Mobile Monetization Challenges
Mobile has been a core pillar of the gaming industry’s broader growth. The notion of what it means to be a “gamer” has fundamentally changed over the past 10 years through increased global access to smartphones, more advanced hardware at a reasonable price, and a broader range of content that appeals to virtually every demographic.
Unlike other gaming mediums, mobile phones are integrated into our daily lives. People spend an average of over 3 hours per day on their smartphones, and check it roughly 58 times per day (Exploding Topics). This implies that over 20% of our waking hours are spent on a smartphone.
However, the uniqueness of mobile gaming also creates its own challenges. While mobile gaming continues to command a majority of global games revenue, the $110b in consumer spending during 2022 represents a ~5% decrease compared to the prior year.
On the surface, this does not seem like a particularly large drop given gaming as a whole was estimated to be down 4.3% over the same period. Despite the 5% drop in revenue, 90b new game downloads represented an 8% increase over the previous year. Additionally, global daily active users (DAU) grew by a corresponding 8% in 2022. For a gaming medium that has historically captured value from attention and sheer player volume, the inverse relationship between monetization and downloads is problematic.
What’s driving the gap between engagement and monetization?
Many mobile games monetize in a way that is fundamentally different from other platforms (PC + Console) through advertising. As you can see below, the importance of advertising depends on the game genre, but ads are ubiquitous across categories.
We have previously written about ongoing challenges in the advertising market, and more specifically its impact on the hypercasual genre where ads account for 94% of revenue.
There are two major headwinds negatively impacting the viability of advertising as a revenue channel: limited audience targeting and tightening budgets.
- Limited Audience Targeting: The deprecation of IDFA (Apple) and AAID (Google) has eliminated third-party access to anonymized device identifiers that tracked user activity across Apple and Android devices. This ID enabled advertisers to better understand the optimal audience for their ads without gathering personal identifiable information. Without the ability to calculate which users should be the highest priority targets, advertisers are forced to cast a wider net that makes each individual ad engagement less valuable. This limits the amount advertisers are willing to pay for ad impressions (generally measured as cost per thousand impressions, or CPM), which makes it more challenging for game teams to effectively monetize player attention through lower per-user revenue.
- Tightening Budgets: As the broader economy continues to soften, advertisers are being increasingly selective about their marketing channels. Given the current corporate trend of ruthless efficiency (as seen from the numerous layoffs happening on a near weekly basis), a “spray and pray” approach to advertising has lost favor. Limited marketing budgets will be allocated to channels that have a more predictable and favorable return profile.
Simply shifting business models from IAA to IAP is not working
The generally accepted solution across the mobile gaming industry has been to prioritize in-app purchases (IAPs) to offset the reduction in advertising revenue. Some examples of IAPs are in-game digital cosmetic items, loot boxes, and level unlocks. Of the 16 mobile game genres in the chart above, 11 experienced revenue mix shifts towards IAPs last year (unweighted average increase of 5.8%).
However, pivoting is easier said than done. For some genres, a reprioritization towards IAPs can require structural changes to the game loop. Hypercasual titles are a prime example of this. Many of the largest developers in this genre are looking to move up-market to casual games (or at least towards hybrid-casual titles that combine the simplicity of hypercasual games with more advanced progression mechanics) in an effort to keep players engaged longer. Hypercasual games currently yield extremely low retention rates (averages: D1 = 25%, D7 = 7%, D30 = 2%), which reduces the probability that players will want to spend money on in-game assets.
For the largest and most prominent hypercasual developers, the strategy is focused on immediately monetizing players through advertising and quickly developing games to retain churning players inside their ecosystem. Voodoo, for example, has developed 200+ hypercasual games that have an aggregate of over 6b downloads (Sacra). To put this in context, Supercell has launched only 5 games since 2010 (Supercell).
Even for game titles that are well-suited for IAPs, the macro environment is proving to be a significant roadblock to monetization. According to data.ai’s latest annual report, consumer spending on mobile games has directly correlated with declining disposable income. This is true across developed countries such as the US, UK, and Germany. Meanwhile, non-gaming consumer applications have been more resilient given the inelastic consumer demand for “need-to-have” services.
Interestingly, this price sensitivity within gaming has applied across virtually every genre. Looking at the top 8 mobile genres for consumer spend, 7 experienced a decline in IAP value year-over-year. At the same time, 6 of these genres saw an increase in downloads.
This decline in consumers’ willingness to pay will likely have a further adverse effect on advertising dollars, as demonstrated price sensitivity makes these gamers a less compelling audience to reach. As a result, there is a compounding drag on monetization for mobile games which we expect to persist at least through 2023.
Takeaway: Despite its 50%+ contribution to overall global gaming revenue, mobile game monetization is facing substantial headwinds across advertising and in-app purchases. While we are still generally bullish on the future of mobile gaming, we believe that a challenging macroeconomic environment will continue to suppress monetization over the coming year. Whether through stronger gameplay, deeper lore, more social engagement, or other mechanics, the studios and publishers that successfully navigate these difficult conditions will be heavily focused on increasing user retention to compensate for decreased monetization.