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Freemium apps: necessary evil or plain greedy?

The vast majority of revenue in the app stores comes from freemium apps now, it is the winning model, but what are the advantages and disadvantages? Should we be happy about it? Is it good for consumers or developers?
By
May 21, 2014

The freemium model for apps has taken over and it’s a trend that’s still in action. All of the app stores are now completely dominated by free apps and games that are attempting to generate cash in alternative ways. Should we be happy about this? Is it good for consumers or developers?

The stats

App Annie and IDC found that freemium revenue jumped 211% from 2012 to 2013, in-app advertising jumped 56%, and paid apps dropped 29%, while paid apps with IAP fell 23%. The research suggests that 83% of all apps in Google Play and Apple’s App Store are freemium and that they generate 92% of the total revenue.

The dominance of freemium is even more pronounced if we just look at Android. This Distimo report shows that the revenue share in Google Play generated by free apps with in-app purchases has been steadily climbing, and it reached 98% by November last year. That leaves 1% for premium apps with in-app purchases, and 1% for traditional paid apps with a one-off fee.

Distimo_Chart_Google_Play_Rev_Share

Three models

There are really only three models in action and sometimes developers go for a hybrid approach, but beyond paid apps we’re basically looking at:

  • In-app advertising
  • In-app purchases
  • Subscription services

If it’s free…

We’ve all heard the old line about how, if you’re not paying for it, then you’re the product. Google is probably the best example of this idea, as it sucks in your data and sells advertising and insights to people trying to sell you things. The truth is we’ve been used to this arrangement for a long time now. Adverts are a fact of life and they pretty much always accompany free services. It’s a fair trade-off and it makes sense when developers offer an ad-free version for a fee. That way you get to choose and they get to eat.

The revenue that can be generated by in-app advertising is rising as the quality and variety of the ads improves. It can potentially be better targeted, because mobile devices provide more information about us and that enables advertisers to shoot for the niche they want. If we’re going to have to see ads anyway they might as well be relevant to us.

Like glossy magazines and cinemas, you pay a premium fee and you still have to wade through advertising.

How would you feel if you paid for the app and it had advertising? That’s irritating right? And yet it’s growing more common. Like glossy magazines and cinemas, you pay a premium fee and you still have to wade through advertising. The thin end of the wedge is developers showing off their other games or apps. You can’t blame them for taking that advantage, but it’s a slippery slope.

On the other hand, even paid apps are rarely expensive. How many games can charge $7 like Minecraft did and still top the charts? There’s an argument that $1-$3 is a subsidized price and they need to supplement it with IAP or advertising. Is Minecraft the exception or proof that you can charge more? Why do we expect mobile games to be so cheap in the first place? They aren’t necessarily cheap to make. Minecraft stands out as expensive at $7, but it’s not really much to pay for such a big game.

In-app purchases

We’ve looked at in-app purchases in depth before and concluded that there’s a right way and wrong way to do them. Bombarding people with prompts for in-app purchases after each level of a game, or every time they open up or close an app is seriously annoying.

Forcing people to pay in order to complete a game is not cool. If you make them grind to complete it for free, or limit their daily action, and offer IAP as a potential speed-up, is that wrong? Is it right to offer power-ups and rare weapons that boost your chances of winning a game for a fee? What if it’s multiplayer? How about offering outfits and other items that don’t impact gameplay at all? Why do people buy those?

The truth is that the success of IAPs relies on a relatively small group of users. About 70% of IAPs are paid for by less than 5% of users. Is everyone else basically enjoying a free ride at their expense?

App_Annie_IDC_IAP_users_chart

Who are these people anyway? You would assume that kids probably disproportionately spend on IAPs, but it’s tough to find concrete data. At least there are measures in place to curb that now, after a few high profile cases. Parents shouldn’t be daft enough to allow it, but fleecing kids is still wrong.

What about addicts? Gamers who are totally hooked and can’t stop buying another fix, like the arcade junkies of yesteryear pumping quarter after quarter into those machines? Are freemium apps the gaming equivalent of a free dose to get you hooked?

A look at subscriptions

For ongoing services, subscriptions make sense. You can choose Spotify with ads and limitations or you can pay a subscription to get rid of ads and choose exactly what you want to hear when you want it.

The really annoying example in this category is when apps are marked as free, with no mention of a free trial period or a subscription fee, or the classic small print approach. Some of the big security apps are awful for this. It can be a major pain to uncover what fees they charge without actually installing the app, the information is deliberately hidden.

It’s interesting to see the freemium model being investigated in Italy. Apps should have to state IAP and subscriptions up front. Tucking it away might not fool most people, but it is a deliberate attempt to fool some. They should obviously be clearly labelled. Why not?

Who benefits?

There’s an assumption that because more revenue is generated by freemium apps now, developers benefit from this as a general trend. But really, it’s only specific developers with popular games that are raking it in. Gartner recently suggested that only 0.01% of consumer mobile apps will be considered a financial success by their developers by 2018.

Are games designed to be great, or are they designed to encourage IAPs?

Some game mechanics are better suited to IAPs than others. Trying to wedge them into every type of game is a mistake. The trouble is that freemium is becoming a prerequisite for success and that’s going exert a growing influence over the way games are designed in the first place. Are they designed to be great games first, or are they designed to encourage IAPs?

It’s not straightforward for consumers either. A fairly high percentage of us benefit because we get good games for free now, but that’s only because a small percentage of players are spending a lot. If someone spends a few dollars a week on a game they enjoy, then fair enough, but when someone splashes out over $100 for a generic match-three game because they’re hooked, is there any chance that they feel like that was money well spent? Isn’t it just exploiting an addiction, like the gambling industry?

We can vote on this by choosing what to buy or download and install, and by rating games and apps and reviewing them. To a large extent, this trend is being driven by us. How do you feel about it?