Apple’s $500MM bet on Arcade and the future of mobile gaming

At Apple’s Show time event last month, amongst a slew of new services and product announcements including Apple News+, a credit card, and Apple TV+, Apple introduced a cross-platform games subscription service called Apple Arcade. When it launches later this year, Apple Arcade will offer users unlimited access to a selection of games that are void of advertisements or in-app purchases via a special tab within iTunes.

And this past weekend, some more information around Apple Arcade surfaced: the company has allegedly earmarked somewhere in the ballpark of $500MM to finance the development of exclusive titles for Apple Arcade. Such an investment seems appropriately sized for analyst expectations around the service’s revenue potential: according to the Financial Times (via HSBC), Apple Arcade might eclipse revenue generated by both Apple News+ and TV+ by 2022.

The goal behind the basket of new non-hardware revenue streams announced at the Show Time event is fairly obvious: to offset slowing iPhone sales as smartphone ownership reaches near total penetration. Apple has seen its services revenue increase fairly consistently since Phil Schiller was put in charge of the App Store, and his focus has primarily been applied to subscriptions, App Store editorial curation, and App Store Ads. And under Schiller’s leadership, the Top Grossing charts have thawed and per-user monetization has increased remarkably: from $58 per iPhone in 2017 to $79 in 2018, with $44 of that coming from games revenues in 2018.

But the aforementioned smartphone penetration level only explains slowing hardware sales, and increased per-user yearly monetization hides another phenomenon: app downloads have peaked and actually declined in Q1 2019 (of course, that discovery on mobile is problematic isn’t a new notion, and popular wisdom has maintained that the mobile app economy is winner takes all since at least 2014). An Arcade-type product certainly makes sense within the context of Apple’s push to subscriptions on mobile and when considering that app downloads are slowing: the biggest developers with the most established momentum are the beneficiaries of increased per-user monetization, but that’s not a good thing from Apple’s perspective. It’s not hard to interpret the Apple Arcade as an attempt to re-balance the iOS ecosystem away from free-to-play games.

Why would Apple want to do that? There are a few possible explanations. The most obvious and practical is that, if Apple structures its Arcade content partnerships like its News+ partnerships, it will keep 50% of subscription revenues (versus the 30% and 15% it keeps now, depending on the age of the subscription). A second plausible explanation is that the winner-takes-all nature of the freemium economy on iOS punishes radical gameplay experimentation and drives game concepts, mechanics, and visuals into a narrow band of choices that drive resonance in mobile advertisements (as in the MAYA principal of industrial design: design should be advanced enough to be novel and interesting but not so advanced that users can’t grasp the functionality).

The size of the mobile advertising market for gaming might be as much as $100BN annually: without a second marketplace to sell their wares, smaller game developers have to make conservative, incrementally innovative design choices in order to be able to distribute their games versus deep-pocketed advertisers. Apple Arcade provides a pressure valve on that ultra-competitive marketplace, creating a home for wholly new, experimental game concepts.

That’s where the funding comes in: the small indie developers that Apple announced that it is working with on the Arcade can create titles that wouldn’t otherwise be commercially viable on iOS without risking their own capital on the projects. Apple is purportedly prepared to provide studios with between $1 and $3MM in development funding for titles that will be exclusive to its platform; that’s another win for Apple, giving it exclusive claim on those games and potentially being a magnetic factor for its hardware (although it seems unlikely that the Arcade on its own could catalyze increased hardware sales). Those indie developers, many of which have defected from mobile and have moved to Steam and, more recently, Epic’s new store, might be tempted enough by Apple’s Arcade funding to return.

So what impact will Arcade have on the mobile gaming industry? Realistically, Arcade won’t siphon a meaningful number of users out of the free-to-play ecosystem — analysts expect the Arcade price to come in around $9.99 / month, which doesn’t prohibit playing both Arcade games and some selection of preferred free-to-play games (at the high end of the LTV distribution for most free-to-play games, even the $120 that Arcade users will pay for yearly access is relatively insignificant). But it’s not unthinkable that Arcade introduces some avowed non-gamers, turned off by what they deem to be predatory monetization tactics in free-to-play (deserved or not), into mobile gaming, ultimately leading them to install free-to-play games. That’d be a welcome development for all game developers: a gentle introductory step into mobile gaming with simple, ad- and IAP-free arcade-style games that opens the door to their more complex free-to-play counterparts.