In-Depth: How Do In-App Transactions Change iPhone Games?

How will the introduction of in-game transactions in free iPhone games affect the market? A Virtual Goods Summit panel including iPhone game notables ngmoco, SGN, Aurora Feint and Tapulous tried to find an answer. Breen of SGN (F.A.S.T.) sees the change as profound and, essentially, immediate. "Every product that we intend to produce going forward will be a free introduction, and then you extend the product over time with transactions," he says. Lacy with Tapulous (Tap Tap Revenge) already has implemented downloads in its pay games. "We have already been experimenting with virtual goods for the last month or so. We sell music -- that's kind of the ultimate virtual good, something people are used to paying for." He expects that the series' next game, Tap Tap Revenge 3, will be launched with a free version. Young expects a sea change as well: "My sense is that the introduction of in-app purchasing is profound for the ecosystem." Rolando 2 has already been modified as an episodic title, but "we don't believe that the trial [version] with episodic content is going to be the dominant form." Currency Problems Though microtransactions are supported, they aren't that micro -- they start at $1, and in-game currency is not supported. This isn't as game-changing or appealing as it could be, says Breen. "There are still some restrictions on the iPhone... You can't have a virtual currency on the iPhone. The incremental ability to add items is restricted to, effectively, one dollar. I want to believe that barrier will eventually come down. The incremental spends are a little larger than I'd like to see." Young, however, thinks the system is more flexible than developers realize. "I would recommend any iPhone developer to read carefully through what you can and can't do because it's more flexible than you would immediately think," he says. However, he says, "It might be useful if there were a pan-iTunes system for currency that allowed for smaller denominations than 99 cents." The bigger issue is the backend for supporting these transactions, in Young's view. "If I were going to focus anywhere first it would be virtual goods management. The system, as it stands today, is just an extension of iTunes. The way in which you manage those items is pretty cumbersome, and a lot of work has to be done before developers can serve virtual goods." Piracy! Of course, one of the biggest points in favor of this system is that it will help stave off piracy on the platform. Says Young, "The real impact of in-app purchases is that it turns away the casual pirate." However, says Young, it'll invite an endgame for the race to the bottom. "I think it'll create a race to zero on pricing. It seems inevitable to me." Who is going to be affected most by this change? Though Breen and Lacy think small developers will be shut out (due to need to deliver high quality content on a consistent schedule) and large developers with expensive apps will be harmed, Young does not agree. "I am not sure it's a company size question as a company mindset question," he says. Citron, of Aurora Feint, suggests that the situation will create such a change that it's tough to predict what effect it will have. "In a year from now, I think this ecosystem will be different." As developers drop out because they can't make any money, it might create a problem for Apple. "It's really hard to say what Apple could do. People have been talking about this since the day the App Store launched. Part of what we're trying to do with our social platform is create a way for players to discover games socially and virally, like they do through Facebook. My thesis is that [virality] is going to have a larger impact." Can Virality Drive Interest? Young isn't high on Facebook Connect as a major driver of player interest -- or sales. "I don't think that virality is a function of having Facebook Connect. I think you need games that have the viral coefficient as core to the game design. You then look at the channels that you have for that virality, and all of the systems that cross systems are pretty lousy. And all of the ones inside systems like OpenFeint or our Plus network are finite." To that end, ngmoco's Touch Pets and Eliminate have their own in-game social networking-style feeds, and viral user interaction as core game design. Lacy is unsure that the markets are directly comparable. "The thing about the iPhone that people don't realize when they compare it to Facebook... What the iPhone does is that it's always with you. It's untapped that last goldmine of time that you have." And when looking at the way gamers spend on Facebook, says Lacy, it doesn't necessarily map to iPhone. "We're still trying to learn about the elasticities of demand on the mobile side, and we're learning that they're very different." While tiny transactions are more popular on Facebook, packs of six tracks outsell smaller packs of two tracks for Tap Tap Revenge. "There's a pervading mentality that what is happening on the iPhone is what happened on Facebook," says Lacy, but he does not agree. Is The iPhone the Answer? Of course, the focus of the panel is the iPhone -- but is there anywhere else to go? Android? DSiWare? "The iPhone is the only game in town right now," concluded Young -- going so far as to cut off the question when it was restated, with the same exact answer. Says Breen in ending, "it's an indicator for where the market is going in all sectors." Other consoles are picking up on this, and more effective microtransactions are coming to Xbox 360, Citron points out, showing the importance of this business model going forward.