When developer Dong Nguyen announced that he would be taking his massive hit game Flappy Bird out of the app store on February 9 because it had become an “addictive product,” the dominant reaction was shock—not just for the players who faced the prospect of no future updates for their latest addiction, but for the designer himself. Though it was free to download, Flappy Bird was pulling in revenue of up to $50,000 a day, some estimated. How could Nguyen possibly give that up?
Nguyen followed through with his threat and removed Flappy Bird, but the game keeps earning massive amounts of money. The reason is that the game doesn’t depend on purchases of the app for revenue, but makes money through in-app advertising. Every time a user opens the app, they’re presented with banner ads that advertisers pay for according to how many times the ads are seen. That means as long as we’re still playing Flappy Bird, Nguyen is still getting paid.
And we’re definitely still playing. Let’s do some math. Advertisers traditionally buy app ads according to eCPM, which means effective cost per thousand impressions—the price to show an ad to 1,000 players. Advertising networks like Adfonic, which sell ads across many apps, quote a standard eCPM of $1.20, but the rate goes up to $5 for app users in Western countries, so let’s assume an average eCPM of $3 (Nugyen is Vietnamese and the game originally took off in his home country).
Freemium is a powerful motivator—75 percent of app-store revenue came from in-app purchases during 2012, according to Distimo. Of the top 50 highest-grossing games in the iOS app store, only two aren’t free, and those are two games with very strong, independent brand recognition.
If the game was really making $50,000 a day (which is a believable figure, since iOS apps typically have to earn more than $47,000 daily to crack the top 10 highest grossing app list, according to the mobile app analytics firm Distimo), then the game is serving over 16,500,000 impressions every day. This doesn’t mean that there are 16,500,000 separate players necessarily; every gaming session serves multiple impressions as the ad rotates.
Though the number is enormous, Flappy Bird isn’t even near the high end of app revenues. Apple’s 2013 list of its highest-grossing apps had the viral matching game Candy Crush in first place, followed by Clash of Clans, a medieval strategy game. According to Think Gaming, the two free-to-play games are still the top-grossing iOS apps, with daily revenue in the U.S. market of $994,344 and $786,506 respectively.
Why are their numbers so much higher than Flappy Bird? Neither game depends on advertising alone like Nguyen’s creation does. They also sell in-app purchases, making money both by selling players’ eyeballs and compelling them to buy virtual content. For Candy Crush, this means digital extras like paying $0.99 for more lives, or a “Color Bomb” to quickly solve a puzzle. In Clash of Clans, users can buy extra gems (the in-game currency) or resources like gold and elixir to help expand their home villages. The game’s top players spend thousands of dollars a month on the in-app purchases.
This payment structure of a free game followed up by in-app purchases is called freemium (a portmanteau of free and premium). Companies are making the games and then giving them away as loss-leaders to drive future in-app purchases—the more addictive and punishing the game is, the more in-app purchases are made by players. Those micro-payments of a dollar or two at a time, plus revenue from advertising, add up to big numbers. The system would have worked wonders for Flappy Bird if only Nguyen hadn’t decided it was actually too addictive.
Freemium is a powerful motivator—75 percent of app-store revenue came from in-app purchases during 2012, according to Distimo. Of the top 50 highest-grossing games in the iOS app store, only two aren’t free, and those are two games with very strong, independent brand recognition. The $3.99 Adventure Time Card Wars plays off the hip animated cartoon on Cartoon Network and the $6.99 Minecraft Pocket Edition is a portable edition of the hit building game, which made over $250 million in 2012.
Like other economies, the in-app purchase ecosystem thrives on marketing. In 2010, the economist Vili Lehdonvirta, who studies virtual economies, argued that traditional marketing practices had not yet been applied effectively to in-game purchases. That absence seems to have been solved with games like Candy Crush and Clash of Kings, which use marketing strategies to drive purchases.
“When the game content becomes increasingly difficult, it requires the user to obtain better items to maintain the same relative level of performance or status, as old items gradually become useless,” Lehdonvirta and Juho Hamari write. “Thus the operator is able to differentiate items in terms of quality and item effectiveness in differing content difficulty.” As Candy Crush gets tougher, it’s only possible to progress if players put more time into the game—increasing ad impressions—or buy items, driving profits either way.
Lehdonvirta cites other factors that make in-app purchases and in-game accomplishments desirable—artificial scarcity of certain objects encourages conspicuous consumption, so players who want to show off buy into the system. Aesthetic qualities also drive the purchase of virtual goods. If you want your Clash of Clans village to look a certain way, then you’re forced to pay for it. But there’s no magic bullet for getting players to drive revenues.
The portable gaming audience is extremely fickle. In March 2012, the social drawing app Draw Something had 3,000 drawings being created every second, making $250,000 a day. But in May 2012 after the app’s parent company OMGPOP was acquired by Zynga, maker of Farmville and other online games, the user base started crashing. Draw Something lost a third of its players in a month, and continued to shed five million users a month after that.
So perhaps Dong Nguyen got out just in time. Rather than manipulating his players into buying in-app purchases and paying for updates, Nguyen is bowing out at the height of his success, and likely preserving a lot of good will in the process. His original game has inspired countless clones that now populate the most-downloaded app lists, and smartphones installed with Flappy Bird were inspiring bids of thousands of dollars on eBay before they got pulled. For Nguyen, if not his players, the game is over.
