"Freemium" Apps And Their Strangely Effective Business Model

Tickers in this article: EA KING ATVI

By Robbie Citrino for Kapitall.

The mobile gaming market, according to The New York Times, reached $9.5 billion in 2014, with a whopping 95% of revenue coming from purchases made within the app. That’s a lot of extra lives. 

The "freemium" model, where users download the apps for free and pay for things like power-ups in the app, has paid off for companies like King (KING). King, maker of the most downloaded app of 2013, Candy Crush, is up 6.5% since its IPO in March, drawing virtually all of its revenue from in-app purchases. And with $568 million in 2013 profit, it seems to be paying off.

Electronic Arts (EA) operates its mobile gaming under a similar model, allowing free downloads for some games while charging $1 for others, and, in both cases, relying on in-app purchases and advertisements to add to their top line. According to their 10-K, mobile gaming revenue increased 30% in 2013, helping them offset decreasing console sales and sending the stock up over 300% in the past two years.

The "freemium" model’s triumph, however, could link to game developers’ downfall. As more users rely upon mobile devices to fill their time, companies that rely heavily upon console and PC users, like Ubisoft (UBSFY) , Activision Blizzard (ATVI), and Nintendo (NTDOY) , could see huge drops in revenue in the coming years.

Can the two models of gaming coexist, or will one crush the other?

Click on the interactive chart to view data over time. 

 

1. Activision Blizzard, Inc. (ATVI, Earnings, Analysts, Financials): Publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide. Market cap at $16.23B, most recent closing price at $22.67.

Sales declined by 16.20% quarter-over-quarter.