Breaking The Wheel

A diagram of Porter's Five Forces Analysis

Five-Forces Analysis has Grim Tidings for Free-To-Play on Mobile

This post about five forces analysis originally appeared on my old blog and Gamasutra. I find that it’s as relevant today as it was then. Mobile is still a hot bed of both independent and publisher-backed development. And for good reason. There is a massive addressable market and mobile devices have high user engagement. Mobile also supports smaller test launches and rapid iteration, meaning that developers and publishers can treat mobile games less like products and more like businesses. Add to that the lack of any marginal production or distribution costs, and you have a super-sexy platform. And that’s exactly the problem. Mobile is so attractive and so accessible that the market place is perhaps the purest example of “perfect competition”, the yin to a monopoly’s yang.

Image source: author


By Reading This Post, You Will Learn

  • What a “Five-Forces Analysis” is and why it is useful
  • Definitions for the components of a five forces analysis
  • How to conduct and interpret one, using the mobile games space as an example

Five-Forces Analysis: A Preface

Let me start by saying I like all kinds of video games. I like console games, I like PC games, I like shooters, and I like RPG’s. Basically, I enjoy anything except sports games (and that’s really a comment about my attention span for professional sports rather than sports games themselves).

I also like mobile games and free-to-play games. And I like F2P on mobile. I’ve had some great experiences with that combo when it’s done well.  I had some good times with Avengers AllianceHay Day, Boom Beach and Pocket Trains.

My point is THIS IS NOT AN ANTI-F2P/ANTI-MOBILE/ANTI-MOBILE-F2P RANT.

I Come Not to Bury Mobile, But to Offer a Word of Caution

The intention of this post is not to castigate mobile-F2P, but to point out a structural flaw in the market. In general, it’s healthy for the industry to have a wide swath of business models, platforms, and vectors for people to play games (or consume them, in business terms). There is a massive amount of potential in the mobile/F2P combo, but the market seems to be cannibalizing itself for short-term gains.

In my other post, “Strategic Design: Why Dark Souls is the Ikea of Video Games“, I mentioned a Harvard Business School professor named Michael Porter, and his creation of something called the “Five Forces Analysis”°. In short, it’s a tool to determine how large an impact the titular forces have or could prospectively have on profitability. The forces are:

  • Rivals
  • Supplier power
  • Buyer power
  • The threat of new entrants
  • Substitute products

Performing a five forces analysis means looking at each one of those categories and estimating the impact it will or could have on profits. In this post, I’ll run mobile-F2P industry through this particular prism, one force at a time.

Force #1: Incumbent Rivals

This one is pretty simple: more rivals = more competition. More competition = lower prices. Lower prices = lower profits. The more rivals you have, the more you have to fight for every dollar of revenue. And you can fight by developing a competitive advantage or you can fight on price. I’m guessing that’s pretty obvious. But, let’s break down the concept of rivalry further.

Is there a large number of competing incumbent firms?

Holy shit, yes there are. Mobile F2P studios, both independent and publisher owned are a dime a dozen.

Impact on profits: Heavy

Are the products homogeneous?

Again, hell yeah. For every Tiny Tower and Boom Beach, there is a horde or Candy Crush, Farmville, and Clash of Clans clones†. And then there’s the swarm of CCG’s.

But, let’s digress for a moment: why are homogeneous products so destructive to profits? The same reason toilet paper manufacturers make per-unit margins on the order of pennies: if your product is interchangeable with the competition’s, you have to compete on price. More specifically, you have to compete on consumer surplus: you need to give consumers more for their money and capture less value for yourself.

In short, if you are making the same design as everyone else, congratulations: you have commodified your game. There is another, less obvious impact of lots of competition: it is really hard to standout on the App Store or Google Play. Unless you can convince Apple or Google to feature you, get ready for your customer acquisition cost to start eating your margin for lunch.

Impact on profits: Heavy

Do consumers experience low switching costs?

Simply put, a switching cost is the cost (both accounting and economic) you absorb when you switch products or services. The easiest example is cellphone service. You are unlikely to switch from AT&T to Verizon mid-contract as it requires some combination of paying an early termination fee and purchasing a new handset.

F2P mobile games, by contrast, have a switching cost as close to zero as you could ever practically expect to get. The only cost is the time it takes to go back to the app store and download something else. An argument could be made that abandoning your progress in a game is also a switching cost.

A consumer can easily download four or five F2P apps at a time. And then four or five more. That’s the double edge sword of F2P’s low barrier to entry: it’s also a low barrier to exit.

Impact on profits: Heavy

Do you have diverse competitors?

This is a little different than having lots of competitors: do your competitors come from diverse backgrounds? IE, does the fact that they have different perspectives make them unpredictable? It’s a little more abstract, but I would argue it has an impact. If you’re in the F2P-mobile market, you’re competing with teams from all over the world. Korea, China, Eastern Europe, India. Oh, and let’s not forget the good folks in Finland.

Impact on profits: Medium

There are a few other factors that impact incumbent competition but probably don’t hurt mobile-F2P too hard. Namely, inventory costs and capacity augmentation (which doesn’t really apply to a digital marketplace), high fixed costs (which is more of a concern for large-scale physical industries), and whether industry growth is slow (which is the opposite of what’s happening in mobile).

Competition: Conclusion

If you’re a mobile-F2P studio, then you’re in the middle of the largest barroom brawl in history. You either have to think strategically or you need to duke it out with everyone and leverage the living hell out of your analytics. Either way, competition is a huge threat to profits. Mobile-F2P is one of the purest examples of what economists call “perfect competition”, pushing price down to marginal cost. And there is no marginal cost to making another copy of the game, hence it’s free to play. And we haven’t even touched the other four forces yet.

Overall threat to profitability from competition: High

Force #2: Potential Entrants

What’s worse than lots of rivals? Lots more. And the democratization of game development has a big downside: everybody and her grandpappy can make and release a mobile game. Let’s walk through why.

Are there economies of scale?

In terms of development, yes (a large company can share resources between games), but not in terms of inventory. Once your game has been submitted/approved to a digital marketplace, you instantly have infinite inventory, the same as Zynga or Rovio. There is no marginal cost, so there are no economies or diseconomies of scale when it comes to the ability to fulfill unit demand. In other words, a new guy is just as able to “produce” units of a product as everybody else.**

Does this deter new entrants? No

Are there capital requirements?

Again, not really. Yeah you need some hardware and an engine license, but those are relatively cheap. These days, you don’t need an office, task tracking software is free, and you can rent server space. The biggest cost is salary but, wouldn’t you know it, we now live in a gig economy and a global talent pool.

Does this deter new entrants? No

Is there limited access to distribution channels?

Not at all. You release a game, you have the exact same distribution channel as Supercell and Gameloft. And so does everyone else. And her grandpappy.

Does this deter new entrants? No

Are there government regulations restricting market entrance?

Nope.

Does this deter new entrants? No

Do any of the incumbents have a reputation for aggressively competing on price to deter new entrants?

It’s difficult to have a price war when your product is already free.

Does this deter new entrants? No

Is there a learning/experience curve to achieve profitability?

This is one area where incumbents have an advantage. Making money with a F2P product is really difficult. Despite what the fervor around F2P would have you think, putting out a mobile-F2P game does not guarantee arrival of the money truck. Learning how to effectively support and monetize a game in live service is its own skill set.

That being said, does it deter new entrants? Probably not. It might help grind them down, but only after they’ve already entered the market and stolen eyeballs.

Does this deter new entrants? No

Do you need access to expensive proprietary technology?

Nope. First there was Unity. And then Epic and Amazon joined the low cost fray.

Does this deter new entrants? No

New Entrants: Conclusion

Basically, other than some relatively low startup costs, the only barrier to entry is Apple’s certification process. So, if your current competitors hurt your profits, get ready for more of them. Lots more.

Overall threat to profitability from new entrants: High

Force #3: Substitute Products

Okay, so you’ve got lot’s of rivals, and you know lots more are coming. It can’t get any worse, right?

Wrong. It’s not just your industry you need to worry about. You need to worry about all the other industries that could pull your customers’ eyeballs away. The most obvious substitute product would be console or PC games, but I’d argue that mobile games are contested by different substitutes: social media, e-readers, and good, old-fashioned, paper books.

There are a lot of products that compete for a mobile user’s time in the context in which mobile games would seem to have an advantage. On the bus. Waiting in line at Starbucks. On the crapper.

The conversion funnel is life

Convincing a mobile gamer to monetize is a slow, difficult balancing act. Too much tutorial means too much friction. Too little and the player won’t understand how to monetize. Squeeze him for money too soon, and he’ll get frustrated and leave. Too late, and she’ll lose interest before the squeeze. If you don’t offer enough content and she’ll get bored. Too much, and she has no reason to monetize.

It’s a delicate process of establishing a relationship with the player. And you have to manage that relationship through a barrage of distractions. Texts. Tweets. Facebook likes. Viral content. Continuously improving options and content for streaming media services.

Or maybe the player will simply decide he would rather read the next chapter of his Ludlum novel.

Substitute Products: Conclusion

Mobile gaming is targeted and paced for people on the move: quick bursts of content. But so is every other app on a mobile user’s device. And you need players to be actually looking at your game in order to pay you for it.

Overall threat to profitability from substitute products: High

Force #4: Buyer Power

Most of the factors that impact buyer power are more relevant in a B2B context, and don’t apply to a consumer setting. But in the mobile space (as in many industries) consumers have a lot of power. If they didn’t, you wouldn’t be giving your games away for free. Again, mobile-F2P is an environment of perfect competition – consumers have lots, and LOTS, and LOTS of choices.

Consumers don’t need you. Strictly speaking, they don’t need (in the survival sense) games at all. And the switching cost is zero. So, if you want their money, you need to offer them something they can’t get anywhere else or give them more value for their money than the competition.

Buyer Power: Conclusion

Even though your consumers don’t have a lot of leverage over you (in the negotiating sense) they still have the ability to capture more surplus because they have lots of options and no switching cost.

Overall threat to profitability from buyer power: High

Force #5: Supplier Power

Supplier power is a little tricky for digital goods. The most obvious suppliers are hardware makers and engine developers. But, for the sake of argument, let’s count Apple and Google as suppliers for mobile games. Okay, okay, throw Microsoft in there too. Do you, as a developer (or even a publisher) have power over your suppliers? Not a chance, Dancing Dixie.

Are there few suppliers?

Well, for engines, you’ve got Unity, and now Unreal and CryENGINE are doing more to support mobile and drop their rates within the price range of indie developers. Amazon launched Lumberyard. But does that give you power over them? If there were fewer developers, maybe. But with the massive number of existing users, they’ll be under no pressure to negotiate with you.

In fact, with that many users, they’re probably better off letting you walk than spending time negotiating if you’re a smaller player. Any price drops are more a function of their own incumbent competition than your buyer power. As for Apple and Google, they’re flooded with products. You don’t like their terms? You want them to take a smaller cut? Yeah, good luck with that.

Threat to profits: Medium

Are there few substitutes for input?

Unless you want to develop your own engine or build your own mobile content delivery service, your stuck with the big players.

Threat to profits: Medium

Is it costly to switch suppliers?

If you want to switch engines, that’s going to cost you months of productivity, if you’re lucky. Switching distribution channels, less so, but you still need to port the product which certainly isn’t free.

Threat to profits: Medium

Do your suppliers have lots of other customers?

I’d call that a big yes. But this is a double edged sword. You don’t have leverage over them, but they have too much going on to put the screws to you personally.

Threat to profits: Medium

Are they more important to you than you are to them?

Again, the answer is almost certainly yes unless you are a huge developer that single-handedly makes them a lot of money. Activision and EA might be able to apply some leverage to Unity or Apple.  Maybe. But in general, there are lots of mobile developers out there. You need an engine and a distribution channel, but the reverse isn’t true.

Threat to profits: Medium

Can the supplier forward-integrate?

In non-business-speak, can your suppliers make games? Unreal is made by Epic. CryENGINE is made CryTech. Amazon has Amazon Game Studios. Unity is getting into game development. Google is getting into game development. I wouldn’t be surprised if Apple jumped in. So, yes they can forward integrate.. More importantly, most already have.

So they are not dependent on you making games for them. But, they do need a critical mass of products in order to keep their platforms healthy, and they still stand to profit from you, even if you end up being a direct competitor in the marketplace.

Threat to profits: Low

Supplier Power: Conclusion

The market suppliers are dealing with enough game makers that they’re not going to squeeze you for more money. But that also means you can’t squeeze them. So, if you don’t like their prices, or their 30% cut is killing your profits, there isn’t much you can do.

Overall threat to profitability from Supplier Power: Medium


Further Reading if You Enjoyed this Post

Strategic Design: Why Dark Souls is the Ikea of Video Games

Market Positioning: The Art of Fighting Without Fighting

If You Want to Lead, Know Your Values (Guest Post Hosted Externally)


Summary: You Can Make Money With F2P Mobile, But A Five Forces Analysis Says You’ll Need To Fight For Every Dollar

Mobile-F2P has a reputation as the place you make products when you have no integrity and you just want to make lots of money. That first part is grossly unfair. There are developers who sincerely believe in F2P and want to make games that are genuinely appealing to a mobile audience and aren’t just Skinner boxes. Supercell regularly kills projects it doesn’t think are fun. NimbleBit takes a fun-first, profit-later approach to design. That’s why you might actually know their names in a sea of mobile developers. In business-speak, they are market leaders with differentiated products (in other words, they avoid the fast-follow, homogeneous product, commodification trap).

The second part, that mobile is where you go to make money, is simply false. It’s a messy, noisy, corporate brawl. There have been obscenely big successes, but that doesn’t make turning a profit in mobile any less difficult. It’s hard. Really hard. And a five forces analysis tells us why. It’s hard to get noticed, it’s hard to retain an audience, and it’s hard to compete on something other than price.

But What About the Massive Expansion of the Mobile Market?

It’s true that there is a counter pressure in that the market is continuously expanding, but that expansion has a theoretical limit. At some point, every potential mobile customer will have a device. Then what? It’s survival of the fittest, that’s what.

And that’s not a bad thing. As I said in the intro, this isn’t an anti-mobile or anti-F2P screed. It’s a healthy thing that some businesses will survive and some will fail. In theory, that means the best companies (though not necessarily the best games) will succeed, and everyone else will go out of business.

The mobile market in general, and free-to-play specifically, is currently over-served. And that saturation will eventually force some developers out of the market onto some other platform. Competition on mobile will be a little less perfect, profits will be a little less skimpy, and supply will approach a balance with demand.

And that’s a great thing.


Key Takeaways

  • A five-forces analysis is a simple framework for understanding the profit potential of a market or industry
  • The titular five forces are: encumbent rivals, new entrants, substitute products, buyer power, and supplier power
  • In the mobile space, encumbent rivals, new entrants, substitute products, and buyer power all create huge threats to profitability
  • Supplier power is less problematic, but still could impact profitability

* Full disclosure: I worked on Marvel XP, a story extension platform that first appeared in Avengers Alliance
°For more info, see Porter, “The Five Competitive Forces that Shape Strategy”, Harvard Business Review, January 2008
†Has anyone coined the term “Clash of Clones”? If not, it’s mine!
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“Five-Forces Analysis has Grim Tidings for Free-To-Play on Mobile” by Justin Fischer is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

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4 comments

  1. Pingback: Marketing Games: The Fine Art of Succeeding Before You Begin Coding

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  3. bcphilo - October 17, 2017 18:37

    Superbly done. Definitely one of the smarter articles on game design etc I’ve ever read. This mirrors my experience a bit. I published a game on Facebook a few years ago (Sheep Shifter – OH YEAH! https://apps.facebook.com/sheepshifter/) it did very well to start and then …. poof! Even with similar amount of users the ad profit dropped off. Could be FB changing algorithm or whatever but even so, made it clear it wasn’t easy money for sure – despite the rare rags to riches tales.

    Reply
    • Justin Fischer - October 20, 2017 14:35

      I appreciate the feedback and you sharing your own experience! Thanks!

      Reply

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