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Talking with Giants in the iPhone App Space

Two years ago mobile phone apps were just not in my consciousness. Sure, I knew that BlackBerries could send email and that you could do that and look at photos, YouTube videos, and maps on an iPhone. But I almost couldn’t imagine having a program that could let you do anything from finding rest stops on Interstate 40 to playing Peggle on the go, let alone check Facebook and Twitter feeds.

But back when I was still pecking out the occasional text on my Motorola RAZR, many large news and entertainment companies were anticipating and developing apps for the iPhone OS. I realize TidBITS tends to focus more on small developers, so why should we care about what these corporate behemoths are doing? Apart from the sheer reach of these companies, they have a very different mindset from the small developer. With that in mind, I spoke to a number of executives at large content companies to find out what they thought about the iPhone.

What I found interesting – even surprising – about these companies is that they typically aren’t interested in devices or platforms per se, but in getting their content out to as many people as possible and making a profit in a quick yet sustainable fashion. If their market research departments were to provide statistics that, say, Windows Mobile 6.5 would provide them the best traction in the mobile space, you would see a plethora of apps for that operating system. They care about content, not technology.

That said, while many of the people I spoke with said they are selling and developing apps for other mobile platforms like Android and BlackBerry OS, all seemed to view iPhone OS apps as a crucial part of their mobile strategies. And they consider debates over open versus closed environments as mostly minutiae.

Innovation or Continuation? Videogame giants like Electronic Arts (EA) and Gameloft, networks like ESPN, CNN, and NBA Digital, and studios like Disney, Fox, and Paramount all seem to have anticipated the groundswell that was about to occur in the iPhone app space. In most cases, however, iPhone and other smartphone apps were just the latest permutation of ongoing mobile strategies that had been put in place years earlier.

For example, Gameloft released its first mobile games for Java-enabled phones almost a decade ago. According to Gonzague de Vallois, senior vice president at Gameloft, the average game back then took up a mere 300 KB. In contrast, the iPhone app version of the card game UNO weighs in at 72.5 MB and the racing simulator Driver is a hefty 405 MB. Similarly, Disney began its efforts in mobile content as a launch partner of
Japanese mobile provider NTT DoCoMo in 1999 and soon after expanded its development and publishing of games, ringtones, and graphics to mobile carriers worldwide, explained Stephen Saiz, director of marketing – digital publishing at Disney Interactive Studios.

And at ESPN mobile apps have been in the company’s DNA since the days of the Newton, when the network sent game scores to pagers via its Sportstrack application, said John Zehr, senior vice president and general manager at ESPN Mobile. “Getting scores is a fundamental function for sports fans to be able to do wherever they are, so that’s been our primary motivation. We’ve been doing mobile phone content since 1999 on some of the first data-enabled cell phones and [PDAs] like the Palm VII.”

Transforming the Mobile Marketplace — Despite this long history, the App Store has transformed app delivery because it has made it easy to discover new applications, Zehr added. “Irrespective of the iPhone, we’d be developing [mobile apps], but until now the biggest challenge was always getting people to figure out how to get them,” he said. “And it cuts both ways. People can review your apps and give feedback right in the App Store, which helps drive our product roadmap and helps us develop products that appeal to their needs.”

Louis Gump, vice president of CNN Mobile, concurred that the App Store has broken down obstacles to app adoption on smartphones in general by providing a central place for customers to browse and buy apps, and by simplifying the process of searching for and buying apps. “The App Store addressed all of these things at the same time. It wasn’t iterative. It was revolutionary,” Gump said.

As a result, the iPhone as a device and the App Store as a marketplace for mobile devices have collectively transformed consumer expectations. “People now expect wireless data. You used to run into a lot of people who’d say, ‘All I want is a phone I can make a phone call on.’ Now if I walk into a room of professionals and ask how many have browsed the mobile Web in the last 30 days, it’s almost everybody. If you ask how many have a smartphone, it’s almost everybody as well,” Gump observed. “So it isn’t just about the iPhone and App Store users, although there are millions of those. It’s about fundamentally changing the marketplace, and what that means is that consumers are going to get a lot of content they never could before.”

The New Gaming Platform — Game makers like Gameloft and EA recognized the iPhone’s (and iPod touch’s) potential as a gaming device early on. Adam Sussman, EA vice president of publishing, said, “We recognized that the iPhone had key factors that we knew would make it successful: a great device, robust platform, and intuitive merchandising experience. We also saw that the iPhone had properties that lent themselves to amazing gameplay, including the multi-touch screen, the accelerometer, and easy discovery process of apps. So our strategy was simply to make games that took advantage of the features of the iPhone, and reach wider audiences as a result”.

Gameloft’s de Vallois noted the iPhone has enabled his company to deliver types of games that weren’t previously possible due to device limitations. “It’s the difference between being given a piece of paper or a massive canvas to paint on. The scope of what you can create is unlimited given the right device to deliver it on. The iPhone has pushed the wireless space into a whole other level. It’s great for publishers because we are able to create beautiful-looking games and the consumers get a rich gaming experience that is becoming more competitive with console games,” he said.

de Vallois acknowledged that many console gamers have the perception that hardcore games and mobile devices don’t mix, but doesn’t think it has to be that way. “This may have been true in the past, but is no longer the case,” he said, citing N.O.V.A., Gameloft’s late-2009 first person shooter game that has garnered acclaim from general gaming Web sites, including IGN and Kotaku.

Both Gameloft and EA have done well since the launch of the App Store. According to de Vallois, iPhone games accounted for about 14 percent of Gameloft’s sales in 2009 – about $17 million. At this writing, 6 of the 50 top-grossing apps in the App Store were EA games. Interestingly, among the highest ranked of these 6 apps were evergreen brands that EA has licensed from Hasbro, like Monopoly, Scrabble, and The Game of Life, all of which are digital versions of old-fashioned board games. EA’s Sussman mentioned that EA and Hasbro entered into a multi-year licensing agreement in 2007 to create digital games based on Hasbro’s intellectual property.

de Vallois said that licensed games accounted for 37 percent of Gameloft’s revenues during the first nine months of 2009. “It’s a decent chunk, so these partnerships play a key role. We are fortunate to have a great relationship with Ubisoft and continue to have the first right of refusal to their licenses. We also have partnered with every major film studio and have proven that the mobile game can complement a film and bring added value to the studio’s overall marketing strategy,” he pointed out. These partnerships have led to games like Tom Clancy’s
(a Ubisoft property) and James Cameron’s Avatar, among others.

Evolving Price and Business Models — The greatest challenge for large developers (or any developer hoping to profit from iPhone apps) may be pricing. Go to the iTunes page of most any paid app, and you’ll read at least one review complaining the price is too high. And developers have responded. Back in 2008, EA charged notably higher prices for games like Scrabble and Tetris, as did Gameloft for Brain Challenge, among other examples.

When Disney Interactive Studios started developing apps for the iPhone, its initial strategy was to expand and test the new platform to evaluate the opportunity. “In the beginning, we applied some resources to bring a few premium games to market, along with a Safari-optimized mobile Web site,” Saiz explained. “The majority of our product is premium or has premium components, [but] our Disney app is free. Since we offer a wide array of quality entertainment within the Disney app, we have attracted a significant user base that we can now cross promote our premium apps

According to EA’s Sussman, the game itself determines its pricing. “Such criteria as genre, game structure, gameplay, and marketplace conditions are just a few considerations that we take into account when pricing games. We also take into consideration whether the game offers additional content to purchase within the game, such as more episodes, more songs, or game enhancements,” he said. “Many of our games are well known, such as Madden NFL, Monopoly, and Rock Band, although we use free versions to generate awareness for titles that lack immediate brand recognition.”

ESPN’s Zehr said its ESPN ScoreCenter iPhone app is free because the network is monetized primarily through advertising sales. “It’s important to have that reach and have our brand in front of people’s eyes via push notifications and alerts via SMS, to drive people to watch our TV product, which is by far our biggest source of revenue and biggest part of our business,” Zehr said. “In other words, if someone gets a scoring alert that tells [him or her] a game is close or in overtime, [he or she] is more likely to watch the [rest of the] game on one of our stations.”

In contrast, CNN views mobile content as a business first and foremost, said CNN’s Gump. “Mobile is a great business opportunity to reach millions of consumers. We think that if you look out over the next five to ten years, the companies that do not build sustainable mobile business models will not be able to invest in their news gathering in the future.”

According to Gump, advertising plays an important role in CNN’s mobile revenue mix, but the company believes a dual-revenue stream, where users pay a modest price for its CNN Mobile app in addition to the advertising, will carry it. CNN’s decision to go with a paid app does increase pressure on the company to build a great app. “If it’s a ‘me-too’ app, people aren’t going to pay, but if you differentiate it, people will find it valuable and say, ‘I spend more than [$1.99] on a cup of coffee; of course, I’ll buy it,'” Gump said.

At the same time, Gump surmised experimentation will continue among competing news organizations to find the right balance, such as the Wall Street Journal’s model of offering the free WSJ app while requiring users to pay to subscribe for its content. “I wouldn’t be surprised if a lot of these models converged,” he said. However, Gump noted that many of his counterparts offering free applications aren’t getting the revenues that they had hoped for, and he expects to see more paid apps in the future.

The iPad and Beyond — This move toward an increased emphasis on paid apps seems to be accelerating with the release of the iPad. EA and Gameloft, among other gaming developers, have released iPad versions of several games that are priced higher than their iPhone versions. For example, Scrabble for iPad costs $9.99, double the price of its iPhone version (and, incidentally, the same amount that EA charged for the iPhone version back in 2008). ScoreCenter XL, ESPN’s iPad version of its free ScoreCenter app, is priced at $4.99. And the iPad version of PopCap’s Plants vs. Zombies HD for iPad will set you back $9.99, $7 more than the iPhone version (although it’s so addictive it should be registered as a controlled substance).

It’s not yet clear if higher iPad prices will take hold across the board. Distimo, a Dutch analytics firm, put out a report stating that, on average, iPad apps cost only about a dollar more ($4.67 versus $3.82) than iPhone apps – although these are averages for all apps in either category, rather than a comparison of iPhone and iPad versions of the same app.

Given that Apple sold over 1 million iPads in the first month, the iPad stands to impact the mobile app space even more than the iPhone did, especially if it does indeed herald a fundamental change in how we use computers. And it will be interesting to see how prices evolve as the iPad continues to gain traction. Will iPad customers agree that the iPad’s larger screen justifies a higher price, or will we see iPad app prices drop down to iPhone app levels as time goes on?

Either way, it’s a safe bet that the major news and entertainment companies will have apps for us to buy, and one way or another, they’ll be making money on them.

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