Winner Takes All: App Discoverability, Quality, and the App Economy

WINNER TAKES ALL

Eric Benjamin Seufert

LTV > CPI #2

November 20, 2014

Discoverability, Quality, and the App Economy

Freemium Economics

Head of Marketing at Wooga

WHO AM I?

THE INTERNET 10 YEARS AGO


• Marketing provides value only for largest spenders;


• Marketing provides value only for largest spenders;• Returns from market capture highly skewed.

MODELING THE INTERNET


• “All pay auction”: everyone pays, few win;


• “All pay auction”: everyone pays, few win;• Content not monetizable;


• “All pay auction”: everyone pays, few win;• Content not monetizable;• $0 switching costs;


• “All pay auction”: everyone pays, few win;• Content not monetizable;• $0 switching costs;• Content investment => perceived quality;


• “All pay auction”: everyone pays, few win;• Content not monetizable;• $0 switching costs;• Content investment => perceived quality;• Development / marketing costs are sunk.

USER BEHAVIOR• Users choose highest quality sites of which they are

aware;

USER BEHAVIOR• Users choose highest quality sites of which they are

aware;• Users respond to firms’ “bids” for their hits.

USER BEHAVIOR

AWARENESS

QUALITY

NO YES

USER BEHAVIOR

AWARENESS

QUALITY

NO YES

SITE 1

SITE 2

NONE. NO HIT.WINNER:

USER BEHAVIOR

AWARENESS

QUALITY

NO YES

SITE 1

SITE 2

SITE 1.WINNER:

q1

USER BEHAVIOR

AWARENESS

QUALITY

NO YES

SITE 1

SITE 2

SITE 2.WINNER:

q1 q2

USER BEHAVIOR

AWARENESS

QUALITY

NO YES

SITE 1

SITE 2

RANDOM CHOICE.WINNER:

q2

ADVERTISING

ADVERTISING• Firms seek maximum exposure if they choose to

compete;


compete;• Demand for advertising is price inelastic;


compete;• Demand for advertising is price inelastic;• As advertising costs increase, likelihood of entry falls;


compete;• Demand for advertising is price inelastic;• As advertising costs increase, likelihood of entry falls;• Spend positively correlated to gross revenues.

ADVERTISING• Firms seek to beat competitors in terms of quality on

marginal basis (quality investment costs are sunk);

ADVERTISING• Firms seek to beat competitors in terms of quality on

marginal basis (quality investment costs are sunk);• Advertising generates revenue proportional to reach,

so firms seek to maximize advertising spend.

ADVERTISING

QUALITY INVESTMENT

AD

VER

TISI

NG

IN

VES

TMEN

T

ADVERTISING

QUALITY INVESTMENT

AD

VER

TISI

NG

IN

VES

TMEN

T

ADVERTISING ARMS RACE BEGINS

BARRIER TO ENTRY PROHIBITIVELY EXPENSIVE

ADVERTISING

QUALITY INVESTMENT

AD

VER

TISI

NG

IN

VES

TMEN

T

ADVERTISING ARMS RACE BEGINS

BARRIER TO ENTRY PROHIBITIVELY EXPENSIVE M

AR

KET PA

RTIC

IPAN

TS

SO WHERE IS MOBILE?

SO WHERE IS MOBILE?

Top 10 Grossing Chart, US / iPhone, November 20 2014

SO WHERE IS MOBILE?


SO WHERE IS MOBILE?• Clash of Clans and Candy Crush

Saga have dominated Top Grossing 1 & 2 positions for 2 years;




• 8 of Top 10 grossing apps are games;






T10 Grossing Dates of first publish:





T10 Grossing Dates of first publish:2014: 1





T10 Grossing Dates of first publish:2014: 12013: 2





T10 Grossing Dates of first publish:2014: 12013: 2<=2012: 7

SO WHERE IS MOBILE?• Four companies own apps that

generate 70% of the unique visitors to the Top 25 mobile apps*

*http://mobiledevmemo.com/the-problem-with-app-store-distribution-in-3-charts/

SO WHERE IS MOBILE?• Most smartphone

owners download 0 new apps per month*


SO WHERE IS MOBILE?• Nearly half of all time spent in

mobile apps is devoted to users’ single favorite apps*


MOBILE IS WINNER TAKES ALL


• $0 switching costs;


• $0 switching costs;• Returns highly skewed;


• $0 switching costs;• Returns highly skewed;• Marketing arms race, sunk development costs.


App store discovery is not “broken”…


App store discovery is not “broken”…

…the App Store was designed to be like this.

HOW DO YOU WIN?

HOW DO YOU WIN?

Higher Quality and / or Better Discovery

BUT WHAT ABOUT _?

Handful of examples of viral breakouts:

BUT WHAT ABOUT _?


BUT WHAT ABOUT _?


BUT WHAT ABOUT _?


BUT WHAT ABOUT _?


BUT WHAT ABOUT _?

High novelty factor.

BUT WHAT ABOUT _?

High novelty factor.Target teen / young adult demographic.

BUT WHAT ABOUT _?

High novelty factor.Target teen / young adult demographic.Heavily subsidized launches through press / platform featuring.

BUT WHAT ABOUT _?

Betting on virality is not the best strategy!

BUT WHAT ABOUT _?

- Dev costs are sunk (if virality doesn’t work, you lose it all!).


BUT WHAT ABOUT _?


- And virality isn’t defensible (your competitors can be viral, too!).


BUT WHAT ABOUT _?


- And virality isn’t defensible (your competitors can be viral, too!).

- And novelty apps are easily replicated.


HOW DO YOU WIN?

Discoverability:

HOW DO YOU WIN?

Discoverability:- Spend more than your competitors, more

effectively;

HOW DO YOU WIN?

Quality:

HOW DO YOU WIN?

Quality:- Better / less contrived monetization tactics.

THANKS

@eric_seufertMobileDevMemo.com

REFERENCES• Adamic, L.A. and B.A. Huberman, 2000, “The Nature of Markets in the World Wide

Web,” Quarterly Journal of Electronic Commerce, 1, 5–12.• Aumann, E. and W. Leininger, 1996, “Asymmetric All-Pay Auctions with Incomplete

Information: The Two-Player Case,” Games and Economic Behavior, 14(1), 1–18.• Hand, JRM, 2003, “Profits Losses and the Non-linear Pricing of Internet Stocks,” in

J. Hand and B. Lev, eds., Intangible Assets: Value, Measures, and Risk, New York: Oxford University Press, 248 – 268.

• Noe and Parker, 2005, “Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy,” Journal of Economics & Management Strategy, 141 – 264.

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