The Science of Game Platforms Part 2: How Sales Drop, and What You Can Do
Joost Rietveld, Assistant Professor in Strategic Management at UCL School of Management returns to Department of Play with the second and final part of his look at the evolution of platforms — from digital game stores to the coming consoles. Part 1 can be found here. The insights presented in this series of articles are based on an academic study written by the author, and published in the Academy of Management Discoveries
Hearing stories and analysing data about game sales or downloads can be a bit of a mixed bag.
On the one hand, platforms like Steam and iOS boast of ever growing success stories. For example, a recent study commissioned by Apple claims that the App Store was responsible for a whopping $519 billion in estimated total billings and sales of both physical products and services and digital goods in 2019.
On the other hand, developers that use these very platforms as marketplaces for their games and apps seem progressively disgruntled by their sales performance.
That’s something that has been particularly evident, in the days this very piece was being written. Epic Games, Apple and Google have entered a high-profile dispute over the balance of power within the App Store and Google Play Store. It’s a complicated and evolving situation that has seen Epic take the dominant mobile stores to task over the 30% revenue cut they take from games offered via their platforms. It all began when Epic introduced direct payments in its Fortnite mobile releases, circumnavigating the platform holders’ revenue cuts.The fallout has seen lawsuits, the removal of Fortnite from both Apple and Android devices, and Apple preparing to sever Epic’s access to iOS and Mac development tools.
There thus appears to be a mounting discrepancy between the overall value created by and on these platforms, and the value that developers are actually capturing for the games and apps they’re offering over such platforms. How do sales patterns for games evolve over the platform life cycle? What is driving these evolutionary trends? And, how can game developers adjust their strategies accordingly to position themselves for success?
How games and app performance evolves over the platform life cycle
In-depth analysis of four market-leading digital platforms using both qualitative and quantitative data sources reveals three broad trends in terms of how app and game sales or downloads evolve as the platforms these products are released on solidify their positions in the market:
- Average demand for games and apps declines. First, while the value created at the overall platform level may increase over time (as pointed out by the Apple study earlier), research shows that the average demand at the individual game and app level actually decreases. On Steam, for example, my co-authors and I find that the median downloads for paid games declined exponentially during our study period. A typical paid game released in 2007 generated 713,959 downloads. This number dropped to 633,552 downloads for games released in 2011, and plummeted to 74,361 downloads for games released in 2015. On Kickstarter, too, we found that the monthly average success rates for creative projects decreased from 42% in 2014 to 35% in 2017, meaning that fewer projects reached their funding goals.
- Demand for games and apps becomes more concentrated. Second, the distribution of the demand for games and apps becomes increasingly skewed. That is, a small group of highly successful games and apps significantly grows their share of the total value captured in these ecosystems. This is illustrated by the figure below, which portrays the share of downloads for games released on Steam in a given year, broken out by percentage-based performance ranks as a function of the cumulative downloads by all games released in the same year. For example, the figure shows that in 2007 the top 20% most downloaded games accounted for approximately 66% of all downloads by video games released in that year. The share of downloads by the top 20% most downloaded video games increased to nearly 90% in 2016. In other words, out of the more than 4,000 games released in 2016, just shy of 900 games accounted for 90% of the 329 million downloads for all games released that year.
- Prices for games and apps decrease while (marketing) costs increase. Third, we find that app and game prices decline whereas the costs developers incur increase. On the App Store, for example, prices for apps have been in decline since 2009. The top panel in the figure below shows that the average price for game apps fell by 60%, from $1.37 USD in 2009 to $0.55 USD in 2016. While this trend can be partly explained by the increasing popularity of the freemium and ad-sponsored business models, research in marketing and economics has shown that consumers have lower willingness-to-pay for freemium apps and for apps with in-app advertisements. The bottom panel in the figure further shows that the cost per install, or the advertising expenses associated with one additional download by a loyal app user, increased at a much steeper rate than the average revenue per app user.
What is Driving These Trends?
Platform ecosystems are rather dynamic and comprise several moving parts (see part one of this article for a primer on platform economics). It is, therefore, virtually impossible to point to one specific cause for these sales and download patterns. That said, here are the most likely culprits:
- The platform sponsor adjusts its governance as the platform becomes dominant. The changes a platform sponsor enacts to manage its ecosystem can have significant impact on the performance and distribution of games and apps. As I discuss in more detail in my first article, platforms initially implement changes that are mostly beneficial to the developer community, such as new ways to generate revenues or enhanced information about the consumers on a platform (structural governance changes). These rule changes are followed by updates aimed at attracting more and more diverse developers to the platform, such as making it easier for developers to make their software compatible with the platform or the creation of new app categories for the platform (boundary spanning governance changes). Subsequent rule changes are mostly geared towards facilitating consumers, for example, by adding discovery algorithms or curated selections of promoted games and apps (redistributive governance changes). This shift from structural governance changes to boundary spanning and redistributive governance changes contributes to 1) an increasingly crowded marketplace, and 2) a progressively lopsided distribution of demand for apps.
- Shifts in consumer preferences and game quality. Another plausible contributing factor is a shift in the type of users on the platform. First, it is well known that early adopters of a platform technology tend to have a higher willingness-to-pay and be more risk seeking in their consumption patterns. This not only applies to the platform itself, but also to the apps and games released on the platform, resulting in relatively more and more diverse consumption choices early in the platform life cycle. Later on, when there are more late adopter-type consumers, we should expect to see convergence on a few key titles, but fewer average purchases per consumer (I studied this in another research project). Second, it may well be that as the platform solicits game submissions from a broader pool of developers that the average quality of games on the platform decreases, which should result in fewer purchases overall and more purchases for those games that are, in fact, of high quality. Changing consumer preferences and increased competition both contribute to lower prices for games and apps and higher marketing costs.
How Can This Inform My Strategy as Developer?
How can the aforementioned evolutionary trends and causal factors help inform developers’ product-market strategies as they consider which platforms to join, and when?
- There is good value in joining a platform early in its life cycle. New platforms, such as the Epic Games Store and the impending consoles announced by Sony and Microsoft, may pose considerable risks due to a small installed base and an uncertain growth trajectory. On the other hand, they also pose considerable opportunity: Due to strong dependence on developers to be successful, a platform sponsor’s governance will be more supportive of developers earlier rather than later. Moreover, consumers who are first to adopt a new platform are likely eager to spend money on games and apps and also to try new things.
- The platform life cycle informs content development and marketing strategies. Broadly speaking, given the above, different types of content and product-market strategies will be effective at different stages of the platform life cycle. Early on, new IPs and content that appeals to an audience of enthusiast consumers is more likely to succeed. Moreover, at this stage it may pay to pursue a ‘gravel throwing strategy’. That is, release multiple products to see what sticks and then reiterate on the ones that are successful. Later on, however, sequels, tie-ins, and content that speaks to an audience of late adopters is more likely to succeed. Additionally, at this stage, a strategy of ‘throwing rocks’ is more likely to pay off. Put differently, the chances of (commercial) success are greater for those developers that release only one or a few products and heavily invest in marketing and promoting these.
- Be realistic and don’t be blinded by outlier success stories. Hits and breakout success stories on platforms like Steam, iOS and Kickstarter are more an exception than the rule. Furthermore, the sales and download performance attained by such hit products aren’t anywhere near what can be expected from a ‘typical’ release on these platforms. Average statistics and platform-wide performance totals are grossly inflated by a few outliers at the top. Rather than looking at averages, the median is a much more informative statistic, and developers need to be realistic when it comes to budgeting and planning for performance.
- It pays to develop good relationships with the platform sponsor. By way of their ecosystem orchestration efforts (such as the aforementioned governance changes), platform sponsors can have a tremendous impact on how much value is created in a platform ecosystem and who captures what share of that value. The platform’s algorithms and curated promotions are often informed by higher-order strategic objectives (such as highlighting features that are part of the latest version of the iOS operating system). Knowing what the platform values and receiving preferential treatment from a platform (such as being part of an Indies Showcase), can boost sales performance exponentially, and make all the difference on a studio’s bottom line.
This article is part of a series of two articles on platform evolution and game sales. You can read the first article here. These articles are based on an academic study titled ‘The Coevolution of Platform Dominance and Governance Strategies: Effects on Complementor Performance Outcomes’ published by the Academy of Management in the Academy of Management Discoveries. You can find the published version of the paper, or you can download a pre-publication version of the paper for free. This article and the academic paper are written by Joost Rietveld, an Assistant Professor of Strategic Management and Entrepreneurship at the UCL School of Management of University College London. Joost has a background of working in the games industry prior to joining academia, and much of his academic research is based in the games industry. This series of two articles was edited for clarity and readability by Will Freeman and published by the Department of Play.
Originally published at https://departmentofplay.net on August 31, 2020.