The Post-IDFA Alliance has evaluated the impact of Apple's privacy push. Image Credit: Post-IDFA Alliance

The future looks bright in mobile games, but it’s a fuzzy bright. And it’s not just consumer behavior during the pandemic that is creating that uncertainty.

Mobile game makers came into 2021 in the midst of the pandemic with a lot of uncertainties around how the mobile ecosystem was changing. While we have some clarity on big uncertainties — such as Apple’s privacy push and the antitrust litigation over the App Store between Epic Games and Apple — there’s still a lot of debate about how things will turn out for both iOS gaming and the broader mobile markets.

I’ll be discussing those uncertainties and changes at events coming this week and soon after. On September 29 at 10 a.m. Pacific time, I’ll moderate a panel on what’s next with mobile app ad monetization. The panelists include MoPub’s global commercial head Robin Wheeler, Facebook Audience Network’s global lead Steve Webb, and Vungle’s senior vice president of global revenue Scott Silverman.

And I’m moderating a panel on mobile game monetization trends for 2021 at the Mobile Growth Association’s MGS Games 21 event at 10:20 am Pacific on September 30 with Chris Akhavan, vice president at EA Mobile; Jarkko Rajamaki, vice president of ads at Rovio; and Carissa Gonzalez of Pixelberry Studios. (The MGS Games 21 event will be hybrid, both online and in-person at the SF Jazz Center in San Francisco). We’ll also be discussing these topics at our upcoming GamesBeat Summit Next event on November 9-10 and our upcoming GamesBeat event on January 25 to 27, 2022.

I’ve also done some interviews this summer with other mobile gaming voices such as Offer Yehudai, president of Fyber, and Brian Bowman of Consumer Acquisition others about this subject. The different experts across the mobile gaming ecosystem are coming around to stronger opinions about what the future holds, and we’ll see a lot of that advice coming through the events in the coming days.

Growth predictions

Above: Global smartphone users per region.

Image Credit: Newzoo

Newzoo predicted last week that mobile gaming revenues would grow 4.4% to $90.7 billion in 2021, coming off of 27% revenue growth in 2020. The 2021 growth is slower than the overall 11% compound annual growth rate expected from 2019 to 2024 because it is so hard to beat last year’s extraordinary revenue as people played more mobile games at the onset of the pandemic.

Because of Apple’s focus on privacy over targeted ads and the accompanying regulatory policies around the world, it has become more challenging to target mobile gamers with performance-based advertising, where advertisers get paid if users take action based on ads. It’s no longer easy to measure if particular ads are effective in that respect.

Dave Westin, chair of the advisory board and strategic speaker outreach for MGS Games, said in an interview with GamesBeat that these headwinds will combine with tailwinds such as the expansion of gaming into new territories like the Middle East, Africa, Latin America, India, and emerging parts of Asia.

“You’re going to see some consolidation among the vendors, and from a publisher perspective, we’re seeing a lot of growth in international markets,” Westin said.

Newzoo expects the number of smartphone users to reach 3.9 billion in 2021, up 6.1%, with much of the growth in emerging territories.

But a lot of these predictions are based on assumptions about how both iOS and Android will change in coming months. Facebook released a report in July that discussed various qualitative factors that could affect mobile gaming and the wider ad ecosystem.

While the IDFA change put pressure on revenues, eMarketer noted a positive — time spent on mobile games increased by 9 minutes per day per U.S. adult in 2021, and most of those games will hold onto that growth going into 2022.

Market researcher IDC estimates that mobile game revenue is $156 billion, and about $26.8 billion of that — or 17.2% — is ad revenue. This imbalance suggests an opportunity to increase ad revenue, Facebook said. Omdia predicts in-app ad revenue will rise 21.3% in 2021.

This will change as the industry makes a transition from the older, historical-based waterfall format for advertising to a new format dubbed real-time app bidding. With app bidding, there are open, real-time auctions between ad networks and other demand sources — enabling more competition among ad buyers, where the highest bidder wins. This results in more revenue going to publishers and developers for each ad impression served to players in their mobile games.

Apple’s post-IDFA ecosystem

Above: Mobile marketing may not be as precise as it once was, due to rising privacy concerns.

Image Credit: Tenjin

Of the $90.7 billion in revenue in 2021, Newzoo said $41.1 billion will come from the iOS platform (45.3% of the global number).

Mobile game companies have been forced to shift their strategies amid the changing market due to tightening privacy measures across the board such as Apple’s changes to use of data from the Identifier for Advertisers (IDFA).

“IDFA has been in play for almost a year, either in discussions or the execution, and it’s still something that we’re going to be talking about a lot,” Westin said.

Newzoo believes that 85% of iOS users updated to iOS 14.5 or above as of July. And most users are not opting in to be tracked for advertising purposes, meaning the data previously collected via IDFA will no longer be available to advertisers for tracking the effectiveness of ads. According to Fyber, opt-in rates for ATT were just 17% globally as of mid-September. Those rates are worse than they were early on this spring.

Fyber’s Yehudai said that the App Tracking Transparency (ATT) policies which encompass the IDFA change have the potential to hurt in-app purchase revenue, which accounts for the bulk of overall app and game revenues and is often enabled by the careful individual targeting of users with ads that is much harder to do now.

Citing similarly low September data from Flurry, worldwide users being shown the opt-in prompt have been opting in at a rate of only 23% week-over-week since August, Bowman at Consumer Acquisition said.

“In the U.S., the opt-in rate is an abysmal 16%. With these low ATT consent rates, custom and lookalike audience size has been reduced 77% worldwide (86% in the U.S.),” Bowman said. “As a result, effectiveness has dropped. Many mobile app developers have paused spending on iOS or shifted heavily to Android, inflating costs per mille (CPMs), [a measure of ad rates].”

Yehudai of Fyber believes that hypercasual game players are opting out at high rates above 80%. As those ads are less effective, the ad rates paid by game companies dropped for a time but then recovered.

“The flywheel kept going for hypercasual games,” Yehudai said. “I think it’s good news for the industry. Hypercasual has been resilient.”

Social casino games, which rely on precise targeting of users to find the big spenders, are having a tougher time. That could mean those game advertisers will spend less, and that ad rates will drop in that segment, and sector revenues could fall as well. They are trying to buy ads that target wider audiences but for cheaper prices.

“It’s getting harder for them to find those users,” Yehudai said.

Above: Consumer Acquisition’s view of iOS privacy changes. Image Credit: Consumer Acquisition

Yehudai also noted growth in Android revenues as a result of the IDFA changes, as Google hasn’t implemented the same strict privacy changes and game makers are shifting budgets to Google as a result.

“All of a sudden, companies are seeing the same and even more revenue on Android. And that’s a change from what it used to be,” Yehudai said. “Android is closing the gap.”

Despite this change, Yehudai is doubtful that Apple is considering rolling its IDFA changes back, as some developers hope.

Bowman of Consumer Acquisition said in a blog post that the transition to iOS 15 that is happening now highlights more anti-competitive behavior, as Apple is using “privacy scare tactics” to get consumers to opt-out of giving data to developers and third-party ad platforms while using friendlier language when it comes to asking if Apple’s own apps can use that data.

“Ultimately, this behavior is highly disruptive to the vitality of the iOS advertising market,” Bowman said. “It is having a negative impact on mobile app game developers, advertisers, and consumers.”

Tianyi Gu, a Newzoo analyst, said in an email to GamesBeat that the IDFA changes will have a limited impact on consumer spending on mobile gaming; however, the brunt of the impact will fall on the part of the mobile games market monetized through advertisement (which is not in Newzoo’s scope, as we look at revenues generated through consumer spending) and games that are heavily reliant on precise user targeting such as 4X strategy, midcore role-playing games (RPGs), and casino games.

Content fortresses

Above: The top five smartphone brands.

Image Credit: Newzoo

To retain some of the tracking ability they had, mobile companies are turning into content fortresses, and companies — including Apple itself — are doubling down on internal ad networks, Gu said. Gu believes companies are turning themselves into “content fortresses,” referring to proprietary ad tech systems that publishers use to cross-promote games within their own content portfolio.

“In other words, publishers are building in-house ad tech to leverage first-party data and promote new games within the content portfolio,” Gu said. “In this way, publishers can keep users within their ecosystem while complying with Apple and Google’s new rules.”

In the West, companies such as Zynga, AppLovin, and Facebook are allocating resources to strengthen their content fortresses, primarily via merger and acquisition (M&A) activity. Tencent and ByteDance are using the same tactic in the East (and globally), Gu said.

“I think big data is going to come into play, being able to take data through data exchanges or data marts and appending that to a unique identifier and then being able to build behavioral targeting,” Westin said. “That is what I see is really the next big thing coming in the space. People realize they’re going to have to figure out ways to properly target these campaigns. And if they don’t have that, that internal data themselves, they’re realizing that there are other companies out there that that do, and they’re taking advantage of that.”

Mobile game developers were already adopting hybrid monetization and IP-based-game strategies, and mobile privacy changes are only accelerating these shifts, Newzoo said.

Epic v. Apple fallout

Above: Epic Games launched the Free Fortnite Cup with Apple as the villain. Image Credit: Epic Games

Epic launched a high-stakes battle, using its strong position with Fortnite in the games market and suing Apple and Google for alleged monopolistic behavior.

But a federal judge, Yvonne Gonzalez Rogers in Oakland, California, handed Epic a big defeat, ultimately ruling in Apple’s favor on nine-out-of-ten counts, penalizing Apple (via an injunction) for its anti-steering App Store policies for in-app purchases.

These anti-steering policies, which Google also recently implemented, prohibit app sellers from advertising alternate payment systems outside the platform holder’s ecosystem. The judge found that Apple’s anti-steering policy hurt consumers by denying them ways to find out about lower prices for in-game items.

Newzoo expects developers will be allowed to charge less in external payment options for in-app purchases in the United States if Apple doesn’t appeal to the injunction.

Newzoo believes that developers would not need to pay Apple’s 30% cut in this scenario, giving the developers the fuller share of revenues (if they have external payment options in place). Based on my own reading of the Epic v. Apple verdict, I don’t think this is clear yet, as the judge ruled that Apple has the right to monetize its intellectual property.

Apple will have to permit developers to advertise better deals and lower prices if they go off the App Store to buy their digital items. But Apple does not have to enable consumers to make those purchases directly through alternative payment providers within the App Store, as the judge ruled the “payment systems” monopoly, as Epic alleged, did not hold up. That was a big part of the case that Epic lost. All Apple has to do is let developers tell consumers about discounts elsewhere and link to those discounts.

Even if consumers go off the store to take advantage of those discounted offers, there is nothing stopping Apple from demanding a 30% cut of those sales, though it would be tougher to collect, said Richard Hoeg of Hoeg Law in an interview with GamesBeat.

Nevertheless, payment providers such as Xsolla and Paymentwall welcomed the decision because it will enable developers to collect emails from users more easily and promote their own off-App-Store solutions in ways that will benefit their brands and enable them to become closer to their own consumers.

I believe one of the biggest issues is friction, as it would be far more convenient for alternative payment providers and mobile game devs to enable alternative payments directly inside the App Store. But the judge didn’t grant this victory to game developers, despite her finding that Apple had engaged in anti-competitive practices.

Future growth

Above: Guild of the Guardians is an NFT collectible game. Image Credit: Immutable

In 2022 and beyond, Facebook believes mobile cloud gaming will catch on with formats such as Instant Games on the Facebook platform. These use cloud datacenters to enable no-download, low-friction games people can enjoy instantly. These have often used HTML5 as a format in the past, but the various types of cloud gaming should enable players to enjoy deeper and more graphically rich games instantly, Facebook said.

As for things like blockchain games or nonfungible tokens (NFTs) coming to the rescue, game startups and big company acquisitions have had a huge flurry of activity this year. But we’ll see if those result in mainstream adoption.

The market for NFTs surged to new highs in the second quarter of 2021, with $2.5 billion in sales in the first half of the year, up from just $13.7 million in the first half of 2020. NFTs have exploded in other applications such as art, sports collectibles, and music. NBA Top Shot (a digital take on collectible basketball cards) is one example. Published by Dapper Labs, NBA Top Shot has surpassed $780 million in sales in just a year. And many are banking that gaming will be a big beneficiary.

Westin believes that we’re still some time, perhaps a year, from seeing a huge impact in the mobile gaming business.

“There isn’t a critical mass of publishers putting out that type of game,” Westin said. “In the meantime, we are seeing a lot of activity in hypercasual, social casino, and real-money (gambling) gaming. Those are the areas that we see having upticks.”