Why Apple remains king of the mobile gameSeptember 9, 2013: 12:27 PM ET
Samsung may be winning in device volume, but Apple's App Store attracts paying customers and makes developers' lives a little easier.
By John Gaudiosi
FORTUNE -- The tech world's attention will turn to Apple headquarters in Cupertino, Calif. Tuesday, where the company is rumored to debut the enhanced high-end iPhone 5S and the lower-cost iPhone 5C. Other devices, potentially the long-rumored iWatch, could also be showcased. While new Apple products at press events multiple times a year are now common in the cutthroat mobile industry, this week's event is especially important for Apple (AAPL) and its investors, as well as for the company's rivals like Samsung, Microsoft (MSFT), Nokia (NOK), Google (GOOG), and Motorola.
"The loyalty of Apple users is at stake, both the geeks as well as regular consumers," said Peter Warman, founder of research firm Newzoo.
That's because the impending launch of iOS 7 will impact users of older iPad, iPhone, and iPod Touch devices. These consumers will be forced to upgrade to a new device because an increasing number of apps or updates no longer will work on the older operating systems.
"This situation is new and forcing consumers to think about buying a new device, whether it's a new Apple device or an alternative from Samsung, Microsoft, Android, or others," said Warman. "If consumers decide to stick with their old devices and use them for everything but apps, then a steady revenue stream towards Apple stops."
Michael Pachter, video game analyst at Wedbush Securities, said that Apple needs this refresh to keep up with competition like Samsung, which just announced the Galaxy Note 3 and the accompanying Gear smartwatch. Apple is also now taking on Microsoft and its newly acquired Nokia.
Warman noted that since Steve Jobs left, there has been no cheering at Apple press events, no tech geeks jumping up and down. "Will Apple's iWatch look a hundred times cooler than that of Samsung and others? Will it do something that only Apple could have dreamed up? Normally Apple launches products first, now they are coming in second or third," he added.
With Samsung beating Apple to the punch with its smart watch, the rivalry between these two giants continues to grow. Samsung clearly leads the field in the hardware space, beating Apple in absolute numbers. Sales of Galaxy phones have helped Google's Android operating systems overtake iOS. But Warman said Apple is currently the only company in the mobile business with the "holy trinity of successful hardware, operating system, and content store."
New research from Newzoo shows that despite higher growth rates, overall GooglePlay revenues still stand at only 47% of the total generated by Apple's iOS stores. One of the reasons Apple has partnered with Epic Games with its Infinity Blade franchise at past press events and featured mobile games in its commercials is because on a global scale, one in three downloads from any app store is a game. Two in three dollars spent on these apps is on games. Warman estimates that Apple will gross close to $2 billion this year solely from its 30% share on mobile games spending.
Gaming is a key driver for mobile, as evidenced by Samsung highlighting the gaming capabilities of its bestselling Galaxy S4 phone. Newzoo forecasts that worldwide spending on mobile games will grow 34% this year, from $9.1 billion to $12.2 billion. By the end of this year, the number of tablet and smartphone gamers will surpass one billion.
"By 2016, mobile games are expected to claim 28% of the global games market, generating almost $24 billion and representing a huge global growth opportunity," said Warman. "The U.S. represents less than 25% of the global mobile games market with Americans expected to generate around $2.8 billion in mobile game revenues this year. Less than 40% of Apple's iOS game revenues come from the U.S. For Google Play, this share is significantly lower at less than 30%."
The key to success in the mobile game, which is extremely crowded and overrun with free-to-play games, is generating revenue. Apple has had more success than Samsung in this arena, despite the fact that a slightly higher share of Americans between ages 10 and 65 use a Samsung phone than an iPhone: 26% vs. 25%. Warman said those iPhone users grow to 35% when looking at the market share among 129 million mobile gamers and 45% if only focusing on the 58 million American paying mobile gamers. "Ultimately, Apple reaches twice the number of paying mobile gamers than Samsung, despite having a lower absolute number of device users," said Warman.
When looking at Apple's power position in the games space, it's important to look iPhone, iPad, and iPod Touch. Apple has no competition with the iPod Touch, which many parents buy for their children specifically to play games and apps without dealing with the high costs of a smartphone. Apple's dominance in this arena stems from the fact that it maintains control of a successful App Store. Warman believes Samsung has refrained from launching a competitive product because without an established App Store equivalent, it only represents a low-margin piece of hardware to it.
"Because of Apple's relatively closed nature and limited variety in screen dimensions, developers can publish one or two versions of their game on iOS and reach a large share of the market," said Warman. "To benefit from publishing on Google Play, developers must create many more versions of their games to cater for varying devices and screen sizes. This isn't ideal for developers who'd rather focus their effort on localizing their game into new territories and optimizing gameplay and business models."
That's why a fast-growing mobile game company like Supercell has been in no rush to port its hit iOS games Clash of Clans and Hay Day to Android devices. Those two games are generating over $2.4 million in revenue a day from its 8.5 million iOS gamers. Even Rovio and its now-ubiquitous Angry Birds franchise launched on iOS and catapulted to the top of the games space with the help of the App Store.
Warman said developers flock to, and stick with, Apple because of its superior reach of paying gamers. Apple devices tend to be owned by more affluent households, for example. Consumers stick with Apple because of the number of exclusive games available on iOS. This ecosystem creates a positive feedback loop for Apple.
With Apple adding 700 million Chinese subscribers with a possible China Mobile deal, the company is also trying to keep up with Samsung in Asia. When looking at the mobile gaming market, Warman believes Amazon (AMZN) is the only competitor that can even come close to Apple because it can offer a seamless payment experience and the level of monetization that Apple has. But even if rumors of Amazon offering a free smartphone come true, Apple could still be in the winner's circle.
"A free Amazon phone will hurt Samsung more because they rely on hardware margins for profit," said Warman. "If Apple devices are cooler than the free one at Amazon, people will buy an Apple." Warman noted that choosing a smartphone is too personal a decision for consumers to make strictly on price considerations. "Apple will benefit from the increased fragmentation in the marketplace, remaining the mobile platform of choice for content developers, while earning billions of dollars in App Store commission income each year."
While a refresh will play an important role for Apple, the company is certainly in the driver's seat in the mobile game. And innovation in new hardware will only help the company that Steve Jobs built.