As job losses continue to mount — 22 million people in the United States have filed for unemployment since the COVID pandemic began, and the relative numbers from some other countries are even more staggering — the broader context of how COVID will impact the global economy becomes more important than whatever short-term impacts the quarantine had on consumer spending in some verticals.
One industry that I think will make for a fascinating case study during the coming recession is mobile gaming. Gaming is often thought of as recession proof; as I wrote in How has the Coronavirus impacted the App Economy?, the performance of public video gaming companies during the global financial crisis of 2008-2010 was mixed, generating record revenues in 2008 followed by a sharp decrease in 2009 (overall, revenues were up in 2010 versus 2008). Interestingly, several public gaming company stocks saw steep price decreases over the course of the global financial crisis that persisted well into 2011:
Putting aside the question of whether gaming is recession-proof or not, it’s important to draw the distinction between console and handheld video gaming and mobile gaming. Mobile gaming is dominated by the freemium model, and as I pointed out in my last piece related to the COVID pandemic, neither mobile gaming nor the freemium business model were particularly popular in Western markets during the last global recession: the App Store was only launched in 2008 and its composition didn’t begin to skew towards freemium apps until 2010, although FarmVille was released on Facebook Canvas in 2009. The App Economy is largely untested by economic downturns: no one really knows what happens to app engagement and monetization during a recession.
Many commentators point to recent spikes in downloads and engagement as indicators that the App Economy is set to benefit from recessionary stress: in mid-March, Verizon revealed that mobile game engagement had increased by 75% from pre-Covid levels, and video chat apps like Houseparty, Marco Polo, Bunch, etc. are experiencing massive waves of interest (Houseparty specifically saw 50MM installs over the course of March). But it seems misguided to take these signals as proof of the App Economy’s fundamental hardiness against a protracted economic downturn: the quarantine economy is structurally different than the recession that it created, even though those two things overlapped chronologically for a period of time.
So when people talk about mobile gaming’s perceived resiliency to recessions, they tend to conflate two ideas: that gaming is seen as recession proof and that the broader App Economy has seen engagement increases during the quarantine. In order to consider how the mobile gaming vertical will fare during a recession, I think it’s important to 1) parse apart differences in monetization within the App Economy between the quarantine and the recession and 2) parse apart the differences between the console / handheld gaming and mobile gaming verticals.
With respect to monetization, several data points imply a mild to severe retraction in consumer spending on mobile. One of these comes from a recent report published by MoPub which revealed nearly universal decreases in eCPMs across both Rewarded Video and Fullscreen ad placements:
As I pointed out in my Advertising during a recession presentation, ad spend decreased sharply during the global financial crisis, to a greater extent than consumer spend did. And while for some of the geographies above, requests per device increased more than eCPM decreased, that isn’t true for the United States, which, according to App Annie, is the App Economy’s largest market in terms of app installs and its second largest in terms of revenue:
Ad spend is a leading indicator: engagement and organic installs might surge during a quarantine, but reduced ad spend indicates that consumer spend has decreased, is expected to decrease in the future, or both. And while massive hit games like Fortnite have seen revenue increase since the beginning of 2020, this is not universally true for all games or all apps. Per Sensor Tower’s revenue estimates, compare Fortnite’s COVID revenue trajectory to Candy Crush Saga’s, which is down, and to Toon Blast’s, which is flat:
The broader App Economy outside of gaming has also seen varying performance during COVID: both Pandora and Headspace are seeing downward revenue trajectories from the beginning of the year:
And, of course, some other non-gaming apps, such as Twitch, have seen incredible revenue growth since the beginning of the year:
The point is, despite the sensational headlines, the App Economy at large clearly hasn’t seen a broadly rising revenue tide as a result of COVID, and neither has mobile gaming as a category: some apps have benefited and some haven’t. As advertising spend contracts, the apps that have deliberately slowed their marketing-driven growth will see revenues decline even further, and as the quarantine ends, the apps that have enjoyed revenue increases via organic discovery might likewise see revenues decrease.
Which leads to the distinction between mobile gaming and traditional console and handhold video games. Accepting the premise that traditional video gaming is recession resistant, is it safe to assume that mobile games are similarly safeguarded? I think some fundamental differences between the two categories make it hard to come to that conclusion.
Within the entertainment subset of consumer spending, video gaming is a substitute good: on a per-hour basis, video games are cheaper than other forms of entertainment like the cinema, theme parks, etc. A $60 video came could potentially provide entertainment for hundreds of hours; it’s a good substitute for other, more expensive forms of entertainment during a downturn. Video gaming also benefits during recessions because consumers tend to re-allocate their budgets to leisure spending so as to bolster their spirits.
Luxury goods — broadly defined as goods for which demand is driven by desire, not need, and thus increases with income — tend to see consumption decreases during recessions that are more extreme than that of general consumer spending. This paper by Ait-Sahalia et al explores the relationship between luxury goods sales and the equity premium, or the difference in performance between equities and risk-free bonds (basically: what happens to luxury goods consumption when equity markets are down, as in recessions):
These findings support the notion that luxury goods suffer disproportionately from recessions, and this explains why traditional console video games might be recession resistant: they’re a cheaper alternative to other forms of entertainment on a per-hour basis.
But what about mobile games? Mobile games are mostly free: they are the ultimate discount entertainment. But my belief is that, while free-to-play games may also serve as a substitute good — to all forms of entertainment, including traditional console video games — the digital products purchased via IAPs in free-to-play games need to be classified independently from the games in which they exist. The decision a consumer makes to download a free game is totally separate from the decision they make to purchase a digital good in that game. Putting aside design factors (“pay to win,” etc.), it’s tautologically true that free-to-play games can be played for free, and so IAPs have to been as luxury goods: characterized by desire and convenience, with demand tracking income.
Connecting this line of thought to the broader App Economy: given a decrease in ad spend, if IAPs do behave like luxury goods, then it stands to reason that mobile games revenue across the board could decline (or see a slowdown in growth) even as engagement increases: more people playing mobile games but producing lower average revenue per user (ARPU) and potentially lower overall revenue.
The App Economy as a whole and mobile gaming as a category may be experiencing increased engagement, but increases in revenue are not universally distributed: some apps and games are suffering during COVID, and the resultant recession has only really just begun. It can’t be taken for granted that mobile gaming performs as the traditional video games sector does during a recession. Despite the bravado and the eye-popping metrics being released to the press, some mobile games have already witnessed a revenue decline as a result of COVID; if mobile game IAPs fit the profile of luxury goods, there could be further declines to come.