Insightful Yet Somewhat Depressing TechCrunch Post on Galaxy Impact

Very insightful post yesterday on TechCrunch by Bo Wang, one of the creators of the Galaxy Impact (GI) game for the iPhone. Bo talks about the economics of their iPhone app and the revenue they generated both from ads and from a short foray into a paid application. The better news: this is the kind of post I like — with lots of real numbers that you can crunch and get your own insights.  The bad news: there’s not a whole lot of ad money right now in iPhone apps, at least not in free casual video game apps it seems.

So in the month of January, Galaxy Impact served 766,708 ad impressions, and generated a total of $175.45 CPC revenue on those ads (on a user base of about 130,000 ad-supported apps, based on my guestimate). If you translate this to CPM (i.e. divide total number of ad impressions by total revenue), you get an ad rate of 22 cents CPM. Pretty bad, or as one of my heavy-hitter online ad friends says: “bottom of the barrel”.

This gives a rough idea of what you might expect in ad revenue from an iPhone app, though a few caveats:

1. this is a casual game — so doesn’t necessarily attract a targeted, highly-coveted audience, and might generate lots of repetitive page/ad views, over a relatively small number of unique users. Also, the post doesn’t tell us what percentage of users are frequent, and what percentage is occasional (i.e. the ad impressions could have been served repeatedly to a small number of active users (bad), rather than to a large number of occasional users (better)). And indeed, GI shows lower rates than some other app benchmarks. The 130K ad-capable Galaxy Impact users might have other usage patterns on other apps (more frequent overall usage, or more ad clicks for example).
2. Functionality can have an impact: where and how you display the ad, as well as how engaging and interesting it is, could change how people would interact with it.
3. iPhone ads are still not a proven ad platform. Even the web at large is still struggling in finding the right ad models (with some saying the model isn’t there to begin with). As a result, advertisers are still not hitching their wagons to this platform so supply is limited. Also, since GI is using an ad network, they get lower rates than apps who have their own dedicated ad sales teams (like the New York Times for example).

The good news is that apps can attract fairly large numbers of users with minimal marketing expenditure as the post mentions, and some ads are being clicked on, which shows future potential.

In the case of Galaxy Impact, even if they had 2 Million users  (i.e. equivalent to Pandora, the most popular free app as of December 2008), when using the same value per user, we’d get roughly $2,700 a month,  which is very low even for a small shop (i.e. one person), unless you have a whole portfolio of these. If the NY Times had two million iPhone users, and assuming they can command $2 CPM (currently the high end for iPhone ads), and under the same usage patterns of GI (not a good assumption, but we’ll use it for now), they would generate about $24,000 a month (based on 9 times higher CPM). Still not exactly what would replace the print edition revenues.

So currently the model for new apps has to be either to use the iPhone to support other business models, or create paid apps that can command a premium. Keep in mind the challenge in attracting paying users however (when Galaxy Impact switched from free to paid they dropped from thousands of downloads per day to barely dozens). Personally, for example, I tend to ignore paid apps unless I have a pressing need/desire for them.

And one final thought: with Galaxy Impact, only one third of the users bothered to upgrade to the latest version (i.e. the version that can serve ads), which shows that whenever possible, you should have key functionality (like ad serving) in place when you launch publicly. While this goes against the concept of ‘launch fast and cheap’ to prove your concept and get feedback, sometimes it can pay to hold off a bit and get your key pieces in place.