How iPhone Apps Are Raking In Cash From Virtual Goods (AAPL, ERTS)

Source: Silicon Alley Insider


Dan Frommer|Nov. 12, 2009, 7:00 AM | 8,689 |comment9

The red-hot virtual goods market is working its way onto Apple’s iPhone app platform, as developers hope to cash in on the iPhone’s relatively new support for in-app payments.

Prime example: The new, free game“Eliminate Pro” from Ngmoco, the iPhone gaming firm founded by ex-Electronics Arts star Neil Young.

Eliminate is an awesome, social shoot-’em-up game, meaning you’re running around, shooting at people over the Internet — whether they’re friends from real life, pals from social networks, or total strangers.

Eliminate launched earlier this month and has already blown past 1 million downloads. It’s basically a miniaturized, iPhone answer to “Call of Duty,” the hit console game. It’s very fun.

Click here to see 10 apps making money from virtual goods and in-app purchasing →

And it looks like Eliminate is making Ngmoco heaps of dough — by the iPhone’s standards, at least. As of Wednesday evening, it was the seventh highest grossing app in the App Store. This means only six apps — of more than 100,000 — were generating more revenue, faster, than Eliminate. This could be several thousands, or even tens of thousands, of dollars per day.

What makes this more impressive is that Eliminate is a free app to download. Therefore, 100% of its revenue is generated by in-app purchasing of virtual goods.

Here’s how it works. To earn credits in the game, which can be exchanged for virtual goods, you need to have “energy” to play. Energy drains quickly, and can only be replenished by waiting an hour — previously four hours — or by buying it back in the form of “power cells.” (So if you’re having fun playing, it’s going to cost money rather soon.) Credits, in turn, can be traded in for virtual goods, such as weapons, armor, suit decoration, etc. The most popular in-app purchase is a 99-cent pack of energy; no. 2 is a $9.99 pack.

Eliminate is one of the first games to take advantage of a new policy change Apple made, which allows in-app payments in free apps. Previously, only paid apps — minimum 99 cents to download — could offer in-app purchasing. This significantly limited the potential audience size — the vast majority of apps downloaded are free apps — and therefore limited potential revenue.

What does this change mean? For app publishers, more players and more revenue. For consumers, potentially more free, high-quality games and apps, with premium options available via in-app commerce.

Eliminate, as a free app, is probably getting about ten times as many downloads — well over a million — as it would be getting as a paid app. This means there is a dramatically larger audience to pay for in-app virtual goods. (A bonus is that it makes the game, which relies on a large community, even better, too.)

Ngmoco’s Neil Young would not disclose the game’s revenues, but in an interview, suggested that a long-term financial goal for the game might be to get about an average 5 cents in revenue per day, per active user. That could add up. If Eliminate could eventually get 500,000 daily active users, that’s a revenue run rate of more than $6 million per year, after Apple’s 30% cut. Not bad for one “free” game on a relatively new platform.

Another game making great use of in-app purchasing and virtual goods is “Tap Tap Revenge 3,” the latest rhythm/music game from Tapulous, an iPhone app startup. The Tap Tap Revenge franchise is basically the iPhone equivalent of “Guitar Hero” or “Dance Dance Revolution,” and has been around for a long time.

Tap Tap Revenge 3 launched in October, when only paid apps could use in-app purchasing, so it still costs 99 cents. But it topped the paid app charts for several days and likely has hundreds of thousands of downloads worldwide.

It, too, is using in-app purchasing for virtual goods: Mostly music tracks for users to play along with, such as song packs from Lady Gaga, the All-American Rejects, Blink-182, Lynyrd Skynyrd, etc.

Tapulous CEO Bart Decrem wouldn’t disclose the game’s total sales or downloads, but says the company has sold “hundreds of thousands” of tracks using in-app commerce. Sounds like another hit.

And while in-app payments will clearly be driving a new market in virtual goods within free iPhone apps, other developers have also found interesting, different uses for it.

One example: Navigon — whose $89 MobileNavigator GPS mapping app is the top grossing app in the App Store — uses it to unlock an add-on feature for its app. Via a $19.99 in-app payment, you can get livetraffic for your GPS app.

Expect to see more in-app payment opportunities to “unlock” things like this — ranging from add-on features, to unlocking levels and goods in free games, to using in-app commerce to manage subscriptions. The result: Ideally, more revenue for app makers (and Apple), giving publishers an incentive to keep investing in making more great iPhone apps.


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