Some of you remember 2010 when games on Facebook were booming! That’s when many of us started our careers in free-to-play games. Me included. And if you were in the heydays of Facebook games, you will also remember how the party ended abruptly in 2012.

Facebook used games for growth and discarded them quickly as it didn’t need them anymore. The platform killed the booming gaming business by handicapping the distribution channels used to grow our games.

I believe that mobile games could be facing the same deliberate death-by-a-platform as games Facebook suffered a decade ago. We’re like frogs being slowly boiled alive. The temperature is gradually increasing due to all the privacy changes. But the changes are happening relatively slowly. So, we’re not jumping out of the water to save ourselves from impending death.

In this essay, I will provide you with an overview of the market, discuss the role of apps versus games, the major changes impacting the games business in 2024, and conclude with what may be the future of this rather negative scenario.

Just remember one thing: Even though Facebook pulled the plug on games, the gaming business rose to unexpected new heights on a new platform, which was mobile. I believe the same will happen again because the appetite for games has never been as vast as it is today. No matter what happens with mobile games, will find, and invest in new distribution platforms to entertain billions around the world.

Data.ai’s State of Mobile Gaming reports is a must-read for everyone in or with mobile games. So make sure to forward it inside your company. I used it to draw many of my hypotheses. Will you arrive at the same?

The Mobile Games Market has Matured

The market returned to growth. Yet the size of the market in terms of revenue is smaller than in 2021.

Game downloads were up by 4% and IAP (in-app purchase) revenue was also up 3%. This may be a reason to think that the hard times are over. But I don’t consider this as a sign of turnaround.

Downloads have pretty much always been growing on mobile. They grew when the lockdowns were over and even when the privacy shakedown started. So, it’s not that crucial of a signal on its own for the overall market health.

The difference in today’s growth of downloads is that it’s up single digits compared to the year-over-year double-digit growth the market enjoyed for the past decade. In other words, the mobile market has finally matured with some key markets, like the US, experiencing a decline in game downloads.

The most mature markets are showing decline in downloads.

The growth of IAP revenue is a positive sign. However, a more careful analysis shows that if we remove Monopoly Go and Royal Match from the equation, the market looks even flatter in terms of revenue growth. And that again is a troublesome turn of events after the double-digit growth of the past years.

You should also keep in mind that the revenues are not inflation-adjusted. In previous years inflation was around 2%. But with inflation reaching an average of 10% in several key countries during 2023, the growth of the revenue would have to at least match that of the inflation.

At the Istanbul Gaming Summit, 23 Google’s Alpagut Cilingir presented, among others, the portion of ad revenue per genre. Watch the full presentation and mark your calendar for the 7th of March for the Think Games Istanbul event that will also be streamed.

On the other hand, the revenue numbers don’t show IAA (in-app ad) revenues, which with several genres play a massive role. Nor are the web shop revenues shown in the graphs (only our partners at Xsolla know this).

Yet what we know is that prominent mid-core and casino publishers have been moving their payers off the platform to not only get away from at this point, an arguably unjustified 30% platform fee but also to own the customer relationship.

Webshops are rapidly becoming a meaningful source of revenue. According to our sources (management of top-grossing franchises), up to half of the revenue of a game can these days come through a webshop.

The games on top-grossing charts make up 64% of all IAP revenues. This is in line with data from past years, unlike the declining trend of games that generate more than $10M in annual revenue. This is another metric indicating that not everything is right with the health of the mobile gaming industry.

Many consider $10M in annual revenue a minimum amount for a free-to-play mobile gaming studio that has even the slightest potential to become a meaningful player in the industry someday. You can be successful with less. And many indies are. But then you are, as Mr. Kress would say, mice nuts.

The stats above paint a picture of a matured industry that is having a hard time finding growth after gradually tighter privacy-infused restrictions on marketing. But nowhere is the impact of these restrictions as visible as in new game launches.

As an industry, we like to complain that there are too many games with constantly more being launched. This makes us feel better if our games are not amongst those that players are playing. I know I’ve used this excuse more than once…

There are less games in the App Store than there was 10 years ago. And less new games are launched since the in-app purchases became possible.

The hard truth nevertheless is that the number of games on iOS has been decreasing since 2016 every year. The number of games we have in the App Store is the same as it was back in 2013. That’s when Clash of Clans launched for context.

And when it comes to new games, there are 30% fewer new games launched today than before in-app purchases were even introduced. That’s a disheartening fact.

Apps Became a Threat to Games

The games industry has long considered itself a recession-proof business. The very logical justification for this was that games offer the most value for the least amount of Dollars. The proof was the market, as the games business soared in 2009, despite the subprime mortgage crisis wreaking havoc on the economies around the world.

Gaming is a logical cost efficient choice for most entertainment per dollar. Here’s what’s missing from the list: social media and streaming. Time spent on YouTube, TikTok, Instagram, Snap, and Twitch has grown exponentially and is eating away from other sources of entertainment. Gaming included.

Yet what was reality 15 years ago, doesn’t apply today because the entertainment landscape has changed dramatically. Over a decade ago premium games competed against movie theaters and amusement parks. Today not only is the game industry shattered in different business models and platforms but it’s also competing against entertainment that didn’t exist when Lehman Brothers tumbled into the abyss.

Today the games industry is comprised of PC, console, and mobile games and further breaks down into three competing business models on each of the platforms: paid, free-to-play, and subscriptions. This leads to the users having more games at their fingertips than they have time to play.

Backlogged Steam catalogs, ever-growing subscription catalogs, new blockbuster titles, and evergreen free-to-play franchises are all competing for the same things - players’ time and money.

And if the cutthroat competition for time and money against other games and gaming platforms was all we had to deal with, we’d be ok. But sadly, it’s not.

Before and during their playtime, players are on their phones. Messaging, watching videos, listening to podcasts, finding their next mate, or just doom-scrolling their social media feeds.

The result is that it is apps that are proving to be recession-proof. Not games.

With the current speed, apps will be the dominant source of revenue on mobile, not games as it was since the inception of the app stores.
Source: Data.ai

As the consumer’s disposable inccome decreases, so does spending on games. Yet app revenues keep on climbing showing no elasticity of demand.
Source: Data.ai State of the Industry Report

To summarize it all, games are being pushed by Apps on two fronts:

1. As consumers' disposable income decreases, they prioritize spending on apps that for many have become essential utility services instead of just entertainment products. Spotify, Tinder, and Netflix subscriptions are almost inelastic. Unlike purchasing battle passes in your favorite shooter.

2. The real squeeze is time as consumers open their TikTok and YouTube apps rather than fire up games. Games are being left at the bottom of users' waterfall for killing time. Today we don’t have the full force of ad channels to combat this trend with creativity, targeting, and advertising budgets.

The Worst-Case Scenario for Mobile Games

Mobile gaming as we know it can die if the following three steps materialize:

1. Consumer spending on apps is growing faster than spending on mobile games.

2. Platforms see that apps are their new growth engine. Not games.

3. Platforms pull the plug on gaming by killing our distribution channels.

Let’s be clear. Apple’s App Store and Google Play are not gaming platforms. They don’t frankly need games.

In Apple’s case, they’ve already stopped tolerating gaming by implementing ever stricter privacy policies. I believe they simply got enough of where the game industry was heading with our predatory monetization of core games and the throwaway ad-ridden hypercasual games. Not to mention how we offended Apple by yanking the marketing of games from the App Store app.

So, the worst-case scenario is what we saw Facebook do to gaming in 2012. They killed the virality from games. Just half a year later, the thriving Facebook gaming industry that gave birth to the likes of Zynga, was dead. I was there. We jumped to mobile games like they were our life rafts.

The Worst is Yet to Come? Or Will All Be Good Again?

To conclude, we’re in a very mature market and we really haven’t seen it all yet. First, there is the privacy clamp down. Then rolled the ad monetization changes.

Since the beginning of the year, ad monetization has been under siege as Google Ads plans to complete the transition away from waterfall 'as early as January 2024. This could mean that whatever historical data you have is off and you need to reassess your partners and then update your LTV calculations. In other words, this could bring down spending on marketing until you see what your in-app ad revenue will be.

“When Apple’s ATT Framework was first released, it was unclear whether Apple would actually enforce its new regulations or use them as an opportunity to highlight itself as a user privacy advocate. But, the continued drumbeat of tightening data privacy restrictions — like Apple’s Privacy Nutrition Labels — show that 2024 could very well be the year when advertisers will have to rely entirely on non-deterministic attribution. This will elevate the importance of probabilistic data and machine learning algorithms that can identify patterns and predict which users are most likely to convert without direct attribution.”
Levi Matkins, CEO, LifeStreet

In parallel, new consent requirements are launching this quarter, which affects both Google publisher products and Google Ads demand. And we have the looming fingerprinting removal that will further hurt performance marketing making it even harder to launch new games.

On top of all, big advertising budgets are harder to come by, payback periods are shorter, and ROAS targets are increasing.

On the bright side, we are beginning to yield the power of AI both in product and marketing. In theory, AI promises rapid dynamic personalization for users on the content side. When it comes to marketing, it’s not only the ultra-fast creation of ads but also the dynamic optimization of ad placements that can have great effects on the return of ad spend (ROAS).

“Generative AI allows for scaling cost-effectively, giving you more options to test creatives and copy to segment to your audiences. This can create cost-saving efficiencies when trying to foster greater personalization and robust testing. However, generative AI may not be as helpful with creatives for brands with strict guidelines.”
– Lexi Sydow, Director, Corporate Marketing & Insights, data.ai

Personally, I believe that the biggest mistake is to continue operating like we did three years ago hoping that magically things will just be like we want them to be.

Companies that embrace change are the future winners. This means not only spearheading the use of AI to achieve competitive advantage on product and growth sides. But it also means the willingness to experiment with new channels and measurement tools that show incremental growth across mixed media. Finally, at the center of it all should be an understanding of your current and future players on a behavioral level. That should be the foundation of your product strategy in 2024 and beyond.