Flurry: Utilities, news, weather and sports are the most engaging app categories

The most engaging apps aren’t games, banking clients or even social networks reports Flurry — they’re simple apps that deliver the same value time and time again. The mobile monetization provider’s latest study shows the most engaging apps are actually utilities falling under the categories of Weather, Reference, Sports and News. Apps in those categories keep the majority of their users coming back regularly, even after three months.

Flurry put together its report by tracking the 90 day retention rates of a series popular apps, comparing their retention rates to how frequently they were used. Altogether, consumers used the apps Flurry tracked more than 1.7 billion times a week.

According to Flurry Weather Apps showed the best retention, with 73 percent of users still opening an app 30 days after installing it, 63 percent opening it 60 days after installing it, and 55 percent continuing to use it after 90 days. Interestingly, although weather apps showed the best retention, they weren’t the most frequently used apps, averaging 3.7 user sessions a week.

The most frequently used apps were streaming music apps, communication apps and social games, but only communication apps retained half their users a month after the initial install. Flurry found 62 percent of users were still opening a communication app after 30 days, but only 47 percent of social game players and 39 percent of music fans were still engaged with their apps after a month.

Flurry used its research to divide app categories into four broad groups: intensive and loyal use apps (news, communication apps), “burst-value” apps that were used intensively, but for finite periods (dating services, social games), infrequently used apps with high churn (personalization, entertainment apps) and infrequently used apps that provide high value and low churn (travel and navigation apps, single player games).

Flurry’s study is a repeat of one the company conducted in 2009. The company found that while the average 90 day retention rate has improved over the past three years, rising from 25 percent to 35 percent, the overall frequency of app usage declined. In 2009, the average app logged 6.7 sessions a week, compared to 3.7 in 2012.

Overall, Flurry recommends that developers working in categories with strong retention explore subscription and advertising based monetization models, while considering consider one-time download fees to monetize apps that fall into categories with higher churn rates. The company found that in-app purchases were an effective monetization strategy for frequently used apps regardless of retention rates.

The full breakdown of Flurry’s findings by category follows after the jump.

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Google Play doesn’t monetize? It does for free-to-play games that use carrier billing

Google Play has an undeserved reputation as platform that doesn’t monetize — at least according to several developers with free-to-play games. Companies as diverse as TinyCo, Spry Fox and Robot Invader are seeing Google Play revenues comparable to, and sometimes even higher than, their iOS earnings.

Google Play’s supposed difficulty in generating revenue has been well publicized. According to recent studies from Distimo and Flurry, Google Play earns one eighth the daily revenue of Apple’s iTunes App Store and generates just 23 percent of the average revenue per user (ARPU). Because Distimo and Flurry’s findings are based on broad averages, however, not every developer agrees with their reports.

Spry Fox’s CEO David Edery recently took to Twitter to set the record straight about Android earnings. According to Edery, for every dollar the popular puzzle game Triple Town earns on iOS, the Android version brings in 67 cents. It’s also not a matter of having a much larger, but less lucrative overall userbase on Android — Edery tells us that Triple Town’s Android and iOS userbases are almost exactly the same size and have similar conversion rates. Although the game does return slightly higher ARPU on iTunes than on Google Play, Edery is still bullish on the platform as a whole, calling Google Play, “a very good source of revenue.”

Larger developers are also finding Google Play has plenty of paying users. Andreessen Horowitz-backed TinyCo released figures showing for every dollar its free-to-play game Tiny Village generates on iOS, it earns 65 cents on Google Play. Removing tablets from the equation, the number rises to 82 cents on the dollar. Overall, TinyCo’s Android earnings are much closer to Spry Fox’s than they are to what Flurry estimates the average Google Play ARPU is.

Glu Mobile is another company reporting Android revenues higher than analyst estimates. Although only 30 percent of Glu’s total free-to-play smartphone revenues in the fourth quarter of 2011 came from Android, both platforms deliver a similar ARPU according to the company’s SVP of sales and marketing, Adam Flanders. Glu is also seeing its Android conversion rate continually improve, something Flanders credits to Google Play bringing in more credit card through its store-wide sales and Google Check Out’s expansion of international carrier billing options.

Access to carrier billing is an important tool for Android developers with free-to-play games because it allows users without credit cards to purchase digital goods, boosting conversion and monetization rates. Carrier billing is one of the key reasons companies like DeNA are able to see conversion rates of up to 15 percent in Japan, compared to about 2 percent in North America. The lucrative South Korean market is also the result of carrier billing — Com2uS has a 10 percent conversion rate for its Android games in South Korea and a three percent conversion rate in the U.S.

Robot Invader’s game Wind-Up Knight makes 60 percent of its total revenue through Google Play, largely thanks to carrier billing according to company co-founder (and former Android developer advocate) Chris Pruett. Wind-Up Knight players are also twice as likely to monetize on Android than they are on iOS and when they do convert, Android users generate higher ARPU than iOS ones — once again, largely due to carrier billing.

“Android actually has a number of unique features that make it pretty profitable,” he explains. “One major feature is integration with carrier billing systems across the world.  In some regions (particularly Japan and parts of Europe), nobody buys anything on their phone with credit cards — they all want their purchases to get charged to their mobile phone account and show up on their bill at the end of the month.”

Overall, the story from developers both big and small is that there is money to be earned on Google Play, but the companies that are making the best use of the market aren’t paid apps, they’re free-to-play games that are able to tap into carrier billing internationally.

Google Play delivers a quarter of the revenues per user Apple and Amazon do, says Flurry

For in-app purchases on a per-user basis, Google Play is now the least lucrative mobile app market behind both the iTunes store and Amazon’s Appstore.

According to the latest report from mobile analytics company Flurry, for every dollar of in-app purchase revenue the average user generates on iOS, the same app will see $0.89 in the Amazon Appstore and just $0.23 in Google Play.

 

To come up with these figures, Flurry measured the average in-app purchase revenue by user in a series of apps popular on iOS, Android and Amazon app stores over a 45 day period. As the study excluded both up-front app purchases and advertising revenue, it’s unwise to take Flurry’s numbers as a perfect breakdown of revenue per platform.

Overall a top grossing iOS app can earn between $2 and $3 million a month on iOS and about $1 million a month on Android. It’s not yet known what a top grossing app on the Amazon Appstore makes, but the figure is likely lower because of the Appstore’s much smaller userbase.

It’s also important to note that overall, in-app purchases are less important on Android. Earlier this week, Distimo reported 80 percent of the top 200 grossing iPhone apps used in-app purchases, but only 56 percent of the top 200 grossing Android apps did.

However, Flurry’s study does help explain why Crowdstar — developer of the free-to-play game Top Girl — reported its average revenue per user in the Amazon Appstore was five times higher than in Google’s official Android market.

As we have said previously, the key issue with monetization on Android hinges around developing a userbase that is ready to pay. iOS and Amazon users not only have accounts set up with payment information, they’re used to purchasing things from Apple and Amazon. Android users, on the other hand don’t often have their payment information on file, something that google is trying to remedy through discounted app promotions.

The lack of progress Google Play is showing — in December, Flurry reported Android apps earned $0.24 cents for every dollar spent through in-app purchases on iOS — only demonstrates the scale of the problem Google is trying to tackle.

[Update: Please note that on April 15, Flurry updated this report to clarify it was comparing app revenue per active user, not overall revenue. Inside Mobile Apps has updated our story to reflect these changes.]

Flurry Adds Age, Gender Demographics in Revamp of Analytics Product

Flurry did a big overhaul of its core analytics product today, adding ways for developers to break out their users by age and gender.

Developers can also look at their user base by location, app interests and usage. For example, a developer could look at the differences in behavior between low, medium and high-usage players. They can also do more advanced cohort analysis, where can they compare the behavior of users who joined the app at different times. (That helps developers to see whether a few tweaks improved the number of users who advance in an app, level up in a game or move onto purchases.)

The company, which has been through many incarnations from originally being an e-mail and news reader for smartphones four years ago to becoming a major player in incentivized installs, has grown a large footprint through its free analytics. Flurry now reaches 100,000 apps and 300 million monthly unique users and tracks 17 billion anonymous user sessions a month.

Peter Farago, the company’s vice president of marketing, says the company derives its demographic estimates from samples it collects from developers.

“We have numerous developers who pass demography into our system, which we have permission to use in a sample,” he said. “We continuously get updated information that helps us iterate on accuracy.” Developers who already have the older version of Flurry’s analytics SDKs won’t have to make any changes or re-submit their work to the app store.

Flurry’s competitors on analytics include startups like Apsalar, which partnered with the Flurry’s rival Tapjoy. Kontagent, which also handles analytics for social gaming companies, recently moved into the mobile space as well.

Flurry is backed by Menlo Ventures, Draper Fisher Jurvetson, InterWestPartners, Union Square Ventures and First Round Capital. It has three arms of its business: analytics, incentivized installs through a program called AppCircle and a new video ads program, where uses can watch short videos in exchange for virtual currency.

iPad2, Verizon iPhone Help Apple Eat Into Android’s Share Among Developers Building New Apps

Both the iPad2 and the Verizon iPhone may have increased the relative allure of Apple’s platform to mobile developers against Android.

Flurry, which has an analytics product in 90,000 mobile apps, said iOS increased its market share against Android in terms of mobile developers starting new projects.

Android new project starts have dropped from 36 percent in the first quarter of this year to 28 percent in the second quarter, according to data on all of the new app projects the company detects when developers install its analytics. Total new projects on both platforms grew by 12 percent quarter-over-quarter to 10,200 in the second quarter.

Flurry says this is Android’s second quarter-over-quarter slide in market share following a year of growth, peaking in the fourth quarter of 2010.

The company goes on to say that there are a number of reasons why iOS is regaining momentum. For one, it launched the Verizon iPhone at the beginning of the year, which gives consumers more choice and the ability to avoid what is perceived to be AT&T’s overburdened network. Secondly, Apple has said demand for the iPad 2 has left it backlogged while the Android-focused device makers have yet to create a credible competitor to the tablet.

Lastly, Google’s payments infrastructure — while promising — still needs work. Apple said at its most recent developers’ conference that it has 225 million iTunes accounts with credit cards on file, which is attractive to developers looking to earn revenue straight away.  At the same time, developers have to figure out how to support a myriad number of devices and distribute through several app stores instead of a single one.

“With developers pinched on both sides of the revenue and cost equation, Google must tack aggressively at this stage of the race to ensure that Apple doesn’t continue to take its developer-support wind,” wrote Flurry’s Charles Newark-French.

Freemium Revenue Surpasses Paid App Revenue Among Top 100 Grossing Games, Flurry Says

Free-to-play games that earn revenue through in-app purchases have made a distinctive rise up iOS grossing charts over the past half year.

Now the free-to-play revenue model is earning more than the paid app model — at least among the U.S.’s top 100 grossing iOS games — according to mobile analytics and monetization company Flurry.

Jeferson Valadares, who became Flurry’s general manager of games after leaving Playfish, looked at the top 100 grossing games last month and in January. He analyzed each app’s revenue model (e.g. whether the game was given away for free and whether consumers could purchase virtual currency in the app.). Then, because Flurry tracks about 90,000 apps, the company can estimate revenue by chart ranking.

Using those two pieces combined, Valadares estimates that nearly two-thirds of the revenue earned by the U.S.’s top 100 grossing iOS games came through the freemium model, up from just under 40 percent six months ago.

The most prominent developers using this model include companies like Sequoia-backed Pocket Gems, Capcom’s studio Beeline Interactive, Storm8, Andreessen Horowitz-backed TinyCo, Playforge, and Glu Mobile. EA has mostly stuck to a paid app approach, although rumors of a PopCap acquisition might move the company into freemium mobile gaming in a serious way. Even Rovio Mobile, which catapulted to success by charging $0.99 for Angry Birds, has been using virtual goods like the Mighty Eagle, which helps players pass levels. The biggest social gaming companies like Zynga and Crowdstar are also starting to make headway into the grossing charts through free-to-play games.

Like in the social gaming world, only a small number of players — between 0.5 and 6 percent — will actually pay for virtual currency in a game.

“In the old paid world of video games, success was measured by multiplying the number of units sold by the unit price, the traditional retail model,” he wrote. “In the new world of digital games distribution, it’s all about how many players you can keep engaged with your free game, followed by how many compelling spending opportunities you can provide them.”

Developers Still in the Dark About Apple’s Policies on Incentivized Installs, Rankings

Three weeks after Apple began rejecting apps containing offer walls, developers are still in the dark about what is acceptable and what is not under the platform’s new approach.

Last month, Apple began sending rejection notices to developers if their apps contained incentivized installs or offer walls where players can get virtual currency for free in a game if they download other apps. This practice emerged over the last year as a way for developers to earn extra revenue and to predictably get visibility for their games. By paying for enough downloads on these walls, developers could break into to the top of the charts. This is in turn raised criticism that these networks were effectively allowing developers to buy rank or “game the charts.” (We published an explanation of the model back in January here.)

Although Apple tolerated incentivized installs for months, it reversed course in April, arguing that they violate the iOS developer agreement by manipulating chart rankings

The company’s change in stance was a setback for many developers who have made their apps free in recent months and turned to in-app purchases and offer walls for revenue. Of an estimated 99.9 million downloads of iPhone apps in the U.S. in March, 39.9 percent of them were free games with in-app purchases, according to mobile app research firm Xyologic.

What’s Happening Now?

We haven’t covered the issue in the last two weeks largely because Apple hasn’t provided any clarity and developers have been reluctant to speak on the record. Apple hasn’t said what its final policy will be or fully explained the reasons behind its turnabout last month, according to multiple developers and install networks.

We’ve heard of anecdotal cases from the install networks where developers have been able to pull strings with connections at Apple and get their apps in the door that include offer walls. But then in other cases, they’re still getting rejected: text-messaging app Pinger said it had an update with an offer wall rejected this week. Many developers, like Sequoia-backed Pocket Gems, responded by taking offer walls out of their newest titles.

Developers that haven’t sent updates to the store since Apple’s changes say their offer walls are working just fine and many Tapjoy campaigns are actually operating normally as we speak. The rankings algorithm, which Apple tinkered with last month, looks like it largely went back to what it used to be and new apps are surfacing with regularity.

All of the uncertainty in the developer community was vividly underscored in game developer Glu Mobile’s earnings call this week, where the company had to speak publicly to its investors about the financial fallout and Apple’s positioning on the matter.

“The situation is still unfolding,” said chief executive Niccolo de Masi. “There is not perfect clarity on where a line is or isn’t in regards to offer-based monetization mechanisms.”

Glu, which went public before Apple launched the iPhone in 2007, is in the middle of making a transition away from a carrier-dependent strategy of making games for feature phones. Using freemium games that make money with virtual currency, Glu nearly doubled smartphone revenues quarter-over-quarter to $5.9 million (under generally accepted accounting principles), it said in its earnings call this week.

But it had to take an extremely conservative stance with earnings guidance for the second quarter. The company’s assuming that it will earn $2.8 million in offer revenue this quarter, much less than it probably would have expected a month ago. Half of that figure has also already been transacted.

Glu is now saying that smartphone revenue (using non-generally accepted accounting principles) will grow by between $550,000 and $1.55 million to between $7.25 and $8.25 million. That would be a marked slowdown from the $3.3 million in quarter-over-quarter smartphone revenue growth it posted in the the first quarter. (Glu’s beaten guidance for the last five quarters, so the company is also probably just playing it safe.)

What’s the financial fallout?

  • If we take Glu as a benchmark for other free-to-play games with in-app purchases, we’re looking at offer walls contributing one-third of game revenue. Glu said offer wall revenue made up $2.2 million in revenue of the $6.7 million in smartphone revenues it earned last quarter (using non-generally accepted accounting principles) or about 33 percent.
  • Glu is predicting quarter-over-quarter revenue growth will slow and it’s preparing for the case that incentivized installs eventually become banned on the platform. “The situation’s unclear and Glu is preparing for the full range of possibilities — from CPI (cost-per-install) being highly discouraged to being highly permitted,” de Masi told us.
  • Distribution may become more unpredictable and the ultimate effect of losing offer walls may be hard to calculate since its effect is so circular. Developers use offer walls not only to earn revenue, but to distribute their work. If they get shut down, acquiring users may become more unpredictable and if developers can’t get users in the door, they can’t monetize them.
  • It’s still unclear what other forms of advertising will benefit from the crackdown. Some developers we’ve talked to are looking at advertising where they can still reward users with virtual currency if they take actions like viewing ads. But we haven’t seen an alternative to offer walls gain traction among developers yet since the situation is still unclear and it’s only been a few weeks.

Who Else is Affected?

Basically, all of the top game developers who regularly push multiple free apps into the Top 100 grossing apps on the iOS store may see a slowdown in revenue growth this quarter.

When Xyologic published its report last week, it listed the top developers who had the biggest download numbers for free apps with in-app purchases. We find it to be a pretty representative list of all of the developers who probably are facing what Glu is seeing this quarter. Just to stress: the chart below contains estimates for U.S. downloads. They are not global figures.

Naturally, the companies that may feel the most pain are the install networks themselves like Tapjoy. The company recently voluntarily dampened the effects of its campaigns by limiting the number of downloads any single app could facilitate.

In the end, it’s likely that this is a temporary setback for most game developers. iPhone and iPad adoption continues on its upward trajectory and Android is very promising, although average revenue per user is still much lower.

When The Same Thing Happened on Facebook, At Least It Had a Roadmap

Like we’ve said before, it’s deja vu all over again for many of the companies providing offer walls like Tapjoy and Super Rewards. These companies, which transitioned from doing different kinds of offer walls on the Facebook platform, faced an uncannily similar situation on that platform in 2009.

Tapjoy, which used to be known as Offerpal and had a totally different management team, came under fire for not having tighter standards over the quality of offers it was providing. Facebook, wanting to financially tap the burgeoning ecosystem it was supporting, launched its own virtual currency Credits and selected a rival to be its primary offers provider. This decision will eventually crowd other companies in the space off the platform.

In Facebook’s case, it at least provided a developer roadmap. There has also been more than two years of time between when Facebook began testing its own payments platform to July, when it plans to make Credits the mandatory currency for canvas games. This has given third-party companies and developers months to plan ahead for this transition.

Apple, in contrast, has not really communicated its new approach to the developer community. The developer agreement does say, “Developers who attempt to manipulate or cheat the user reviews or chart ranking in the App Store with fake or paid reviews, or any other inappropriate methods will be removed from the iOS Developer Program.”

But Apple didn’t decide to interpret offer walls as a violation of this clause until last month. Apple’s lack of communication in managing this issue makes Facebook ironically seem like the patron saint of transparency.

Not that this will do anything to deter developers. iTunes payments are so fluid and the market size is so large, with 189 million iOS devices sold cumulatively as of last quarter, that developers will still be climbing all over themselves to be on the platform.

Pick your platform. Pick your poison.

Mobile Game Developers Grapple With Apple Crackdown on Incentivized Installs

We’ve been trying to get a sense of how the biggest freemium game developers are grappling with major changes to Apple’s policies this week. Apple started rejecting apps that have offer walls where users can download other developers’ apps in exchange for virtual currency late last week (see right). The company is arguing that they violate the developer agreement by allowing apps to cheat the chart ranking, even though Apple has tolerated such offer walls for at least the last year.

This is a fundamental shift that will change how thousands of apps acquire new users or monetize and it is a setback for the emerging space of free-to-play games. Most of the larger developers we’ve reached out to are being relatively quiet and Apple is not being very forthcoming with third-party developers about exact policy changes are and what is acceptable and what is not. The hope is that the platform will be more talkative now that the quarterly earnings call is over.

But this is what we’re seeing so far:

1) Apple Appears to be Continuously Tinkering, Not Issuing a One-Off Change: As we noted yesterday, the apps that got an unusual boost through the weekend — well-known consumer Internet brands like Facebook and Skype that aren’t games — are falling back down on the charts again. Six of the current top 10 titles are games, while the rest are photography or entertainment. Most of them are brand-new apps, unlike a few days ago when we had older, more classic titles at the top.

According to conversations we’ve had with the bigger pay-per-install networks, it appears that the ranking algorithm is returning to what it was before last week and is again favoring downloads. But it’s very clear that some type of change happened last week that boosted highly-ranked apps in specific categories. Facebook jumped to #1 even though the company hadn’t issued an update; the app hasn’t held that high a ranking since at least July 2009. The app has fallen back to its normal position at #16 today. Google Earth was another beneficiary from the change. It is #1 in the Travel category and had jumped to #46 overall on Sunday from its typical ranking between #80 and 100. It’s also tumbled back down to a normal position at #74.

2) Some Developers Are Holding Off on Updates: Some developers are going to postpone updates and see how the market shakes out in the next few weeks. Playforge, which makes the Top 10 grossing app Zombie Farm, had planned to bring an iPad app to the platform sometime this month but told us it will probably delay the release. The company pushed an update to its iPhone app on April 14, before the rejections started happening. So Playforge has some breathing room to wait for information before it issues another iPhone app update.

3) Other Developers Are Removing Offer Walls: Get Set Games, whose popular Mega Jump title was caught in the crossfire and had a bug fix-related update rejected by Apple, told us they’re expecting to be back in the store in a few days. They’ve removed the offer wall.

Several of the TeamLava games also seem to no longer contain offer walls. The company handles all of its content on the server-side so it doesn’t need to go through the app store approval process to release updates. The company likely just took them out. They haven’t replied to requests for comment yet.

4) Other Advertising Networks Are Opportunistically Moving In: Competing ad networks, most notably including Apple’s iAd, are looking to take advantage of game developers scrambling to find alternate means of distribution.

Stuart Dredge at The Guardian’s Apps Blog pulled up this intriguing e-mail, said to be written by an iAd salesperson to a mobile developer:

“I am sure you have been reading about how the ecosystem of how you get ranked is seemingly changing, and it seems as though there is more of a focus of engagement and quality which is something I would like to discuss with you. Driving these quality users and new unique users to your platform will certainly help with driving ranking, but also help on actually having people use the application for what it is intended.”

MoPub, a monetization company founded by former AdMob employees which is backed by Accel Partners, is also trying to use the crackdown as an opportunity to sign up new clients.

“Publishers who have become accustomed to revenue from incentivized downloads are now in the tough position of coming up with a new monetization strategy – and fast,” wrote co-founder Jim Payne in a blog post. “If you are in the situation where you are wondering what to do in your game or app for monetization now that incentivized downloads are gone, give us a shout.”

Playforge’s Thomas Chung said shifting to regular mobile advertising might not be that bad, since the users regular ad networks provide may be much more lucrative than what pay-per-install delivers. Critics of pay-per-install have long argued that players just download apps, get the reward, and then delete the apps later — providing little value to the developer.

“It’s not quite as simple as you think. An incentivized install on Tapjoy may be $0.60 and the effective cost-per-install on a regular advertising network might be $1.50,” he said. “You have to compare the relative value of the users you’re getting.”

Tapjoy, the biggest pay-per-install network, tried to address this issue earlier this year by introducing cost-per-action advertising, where developers only pay if the users actually do something in the app like level up.

5) Advantages May Be Baked in For Early Movers: Companies that used pay-per-install early on and now have a large base of daily active users are at a big advantage compared to newer developers. If they want to launch a new game, they can just market it to their existing customers while newer developers will have a hard time getting users in the door.

Even though the mobile gaming ecosystem is much less mature compared to social gaming on the Facebook platform, the effect may be somewhat similar to what happened when Facebook inadvertently protected Zynga’s leading position in the market when it clamped down on virality last year.

Already, DeNA-owned Gameview Studios told us on Monday that they had dialed down their spending on incentivized installs. They already have 10 million downloads for their iOS hit Tap Fish and won’t necessarily need to buy downloads in the future when they release new titles.

Storm8 is another company with a large existing base of users. They aggressively cross-promote their games and have a layer that can send notifications from one game into another if a user has both. Even though their offer walls appear to be out, players are still prompted to download the company’s other titles in exchange for virtual currency immediately when they open the game (see below). It’s not clear if this is still OK under Apple’s new rules.

6) Profit Margins May Be Thinner in the Near-Term: Like we said yesterday, freemium games that monetize through in-app payments are a relatively new business model to the iOS platform. Developers that make free games often make money by giving users the choice of either paying directly or getting virtual currency for free if they download another app. These companies get a cut for every download they drive.

In turn, they also use pay-per-install networks to get users. They spend less than what they estimate the lifetime value of the player will be and keep the spread between the two figures.

“As you would expect, we’re all in a pretty big panic,” wrote Alex Weston Lin, who runs business development at a smaller pay-per-install network called G6Pay that has driven about 1 million downloads this spring, on question-and-answer site Quora. “Our biggest publishers are scared because one of their biggest revenue streams is about to diminish over night.”

Allowing users to get rewards for downloads might boost the conversion rate in an app from 5 percent to 30 percent, he said. According to conversations we’ve had with companies that use offer walls, they might earn about 30 percent of their revenue through them with the rest coming from pure in-app purchases or advertising.

At Appcelerate in November of last year, ngmoco:) founder Neil Young shared some figures explaining how the revenues break down for the company’s mobile apps. You can see that install sales represent between 2.5 and 10 cents per daily active user.

If pay-per-install is banned for good, developers will just have to experiment to see what boosts conversion or what other distribution channels make sense. After Facebook started clamping down on cheap virality in October 2009, developers like Zynga eventually found ways to raise average revenue per user despite a stagnant number of daily active users. Mobile is more promising however, with tablet and smartphone penetration accelerating.

7) The reaction in the developer community is still divided: Some developers, like bootstrapped Camera+ maker tap tap tap, applauded the move. They argue that the rankings should authentically reflect quality and that no developer should be allowed to game them or buy rank.

Other developers say that pay-per-install provides them a modicum of predictability — and an assurance that their work will at least be seen — when they launch titles they’ve spent months on.

“Some people say screw the cheaters,” Chung said. “But there are plenty of companies out there like Gameloft and EA, who have the marketing muscle, and are going to spend hundreds of thousands of dollars anyway to get a top rank.”

Chung added that banning PPI doesn’t address the real issue, which is that Apple hasn’t solved the discoverability problem. With 350,000 apps vying for visibility on a 3.5-inch screen, there still isn’t a great answer.

Apple Appears to be Cracking Down on Incentivized Installs

Apple appears to be on a campaign to ban the practice of pay-per-install, where developers offer their apps in other games and pay for downloads when players install their titles for virtual currency. Developers often use this tactic of paying per download to break into the top of the app store charts. (Update: We also have a story here as of April 20 that covers how developers are dealing with the crackdown.)

Developers began receiving rejection notices for dozens of apps late last week and yesterday, saying that they are prohibited from having offer walls. Apple looks like it is changing the interpretation of clause 3.10 in its developer agreement, which says, “Developers who attempt to manipulate or cheat the user reviews or chart ranking in the App Store with fake or paid reviews, or any other inappropriate methods will be removed from the iOS Developer Program.” It’s uncertain what will happen to the thousands of apps that have already been approved and have offer walls.

The move comes on top of a ranking algorithm change we reported yesterday. It looks like Apple is considering extra factors in addition to downloads for the top free app rankings in the store, possibly including active usage and ranking in a category. Apple did not reply to requests for comment or publicly confirm the changes, but the biggest ad networks serving thousands of developers and gaming companies acknowledged that positions in the free rankings had shifted in a very unusual way last week.

Taken together, these decisions are going to change the business models for thousands of apps which rely on pay-per-install either for revenue or getting new users. Apple clearly wants to fix the perception that its top rankings can be gamed and its approach to managing the app store is converging with that of Google’s.

A developer (with their name redacted) passed on this rejection notice from Apple late last evening:

“We found that your app, or its metadata, includes features or content that can have an excessive influence in the listing order or ranking on the App Store, which is not in compliance with the App Store Review Guidelines.

Specifically, your application allows users to download other apps in order to receive in-game currency. Please refer to the attached screenshot for further information. This feature can have an excessive influence in the listing order or ranking on the App Store.

If you only have to revise your metadata – including icons and screenshots – and not your binary, your iTunes Connect Application State will still show as Rejected. However, we don’t require a new binary for metadata issues only. Please visit iTunes Connect, Manage Applications, and revise the appropriate metadata values or settings. When you are finished, please return to the Resolution Center and reply to this notice.”

Separately, Tapjoy, which is the very largest of all the networks and reaches 200 million unique users, passed on this statement to us:

“As you may have heard, a number of applications submitted for update have very recently been rejected from the Apple App Store based on the fact that they were running incentivized app installs within their apps. This is something new from Apple and we, along with every partner we’ve talked to, were unaware of this prior to these notices of rejection. Like many application developers, we have reached out directly to Apple and look forward to clarification.

To be clear, there is no new Apple policy that we are aware of. It seems there may be a new interpretation of the existing 3.10 clause, which is a bit surprising, as Tapjoy, AdMob, iAd, Flurry, W3i and others all power various forms of app install advertising. Many of the brands that promote their apps via Tapjoy also do the same on other major ad networks across the mobile advertiser ecosystem, and all of the apps we promote on iOS are Apple-approved. 3.10 reads:

3.10: Developers who attempt to manipulate or cheat the user reviews or chart ranking in the App Store with fake or paid reviews, or any other inappropriate methods will be removed from the iOS Developer Program

Unfortunately, we believe much of this is caused by misconceptions around pay-per-install, the free-to-play model, cross-app promotion and their collective value to the ecosystem. We believe there are significant benefits to the advertiser (only pay for what you get), the publisher (monetize users who otherwise wouldn’t pay), and perhaps most importantly to the users, who not only get to discover new, exciting applications, but receive what is essentially a coupon for ad-funded virtual currency inside one of their favorite apps. All of this, of course, adds up to value for Apple as well, by creating a viable and thriving ecosystem.

Tapjoy has been and continues to be very supportive of the Apple app ecosystem, and we were not surprised about the Top Free & Paid rankings algorithm changes – we’re all for incremental changes that add to the user experience and keep the environment dynamic. But banning the largest and most effective channel for app installs has a significant and long-term negative impact on the user experience, developer innovation and advertiser utility.

As the market leader in application distribution and monetization of free-to-play games, Tapjoy is currently coordinating with a number of our developer partners, as well as others in the market, to get a clear understanding of the issues and to continue to partner with Apple to meet their needs, along with those of app advertisers, developers and users.”

There are many ways to look at Apple’s decision and its fallout:

1) Apple clearly wants to fix the perception that its top rankings can be gamed. As the iOS ecosystem has matured, it’s become common practice for developers to set aside a paid marketing budget to promote apps, whether that is through classic banner advertising or the pay-per-install model. Pay-per-install caught on in the last year because it’s cheaper compared to a traditional CPM campaign. With limited, visible shelf space in the app store, there is a huge drop-off in downloads between the top-ranked apps and everyone else. A top 10 ranked free app in the U.S. usually sees more than 100,000 downloads a day, with the top three slots getting more than 300,000 downloads a day, according to developers who’ve held those ranks. There is a big winner-take-all effect.

Paying for enough downloads to get into the top echelons of the charts has become a way for developers to at least guarantee some visibility. Networks like Tapjoy and Flurry provide downloads to these developers through offer walls in other games, where players can get virtual currency if they download apps. With tens of millions of downloads happening a day, if apps are good, they stick. If they’re bad, they fall off quickly.

That said, the cost of a campaign has been rising throughout the spring as the market has become more competitive. At the beginning of the year, we were hearing that a campaign to break into the top 25 might cost at least $20,000, but the bottom range rose to about $30,000 last month. Some developers are even paying between $500,000 and $750,000 a month to have a consistently-high ranking. The amount varies widely because a well-designed app will need to spend less as users stick and pass it on. Costs are rising as the app store has simply become more competitive. Incumbents from the social gaming and console worlds are taking the iOS platform more seriously and several mobile game developers have raised funding from top-tier venture capital firms, giving them capital to spend on paid campaigns.

As pay-per-install has become common and Tapjoy’s model has spawned more than a dozen copycats, this issue has been getting more attention in the mainstream tech community. Chris Dixon, a prominent angel investor and co-founder of Hunch, wrote a post two weeks ago pointing out a free night vision app that was highly-ranked but clearly didn’t work. It appeared to have climbed the rankings by frequently releasing updates to keep its user ratings high and doing some pay-per-install. The app was a client of iDev Network, an obscure cross-promotion network that says it’s still in private beta. (Speaking of which, that app has somehow made it to #4 again this morning on the U.S. free app rankings list.)

In general, changing the ranking algorithms to factor in more than downloads is a good thing: apps can now get visibility on what really matters, which is active usage. Downloads are frankly a terrible metric for measuring success but these numbers are often widely cited in the press because they’re the only ones developers are willing to share.

A few of the larger pay-per-install networks had anticipated ranking algorithm changes for some time. Flurry, Tapjoy and W3i began moving toward a full-service model earlier this year where they provide game design, marketing advice or even funding to developers on top of install campaigns.

What wasn’t expected was an outright ban on offer walls.

2) Apple and Google’s approaches to managing their stores are converging: Google’s Android Market rankings have long included factors other than installs. While the company has never shared its ranking algorithm (in the same way it has never revealed its search algorithm), we suspect it factors in criteria like the long install rate, or whether users hold on to the app after downloading it, and the DAU/MAU ratio, which is a measure of stickiness.

In moving beyond downloads, Apple appears to be catching up with Google’s approach and is fixing rankings to better reflect apps that hold onto to users.

In an interview we had at the beginning of the year with Google’s group manager for the Android platform Eric Chu, he expressed distaste for paid user acquisition.

“A developer with deep pockets could just buy a lot of ads to get to the top,” he said in an interview with us. “So we try to use other signals to help us understand, do users actually like the app? We’re trying to fine-tune it to make sure that great apps do well.”

3) This swings power back in favor of more traditional advertising networks like Apple’s iAd and Google’s AdMob: If Apple is banning incentivized installs, then developers will likely return to traditional advertising campaigns and pay for banners or interstitial ads. This coincidentally favors Apple’s own in-house solution, iAd. Classic CPM campaigns can cost an order of magnitude more than pay-per-install for the same result.

4) The big, freemium game developers will have to go back to the drawing board and rewrite their business models: This week’s rejections also mean that the freemium model that’s taken off in the last six months is probably broken as it exists today. In the last year, we’ve seen developers shift from relying on paid apps to building free apps that make money through in-app purchases of virtual currency. Almost half of the top-grossing apps in the U.S. today are free.

One prong of this approach is that developers give users the choice of paying in the app or getting currency for free if they download another app. In turn, many of the top apps also buy downloads, spending less than what they anticipate they’ll earn over the lifetime of the player. They earn the spread between the two figures. While the profit margins from this approach are a closely guarded secret, the rejections almost certainly mean every company using this strategy will have to rethink their model.

5) If Apple is favoring active usage, the free rankings may become less volatile and it may be harder to brand-new apps to break in unless they are hand-selected for featured placement in the store:

If Apple moves more closely to the Google model and factors in active usage or long installs, the rankings may ultimately end up favoring older apps that have large, existing user bases. If you look at the top free apps in the Android Market today, more than half of them are well-known consumer Internet brands like Facebook for Android, Pandora, YouTube, Google Maps, Angry Birds and Adobe’s Flash which squeeze out indie titles.

In spite of its flaws, focusing on recent downloads injects volatility into the rankings, meaning a greater variety of apps get visibility. With a featured section of the store and an app of the week placement, Apple can combat this to an extent. But it also means that the company is consolidating its power to curate the store. Having relationships with employees at the company to get placement is especially important.

6) It’s deja vu all over again for Tapjoy and Superrewards. Lastly, again this shows the risk of building on someone else’s platform. Tapjoy ran into a not too dissimilar situation in 2009 when it was known as Offerpal and was building on the Facebook platform. Run by a different management team then, it caught flack for having poorly-vetted offers. Sensing the financial opportunity of social gaming, Facebook later moved to create its own universal virtual currency Credits and selected a rival Trialpay to the be the offers provider. That may eventually crowd out Tapjoy’s business on the Facebook platform.

Around the same time, Offerpal fortuitously bought a small startup named Tapjoy, which revived the company. It later renamed itself Tapjoy and today the company has a completely different management team and business model. Yet again, it’s running into a situation where the platform is exerting control and its revenue model may be fundamentally challenged. Adknowledge-owned Superrewards also had a similar model on the Facebook platform and has since shifted into pay-per-install this spring.

Developers Say Apple’s New In-App Purchases Rules Probably Won’t Hurt Them Too Much

One of the big changes hidden within this week’s update of Apple’s iOS 4.3 were new restrictions around in-app purchases.

They’re aimed at preventing children from unwittingly racking up hundreds of dollars in charges while using games that monetize with virtual currency. A story by Cecilia Kang in The Washington Post last month sparked the controversy when she reported that children playing Pocket Gems’ Tap Zoo and Capcom Mobile’s Smurfs Village were buying the games’ virtual currencies in near $100 increments without knowing it was real money.

Apple’s changes mean that when a user opens an app and wants to make to make an in-app purchase, they’ll need to re-enter their password. When they do, it will trigger a 15-minute window for additional in-app purchases, according to what Apple told GigaOm. This isn’t quite as extreme as requiring a password every single time a user wants to make a purchase, but it at least means that parents will be able to control which apps their children are making purchases with.

“With iOS 4.3, in addition to a password being required to purchase an app on the App Store, a reentry of your password is now required when making an in-app purchase,” Apple spokesperson Trudy Miller told The Washington Post. Apple did not return requests for comment.

While this might lead to a minor loss of revenue in the short-term, the feedback we’ve heard from developers suggests that this is a good move in the long-run. The revenue loss from having parents not trust their children with mobile apps is worse than a password permission change.

“This is an important trust issue between Apple and their iPhone consumers and Apple has done the right thing,” said Peter Farago, Flurry’s vice president of marketing. “I believe that no company selling virtual goods is in favor of allowing accidental purchases to continue if it ultimately aggravates consumers.”

A few developers have tried to change pro-actively or do damage control. Before The Washington Post story blew up the issue, Smurfs’ Village maker Capcom Mobile had already put more explicit warnings in its Smurfberry store. But like many other developers over the last several months, it also raised the highest price bracket for its in-game virtual currency to near $100. Another developer Recharge Studios, which is a wholly-owned subsidiary of pay-per-install network W3i, made its refund process for inadvertent purchases more transparent and pledged to lower its price points.

As Apple continues to set industry standards, developers expect that other platforms like Android and Windows Phone 7 will likely adopt similar practices.

“We anticipate that over the medium term, Android will also provide similar protections to ensure all demographics can enjoy the latest generation of freemium games,” said Niccolo DeMasi, the chief executive of Glu Mobile, the publicly-traded maker of popular apps like Gun Bros and Deer Hunter.

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