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April 30, 2015

The True Cost of Mobile Gaming

Introduction to freemiums

In the last few years, some very big changes have been happening to the way we pay for mobile apps and games – and with it, the relationship between developers, distributors and consumers is changing.

The rise of the "freemium" payment model – meaning the app is downloaded for free, but supported by in-app purchases – has been both meteoric and extremely profitable. Today, the biggest freemium titles on the App Store pull in over $1 million a day, and freemium has become the dominant pricing strategy across almost all app categories .

But wherever a large amount of money's being made, controversy is never far behind. The freemium model has come under fire from some games journalists, who claim they stifle creativity and encourage a focus on monetisation rather than value.

In-app purchases have also spawned major legal action, with Google, Apple and Amazon all recently told to refund millions of dollars by the US Federal Trade Commission over "unauthorised charges" relating to freemium titles. And while Google and Apple have settled, Amazon is fighting back, pointing to consumer's right to make an informed choice.

The popularity of the freemium model continues to grow – and there's even evidence that gamers are willing to spend more on it than they would on traditional "pay once" games. Let's take a closer look at the rise of freemium, and the people who pay for it.

How does freemium work?

At its core, freemium is based on a marketing tactic as old as time – give a sample of a product away for free, encouraging customers to try it, enjoy it, and come back for more. It's a particularly compelling tactic since the rise of the internet, which has enabled consumers to self-educate more than ever before, allowing users to 'try before they buy'.

Freemium embraces this by lifting the pay barrier and inviting customers to come in, get comfy and crush some candy, all without spending a penny. However, there's a limiting mechanic built into the game itself that means, sooner or later, the player's progress slows to a crawl or stops completely. The only way to keep playing is to hand over some cash – usually via a small, convenient in-app payment.

These payments are usually dressed up as something that's part of the game world. In Clash of Clans, your clan's progress is determined by a number of resources, but the most important is Gems, which can be purchased with real-world money: anything from a "Pile of Gems" (500 for £3.99) to a "Chest of Gems" (14,000 for an eyebrow-raising £79.99 – that's about twice as much as the average triple-A console game costs).

Candy Crush Saga follows a similar pattern, with extra lives and "boosters" available from the in-game Yeti Shop for a price. As with Clash of Clans, you can try to play without spending money, but it's a deliberately slow process. Lives regenerate only once every 30 minutes, so if you're stuck on a tough level, there's a constant temptation to grease the wheels, at just 69p for an instant refill.

Most freemium games are built around mechanics like these. They're designed to be addictive and easy to pick up and play, but rather than the traditional one-off payment for a complete game, customers need to keep putting coins in the slot if they want to continue playing. It's essentially the same business model seen in arcades during the 80s and 90s – so what's the problem?

But while it's hard to carry a Pac-Man arcade cabinet around in your pocket, smartphones loaded with freemium games have given us all a convenient portable slot machine to pour money into when we're bored. It's also been suggested that by spending incremental amounts, gamers end up paying far more for freemium than they would have been prepared to pay for the same game up-front.

Freemium is huge, and it keeps getting huger. Research from Distimo found that at the beginning of 2013, free apps with in-app purchases accounted for 77% of titles in the Apple App Store. By the end of the year, it was up to 92% - and paid apps were just 4%.

But do gamers really get a worse deal with freemium, or has the model allowed greater choice, greater self-education and the freedom for customers to name the price they're prepared to pay?

How much are people really spending on freemium?

According to a 2014 report by mobile analyst Swrve , the vast majority of people playing freemium games don't actually spend a thing. During January 2014, only 1.5% of active players made any in-app purchases at all. Among those who do pay, Swrve estimated the average user spends $15.27 (around £10) per month – and only half of those make more than one purchase. Three years earlier, a similar report by Flurry found much the same thing: only 3% of players spend any money on freemium games, with an average spend of $14.

These figures suggest that, rather than drawing its considerable profits from legions of zombie-like addicts, freemium games are actually supported by a small and dedicated core of big spenders. Only 13% of paying players make five or more in-app purchases a month, says Swrve – and that's around 0.2% of players overall. The firm estimates that freemium games derive as much as half of their revenue from the top-spending 10%.

So they're not enslaving people's wallets in droves, but does this still mean the freemium model is unfairly exploiting a naïve few – perhaps people who are predisposed to gambling or compulsive spending? Again, the statistics suggest otherwise. In 2013, a survey of 3,000 active mobile gamers in North America by market research company EEDAR found that these big spenders are both well aware how much they're paying, and feel they get value for money.

Some 78% of customers who spent $50 or more on games like Candy Crush Saga and Clash of Clans said they felt they had received their money's worth from their purchases. This figure was 67% even among those who spent extreme sums of $100 or more. EEDAR also found that these "hardcore" freemium gamers are very selective about what they pay for, and tend to enjoy games across a number of different platforms and payment structures.

"In addition, these heavy mobile spenders play on a broad variety of platforms, including consoles, and understand the value proposition supplied across different business models, and still choose to purchase microtransactions," said EEDAR's senior analyst Patrick Walker.

Not everyone agrees, however, and the freemium model recently came under the watchful eye of market regulators – at least partly due to the sheer amount of money it's making. 2014 saw three of the world's biggest tech companies go up against one of its most powerful consumer rights organisations, and the battle's still not over…

Regulators, mount up

As early as February 2011, the Federal Trade Commission – the US government's consumer protection agency – indicated that it was planning an investigation into "mobile applications that are free to download, but subsequently charge users for products and services within the applications". In its response to a concerned senator's letter, the FTC agreed that "consumers, particularly children, are unlikely to understand the ramifications of these types of purchases".

The announcement came shortly after Capcom, the creator of Farmville-a-like Smurfs' Village, agreed to give customers a warning about in-app purchases. However, this was only after parents complained that their young daughter had been able to rack up more than $1,000 in unauthorised Smurfberries. The game was clearly designed for children, but nonetheless offered the option to buy up to $99 worth of Smurfberries at a time – hardly a pocket money amount – and as it turned out, this was just one of many cases.

It took three years for the FTC to complete its investigation, but the results sent shockwaves through the industry. Apple was the first on the regulator's hit list, and in January 2014 the tech giant, which is responsible for the App Store, agreed to pay at least $32.5 million (£22.2 million) in refunds for payments made in children's games. (If this sounds like a staggering amount, it's not – in fact, it's equivalent to about a day's profits from the App Store.)

Google was next, and in December 2014 the big friendly search engine agreed to pay back $19 million (£13 million) to customers unfairly billed through its Play Store, after being hit with a class action lawsuit on behalf of parents. Again, the action hinged on the claim that the distributor didn't make it clear enough the free apps can charge money.

These sums amount to pocket change for the likes of Apple and Google, but they had the important impact of forcing both companies to change their policies regarding children's freemium games – both now require more stringent sign-in procedures before payments can be made. A European Commission ruling in July 2014 also means Google can no longer describe freemium as "free" in the Play Store (Apple refused to make the same commitment).

Amazon has been the one notable holdout. Instead of bowing to the FTC's demand for repayments like Apple and Google before it, the online retailer refused to settle, saying its Appstore provides "prominent notice of in-app purchasing, effective parental controls and real-time notice of every in-app purchase".

The FTC singled out two games in particular – Ice Age Village and Tap Zoo – which it said have generated "thousands of complaints", and even quoted an unnamed Amazon employee as admitting "we're clearly causing problems for a large percentage of our customers". But at the time of writing (April 2015), Amazon has refused to budge, and the case is pending.

Another interesting feature of these cases is that the FTC didn't go after the developers, but the distributors of the offending products. Apple and Google both take a 30% cut of everything sold in their stores –in-app purchases included – but developers like Gameloft, which designed and made Ice Age Village, suffered no loss of profit and arguably no reputational damage either from these lawsuits.

What's next for freemium?

The freemium explosion might have been huge, but it's not unlimited. It's already been shown that quality is still king: the model isn't a golden ticket for developers, and it still takes time, dedication and talent to create a game that has a chance of knocking the top titles from their perches. Games still have to be fun, and poorly-reviewed freemium titles will die off like any other.

The actions of the Federal Trade Commission, European Commission and other agencies around the world are also making it abundantly clear that freemium isn't a green light to swindle naïve gamers (or their parents) out of their hard-earned cash. Regulation will continue to make sure the model isn't working against consumers, and developers intent on pushing get-rich quick schemes dressed up as games will find themselves less and less welcome in the hallowed halls of the App Store.

Pro gamer Sean Plott thinks the future is freemium – but that freemium will keep evolving. In an interview with Business Insider , he said he even sees the trend spreading to PC and console gaming, pointing to examples like Riot Games' League of Legends – a multiplayer game that's free to play and supported wholly through in-game purchases. Plott believes pricing models will increasingly separate into two distinct paths: the traditional one-off fee for single-player games, and free-to-play multiplayer games that make their money through microtransactions.

The twist is that these microtransactions don't unlock progress barriers - they simply give cosmetic enhancements like new outfits, or allow players to get content faster than they normally would by playing the game. Grinding Gear Games' Path of Exile goes even further, operating entirely on an "ethical micro transactions" model in which players pay only for cosmetic enhancements with no effect on gameplay, effectively offering a donations bowl with benefits.

For all the criticism it's drawn, freemium undoubtedly played a huge role in the mobile gaming explosion, helping to grow an industry that's due to outsell console games in 2015. It's helped to change the way we think about how we consume and pay for content. Perhaps most importantly, by offering fun, accessible gameplay with no up-front fees, it's encouraged millions of people of all ages and backgrounds to finally give videogames a try – at least as long as they keep putting money in the slot.