It is a common misconception that free mobile apps are not viable businesses. I beg to differ, and point to several free social gaming apps as primary supporting examples.
First, it is important to establish what specifically I’m referring to when I say “free social gaming apps”. In particular, I would point to social gaming companies such as King, Team Lava and PopCap Games, whose titles include the likes of Candy Crush, Bubble Mania, and Plants vs. Zombies, respectively. These mobile social gaming companies typically consist of a portfolio of games that are relatively quick and inexpensive to develop, and are targeted primarily at casual gamers (read: middle-aged women).
While it is true that the vast majority of mobile social games are available for free to download from the app store, it is not true that these companies don’t generate revenue. Quite the contrary, these companies often generate absurd amount of revenue, very commonly on the order of tens and hundreds of millions of dollars. How, you ask? Primarily through micro-transactions, i.e., incentivizing their users to make very small (e.g., $0.99) but frequent purchases throughout game play, primarily to advance throughout levels the game, acquire better social status within the game, or purchase virtual goods, such as weapons, that will help the gamer perform better. When a game has millions of daily active users, these purchases add up in a meaningful way. Furthermore, given the low cost structure of mobile social gaming businesses, most of the revenue drops to the bottom line. In fact, it is typical for these types of businesses to have EBITDA margins in excess of 70%, which is mind-blowing considering the absolute dollar amount of revenue these businesses generate.
Here comes the catch, though. Mobile social gaming companies, above all, absolutely need a large active user base in order for the micro-transactions to present a meaningful contribution to revenue. As one could imagine, though, the act of acquiring users has become increasingly difficult as the number of the offerings in the app store has increased exponentially. Simply put, the app store is an extremely crowded marketplace, with the vast majority of downloads going to those companies that already have a large and satisfied user base that has enabled them to rise to the coveted top of the app store rankings.
So, the next logical question is, how does an unestablished mobile social gaming company go about getting to the top of the rankings without spending an arm and a leg on marketing? The answer I would offer is that it is nearly impossible. If you’re lucky, you have a friend who works for Apple who can get your app featured. Until a few years back, your other alternative was to pay shady companies to utilize automated “bots” that downloaded your app enough times to make it rise seemingly organically through the ranks (Apple has since cracked down on companies who employ these practices). Nowadays, it is no coincidence that a few, select companies with multiple titles dominate the top-ranked list in the app store.
By this point, you understand that customer acquisition is incredibly important to these mobile social gaming companies. But customer acquisition is