Apple: the new 1st party

Apple is now a de facto 1st party games publisher. While it is not the same kind of publisher as Nintendo, Sony or Microsoft, it is time we recognize it for what it is. Last week at the iPhone OS event at Apple headquarters, Apple CEO Steve Jobs reported that to date the company has sold 50 million iPhones and 35 million iPod Touches. Given that some of those sales were upgrades of earlier versions to later versions, and the fact that a small percentage of the audience actually owns both an iPhone and an iPod Touch, the total install base in terms of people is probably a little less than 85 million. Even if we are over conservative and peg the estimate at 80 million, that is still at least a highly respectable and at most a ginormous market.

But comparing Apple to the traditional "Big Three" 1st parties isn't exactly apples to apples. (Yes, I realize the pun.) iPhone games are largely lighter fare limited in features, depth, interface and graphics. You can't effectively play World of Warcraft, Mario or a Call of Duty game the way you can on a PC, Wii or 360/PS3 due to the interface, screen size and slowlness of 3G compared to a hardline. (WiFi is okay but not always availble to everyone).
From a financial perspective, despite having 80 to 85 million consumers as an audience, iPhone games simply don't generate upside scale the way a major blockbuster game does on a traditional platform.

However, iPhone games don't cost nearly as much to produce. That may change to a degree with the iPad, but until millions of gamers start buying the iPad, don't expect it to seriously increase the average cost of the collective iPhone/iPad game development cycle.

Take the Call of Duty: Zombies app on the iPhone. This is an excellent extension of the Call of Duty brand to another platform that in reality did not cannibalize sales of Modern Warfare 2. Unlike most non-free apps that sell in the $1 to $2 range, Zombies was priced at $9.99 since releasing on Nov 16, 2009 and for several months has been one of the most successful iPhone games.

Just how successful was this game? In a recent survey I worked on with DFC Intelligence we asked US, UK and EU computer and console gamers about game ownership and crossover with iPhones and specific apps. We found that 31% owned an iPhone or iPod Touch. (We'll just group them as "iPhone" from here.) Of those, 24% indicated they had purchased the Call of Duty: Zombies app. Since MW2 has sold roughly 15 million units world wide by now (quick, is it already up to 20 million?) let's take pause to do some estimates.

Pretend 31% of Modern Warfare 2 owners actually have an iPhone. (Seriously?) That's 4.65 million MW2 owners who own an iPhone. Hmm...really? Suppose 24% of them bought the Zombies game. That's 1.116 million sales to the MW2 audience. If this gorilla math is accurate, that's a gross revenue of about $11 million. If Activision gets 70% of that...we're talking nearly $7.8 million. How much did it realistically cost to make that game. I've played it. It's good. Is it worth $10 bucks? That's a matter of opinion it's definitely a successful product so besides having the right brand attached to it, it did something right.

But that's just gorilla math. Let's say the actual sales of the Zombies game were closer to 10% to 15% of the estimate above and Activision revenues were really closer to $1 million. Again, how much did it cost to make that game that had only one map in the original release? (Let's forget about the additional maps/content you can buy for the app.) Whatever the actual numbers are, there is a compelling business case for it as a product.

So for a brand like Call of Duty, releasing an iPhone version of your game that is intentionally less complex but still delivers some portable fun was a good idea. This is perhaps one of the best examples of a major game brand extending itself to the iPhone platform in a way that did not cannibalize sales of the console/PC games and in fact probably sold quite well to those same gamers who also own an iPhone.

All the time we have been talking about numbers, zombies and and gorillas, Apple was counting their monies. As has been suggested by Nintendo and others, it's not like Apple is going to pass Nintendo in gaming related revenues. If we think of the iPhone as a console, it will probably generate in the $100 million to $200 million in gross revenues per quarter in 2010. If that is actually to low an estimate, then we could guess the iPhone games software market on the order of $500 million to $1 billion for 2010. If actually high, then the annual total comes crashing down to around a quarter billion dollars. Either way, Apple is making money and so are successful developers for the platform. (Certainly not all iPhone game app developers are becoming the new rich.)

Nintendo, who has been openly critical of the iPhone and iPad as a gaming platforms, is definitely threatened by Apple simply by the fact that kids everywhere are getting exposed to iPhones and they are playing with them. (I've said this in past blog posts.) But that doesn't mean immediate doom for Nintendo. You still can't play Pokemon and Mario and Mario Kart on an iPhone in the same way you could on a DS. They are better experiences on Nintendo's platform simply due to the interface. But kids are playing with the iPhone for iPhone, not DS, gaming experiences. Many of these are throw away games where you play for 60 seconds, get bored and play something else. Or they are playing the same game 50 times in a row like the way my 5 year old nephew falls asleep while playing skiball on my sister's iPhone. It's the same game of skiball over and over but he doesn't care. Even if the games are more involved, they simply aren't as big of an investment in terms of time or money as compared to DS games.

And that's the threat to Nintendo, even if it forever has better games that are worth spending more money on. Apple is allowing for a dilution of gaming to simpler elements that, for better or for worse, is attracting consumer attention and dollars. Apple's total control over distribution and access to the iPhone market is staggering compared to traditional 1st party publishers of their respective markets. Nintendo, Sony and Microsoft all have to deal with retailers, disc manufacturers and beyond for their software businesses. Apple can do all that from their headquarters in California since their distribution is all digital. In fact, Apple is better suited to support its platform given it has a dedicated retail presence that already makes money without the iPhone software market.

If our definition of a 1st party is a company that manufacturers a hardware platform and controls what content can go on that platform while taking a percentage of every piece of software sold on it, then Apple must qualify. The problem some people have with this is admitting that these pieces of software are, in fact, games.