Googles Pimp Hand is Strong: The Dirty Little Secret Behind App Revenue

I wrote this about a year ago because I did not like the commoditization of content going on in the iTunes store. As games creators started to build for the store, I saw the train and I saw the wall. I just did not know how much track was in between. There seems to be a false sense of creator liberation, leaving the indentured servitude of the evil publishing overlords for a life of rainbows, unicorns and green fields of "direct" publishing and direct contact with the audience . However, as I pointed out over a year ago, the iTunes store is not the haven for creator profitability, it is really an aggregation of stuff large enough to create a compelling argument for the purchase of a high margin piece of hardware. This picture is not so pretty, but it looks like the work of Ansel Adams relative to Google's impact. Through Google's admob's division's domination of the app market on both iOS and Android systems, Google has turned game developers from indentured servants to whores.

Today's game maker is indeed selling directly in a meaningful way for the first time since about 1994, but they are receiving only USD .70 to USD 7.00 per unit sold. App development is running anywhere from tens of thousands of dollars to over a million for things like Infinity Blade, with most of the top selling apps falling in the USD 200,000 to USD 400,000 range - or about the same as the last time developers sold directly in a meaningful way. Some may argue the market is larger, but this pricing scenario certainly does not make for the robust market console and PC games enjoyed when the budgets were at those levels and publishers were taking anywhere from USD 39.95 to USD 99.95 per unit sold. Our audience was indeed smaller, but the budget for the first Tomb Raider was within the range of today's apps and generated over USD 200 million - and it was not the only PlayStation game performing at that level. Many will be quick to point out the lack of COGS, but they just also acknowledge, all the customer acquisition costs remain, and are exacerbated by a much more crowded market. I am not alone the only one to recognize the shortcomings of the sale model, in fact, most developers see it and either skip sale altogether, or relegate it to a second revenue stream through by making an ad supported model of their apps available.

A survey of the top app developers reveals advertising as the major source of revenue. On Android, it is the only source of revenue. Google, through admob, dominates both iOS and Android ad sales. Android developers who lament Google's failure to provide an iTunes like presence for aggregation and sale of apps, fail to realize Google has no incentive to do so. While the developer who put time, tears and sweat into an app sees a game or great work of staggering genius custom designed to unseat Angry Birds and bring joy to greater masses of humanity of than any other product in the history of mankind, Google sees only filler. Like television executives, the content between and around the ads and the people who make them are a necessary impediment to business they begrudgingly deal with. Google joined Apple in an even stronger effort to commoditize content.

In his recent book, "The War for Late Night: When Leno Went Early and Television Went Crazy," Bill Carter recounts a meeting Lorne Michaels, iconic producer of Saturday Night Live, had with the head of NBC when he was about to resign his role as producer. Irwin Seglestein, the executive in charge of creative listened to Michaels lay out the idealistic reasons he had to resign before Seglestein explained:

When you leave, the show will get worse. But not all of a sudden- gradually. And it will take the audience a while to figure that out. Maybe two, maybe three years And when it gets to be, you know, awful, and the audience has abandoned it, then we will cancel it. And the show will be gone, but we will still be here, because we're the network and we are eternal. If you ready your contract closely, it says that the show is to be ninety minutes in length. It is to cost X. That's the budget. Nowhere in that do we ever say that it has to be good. And if you are so robotic and driven that you feel the pressure to push yourself in that way to make it good, don't come to us and say you've been treated unfairly, because you're trying trying hard to make it good and we're getting in your way. Becasue at no point did we ask for it to be good. That you're neurotic is a bonus to us. Our job is to lie, cheat and steal - and your job is to the show.

Google's mission is to sell ads. They do not care what the ads go into. If a sponsor does not like a certain type of app, no big deal - to Google - they move on to something else. They have hundreds of thousands to pick from and Google will always be there. The developer, on the other hand, put in sweat equity, incurred opportunity cost and maybe even their own money to get the thing up and running. Even a relatively big developer like Rovio, which built over 50 games before Angry Birds does not have the portfolio or agility of Google. Mobile encourages a high click through, commanding a relatively high cpm. The only thing Google needs are placeholders to prevent the ads from being served into black screens. They do not want your game, they want your audience. In fact, they want the opposite of your game. They want new stuff. They want your game while it is new, and then, like the network, they effectively cancel it and want a new game, thereby leading to an inevitable churn in the app market. For Google churn is good. For an app developer, it is death. Because if Google, far and away the leading ad provider decides it does not want to fill the inventory on your app, you may as well pack it up and go home. This begs the question, if Google is providing your main revenue stream, and the players receive your product for free, who is your customer and what are you selling them? I say it is Google and your product is eyeballs.

App providers rushing into the ad supported market who say their product is a game are no different than dot com guys who were going to get rich selling dollar bills for ninety-nine cents. If most of your games are being given away for free, they are not your product. You are monetizing the network of eyeballs created by the free distribution of the game. You sell those eyeballs to Google. Google will continue to buy those eyeballs, if they are happy with your app. You may get millions of downloads of a free porn viewer for Android, but your customer, Google will not be happy and will not pay for your eyeballs. In this regard, Google's pimp hand is strong. The choice of the app developer is to cater to Google, or hope they can sell enough apps to support their business. While the direct sales model may be stressed by pricing in the iTunes store, there is some light at the end of the tunnel in the form of digital objects and the growth of freemium games.

In this scenario, an app creator shifts the Google focus, and with it the designation of customer and product from Google and eyeballs to gamers and the app itself. Unlike the box it, ship it, on to the next days of console games, purveyors of these apps are building living breathing products and responding directly to their customers' voracious appetite for content. Development costs are often as high or higher after launch as during initial development, but the payoff is a long and healthy revenue stream. Today this remains a much more "roast duck or no dinner market" than the finger twitchy ad driven app games, but hopefully this market will grow enough to allow a migration back to the good old days of indentured servitude and commodity pricing of the iTunes store.


XIX said…
Apparently the evil publishers were holding the evil distributors in check.

Who knew...
Yaron said…
Intelligent as always.

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