MAY 20, 2012 • The mobile game space is evolving at a dizzying pace. Carlsbad, Calif.-based Appy Entertainment has only been in business since 2008, and already the studio has radically shifted its business model away from paid downloads to a free-to-play virtual item sales. Considering that some of those on staff have roots in the game business going back to the early 1980s, the changes in platforms and monetization from those days is enormous.

Yet what sets the business apart in 2012 is how fast new platform introductions are forcing ever more nimble reactions from developers. In the last two years, tablets and smartphones have been the big story. On the horizon is the wider adoption of other new devices such as connected TVs. And all the while, those miniscule production budgets that allowed so many small studios to get in the game are creeping ever higher.

With major mobile hits like Trucks and Skulls plus FaceFighter under its belt, DFC went to Appy Entertainment’s chief executive Chris Ulm, and brand director Paul O’Connor, to get their educated viewpoints on the state of mobile development today.

DFC: Please give us a sense of where growth is happening in the mobile space. What are the hot segments?

Paul: The greatest growth potential in the mobile space right now is in social games featuring shared experiences, games that allow players to effortlessly have fun together. These users are directly plugged into user-to-user viral growth, and there is built-in social pressure to keep up-to-date with your friends.

Since such games dovetail with Appy’s mission to bring people closer together through games, we are concentrating our efforts in this category for all of Appy’s future titles.

Other hot segments on the app store will be free-to-play games based around core gamer genres (like FPS) with high-end production values and (2) RPGs that appeal to both Asian and western markets.

The market will reward games that are easy to buy, easy to play and have a very long potential play time with short bursts of activity.

DFC: Which of those segments have staying power moving forward?

Chris: The aforementioned social/mobile segment should see the most staying power (and also the most competition). We think that the free-to-play business model will eventually swallow the App Store and become the standard for all but the most successful premium games and brands.

We also see an emerging market for more immersive, high-production value games on the horizon as iPad adoption becomes even more widespread, and as Apple moves into the living room with their rumored television initiative.

Ultimately, there are a tremendous number of very talented developers using every trick at their disposal to make great games for an exploding worldwide market. There is a room for every genre to break out and go wide provided the games are compelling and viral. Essentially there will be a Draw Something or DragonVale every month.

DFC: What is the appeal of gaming on mobile devices compared to traditional consoles or PCs?

Chris: Mobile devices are always on, are played with natural gestures, feature immediate gratification through digital distribution, allow connectivity to friends, and have short session times with very long immersive games. Mobile gamers have an incredible variety of games to choose from – all at very low to free prices.

In contrast, console games require a larger investment of time, money and training. First, you have to make an appointment for a long session which requires absolute commitment to the play experience. You can’t play Call of Duty while watching TV like you can with Where’s My Water!

Before you can play you have to buy a special purpose console and hook it up to a high definition TV. Then you have to buy the game at a store and part with 60 bucks. Then you have to learn how to operate a three-directional controller with 10 buttons. Consoles are demanding mistresses. People spend a few hours with their console game machines a day but they have their phones with them 24/7. They use their tablets while watching TV or eating dinner.

In our view, it’s a golden age for the world population to discover and enjoy games. Gaming is exploding from an activity that a few hundred million can enjoy to a world market of billions.

DFC: iPads and iPhones are very expensive elite devices.  What makes them competitive advantages over a device like the DS/3DS where you can get a family of four their own device each for basically the price of an iPad?

Chris:In competitive markets with carrier-based subsidies, iPhones can be had for zero dollars. Even the top iPhone 4s is only $199 in the US compared to $169 for a 3DS. Even without a contract, iPod touches are $199 which is the entry point for iOS. Android devices can be found even cheaper.

An entry level iPad is $399 or the equivalent of two 3DS devices, so we don’t think that the device price point is a huge barrier when measured

against the software library and utility of these devices versus a single-purpose gaming machine.

Of course, the real competitive advantage is in the cost of software. It doesn’t take more than a couple stinkers at $30.00 a pop to make that DS/3DS seem like a more expensive proposition. There’s a near-limitless supply of free and inexpensive games on iOS that dwarfs anything the DS has on offer, a platform that does not support free games. And one more bonus: there are no tiny little game cards to lose on iOS. Any parent that’s ever turned a minivan upside down looking for a lost DS game will recognize the virtue of this.

DFC: Are tablets mutually exclusive with desktops as an evolving factor in consumer trends?  If so, please explain why you believe so.

Chris: Steve Jobs was right. When he launched the iPad he referred to it as a “car” and PC’s as “trucks”. We think the portability and function of tablets – while falling short of desktops in keyboard-intensive tasks like word processing, coding, number crunching and art – is “good enough” on all of the other things that matter to average computer users. These virtues include portability and lightweight, all day battery life, high resolution screen for media and games. For reading, internet browsing and media consumption, tablets are superior to PC’s. In some ways, they are infinitely superior. Sitting down with a client and going over slide decks on a tablet is far better than on a computer, for example.

Tablets are cars and as their prices fall and utility rises, they will be the choice of the vast majority of PC users and professionals. Desktops will become an important niche market for people that need more powerful computers for content creation, business analysis and software development.

DFC: Assuming we are trending to a more mobile device culture, what does that mean for game design and monetization? By that we mean if people are enjoying games in smaller bits/windows of opportunity, how does monetization keep up?

Paul: It means mobile games need to concentrate on retention and the lifetime value of a player. It may very well be that your mobile game doesn’t monetize a customer until they’ve played your game for days or weeks. Mobile game design needs to create compelling reasons for players to return to a game over time, to form a bond with that game, and to decide that making a purchase in that game will enhance or extend the experience they’ve already come to enjoy over an extended period of time.

DFC: Conversely, assuming there are longer play windows in the living room or home office, does developing F2P games for consoles or the PC have a manifest positive impact on virtual item sales?

Chris: To the degree that living room penetration introduces core gamers to virtual purchases it can only help speed uptake of the category. It will also challenge the existing status quo as gamers start to bring expectations from their mobile games over to the console space.

DFC:  Some developers still prefer fee for download over free to play as a business model, especially in categories like family where virtual item sales can get tricky with minors. How do you see the business models evolving?

Paul: It is impossible to overstate the friction between free and even $0.99 in this market. Free games will have many users that don’t end up paying for anything. As mass audiences are key to driving brands and building customer bases it will be difficult for premium games to compete in the long run with free games, unless they have a key differentiation that is so compelling it overcomes the price resistance.

DFC: We understand Appy’s conversion of Trucks and Skulls from a 99 cent purchase to a free to play title boosted revenue by 150%, and downloads by 340%.  Please tell us more about what you learned from the Trucks and Skulls experience, and how that translates to the rest of your content business.

Paul: We learned that even launching as large as possible on iOS – and Trucks launched as Apple’s iPhone and iPad Games of the Week in 2010 – that the long-term profitability of premium games is limited in the iOS marketplace. There are very few titles that can maintain optimum rank position and gross sales at a premium price of $0.99 or more.

We found that Trucks was considerably more profitable as a free title than as a premium game, both because the freemium model allowed us to better monetize existing players, and because the virtues of a bigger player base (organic lift, referrals, etc.) provided collateral benefits that premium games could not match.

DFC: Are most mobile developers actually making money? What will separate the really successful mobile developers from all of the rest?

Chris: Our anecdotal impressions are that most mobile developers are struggling or at best breaking even. The press concentrates on the big success stories and misses the difficulties of staying afloat in this very competitive market. The developers that succeed will be those that manage to (1) control their costs, (2) amortize key technology over a series of related-but-evolving releases, (3) nurture a brand that resonates with their players and, most importantly, and (4) continues to deliver compelling and highly-engaging experiences and updates on a regular basis.

DFC: How does Appy, or any developer, break away from the clutter of 500,000 competing apps?  What does it take to grab the awareness of consumers? Ignoring consolidation and attrition, how do these developers get their titles in front of enough users to become successful in a sea of similar content?

Paul: Appy has concentrated on a quality strategy that has made our games attractive to Apple for featuring on iTunes, as well as premium placement on paid commercial sites that often agree to feature our games free or at reduced cost as a service to their customers.

DFC:  How will Appy do social mobile differently than other developers?

Paul: Appy’s games are friendlier, higher-quality, and more approachable for a mass audience than many social/mobile games. With our emphasis on player satisfaction, we are interested in building long-term relationships with players rather than being the flavor-of-the-week. We also pride ourselves on differentiating our games with unique mechanics and mini-games that make our social game more than just a click fest. We care about originality, quality and the user experience and are focused on surprising and delighting our players.

DFC: We have heard that Appy has found a decent success in North Africa and Russia, in addition to Western Europe and Asia.  Please tell us more about which of your games are popular in these regions, and what it takes to do business there?

Paul: FaceFighter has performed strongly in Asian territories with a culture of martial arts training and/or appreciation. Our games have also had strong sales in the Middle East, which we think it at least partially due to the communities of U.S. military service people in those areas.

DFC: What is a reasonable budget for a mobile game?  Is it still possible to develop a hit on a shoestring?  How do small independent developers compete with larger companies that are spending big money to gain market share in the space?

Chris: Our own budgets are past shoestring level but we’re confident we can create competitive products. Competing with larger marketing budgets is a greater concern which is one of the reasons we believe Apple needs to create a better-curated App Store where they can more efficiently promote the work of the creative, mid-sized independent developers that are critical to the iOS development ecosystem.

DFC: Are million dollar-plus development budgets becoming the norm? If so, given the screen format, what is all of that extra money going to buy? What is the added consumer experience that can justify the investment?

Chris: We don’t think it is yet the norm but budgets are getting larger. So as long as the audience grows in pace with the budget this is not a great concern. The nature of the games we design make it unlikely that we will get into a budget-devouring arms race where players rate our games on the number of hours they provide, as in the case of a console FPS.

DFC: Conversely, what will be the impact of budget girth on all of the “lean and mean” developers making mobile games?  Can independent studios with 20-40 staffers be enough to create these expensive mobile games?

Chris: With 20-40 staffers and larger budgets we could comfortably ship four or five top quality mobile games a year, including cross-platform support and ongoing updates for existing titles.

DFC: And what of the small shops with 1-5 staffers, will there still be a demand for the games they can create when the budgets balloon?

Chris: Yes, especially if these small shops concentrate on innovation and keep their costs in line. If they try to follow larger studios into staff-intensive genres like social/mobile games, we think they could be in for tough times.

DFC: What happens when you have large publishers with the resources to throw $4 million at the space for an individual game?

Chris: We think you will have large publishers losing $4M now and then! Seriously, a larger budget for production, and especially promotion, does not hurt but neither is it a guarantee of success. Those larger publishers would be better advised to invest that money in purchasing studios and teams that understand this space and can more wisely spend that kind of money.

DFC: How do you compete with a company like Zynga that understands F2P well, has another platform dominance of Facebook, and is promoting its own platform?

Chris: We think the app space will get tougher and tougher especially if app discovery continues to be bounded by a system that is primarily driven by quantity. Platform owners should, and we think do, understand that the only way to ensure continued innovation is to reward developers for both quality and quantity of users.

If the market stays the same, the top companies will consolidate their positions by buying more users, whether through advertising or by acquiring successful developers.  This will allow them to solidify the success of their portfolio by burying the competition.

The only answer for small companies is to understand that ultimately only your players can make you successful and that pleasing them with something they can’t easily get from larger and less nimble companies is your first, last and only priority.

DFC: iOS is Appy’s primary development platform. What impact does that have on your development for Android? Does the release of the same game have a lag in release date?  Are there any feature differences?

Paul: We know what we don’t know about Android, but aren’t yet fully blooded in that space. We are laser-focused on iOS at this time but our growth plan calls for in-house Android support and for Android version of our games to follow iOS release within a few months. A simultaneous release would be optimal to maximize marketing spend and we will get there in time.

DFC: Is feature-for-feature cross-platform play all of that important to mobile users?

Paul: Yes. One of the more frequent player requests of our SpellCraft game is to implement cross-platform play. Players want to progress on the same game whether they’re using their iPad at home or their iPhone at lunch. We’re adjusting our tech to accommodate this system in future games.

DFC: As of last October, your FaceFighter Gold for the Android had been downloaded 650 thousand times.  How did that compare to the iOS versions?

Paul: That is less than one-tenth of our iOS downloads for the FaceFighter franchise. If you include pirated copies you will find the Android numbers are even greater.

DFC: As more and more homes have connected TVs, what will be the impact on the F2P game business?  The demographics are attractive, and there is no added acquisition cost to the consumer, but the screen size is huge compared to mobile.

Chris: Resolution requirements of the new iPad are already driving us to create games that will work on larger monitors. We expect F2P games will prove as welcome on connected TVs as they have on other platforms. We think there is also opportunity for larger home systems to display television signals and game content simultaneously — so you can keep an eye on your basketball game and your spell ingredients in SpellCraft at the same time! Evidence suggests that players are already splitting their time with iPads while watching television so the concept of getting both on the same display isn’t too much of a reach.

DFC: With connected TVs, do we really need Google TV or Apple TV to see a successful App TV?

Chris: We think Apple has the best chance to get it right because they have such a rich ecosystem. It’s not just the TV that’s important, but also the content pipeline, billing infrastructure, distribution agreements, and user experience that are critical, and no one understands all those parts and how they fit together better than Apple.

DFC: What are the advantages of operating from Carlsbad, Calif., other than being in walking distance to the beach?

Paul: Carlsbad is actually a little hotbed of game development. With an office in this community we can network with several independent iOS game development studios – such as Nimblebit and Snappy Touch – and also recruit talent from several console game development studios in the region. Plus, there’s the weather. And the weather. Did we mention the weather?