The AppDroid Apocalypse

Apple TV and Google TV: Threat or Menace?

The Appdroid Apocalypse is coming, and it poses a threat to the survival of the console business as we know it. Surviving, or better still, thriving, will require understanding the coming changes and changing business models in response. It won't be easy, and for some companies it may prove impossible. For others it's a huge opportunity. Either way, the Appdroid Apocalypse is arriving soon, and we'd all better be ready.

What is the Appdroid Apocalypse? The same App Store/Android Market that's busily eating up market share from the Nintendo DS and the Sony PSP is coming to a family room near you. The Apple TV and the Google TV will eventually offer the same gaming apps that you find on iPhone/iPad/iPod Touch and Android, but they'll be played in your family room. Yeah, the same place your console is plugged in. These apps, numbering in the tens of thousands, cost an average of less than $1.50. Thousands of them are free, or free-to-play. The most expensive ones are still under $10. The Apocalypse part is where this new console business turns the existing console business into a scorched wasteland... or at least, a market where sales are declining from year to year rather than growing.

Whoa, wait a minute, you say. That's not what Apple TV does... Apple hasn't said anything about offering Apps on Apple TV. Sure, and they didn't do that for the first year of the iPhone, either. Everything is there to make it happen; the new Apple TV runs on iOS, after all. You think maybe Apple hasn't noticed they've made a billion dollars selling Apps? Or the potential of selling a few billion more in family rooms? Apple can flip a switch and turn on an App Store for Apple TV at any time. They probably just want to get everything ready for the launch, so they can hit the ground running. It could happen soon, or they could wait a year. But it's going to happen.

Google is in a similar place. They see how much action they've gotten from the Android market, and how Apple has done with the App Store. Does Google want to lose the family room to Apple? No way.

One thing Apple and Google have in common is that neither one particularly cares what happens to the traditional console business. Gee, Microsoft might lose a lot of money? A happy side effect of Apple and Google's plans.

Where's the evidence for this Apocalypse? Let's look at the numbers. Android phones are now being activated at the rate of 200,000 per day, according to Eric Schmidt. Combined, Android (8.5 million through 2009) and Apple smartphones (according to this report) will be in excess of 150 million by 2012, and with iPod Touches and iPads, along with Android tablets, it may be well over 250 million units (Gartner Group projects over 100 million tablets sold in 2012). Compare this to an installed base of 132 million DS units as of June 2010; that's likely to grow by another 15-20 million units by 2012, but that still leaves it about half the size of the iOS/Android installed base.

Nintendo's DS business is faltering; both hardware and software sales are down (43% and 23% over the last six months). The 3DS is coming next year, but it will likely be $250 to $300, and it still won't have a business model akin to Android or Apple's relatively open markets. There are over 300,000 Apps in the App Store, and the Android app market has hit 100,000. By comparison the DS has in the low thousands of titles, and many are no longer available because you just can't find a cartridge. All of the apps are always available, since there is no physical inventory.

At least 25% of those apps for iOS are games, and the average price is around $1.50. Thousands of them are free, and many are free-to-play. Apple and Google are integrating advertising into their platforms, which promises to keep game prices low as publishers can make money from ads. Freemium business models, such as used in social games like Farmville, are wildly successful (to the point where Zynga is looking at $1 billion in annual revenue by 2012); this is not a model planned for consoles. Nintendo has some 241 downloadable titles available for the DSi, but they are mostly $5 or $8 (and the DSi is a small part of the overall DS base). Nintendo is careful to preserve its retail business by keeping retail titles out of its download store. They saw what happened when Sony introduced the PSPGo, which offered no way for retailers to take a cut from software sales since it was all downloads.

The handheld videogame business is rapidly being outsold by Apple and Google, and the trend will accelerate. Sony has done pretty well with the PSP (over 50 million sold) but it has paled in comparison to the DS and the iPod; their attempt to get into the future of the business with the PSPGo (which used digital distribution) failed miserably as a high price and massive retailer pushback doomed the device. They may try again with the PSP2, but they'll have to innovate with their business model to find a way to get retailers to support digital distribution (Sony also needs to get their internal music and movie units onboard, which also promises to be a fight). Nintendo has come out squarely against the idea of digitally distributing core titles. The even more fundamental problem is that Sony and Nintendo offer devices that are only game machines, while Apple and Google offer devices with a wide range of functions. The greater efficiencies of scale mean that Apple and Google can put more and more power into their handheld devices at lower and lower cost, and they release new hardware on a yearly schedule instead of the 3 year or more schedule of Sony and Nintendo.

Now Apple and Google are poised to bring this business model innovation into the family room (here's an overview of their current offerings). You'll see an App store for the Apple TV and the Google TV, offering many different titles. Developers can easily release software without elaborate bureaucracy. There will be thousands of titles available at average prices an order of magnitude below standard console games.

These Google TV and Apple TV boxes will not be close to the power of current consoles; at least, not at first. But they'll be plenty powerful enough to run, say, Farmville. Or any of the thousands of games on iPhone or Android. Advertising will be built in, and free-to-play business models will be welcomed.

And this is how the classic console industry starts to decline. Does anyone think the last two years of declining sales have just been a fluke?

Do these things mean AAA console titles are obsolete? No, there will still be demand for them. But development costs have to be kept in check to make these titles consistently profitable. Mid-range titles are getting squeezed by lower sales and higher budgets, and there's only so many AAA titles the market can absorb.

Surviving the Appdroid Apocalypse means investing in new types of games and new business models. We're already seeing EA buying mobile and social game companies; Activision is talking about a subscription model for Call of Duty. It's a difficult task, though, to take a company mostly based around a 2-3 year development cycle for its games and completely change the way it approaches business. There will be wrenching readjustments along the way. Creating a steady flow of profits on free or 99 cent software is a huge challenge, and it will mean different development models.

It's not all bad news, though. The changes favor smaller developers who can more easily adjust to a new market of smaller budgets and shorter development times. The indie developer has many more possibilities opening up than seemed possible a few years ago.

It's also true that marketing becomes a huge issue when you're trying to stand out among tens of thousands of titles all competing for attention, and that will be a big problem for smaller developers. Developers of all sizes will have to be able to make a profit on a game that may be given away. Big publishers will have many advantages going into this market due to their size, audience awareness, and the amount of dollars they can throw at things. Small developers will have more of a chance to break through into a big market than they've had before, but it won't be easy.

We're all going to have to figure out out how to first survive, and then thrive, after the Appdroid Apocalypse. Because it's coming soon to a family room near you.

Android Sales Rising, Android App Revenue Lagging

Google's Android continues its growth, as Google announced as part of their 3rd quarter earnings roundup (which was terrific, of course). The Android Market is now over 100,000 apps (about 30,000 of them are games), and apparently activations continue at about 200,000 every day, which pencils out to around 6 million new units a month. Whoosh. Google's mobile search and services drags in about $1 billion a year for the company, which will no doubt continue to grow.

We'll see the introduction of Android 3.0 this year, and probably more new versions next year. I'd bet on a tablet version next year some time, too. Google plans to a launch a streaming music service with Android 3.0 this year, according to reports. That should give it a boost, though rumors say Apple will be doing something similar at some point (they did acquire a streaming music company earlier this year).

The Android operating system overtook iOS in the second quarter in terms of global market share, 17.2% to Apple's 14.2%. Of course, they were both beaten by Blackberry and Nokia took first place for smartphones. But that was before Apple's iPhone 4 hit, and that has been a smash hit that bids to rewrite those percentages for the next report.

With all this, are developers making a lot of money off of Android apps? Well... not so much. This New York Times article lays out some of the problems. Sales are anemic compared to iOS app sales, in part because it's a lot easier to buy an iOS app; one click in the iTunes store and you're done. Google doesn't want to use anything but Google Checkout, and so most people have to enter in a credit card number and it is no longer simple. Also, there's no in-app purchase mechanism (which has been a huge boon for iOS developers), though Google has said they plan to implement that at some point.  Finally, many Android developers just depend on ad revenue, figuring that Google tends to attract people who don't plan to pay for things (since Google offers so many free applications and services).

Another big issue is the fragmentation among Android devices. There's a huge variance in the hardware and in the versions of Android, so developers have to spend a lot more time, effort and money testing their app on different devices. Yes, you have to check out your app on an iPod Touch, various flavors of iPhone and iOS, and iPad, but that's still far less of an issue than all the different versions of Android and the hardware it runs on. It almost reminds you of the bad old days of trying to create games for phones, with hundreds of handsets to consider. (At least, you don't have to worry about the telco getting in the way, or any problem putting your app on sale.)

I think we'll see more Android apps, especially from iPhone app developers looking to extend their success. Porting an app is going to be easier than starting from scratch, and many of your marketing efforts will help sales on both platforms. But it's a different market, and it still lacks some of the refinements of the iOS market. Those little touches can make a big difference in sales, and therefore a big difference to developers (especially small ones).

Marketers need to understand the differences between the two markets, and study them, before launching marketing efforts. Or even before finalizing app design; your revenue plans may need to force differences in the design. I wish it was all simple, but of course it's not.

Google Games?

Here's an interesting bit of news: According to TechCrunch, Google has invested $100 million into Zynga, with the intent of making it the cornerstone of their upcoming Google Games. Zynga has been racing along, with a rumored $350 million in revenue last year, half of which was operating profit (!). Now, you might ask why Google is getting into games? A number of reasons spring to mind. Social games, for one thing, are an amazingly fast-growing market segment with intense profitability. So are mobile games. And what company would Google be trying to outmaneuver in the social networking space? Facebook, of course, and they and Zynga aren't getting along all that well right now.

Add in the upcoming Google TV revolution that could steal serious market share from console games, and you can see the outlines of a strategy here. (Plus it helps block Apple's march to world domination along the same path.) Talk about your battle of the titans... this is going to be an interesting scrum, as heavyweights like EA join the fun with Facebook, Apple, and Google.

One winner I can predict for sure: Consumers are going to have more gaming choices, and probably at lower prices, than ever before. I think gaming is going to be an ever larger share of overall leisure time, taking a bite out of TV watching for one thing. We'll have to see how this strategy unfolds, and particularly how the various players intend to make money. Will social gaming continue to have legs? Sure looks like it at this point...