In-App Purchase Bundling: Door To Mass Market Or App Economy Devaluation?

The App Economy is built upon shaky foundations. Too few apps account for too much of the total app revenue. Over three quarters of app revenue is earned via in-app purchase (IAP). Furthermore, high spending consumers – whales, bring in most of the IAP revenue. The net result is that the app economy is largely dependent on a relatively small amount of high spenders. Could telcos bundling IAP credits into cell phone tariffs be a way to both broaden the market and drive revenues?

IAP Buyers Are A Distinct Minority

A minority of game players spends money in apps. For example just 2% of King’s 365 million users actually pay. As a result of this dynamic the underlying dynamics of mobile games are often threatened: those gamers that do pay get a significant competitive advantage over the majority who play for free, which matters when 98% of your gamers play for free.

Among those free users there are additional IAP prospects who have not yet converted because parting with extra cash is too much of a barrier to try the IAP perks. Telcos and tech giants have an opportunity to address this market by bundling in app purchase credit with their regular product proposition. For example, buying an iPhone will earn you x in-app dollars for your favorite King Game. Similarly telcos can bundle/give away in-app credit with top ups and monthly phone tariffs.

Bundling will disrupt the IAP space

Telcos and tech giants boast already sizeable and growing gamer communities in their customer base. Offering them IAP perks, as a bonus with the core product purchase is a logical future strategy move. Bundling IAP will bring the proposition closer to mass market and therefore in theory solidify the app economy foundations. But new bundle customers will increase the pool of people using IAP perks, making in-app spenders and IAP products less exclusive. Which means less cool to buy.

Effects vary across the IAP spending spectrum

If the added value of an IAP is right, part of the bundle-added consumers will be satisfied with IAP enough to continue spending on their own. This will essentially act as a ‘free trial of in-app purchasing’ and will unlock significant revenue potential.

But the more people that try IAP, the smaller each player’s competitive advantage gain. This, coupled with the sense of ‘I can now get IAP for free elsewhere’ will discourage a long tail of cautious spenders from buying at original IAP prices. On the other hand, large spenders who never really cared about the amount they spent will likely end up spending more in order to maintain their relative competitive advantage.

A cautionary tale from the music industry

When bundling music became popular, improved reach sounded like a convincing argument. But as it turns out, making any product a ‘free giveaway’ devalues it significantly. Getting a 9.99 music subscription for free as part a telco bill for 12 or 18 months had he effect of educating consumers that the most valuable music product should actually be free. The app economy is dependent on converting even smaller percentages than the music industry and so must be careful to avoid driving that share further down by repeating the music industry’s mistakes.