Mobile ads can equal virtual goods in revenue

Mobile app developers should build revenue model on combination of advertising and in-app purchases, even if virtual goods are proving to yield bigger returns, note market watchers.
Written by Jamie Yap, Contributor

Virtual goods have crushed mobile ads as the most profitable business for mobile app developers, but market players and watchers say mobile ads have as much potential to churn revenue and developers should support both elements in their business strategy.

According to a Flurry report released Oct. 14, mobile virtual goods generated four times as much revenue than mobile advertisements last month. The study was conducted from a sample of leading applications on Apple's iOS platform with a total reach of 2.2 million users, and did not include Android apps because Google's Android Market has yet to support in-app purchases, the mobile analytics firm noted in the report.

In micro-transactions or in-app purchases, users pay real money to acquire virtual products or additional functions used in the app. Levels, points, gold coins or weapons, for instance, are in-app purchases commonly available in game apps.

Peter Farago, vice president of marketing at Flurry, said in the report that mobile advertising was outpaced by in-app purchases because ad agencies are skeptical about the viability of social games and social mobile media as an advertising channel. If they remain locked in this mindset, Farago added that agencies would miss out an opportunity to reach out to a mass of consumers already engaged in new forms of content.

In an e-mail interview with ZDNet Asia, Farago emphasized that virtual goods have real perceived value to players, thus, allowing in-app purchases of virtual goods to deliver more revenue than ads when implemented well into the core experience of gameplay.

He added that mobile app developers will turn to any channel that allows them to earn the most revenue per user, he said.

Agreeing, Audrey Heng, market analyst for emerging technology research practice group at IDC Asia-Pacific, noted that from a developer's point of view, virtual items are profitable as long as they are able to create any amount of virtual items at little to no cost.

Heng concurred that agencies are resistant toward mobile advertisement, noting that mobile and online advertising are still nascent in the Asian region, excluding Japan.

In an e-mail interview, Heng urged the need for advertisers to realize the returns on investment (ROI) from mobile and online ads, especially when it is "easier and faster to [measure] the ROI of virtual goods sales and in-app sales because it can be seen once the transaction is completed".

Mobile ads remain relevant revenue stream
Despite the appeal of in-app purchases, Lai Kok Fung, co-founder and CEO of BuzzCity, a mobile advertising company, said that mobile ads are still a relevant source of revenue for developers.

He explained in an e-mail interview that certain categories of mobile apps such as infotainment services which "do not lend themselves naturally for monetization through virtual items". Furthermore, he added that since Android Market has yet to support in-app purchases, advertising remains the only viable method for income for developers on the Google mobile platform.

Lai noted that in order to monetize on virtual goods, a mobile app must have scale and be able to support a large number of users. "Very few companies can achieve that kind of scale to generate meaningful or large chunks of revenues from virtual items," he said.

However, companies that rely on advertising as the main source of revenue still need to cultivate the relevant skills that allow them to monetize on both virtual items and advertising, he noted.

Flurry's Farago added that many app developers would tap a combination of advertising and virtual goods "to deliver the maximum possible revenue for the games they distribute".

Revenue model contingent on app type
Nicky Wong, founder of Infindo, a mobile app and platform development company, noted that whether virtual goods or mobile ads will prove a better revenue source depends on the nature of the app, which can range from a game, service to e-book. Wong told ZDNet Asia, however, that virtual goods are a proven revenue model and one that "is going strong in mobile".

And while in-app purchases are a sales booster, he pointed out that a strong ad integrated platform can boost ad revenue as well.

Another mobile app developer, Neil Cossar, noted that regardless of the type of revenue model executed, developers should never lose sight of the bottom line--"make new and interesting products to stand out and offer something different". Cossar developed This Day In Music for the iOS platform.

Alan Chan, director of SBA Mobile, which produces mobile apps, said the company currently splits its investment equally between advertising and virtual goods because it has yet to determine which is a better source of revenue.

While he viewed the two revenue channels as complementary, Chan opined that when it comes to virtual goods, there is no limit to what items can be created and that are in demand among consumers.

He also noted that ad revenue is based on a business-to-business model, and hence there is a higher possibility that companies have a limited budget to develop ads. On the flip side, virtual good sales thrive on a business-to-consumer market, where "as long as the perceived value of virtual goods is higher than the amount paid, the potential [for revenue] is much higher", Chan said.

Wong acknowledged that developers ultimately prefer to roll out paid apps over free apps, and they prefer to support virtual goods because these yield instant revenue when compared to an ad model.

"Unfortunately in the real world, consumers prefer [free apps]," he said, noting that developers will need to think about how they can strike a good balance when formulating their business model and marketing strategy.

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