Posted by: seanmalstrom | March 27, 2015

App software creators make no money

This is related to Nintendo because of Iwata’s comments about digital prices on software and why Nintendo wants to keep software prices up. Many think Nintendo is EEEEVIL for doing this. But we need to ask a good and important question: why did digital prices drop in the first place?

Take a look:

After years of operating under these conditions, consumers today perceive software to be worth effectively nothing. According to an anonymous developer, “if you’re trying to sell to the mass market for more than $2.99, you might as well charge $1M.”

Recent revelations show that the situation has gotten so bad that today there are only approximately 3000 apps profitable enough to support a median income of $50k for their developer. It is also important to note that not all apps are built by one developer, many work as a team. So it follows that there are many fewer than 3000 developers sustainably doing independent development.

It should also be added that the income is not stable. Even if you were successful, this $50K income only lasts a little while.

According to reporting, “1.6 percent of developers earn more than the other 98.4 percent combined. And the bottom 47 percent of engineers earn less than $100 per month.” Yet somehow, independent app development has often been described as a ‘gold rush’ despite it being quietly understood by developers, even as early as 2009, that this was hardly the case.

This is the reality of the mobile market. Stupid investors think there exists ‘fortunes’ to be made if only Nintendo or someone else made mobile games. But many people bought into this and now their games make nothing.

But is the drop of digital prices to next to nothing the result of market forces? Yes and no. It is not the result of the software market forces but the hardware market forces. And the biggest market force in hardware is Apple.

According to an anonymous source: “Apple optimizes for one-hit wonders. Nail it in 1.0, get featured, then throw it away and build a new app.”

In the words of analyst Ben Thompson of Stratechery, Apple has ‘commoditized their complements’:

Apple makes money on hardware. It’s in their interest that said hardware be sold for as much of a premium as the market will bear. However, it’s equally in their interest that the complements to that hardware are sold as cheaply as possible, and are preferably free.

Apple is a hardware company, not a software company. Apple is even giving away their own software such as Notes. People may think, “Wow! Apple is so wonderful! They are giving us free software!” But Apple does this so it can charge a premium profit on their hardware.

This is a reversal of the 1990s. A home PC had shit hardware where you paid for the software of Windows and other programs (while the quality of Windows may be suspect, the quality of 1990s PC gaming is not. In the 2010s, a mobile PC (smartphone/tablet) is quality hardware (since it is small, mobile, and integrated) with shit software (free apps).

This is why Nintendo views mobile gaming more as an ‘IP awareness’ program than as a profit making program. Make no mistake, Nintendo wants their mobile games to be profitable. However, Nintendo wants EVERYTHING they do to be profitable. This is how you make a sustainable company.

Nintendo’s business model has the bulk profit come from the software. The hardware is somewhat profitable or even cost at all. The software is where they make their money. They want you to buy the hardware and then buy all their games.

Interestingly, Malstrom wants to be able to buy their hardware and a desire to buy all their games. Nintendo and Malstrom want the same thing, yet it is amazing how at odds we get. They do not want to make software I want to buy (or you, the beautiful reader).

Looking back, I believe the Wii with the Wii Sports and Wii Fit were all actually geared to turn people not into ‘gamers’ but into ‘gamecube-esque gamers’. Nintendo wasn’t trying to spread gaming but specifically train new consumers to play the games they want to make (which would always be 3d Mario, Aonuma Zelda, and so on).

I believe the reason why everyone looks the other way about paying so much for hardware while expecting software to be free is because the hardware has a physical presence while software does not. I do not want to pay for something I cannot hold or touch. People pay for a tactile experience. There is a reason why there are so many unboxing videos.

Here is an interesting thought. What if Nintendo put out a $1000 console where all its games on it are ‘free’ or extremely cheap? Would it sell? In this current market environment, it just might.

I prefer cheap hardware and expensive software. My favorite bundle is the game console, two controllers, light gun, and Super Mario Brothers and Duck Hunt. Even to this day, I will pay $50 for cartridge games. Much of the reason why is because they are probably still in the cartridge. There is nothing like actually having that tactile experience. You can’t get it as much with discs and cannot get it all with digital downloads.

The 1990s to 2010s showed that the market changes its mind. Today, it may think paying premium for hardware and expecting software to be pennies is the norm. Tomorrow, it could be very different. Changing your company around to this market mood is not advisable.


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