“There are three kinds of lies: lies, damned lies, and statistics.” So goes a common saying warning us about the ease with which statistical data can be manipulated to arrive at just about any conclusion one could desire. According to an article on CNBC, it appears that Steve Jobs’ infamous reality distortion field was in full swing at Apple’s Wednesday tech conference and new product unveiling. Jobs has claimed victory for the iPod Touch in the portable gaming market, boldly stating that it is “the number one portable game player in the world” and that the device “outsells Nintendo and Sony’s portable game players combined.” To wit, CNBC reports that 1.5 billion game and entertainment apps have been downloaded for iPod Touch alone. But does this really mean that Sony or Nintendo have been beaten at their own game in any meaningful way? Much like Microsoft’s recent amusing abuse of fuzzy math to claim that the Kinect is cheaper than either a Wii or a Move-equipped PS3, the audacious boasting and trotting out of impressive numbers are effective strategies for glossing over the details of the situation.
Yes, 1.5 billion downloads is no small feat, and Apple has made serious headway towards making their presence known as a major player in the gaming market. However, it bears mentioning that Apple didn’t specify whether those were 1.5 billion paid downloads. I’d be willing to bet that a sizable chunk of those downloads were from the app store’s selection of free games. Furthermore, the average iPhone game costs $1.24, while most DS and PSP titles carry an MSRP between $19.99 – $39.99, which means the 1.5 billion downloads are not all necessarily generating that much money for Apple. And while 1.5 billion sounds huge, market research has found that most iPhone users abandon downloaded applications after the first use, with only one percent of total downloads resulting in a long-term audience. While it’s valuable to establish the iPod and other iPhone OS devices as a gaming brand, all those free downloads are not generating revenue for Apple, and it’s questionable how many long-term customers these apps are actually bringing into the fold. Which brings us to the central question: Isn’t the point of dominating any given market to make money?
To investigate this question, I looked at market research data which sheds some light on the all-important issue of how the actual revenue of the market is divided. As shown by the estimates represented in Flurry Analytics’ pie charts, following the money tells a very different story about which portable platform is the current 500 pound gorilla. The charts tell us that according to estimates based on the most recent NPD Group figures from 2009, iPhone OS software (a.k.a. games purchased from the app store and played on the iPad, iPod Touch, and iPhone) generated 19% of total US portable game software revenue, beating out the PSP’s share, which was 11%. But the Nintendo DS came away with the lion’s share, claiming 70% of the total revenue. Flurry estimates that portable gaming generated $2.55 billion in 2009, and the 19% of that going into Apple’s pocket sure isn’t chump change, but I contend that Apple going ahead and declaring themselves the winners at this juncture is jumping the gun and intentionally misleading.
When scrutinizing the finer details, we must also consider that in the gaming industry, immediate profits are sometimes considered a bonus, not an essential step, while a company focuses on establishing its brand. For evidence of this, one need only look at Microsoft’s championing of the loss-leader model with their original Xbox platform. Forbes magazine stated in 2005 that the Xbox cost Microsoft $4 billion dollars, indicating that this represented an investment in a business venture that could become profitable in the future. Finally, just two years ago, Xbox’s game division reported its very first profitable year. Only companies such as Microsoft and Apple with billions of dollars collecting dust in their coffers could afford to take the risk of an initially unprofitable business venture, and that is precisely what they’ve done. The lesson here is that there is a delicate balance to be struck when investing in a product’s long-term success, and that accepting low profits or dips into the red now can lead to eventual success later, however we choose to define it. This could spell good news for Apple as it challenges Nintendo and Sony for a bigger slice of the pie. Remember: the GameCube, with its inexpensive hardware, was profitable over the course of its life to Nintendo. But would anyone truly consider it the victor of the last-gen console wars? Did Nintendo succeed in capturing the attention of worldwide audiences and boosting the popularity of their brand during that time? All but the most diehard fans would have to concede that sometimes, simply turning a profit doesn’t mean everything. The Xbox narrowly beat out the GameCube in hardware sales around the world (with the notable exception of Japan, where the Xbox floundered), and the PS2 handily trounced them both.
In short, Microsoft took a hit to nurture the Xbox, and while they are not close to beating Nintendo in hardware sales this generation, they are finally turning a profit and squeaking ahead of the PS3 in worldwide sales numbers ”“ a complete reversal from their initial foray into the console market. Nintendo kept manufacturing costs low to ensure they made money with the GameCube, but it was still largely overshadowed by the PS2’s staggering 145 million+ hardware sales. So how does Apple’s handheld offering shape up in comparison to the existing industry giants? They have surpassed the PSP in revenue, but can’t yet touch the DS. So they point to the hardware sales, conveniently ignoring the fact that the DS and PSP are marketed primarily as gaming devices, while most people seem to buy iPhones, iPods and iPads for making calls, listening to music, and browsing the web, with game purchases resulting as an afterthought. Case in point: I have yet to see an iPod Touch for sale at my local GameStop, but there are DS and PSP systems and titles lining the aisles in spades. As such, Apple’s attempt to swoop in and claim domination of the portable market by virtue of the fact that consumers are buying phones and music players that just so happen to play games seems a little sketchy.
Then there is the pricing structure to consider. Console price can be a huge barrier of entry, especially for casual gamers. Some purely anecdotal ramblings here: I own and love both a DS Lite and a 32 GB 2nd gen iPod Touch. I bought the former to play games, and the latter to play music, and both were purchased at launch. To date I have downloaded five gaming apps for my Touch, and have not paid one cent for any of them (they were all free games). Having spent much more for my iPod ($399) than my DS ($129), I am having a hard time justifying spending any more money for downloadable content when I only really bought the iPod to play my existing music collection. I can only imagine this point being more significant for iPhone owners, who must contend with ongoing bills for the data plan on top of the cost of the phone. Given an average DS game price of $30, I could buy 9 DS games in addition to a new DS Lite before I had spent $399 for an iPod with zero games. And based strictly on my opinion as a hardcore gamer, I’d take a handful of games designed for a device that was created from the ground up as a gaming system, and which include all the franchises I love, over the current most inexpensive model of iPod Touch ($229) and the overwhelmingly huge app store with its litany of casual games and distinct lack of original IPs any day.
Some thoughts to swish around: Would you buy an iPhone OS device primarily as a gaming system? Do you play games on your iPhone, iPod, or iPad more often than your DS or PSP? Which device do you actually spend the most money on for games? Do you consider the iPhone OS family to be true handheld gaming devices? And finally, do you think Steve Jobs is right to claim the title of “number one portable game player” for the iPod Touch for its hardware sales, or should number one status be reserved for the company with the biggest sales of gaming software?