IQzone's Patrick Pettay on why he believes advertisements should be used alongside IAPs in mobile games

Improving monetisation for game developers through advertising

[The following article was written by Patrick Pettay of IQzone, a privately-held mobile technology company specialising in mobile advertising.]

Free-to-play apps dominate the apps stores, powered by either freemium, incentivised ads or display advertising business models.

Last year, it was boom time for the top free-to-play apps, almost all of which operated freemium business models. These models enabled micro-transactions within the gaming experience, making it possible for users to purchase extra lives, weapons and even laboratories to help players progress through the games quicker than usual.

Two gaming companies over the last year in particular, generated significant revenues and exposure: Clash of the Clans by Swedish developer Supercell generated $892m in 2013 (it subsequently sold a 51 per cent stake to Softbank in October 2013) and Candy Crush Saga by British developer King made around $1.5bn last year (King filed for IPO in March 2014). Not something to be sniffed at.

The freemium model clearly proved itself successfully last year with a number of development studios. The question this year is whether this model alone, is sustainable on a long-term basis? It’s estimated that only a single digit percentage of users make purchases through freemium apps; clearly game developers are missing out on incremental revenue opportunities.

Potential dampeners to the freemium model include market saturation (everyone starts adopting the approach) coupled with (hefty) microtransaction fees hitting users’ credit card bills. The biggest concern is around compromising the user experience and overuse of payment barriers to perform tasks within games.

In addition to the freemium model, game developers should also be incorporating other monetisation methods into their apps. They can also choose incentivised gaming and display advertising. With incentivised gaming, users download advertised applications in return for credits, this helps to boost the app store ranking for the promoted apps. With display advertising, developers choose where to place advertisements from a range of formats (banners, rich media, native or video,) at different points in the app and generate advertising revenue every time an ad is displayed or clicked.

As consumers, we already accept that advertising plays a critical role in delivering and supporting free media and services (such as TV, web, radio, newspapers), and thus gaming apps should not be any different so long as there is a balance and between making money and not comprising the gaming user experience.

Potential dampeners to the freemium model include market saturation (everyone starts adopting the approach) coupled with (hefty) microtransaction fees hitting users’ credit card bills.

Patrick Pettay, IQzone

The incentivised option, although largely successful with game developers (in terms of generating relatively large revenues), has caused advertisers to challenge the value of spending large amounts of marketing budget on incentivised app download campaigns that can only contribute to app store ranking and do little to delivering users that convert into paying customers. Nonetheless, let’s not forget that for some end users, incentivised gaming actually works because they can advance through levels for free and thus this revenue model should be considered while advertising dollars remain strong here.

The industry has also been critical of the display advertising model, piggy-backing on reports that standard banners generate accidental clicks coupled with lack of effectiveness due to limited space for brands to place text and images. Publishers have also commented that banners distract users and the revenue earned doesn’t warrant the poor user experience.

That said, mobile advertising is working effectively today for many of the top game developers supported by strong ad dollars from performance campaigns paid for on a cost-per-install basis and that represents approximately 80 per cent of mobile advertising spend. Additionally, mobile display advertising represents the biggest opportunity going forward for game developers as it evolves into a mainstream advertising vertical for all types of advertisers.

Mobile display advertising is going through a rapid transition. Firstly, more engaging ad formats such as auto-play videos or native ads that integrate with the editorial content of a page will not only provide brands with a much improved user experience, but will also deliver significantly higher revenues.

Unfortunately, up until now, the mobile display space has been dominated by standard banners, which brand advertisers and agencies have stayed away from. Secondly, the flow of brand marketing spend from established advertising agencies, finally aligning ad-spend with time spent on mobile devices, will contribute to the decision making process for using one vertical over another. As more brand dollars flow to mobile, game developers will see higher eCPMs thus increasing their ARPU through this revenue model.

Finally, the big internet players such as Facebook, Google and Amazon have launched exchanges and networks to place ads on developer games. It’s these big players that will open up mobile advertising display budgets globally (circa 70 per cent of mobile advertising spend now comes Google and Facebook alone). Just look at the phenomenal revenues generated by Facebook’s mobile advertising platform in the last year ($6.98bn), mostly driven by app installation campaigns.

Aside from more engaging ad formats, other revenue drivers for game developers to consider include volume / ad frequencies, price floors, choice of mobile advertising partners (exchange / ad networks), and country optimisation.

The first point is self-explanatory, the greater the volume – the more revenue you can generate. On the second point, game developers can establish minimum price points for their valuable advertising inventory and in that case, only ads that achieve pre-defined price points are displayed. Thirdly, the choice of mobile advertising partner is critical and factors to consider include service, global fill rates, average eCPMs and features supported. Finally, demand and price for advertising inventory varies greatly from country to country (with significant demand tied to higher prices in North American and Western Europe) and developers should optimise the before mentioned drivers (volume, price floors, demand partners) on a country by country basis.

Smart game developers should build their games to use a combination of monetisation options (freemium, incentivised, display advertising) and actively move users between these alternatives.

Patrick Pettay, IQzone

With all monetisation options, user experience is a fundamental consideration for game developers. For display advertising alone there are a number of decisions to be made. The first of which, is the placement and format of ads. This could include ads that behave like “book ends”, displayed when a game is opened and at the end of a game when the user has decided to close the app (the parallel here is placing ads inside the front and back covers of magazines).

This approach is interesting because the ads do not compromise the in-game user experience as the ads are displayed before a user has started and after they have decided to end a game. However, one can make the case that displaying an ad before the user has begun, if not messaged correctly say through a “Brought to You By or Sponsored By” message is not a great experience.

The most common option that we’re probably all-to-familiar with, is placement of ads within a game. Here, game developers need to study the gaming experience and user journey through levels meticulously in order to determine the optimum points to inject ads into the game while a user is playing.

The most logical and natural placements for larger ad formats (full screen) and videos are between levels to minimize possible user distraction. It’s between levels and at natural pauses within games that users will be more receptive to display advertising and more likely to click.

However, one could argue that this placement is not entirely optimal as the user is between levels and probably not in the right frame of mind to accept advertising, which brings us back the option of ads appearing at the start and end of games. In all cases, frequency and timing is key.

Next is quality of ads displayed. Game developers can control ads via their advertising partners. The OpenRTB standard by the IAB adopted by ad networks / DSPs / exchanges gives publishers the tools through their ad serving partner dashboards, to control ad quality and stop spam and other unwanted ads from getting through thereby keeping the quality of ads high.

Finally, timing of ads is a major driver, as advertisers pay premiums for larger ad sizes and more engaging ad formats (native, rich media and video). That said, it’s critical that these more engaging ads are displayed when a user is in the right frame of mind so that it maximises the advertising effectiveness for advertisers. Would that optimum timing, be best before, during or after a game?

Game developers are not alone when it comes to display advertising. The Interactive Advertising Bureau (‘IAB”) has developed best practices based on industry feedback that should fast track some of the decisions described above.

The future model for gaming apps is clearly free-to-play and one that gives users the ability to try out games before making a purchase. Smart game developers should build their games to use a combination of monetisation options (freemium, incentivised, display advertising) and actively move users between these alternatives.

For example, if users are not making purchases after a number of games then they should move from the freemium to the display advertising model. Not only does this multi-approach fully optimise the revenue potential for a game, but it will also position the publisher to take advantage of the large increase in mobile display advertising currently occurring.

For game developers looking at starting to use display advertising, they should explore the new formats (full screen ads, native ads, rich media and video) available and determine the optimum placements for ads in the user journey, as each game is different, while striking the balance and trade off between placing ads inside or at the end of the game experience.

Facebook has proven display (native) advertising can deliver significant revenues, along with some of the biggest game developers in the world, such as Outfit7 and Zeptolab, generating significant revenue through this channel.

As display advertising continues to evolve and mature and align itself with the major revenue opportunities that will be driving mobile content in the future, game developers need to be ahead of the curve and leverage this revenue channel now.

Mobile display advertising, overhyped and under-delivering many will comment up until now, is changing rapidly and is likely to emerge as the dominant commercial model for game developers over time as budgets shift from other channels, aligning itself with how consumers spend their time across multiple devices.

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