

audience is female, with the far right equaling 100% female and the far left equaling 0% female (i.e.

23

Fig. 2.2 — Flurry 2013 Consumers Demographic

Source: Flurry [8]

100% male). On the y-axis, there is the average age of the consumers (from 20 to 50 years old)

playing a particular game genre.

The results are:

I. Games in quadrant I are preferred by female consumers around 40 years old. Mobile games

in this quadrant belong to the Slots and Solitaire type. Both genres are solo-play games.

II. In quadrant II we have just the Casino/Poker games which may appeal to older men and

women. This is also the only game genre that skews toward males over 35 years old.

III. In quadrant III we have the tightest cluster. Game types such as Shooters, Racing, Card-

battle, Strategy and Action RPG appealed more to younger men. This study conveys that

male consumers gravitate more toward competitive, action or sport mobile games.

IV. Quadrant IV shows the most crowded female cluster. This quadrant includes younger

female consumers that play less competitive games that tend to be played in a more

enduring and consistent way.

Now let's have a look at the results from another market analysis conducted by Flurry in 2012 [9]

studying a sample of more than 300 millions iOS and Android consumers that played free-to-play

games at least once a month:

The matrix above is a “loyalty matrix”. It plots the top nine free-to-play game genres by how often

they were used compared to how long consumers continued to play them over time.

On the x-axis there is the 90-day retention rate for each of the nine game genres. On the y-axis there

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Fig. 2.3 — Flurry 2012 Loyalty Matrix

Source: Flurry [9]

is the frequency of use per week.

Quadrant I represents a “sweet spot” for developers. Mobile games in this quadrant are played

intensively by a set of highly retained consumers, with Social Turn-based games succeeding in

building an active and loyal user base offering games to be played with friends.

If we combine the conclusion that the loyalty matrix conveys, with the results of the previous study

from Flurry [8] we can conclude that the game genres that retained most consumers appealed more

to women than men. We previously said that almost 50 percent of mobile gamers are women but

female consumers do not pay as often as men. Yet female users are easier to retain since they are

most likely to engage with Social Turn-based, Slots or Management/Sim games.

Further investigation of the findings from both matrices proved that consumers tend to be less

committed to the more competitive kind of games. According to this statement it is possible to

assume that male consumers are less committed players than women. Even if men tend to try a lot

of different games, and generally keep playing for a shorter time, they tend to have a higher

willingness-to-pay in order to progress faster in a game.

Those are major findings that leave room for the development of new game designs and

monetization strategies. From a marketing perspective, mobile game companies can also leverage

this knowledge to design targeted campaigns appropriate for the kind of audience to which a

particular game genre is most likely to appeal [8].

Where — Tablets vs. Smartphones and the Issue of Fragmentation

It is important to acknowledge where consumers are buying the games and it is also important to

study where consumers are playing the games. In other words I will try to uncover how consumer

spending in shared among the most popular application stores and to what extent mobile games

consumers use either smartphones, tablets or phones to play games. Again the data that I'm going to

show have been personally gathered from secondary sources of information.

Where Plays: Tablet vs. Smartphone

Mobile games are by definition mobiles. Consumers can play them wherever they want as long as

they have enough battery power available on smart device. Since mobile gaming is ubiquitous we

could restrict the scope of this investigation answering the question:

“On which device consumers play the most? Smartphones or tablets?”

25

It is important for companies to understand the consumers demographic of players playing on each

mobile screen so they can better market their mobile games.

A qualitative study conducted by Statista [45] provides information on the device usage of 1004,

18+ years old, mobile gamers from the United States and the United Kingdom. The survey was

conducted in April 2012. The vast majority of respondents (67 percent) answered they accessed

mobile games only from their smartphones. In “SECTION 1” findings from Newzoo and Distimo

[28] 2013's market researches confirmed that mobile gaming on tablets will grow faster in the

coming years. According to Statista's 2012's analysis, 54 percent of tablet-only gamers are female

consumers [45] and tablets' usage increases with age. During the survey period, it was found that 26

percent of tablet-only mobile gamers were over 65 years old [45]. Tablet gamers of age 18 to 24

years accounted only to 6% of the total sample [45].

If female consumers won for tablet gaming consumption, men lead the field for the number of

screens. According to Statista 56% of male consumers in 2012 were playing games on both their

smartphones and tablets [45]. Furthermore consumers from the Millennials' cohort are more likely

to play on both screens. This latter finding strengthens the hypothesis that consumers of age 25 to

34 is the demographic segment that should be pursued by mobile gaming companies.

Where Pays: The Issue of Market Fragmentation

Secondary data from 2013's market researches revealed that the majority of consumers spent the

highest amount of money primarily on the Apple and Google's application stores.

Nonetheless if we look at the download shares, the pie chart below shows that in 2013 the Amazon

Appstore was the most game centric platform. On the Amazon Appstore a remarkable 63% of

downloads was generated by mobile games [50].

26

Fig. 2.4 — Amazon Store

Source: Distimo [50]

In “SECTION 1” we also acknowledged that together with the evolution of the mobile gaming

value chain came about the problem of market fragmentation. Fig. 2.5 shows how the market

fragmented as the value chain matured.

Nowadays with so many levels of fragmentation, the problem of apps discoverability is a real issue

for every company in the industry [37]. The main problem with some many marketplaces, is getting

enough user mindshare to win the competition. Finding a particular game on the target device

(Android smartphone, iPad, Windows Surface, etc.) is extremely difficult if the customer doesn't

enter the application store with a particular name in mind [12]. It's the overly crowded storefront

problem all over again.

Moving rankings on the the application stores is based on the number of downloads and this

requires the publishers and developers to invest a substantial amount of money in marketing and

advertising their mobile games. Another costly and time consuming activity is submitting the same

game to multiple stores. This operation necessitates the development of one or more ports of the

game for every new game release hardware and application store's ecosystem on the market.

When — Christmas Spending Slows as the Market Matures

When customers are buying is defined by time of the day, month/season, or buying cycle [52].

A SponsorPay [39] research attested that, the majority of American consumers (31 percent) play

mobile games when they are in bed, while 16 percent of them play when they are commuting. For

better or worse, it looks like mobile gaming is taking the place of bathroom reading, as SponsorPay

reports that 11 percent of consumers play games in the bathroom [39].

This might be interesting to some but the final question of our consumer analysis is that of purchase

timing. For each market segment, it is important to understand when and how often consumers

27

Fig. 2.5 — The Degree of Market Fragmentation

Source: Booz&Co. [37]

make a payment. Fig. 2.6 shows a further important issue that is affecting companies in the mobile

gaming industry. Mobile games are the app category with the lowest lifecycle.

Moreover, 49% of all payers make only a single purchase per calendar month, while only 13% of

paying players make five or more monthly purchases [47]. The average time to the first purchase is

just under 24 hours. Of those players who go on to make a second purchase, the average time lapse

between first and second purchase is a mere 1 hour and 40 minutes [47]. Again those findings

highlight the fact that companies should be able to retain the consumers' segment who are more

likely to spend the largest amount of money. Moreover the fact that the average time to first

purchase is just under 24 hours should inspire developers to design game mechanics that

immediately put the player into the game. Every second lost is a potential customer that goes away.

To my personal advice mobile games should be at first easy to pick up and play, with no time

consuming tutorials or lengthy cutscenes. Companies should give consumers a reason to buy the

game within within 24 hours. If consumers make the first payment then there is a possibility they

will spend money twice within 1 hour and 40 from the moment they made the first purchase [47].

When it comes to purchase occasions a 2013 report from Flurry [15] confirmed that the mobile

games market follows the same trend of the video game industry. Consumers' spend is more

frequent during the holiday season. American consumers, spend more money throughout the

Thanksgiving period. Overall the research revealed that Western countries are spending more

money on games during the Christmas time. On the 25th of December 2013's mobile games

downloads were up by 91% [15] compared to an average day of the first three weeks of December.

Nevertheless the study conducted by Flurry revealed a slowing growth with respect to the previous

year [15]. This could be a signal of the market maturing. The main reason why games downloads

spiked during Christmas was mainly due to the fact that millions of people found either a

28

Fig. 2.6 — Apps Average Lifecycle

Source: Flurry [16]

smartphone or a tablet under their Christmas tree. Nowadays in the English speaking and Western

European countries fewer consumers are coming online with mobile devices for the very first time.

Consequently there is an increasing number of consumers who is showing loyalty to particular

games and doesn't need to go on a download frenzy to find what they like.

As it happens the biggest growth in mobile gaming is coming from the other side of the world,

where Christmas is a less significant holiday or not celebrated at all. In Asia-Pacific countries new

device activation and app download comes more frequently and is consistent throughout the year

[15]. Those findings should encourage companies not to rest on their laurels and just wait for Santa

to arrive. They better start studying the demographic and psychological descriptors of the emerging

countries and develop marketing strategies and gameplay features that better capture consumers

from the APAC region.

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SECTION 3: THE ARM MONETIZATION FUNNEL

The analysis of consumer behaviour might help companies to better understand their target cohort.

However this is only the first step in the development of mobile games businesses. What follows is

the need to retain and finally monetize consumers. The adoption of internet together with the

introduction of free-to-play games, transformed the mobile games market from a product industry

into a service industry that could potentially run 24/7 and with a high degree of consumers'

interaction. Now that games are services, the business model requires continuous balancing between

value for the consumer and profit for the company. When a player downloads the game, developers

and publishers must retain him as long as possible if they want to succeed. In order to do so a good

customer service and the creation and enhancement of a social community are all fundamental

aspects that must be managed consistently if companies want to make revenue. Furthermore the use

of game analytics in the creation and update process of mobile games should be most important to

every studio. Having a game always connected to the Internet not only allows developers to make

frequent updates, also makes it possible to collect data about user behaviour [7]. The concept of the

purchase funnel [2] should help companies to focus the attention on their ability to gather metrics.

The advertising model developed by E. St. Elmo Lewis [2] describes the steps a customer must go

through before spending money on any kind of product or service. A key takeaway from this model

is that the more consumers go down the funnel, the less in number they will be. A revised model of

the classic 1898 funnel has been developed by research group Kontagent to better suit the needs of

companies in the mobile and social games market. The biggest addition to the original model is the

introduction of Virality, K-factor and Cost-Per-Acquisition (CPA) as driving KPIs of consumer

acquisition. Fig. 3.1 shows the Kontagent's ARM monetization funnel:

30

Fig. 3.1 — ARM Monetization Funnel

Source: Kontagent

The acronym ARM stands for:

• Acquisition

The acquisition of new players is important to every mobile game company.

However consumers acquisition can be costly and unprofitable if mobile players do not

convert into mobile payers.

The most important KPIs for user acquisition are: Virality, the K-factor and Cost-Per-

Acquisition (CPA) [7].

Virality is dedicated to the number of new players acquired thanks to people already playing

a mobile game.

The K-factor is for one player, the average number of players brought to the game via

his/her social networks.

Cost-Per-Acquisition is a KPI that measures how much it costs to the company to have a

paying or playing user. In the mobile gaming industry this is usually computed as Cost-Per-

Install (CPI).

• Retention:

Retention is probably the most important step of the entire funnel as it contains the most

valuable consumers to the company. Retained consumers are most likely to spend big money

and spread a positive word-of-mouth that would attract organic (i.e. free of advertising

costs) acquisition. Important KPIs to monitor retention are:

Monthly-Active-Users (MAU), Daily-Active-Users (DAU), Retention and Churn rates [7].

• Monetization

Monetization is about choosing a sustainable revenue model and the conversion rate of

players becoming payers. The most profitable revenue models have proved to be:

free-to-play, in-game advertisement, subscription fee and pay-to-play monetization

strategies. Nonetheless a mix of the four can still exist and deliver profitable games.

Important KPIs monitoring monetization are the Average Revenue per Paying or Playing

User (ARPPU vs. ARPU) and the Customer Lifetime Value (LTV) [7].

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Customer Lifetime Value (LTV)

A key takeaway from the ARM model is that once companies have built a successful and balanced

funnel, they can increase the scale of their success by reinvesting money into additional consumers

acquisition [12]. As it happens the greatest part of acquisition comes from costly advertising.

If a company is marketing a free-to-play game, then the revenue that every consumer generates

must always be greater then the cost of acquiring a new customer. In other words if companies want

to monetize free-to-play games, the Costumer Lifetime Value must be higher than the Cost-Per-

Acquisition:

LTV >CPA

Computing CPA can be rather straightforward. Most companies in the mobile games industry

measure CPA as Cost-Per-Install (CPI) which accounts to spend in advertisement every time a new

consumer installs the game on his/her mobile device.

About measuring LTV things get a bit more complicated. Most free-to-play games are not fixed

priced so calculating the LTV requires insight about consumers lifetime and spending patterns.

Lifetime value is the present value of the sum of future revenues from the moment the consumer

tries the game until he/she leaves. It can be thought as the infinite sum:

LTV =rev+rev∗R+rev∗R2+rev∗R3+...

“rev” is the revenue that a user produces during the time period, and “R” is the retention rate

between time periods.

This is an infinite series that can be simplified in the following formula:

LTV = 1(1−R)

∗rev [43]

The first component of the LTV formula is called duration. This KPI is the reciprocal of churn rate

and it measures the average number of months a consumer will keep playing the game. To calculate

duration, a retention profile of consumers is required. The key retention benchmark data for the

mobile games market are 1, 7 and 30 days retention [43].

Since retention is part of the LTV formula, the higher the churn rate the lowest the LTV. Thus the

success of any monetization strategy will largely depend on the companies' ability to engage and

retain users once they have acquired them.

The second component of the LTV formula is consumer value. In the mobile games industry the

32

revenue a consumer will generate to the company is usually computed by calculating the

Average Revenue per Daily Active User (ARPDAU):

ARPDAU = RevenueDaily Active Users

LTV: Numerical Example

A mobile game is said to be performing well if it displays the following retention profile:

50-25-12 (daily-weekly-monthly retention rates) [42]

With those numbers in mind I will make up a numerical example that shows the effect on Customer

Lifetime Value of incremental drops in the value of retention rates.

Suppose the ARPDAU is fixed at $1 per time period, and paying consumers are fixed at 5000 users.

With a 50% retention rate:

LTV = 1(1−0.5)

∗$ 1∗5000=10,000

If after one week the retention rate drops at 25%:

LTV = 1(1−0.25)

∗$1∗5000=6,666.67

Ultimately with a retention rate equal to 12% at the end of the month:

LTV = 1(1−0.12)

∗$1∗5000=5,681.82

The results of this experiment show that a decline of 50%, relatively speaking (i.e. 50% decline

from day 1 to day 7 and again 50% decline from day 7 to day 30), could cut down revenues almost

by half.

Thinking at this example reverse doubling retention rates, companies could also double revenues.

Moreover retention is part of the LTV formula and the LTV is an indicator of how much a company

could spend per user on paid acquisition. As a consequence from a marketing perspective, the

higher the retention, the higher the number of consumers a mobile gaming company will acquire.

Those two latter conclusions strengthen my thesis that companies in the mobile games market

should focus very much on the retention part of the ARM monetization funnel.

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CONCLUSIONS

The data presented in this thesis show that even though mobile games are becoming more and more

popular, the mobile games market is not mature. Three main steps in the evolution of the mobile

games value chain produced such transformations that many companies in the business are now

struggling to generate consistent profits from their games. Nonetheless mobile games reaching a

mass-market audience have the potential to generate large profits. As a matter of fact recent studies

from respected professional service firms revealed that revenues generated by mobile games in

2013 were far superiors from those of any other digital entertainment products on the market.

Moreover mobile games are the greatest revenue generating apps category for every notable

application store. The mobile games industry is also expected to grow rapidly in the coming years.

The main factors favouring growth are the increasing digitization of the product, coupled with a

strong democratization of the Internet and an increase in the smartphones and tablets' penetration.

Another aspect facilitating growth is the increasing number of large publishers entering the value

chain and flooding the market with free-to-play mobile games. Thus expanding the consumer

audience and effectively transforming the mobile gaming market from a product into a service

industry.

As the industry matures the ability to target users based on demographics and personas, and then

track the effectiveness of such targeting, is just starting to take hold. The average mobile games

consumer belongs to the Millennial generational cohort and there is almost a 50/50 split among

genders. The Asia-Pacific region has the largest concentration of users and it accounts for bigger

revenues when compared to the other geographic segments. China, Japan, Korea and Taiwan in

particular, are showing the highest percentage of mobile players that also pays for mobile games.

Companies need to adapt to market's rapid transformations and quickly react converting their

business model from art into science. The ability of companies to leverage big data is becoming a

factor of success. Monitoring each step of the ARM monetization funnel can greatly inform

companies acquisition, retention and monetization strategies. If publishers and developers cannot

process big data internally, then there are many third party companies that would provide them with

the metrics they need. Moreover it should be clear to every player in the mobile gaming industry

that the largest part of consumers acquisition comes from costly advertising. A company can

monetize free-to-play games as long as the Customer Lifetime Value of the target cohort is greater

than the cost per user acquisition. From here the importance of increasing the amount of retained

consumers since they are more likely to spend big money and drive organic acquisition.

34

GAME OVER

You have unlocked a visual representation of key findings from this project.

Click or scan the QR code below to navigate the official Prezi.

http://prezi.com/quqwrhacfhk6/?utm_campaign=share&utm_medium=copy

35

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