Has Amazon Cracked the Problem With In-App Payments?
There’s an experience familiar to nearly anyone who’s downloaded a game on their smartphone. Try as you might to conquer the latest level/village/candy, your thumbs lack the speed/agility/candy to get you through. With deep regret, you purchase an item or expansion pack to continue your long march toward distraction. If, every time you do this, you find yourself thinking that there must be a better way, know two things: you’re right, and you’re not alone.
In-app payments aren’t going away any time soon. But increasingly, alternatives are becoming available that might offer some relief. This February, Apple instituted a “Pay Once and Play” section of its App Store to highlight apps that truly deliver on that promise. More recently, and far more dramatically, Amazon introduced Underground, an Android app that contains a huge number of traditionally paid or freemium apps that will cost its users absolutely nothing to use, alongside a traditional Amazon shopping experience.
“For many customers we were hearing that sometimes it’s frustrating when you’re involved in a game and have to stop and make a transaction,” says Amazon Appstore director Aaaron Rubenson. “What we realized is that a model like the one we rolled out in Underground, where customers can simply download and use all of the features of a given app, or explore a game without having to worry about transactions in the middle… would be wonderful for customers.”
Customers and, it turns out, developers, have grown increasingly frustrated with the revenue generated by the in-app purchase model. Only a handful of app-makers, it seems, actually benefit in a significant way. If they cause so much frustration from both directions, why do in-app payments not just persist but dominate your downloads?
The Tyranny of IAP
Those costly in-game upgrades may be an annoyance, but at this point they basically are the app economy.
“In-app purchases drive roughly 95 percent of App Store monetization,” says Danielle Levitas, SVP of Research & Analysis for App Annie, an app analytics firm. That’s a gluttonous slice of a very large pie; IHS mobile analyst Jack Kent pegs the scale of the app business at $35 billion this year alone.
You would think, then, that developers would see IAP the way a starving hummingbird sees nectar. For the top tier of game-makers, or at least those who’ve found a breakout hit like Candy Crush or Clash of Clans, this is absolutely true. Nearly everyone else, though, has a terrifically hard time generating significant revenue off of in-game add-ons.
“The apps market is a hits-driven business with those few developers at the very top of the charts claiming most of the revenues,” explains Kent. Not only that, but even those developers rely on a small subset of consumers who spend big. “The in-app model relies on monetizing a small segment of the audience,” Kent goes on. “Within that group there is an even smaller segment of users that will spend huge amounts within a game.”
It’s easy to see how what Levitas colorfully refers to as a “whale-reliant market” ends in frustration for all but the very few, on both sides of the aisle. The majority of consumers can’t afford enough add-ons to get the most out of the game, while the majority of developers sit on the bench while Game of War addicts drop another Benjamin on 28,000 gold coins, perhaps in hopes that Kate Upton will notice the might of their cavalry.
Meanwhile, 95 percent is an impressive percentage, but it also doesn’t leave much room to grow.
“We’re kind of maxing out the IAP business model,” says Levitas. “In general, the industry has to think about how to innovate on the business model.”
Which brings us back to Amazon Underground, the most aggressive innovation of that sort you’re likely to see.
It’s worth digging a little deeper into Amazon Underground, in part because so much about it is unique to the company that makes it.
“What we heard on the developer side was that it was difficult to earn a decent amount of revenue even when the intellectual property was popular with customers,” says Amazon’s Rubenson, echoing the limitations laid out by both Levitas and Kent. “With the numbers being that small, it’s difficult to stay above the poverty line.”
Amazon’s answer? Pay developers out of pocket based on aggregate minutes of usage, at a rate of $.002 per minute.
“There’s no limit, and it doesn’t matter what the app cost initially, or how many items there are or what they cost. We just have the rate,” explains Rubenson. “As a developer, you’re able to engage by continuing to issue updates, or new levels. If you can keep people excited about it you can keep making money that entire time. It essentially becomes an annuity, if you’re successful and can drive engagement.”
Rubenson points out that developers have also been relieved not to have to think about shoehorning transactional moments into their gameplay, which can upset the pacing and enjoyability.
For users and developers who aren’t already milking cash cows, this is inarguably great. You can’t beat free, and you can’t beat getting paid by simply making your app more fun to use. “It is certainly a very innovative model and one that could prove a useful way for developers to monetize older catalogue titles,” says Kent.
So what’s the catch? Well, the older titles, for one; Levitas compares looking at Amazon Underground’s current offerings to watching reruns of 10-year-old sitcoms in syndication. It’s a way to breathe new life into old or underserved titles. It’s like the $5 DVD bin at Target; it has some great titles, but you won’t find Mad Max: Fury Road in there.
The more pressing hurdle, though, might be what it takes to get to Underground, which also speaks to what’s in it for Amazon.
Amazon Underground, like its Appstore, exists natively on its Kindle Fire tablets, but the failure of the company’s Fire Phone has left Amazon without an easy smartphone app foothold. On Android, Underground and the Appstore exist as strange Android nether-realms, accessible only through a multi-stage download process that operates outside of Google Play. You can’t access it on an iPhone at all.
It’s also why, while Amazon footing the bill for both its customers and developers is a genuine win-win, it’s not no-brainer. It’s also not a model you’re likely to see anyone else replicate any time soon.
A Better Way to Pay
Apple and Google aren’t going to be footing its developers’ bills any time soon; they simply don’t have any incentive to. That doesn’t mean, though, that there aren’t other options available to app makers.
“I believe that we’re at a stage now where we have to have more mechanisms for payment,” says Levitas. “We have to see experimentation. Are there different ways to monetize in terms of what upfront purchases mean? Are there different ways to monetize in terms of referral programs? Are there different ways for people not to feel like they’re getting nickled and dimed every few minutes or every few levels?”
Education-focused apps, for instance, have found success with subscription models, while entertainment apps lean more heavily on in-app advertising. The latter can work for games, as well; Threes! developer Asher Vollmer introduced an ad-supported version of his for-pay game after a long run in the upper echelon of the App Store.
There’s no one right answer, and ultimately maybe the best we can hope for is a balance that doesn’t drive us all insane.
“Certainly in the short term, I think all of these models can coexist,” says Rubenson. Hopefully in the long term, too, for our sakes and developers alike.
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