Does the iPad FINALLY Give Apple a Viable Gaming Platform?

Wait … WHAT?!?! I know what you’re saying: what about the 150 trillion games in the App Store? What about the massive growth in the sales of games for the iPod Touch that I talked about here? I know about all of that, but I still believe this: the iPod Touch business model as it exists today is not one that is sustainable for the game industry, and therefore the iPod Touch will NEVER be a viable ‘major tent-post platform’ based on that business model.

OK, you have probably noticed I’m already starting to nuance my phrases in the first paragraph … but stick with me and you will hopefully see that I DO have a point.

I have gone through the basic economic model of the gaming industry in the past, and also the details of how that $50-60 you spend for a PC or Console game is broken down … so I won’t belabor that again. More than half of the money goes to development, test, and other pre-release items. The console licensing fees and retailer charges sum up to less than the 30% Apple grabs from App Store sales.

The reality is this: the vast majority is NOT spent on packaging, manufacturing, transport, warehousing, returns, and other things directly associated with physical goods. The majority of money goes to paying folks to actually produce the game.

For smaller App Store games such as Doodle Jump, developed entirely by two people with a contracted illustrator, marketed directly on the App Store, and with a very small overall budget, a selling price of $0.99 was very quickly made worthwhile as the game has sold about 4 million copies. (Note: have you played? You really should – and it is only $1!) The game has netted each of the two developers more than a $1 million in profits.

I don’t want to seem like I am detracting from Doodle Jump’s deserved success, but it is a small and fun game that cost very little to make. It has been called the ‘iPhone’s Tetris’, using an analogy to the GameBoy’s launch title and one of the most played games ever.

But when you look at the GameBoy Advance, the games that really made the platform an amazing gaming system were NOT just Tetris (again, not detracting from THAT classic): you have Castlevania: Aria of Sorrow, Legend of Zelda: Minish Cap, Golden Sun, and Advance Wars to name just a few. These were all games developed exclusively for the GBA handheld, and all of which were large games with multi-million dollar budgets and large teams for development and testing.

Before digging deeper let me put something out there – a platform built entire on 2nd-run ports and ‘Tetris’ is NOT a viable first-tier gaming platform for the long haul, however profitable it might be in the short term. And that is in no small part because that profitability comes from low development costs.

So, assuming that each of these games took two years to develop, had an average team size of 40, and therefore cost ~6 million each to develop based on salary and overhead – based on today’s dollars. For simplicity we will call that $6 million the total cost we need to recoup. Assuming again that we are losing ~30% of sales revenues to miscellaneous overhead, and also assuming a $30 selling price for each game, that means each sale results in $21 in net revenue.

At $21 for each sale going towards paying off that $6 million, we’d need to sell ~300,000 copies of the game before we actually make any money. Of course, there are a few things you can do to change that equation – and most of it involves reducing the cost associated with development. Because if we only had a $4 million budget the payoff would drop to ~200,000 sales, but back at $6 million a $15 game needs ~575,000, a $10 game needs >850,000, and a $1 game … needs close to 9 MILLION sales! THAT is why the iPod Touch cannot sustain even the same business model as the Gameboy Advance.

OK … I have more or less said that before, why must I belabor it yet again?!? To make a point – resources are finite, and the laws of physics are immutable. The amount of time and resources required to program, develop and render a game scene don’t care what target is selected, and therefore remain constant. If Grand Theft Auto IV cost $100 million and four years to make, and the average console game now costs ~$30-50 million and two to three years, we are really at the point where games cost as much as movies to make.

To use a different example – Puzzle Quest 2, the follow-up to the successful 2007 game, arrives for the Nintendo DS and XBOX360 Arcade in June. Why isn’t it immediately targeting the iPad / iPhone? I mean, the original Puzzle Quest is available on the platform and has done very well – and if there is a genre best suited to the platform it is certainly puzzle games.

My guess is that they assumed that the iPad / iPhone version would cannibalize the sales of the others. Why would that matter? I mean, isn’t a sale a sale? Not if the profit margin is disproportionately low. So I am speculating that there is no ‘day of release’ App Store version because the developers want to make money, and the way to do that is to release on high-profit platforms, then after they recoup their development costs from the XBOX360 and DS sales, they will release a version to the App Store to rake in the profits without the stress of margins to concern them.

Which sort of goes back to my initial statement: if a company cannot see a profit path from a platform they will not develop for that platform. Look at the PSP – that has been hurting for games for ages because of mediocre sales (fueled by exorbitant piracy, but that is another story), and in turn that has impacted the number and types of games released for the platform. One approach is to make a platform ‘Second Tier’ – in other words, don’t make the primary investment there, recoup on other platforms and then transfer the game to grab additional profits with minimal investment and risk.

And I absolutely believe the iPod Touch / iPhone will remain a ‘Second Tier’ platform due to the pricing model.

So here is my stake in the ground: until a major developer creates a so-called ‘AAA’ first-run big-budget game targeted as a iPad exclusive, it too will be a ‘Second Tier’ platform.

But can the iPad change that? I think it can, and again it goes back to the pricing model. As mentioned, games now cost nearly as much as movies to make, so budgets of $50 – 100 million are not uncommon. Even at the top App Store price for an iPhone game ($10), that still means ~10 million sales to break even, and 15-20 million to be a ‘success’. That is 25% of all iPhone / iPod Touches ever made … and the likelihood of that happening is pretty much nil. At the App Store average price ($2) you would need to sell >100 million copies, which would definitely never happen.

Well before the release of the iPad there were loads of article showing that the resistance to higher priced games on the App Store has increased. Most folks won’t pay $10 for a game – even from a large developer. So more games are getting ~$5 – 8 prices, and doing well with that – but anything above $1.99 is seen as showing ‘impulse resistance’. And since so much of the success of the App Store is based on prices so low that you can play for only 15 minutes and never feel guilty about the price, that barrier is pretty important.

Therefore selling more games like Doodle Jump and suddenly expecting to be able to charge more is not a tenable approach – developers need to ‘think different’.

eWeek had a nice slideshow about what Apple needs to do to break through with gamers (and not just on the mobile side), including this:

Encourage Development of Hardcore Games: If Apple wants to truly increase its gaming cred, it needs to get more “hardcore” games into the market. Currently, there are too many casual games in its App Store that allow users to perform very basic tasks. It needs more first-person shooters, a solid offering of adventure titles and more. To some, the iPhone is not a true gaming device. They believe it’s little more than a product where you can play some simple games. But as Apple has shown, it wants to be taken seriously in the gaming market. It can only do that by encouraging developers to offer more advanced titles.

They go further in discussing the hardcore aspects, saying “Hardcore gamers might not be the most profitable group in the market, but they dictate success.”

For some, this might seem odd – I mean, aren’t the dominant systems this generation the Nintendo DS and Wii? And aren’t those just casual game systems? Right and wrong. They are certainly the dominant systems this generation in terms of hardware sales, and the DS completely dominates the handheld space in every possible way, and both systems have done amazing things at putting more games in the hands of more people.

But if you don’t also think that Nintendo and all of its third-party developer partners stay up late thinking of how to make sure hardcore gamers are clamoring for hardware to play the coolest new games you’d be very mistaken. The amazing success on the software side of both systems attests to how well they’ve done. The Wii has definitely struggled more – despite being the top selling console, and despite consistently placing several games in the Top 10 Monthly sales numbers, it rarely leads the overall software sales, lagging behind the XBOX360 – in part due to the hardcore attachment to the XBOX360.

Think of it this way – last November even my wife was aware of the impending launch of Call of Duty: Modern Warfare 2 because of the media blitz, and the end result was lines at stores for midnight launches and the largest launch in entertainment history (including movies)! There is absolutely nothing comparable on the App Store. Games like Doodle Jump or Plants vs. Zombies are popular and do very well, but that is much different than the whole ‘blockbuster’ mentality.

Apple has a unique opportunity – people have become very used to the App Store, and will gladly buy stuff there. The iPad is selling at an insane rate, but the apps available are not delivering to the promise Steve Jobs had for the platform as of yet. I believe that folks will support $15 games in droves – so long as they are shown to be worthwhile – and a $30 million budget game needs to sell ‘only’ 2 million copies at $15 each to make profit!

So what do Apple and third-party developers need to do?
Subsidize development of a AAA action game for hardcore gamers: N.O.V.A is a tech demo, and not all that great of a game. Every great platform has its own set of exclusive and defining games, and Apple needs that for the iPad. Of course, Apple could just buy a developer as noted in the eWeek article.
Get developers to think iPad when they think of ‘multiplatform’: imagine is Splinter Cell: Conviction came out for XBOX360, PS3, PC & iPad recently? That sort of thing would cast the platform in a very different light.
Fight the trend of ‘iPad game = iPhone game with HD graphics’: I would estimate that so far nearly every iPad game I’ve played reeks of being the same game with some increased resolution portions. Civilization Revolution is bad that way, with battles being played out in low-res, and the landscape mode ignoring rotation to the other side. The problem – it makes paying $10-15 seem like a rip-off and will hurt the platform long-term.
Load up the iPad App Store with games that will sell at $15: load up with turn-based strategy and RPG and puzzle and action games from recent years – looking at what has been offered in the recent sales at Steam and Direct2Drive shows there are tons of games that would work great on the iPad and could be sold for reasonable prices.

Does Apple actually have to do ANYTHING? No! I mean, they are actually making loads of money in the current situation, and are more of a factor in gaming than they have EVER been – and this week they also see the launch of Valve’s Steam game distribution platform for the Mac, certainly a major victory. But here too the Mac will be a second tier platform: it is great to get 5-year-old games like Half-Life 2 finally on the Mac, but we are still stuck with ‘unsupported abandonware’ like Dragon Age and Battlefield 2142 and so on.

I hope that Apple and game developers team up to make the App Store a major force in gaming rather than a fun little place for millions to grab cool little niblet games they will forget about the week after they buy them.

So what do you think? Do you think that Apple and App Store developers need to change things, or does the game world need to come around to the App Store way of doing business or … ? Chime in with your thoughts!

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