Pay-to-play vs. free-to-play: when does premium work?

Free-to-play games have dominated mobile gaming for several years now  – at this point, premium (pay to own) games have been relegated to a niche on the iOS and Android platforms. While there are success stories such as last year’s Monument Valley, massive hits along these lines are becoming increasingly rare.

Case in point: 407 of the top 500 grossing games on the US iOS app store in Q3 2014 were free-to-play. They represented an eye-popping 95% of total app store revenues. And the top 10 is completely free-to-play (see the chart, courtesy of App Annie).

Let’s look at the reasons behind this, and see when releasing a premium title can work.

Top 500 grossing games on the US iOS app store in Q3 2014 Why is this happening?

Why are premium games on mobile so seemingly unprofitable? There are several reasons for this heavy slant towards free-to-play on the grossing charts.

On one side, the economies of scale of digitally distributed games on smartphones and tablets offer massive potential user bases to developers. In tandem with this, games based around consumable micro-transactions such as in-game currency and limited-use items have higher revenue potential on a per-user basis, compared to premium games that don’t have any additional content available to purchase.

New business models and technologies are also shifting our consumer mindset. Free-to-play games and “all you can eat” media services such as Netflix have drastically altered our perception of value, while high speed Internet and peer-to-peer (P2P) technology have made downloading and streaming of huge files (both legal and illegal) trivial.

As well, mainstream consumers are not always sophisticated enough to understand the fundamentally different experiences that premium games offer from free-to-play, instead seeing a free game versus one at $1.99. And in the case of simply needing an entertaining time killer while waiting for the bus, they may not even care – thus free wins out. Such a decision doesn’t guarantee any revenue for a free-to-play title, but it does cost a premium developer a sale.

When does premium work?

There are instances where a premium strategy can work. A few levers are:

  • nostalgia
  • appealing to core gamers
  • strong word-of-mouth potential through a unique premise or graphics

High-quality, feature-rich games based on classic intellectual properties (IPs) appealing to dedicated “core” gamers have experienced success. XCOM: Enemy Within is just such a case. It launched in November 2014 at a relatively high price of $12.99, but one that is acceptable to XCOM’s target audience of gamers used to paying $40 and up for console games.

XCOM: Enemy Unknown

While there isn’t data available on its success so far, in 2013 its predecessor XCOM: Enemy Unknown did manage to enter the top 10 grossing charts for iPad apps, even at a price point of $19.99.

Another example is Five Nights at Freddy’s, a tense survival-horror game released in August 2014, in which the player assumes the role of a night security guard in a Chuck E. Cheese-style children’s restaurant. Their challenge is to avoid being killed by the restaurant’s animatronic robots, which turn murderous and roam the halls at night.

With its original gameplay, scenario and scary moments that naturally led to word-of-mouth sales, it has performed well, with a sequel released in November.

Five Nights at Freddy’s

Since September 12, 2014, Five Nights at Freddy’s has not been any lower than #7 on the US iOS downloads chart, spending roughly half that time at #1. As a premium title, each of those downloads represents a sale. This is without question impressive for an indie title.

However, its success relative to that of top free-to-play games also illustrates exactly why the grossing charts are filled with free-to-play and not premium.

The game is currently #104 on the US grossing charts, and while it experienced a peak position of #10 on Christmas Day, it has spent most of its life between the 50-80th positions on the charts (see below).

App Annie store stats

#1 on the downloads chart, but only the 50th highest grossing game: this is an eye-popping statistic.

So perhaps the connection between the number of downloads and financial success with premium games isn’t as close as one may initially believe. This simply comes down to the higher potential lifetime value (the value a game will derive from its entire relationship with a customer) of players in free-to-play games, combined with the massive user bases that they can create.

Done right, free-to-play games are gateways to unlimited revenue potential. If a free-to-play game is a store with a wide-ranging and ever-growing stock of wares, a premium game is a store that sells only one item.

When looking at successes and failures in mobile games, one must keep in mind that the app stores are a maelstrom of uncertainty, hot competition, trends and just plain luck. Predicting an unlikely success like Flappy Bird is impossible. Even the most thorough analysis of historical success and trends in an attempt to make a hit (whether free-to-play or premium) can fall flat.

So… are premium games dead?

Premium games on mobile devices are not dead, but they now definitely occupy a niche that will not suit every project’s business goals or positioning. As long as free-to-play developers don’t sit on their laurels and allow their monetization techniques to stagnate, this balance of power on the grossing charts won’t change.

At the very least, prior to starting a new project, developers need to think carefully about their own success metrics, the game they want to make, their intended target market and the best business model to achieve those, whether it be free-to-play or premium.

Posted in: Industry Transformations

Tags: business model, free games, free-to-play, mobile games, monetization, pay to own, pay-to-play, premium



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