One of the principal elements supporting my thesis around the second act of the mobile app economy is that new business models have invigorated commercial activity on mobile. One of these business models is the subscription mechanic: after Apple and Google reduced their platform fees to 15% on in-app subscriptions that users have maintained for more than a year, the number of apps offering subscriptions exploded. New categories and verticals emerged on mobile as the viability of subscription revenue created monetization opportunities that simply aren’t possible with the one-off in-app purchase mechanic.
Consider how important it is that, as I write this, more apps in the Top 10 Grossing list monetize exclusively through subscriptions than don’t offer any subscriptions:
Compare this to an article I wrote in 2015, The winner-takes-all nature of the app economy in one graphic, in which I noted that seven of the ten top grossing apps on December 26, 2014 were also among the top ten on December 26, 2013 — and all but two of those apps were games (none of which featured subscriptions at the time):
What can be taken away from this? For one, the top ten grossing chart has become more diverse as it has thawed: subscriptions are perfectly functional within games, but they unlock massive monetization potential in a range of other verticals (dating, audio streaming, and video streaming are well represented in the top 10 now). And while the subscription mechanic can’t take all of the credit for this development — other macro factors such as increased access to fast mobile data, better hardware that can accommodate mobile and audio streaming, and general consumer comfort with consuming content on mobile certainly allowed for this situation to manifest — it was probably the single most effective way to unlock value from consumers who are increasingly ready to shift everyday habits onto mobile.
And it’s possible that the power of IAP-based monetization could be eroded as the “loot box” mechanic comes under increasing regulatory scrutiny. In May, Congressman Josh Hawley introduced legislation that would ban the use of what he called “manipulative” design features (of which loot boxes were specifically called out) in games targeted towards audiences under the age of 18. And back in January, after fighting it for months, EA capitulated to Belgium’s ban on loot box mechanics and removed its “FIFA Points” product from FIFA for players in the country. One of EA’s top lawyers recently appeared before a House of Commons committee in the UK and described the use of loot boxes in its games as “surprise mechanics,” as the British parliament explores a similar ban on loot boxes, which it has compared to unregulated gambling.
If loot boxes and other gacha monetization mechanics are regulated out of existence in Western countries, in-app purchase revenue for mobile gaming — which is by far the largest category by revenue on mobile — could evaporate, leading mobile games developers to further explore subscriptions as a primary revenue stream. Although many popular mobile games support subscription purchases now, some developers are reticent to shift their games’ economies towards subscriptions because subscriptions don’t support the magnitude of spending that leads to long-tail user monetization distributions (ie. they can’t create “whales”).
But in the modern mobile economy, subscriptions are attractive to developers for other reasons:
- Recurring subscription revenue is “better” than one-off IAP revenue, which is far more difficult to model into LTV and marketing ROAS projections;
- Subscriptions tend to be introduced early in the user lifecycle, meaning that very strong signals can be quickly sent back to the algorithmic, event-driven campaigns that power most mobile user acquisition;
- Extending the above, the velocity of marketing spend is much higher for subscription-based apps because subscriptions are offered early in the user experience, meaning recoup times are lower and many more users can be acquired in the same amount of time relative to LTV vs. CPI-based marketing campaigns (which tend to recoup marketing spend over relatively longer timelines).
Of course, one other attractive attribute of subscriptions in mobile apps is also the greatest risk to the format: developers can fulfill subscriptions out-of-app and thus bypass platform fees. I have written before about the difficult position that Apple finds itself in as Spotify and Netflix have successfully maneuvered their subscription processing beyond the reach of Apple and Google’s platform fee collection (with Apple claiming last week that it collects a platform fee on just 1% of Spotify’s iOS users), but it seems unlikely that many other companies could replicate that strategy. To repurpose the famous J. Paul Getty quote, if you have 100 users and try to move subscriptions off of Apple, that’s your problem. If you have 100 million users and try to move subscriptions off of Apple, that’s Apple’s problem.
In other words: Apple and Google can’t afford to lose a Netflix or a Spotify from their platforms. If Spotify removed its mobile app from the App Store completely as a result of its feud with Apple and shifted users into an HTML5, browser-based player, it could set off a chain reaction that might seriously threaten Apple’s increasingly-important services business (and, longer term, its hardware business).
Apple needs to keep the largest mobile developers happy, even if they breach terms that are enforced on much smaller developers. This is why Apple seems to be investing energy into making subscriptions even more attractive to developers: if it can’t punish the largest developers for flaunting its rules, it needs to entice slightly smaller developers to comply with them via tools and features that make it sensible to stay within Apple’s payments system. And because of this dynamic as well as the aforementioned macro trends and regulatory risks, I believe that subscriptions will continue to gain traction as the monetization method of choice for mobile developers.