GDC 2010: Ngmoco's Neil Young on how freemium will change the App Store world

On the third day of GDC 2010, Ngmoco's Neil Young took the stage in one of the largest rooms at the conference to talk about what his company had "unlearned" in its time in the App Store. Ngmoco has become a large and polarizing figure in the world of App Store development -- after starting out with a big investment from the iFund, it's moved quickly to become one of the biggest iPhone-only developers, and after starting out with a few premium titles like the very successful Rolando, have recently made waves with its "freemium" business model. Young talked about the company's history so far, and went in-depth on Ngmoco's plan for ruling the App Store and why he believes it's the "most significant shift and opportunity for [game developers] since the birth of this business."

We've summarized Young's long address in this post. It was pretty incredible -- not only did Young lay out his idea of a clear plan for building and developing a large portfolio of very profitable App Store titles "at scale" (the company plans to release twenty new freemium products on the iPhone in the near future, as well as six titles on the iPad), but he made it very clear that he fervently believes that freemium and the model he's structured is the future of the video game business.

He began with a recounting of the history of the company (complete with a Mark Twain quote and impersonation -- later in the lively talk, he also imitated Don King and sang a line from High School Musical), from all the way back at standing in a line "outside of an Apple Store in Santa Monica" waiting to buy an iPhone. He said he quickly saw that the iPhone changed the usage pattern of a smartphone -- usability and capability meant people were interacting with it in new ways. He saw that people were using over half of their time with the iPhone "not making a telephone call," and was convinced enough that games could be a big market that he called up an old partner and went to work. Ngmoco started with a $5.6 million round of funding from the iFund, and Young and his company were in business.

He said that the first idea Ngmoco had was to use "highly instrumented" free apps to promote premium products. It would run a bunch of quick, free apps out to the App Store, monitor how and when people used them, and then use that knowledge to promote more in-depth, premium apps. Ngmoco released Mazefinger, Topple, Dr. Awesome, Dropship, and its "first commercial hit," Rolando, all in that first round, using the free apps to drive sales of the higher-level premium apps. After a little while and a lot of data gathering, the company concluded a few things: premium apps were working, but the fast apps were not. Ngmoco would need a better way to reach a bigger audience, and it'd need to do that fast -- Young said that at that time, the App Store market was growing at 400%, but actual app releases were growing 1200%, so his company decided that "it's going to get messy."

So it began phase 2. First, another round of funding, and $10 million investment. All legacy products were shipped or killed, and focus was placed on premium titles only -- Star Defense and Rolando 2 -- while the Plus+ network was created for app promotion (to replace the "fast apps" that it'd started with). But it didn't work out: "Star Defense disappointed us," said Young, "and Rolando 2 did better, but it didn't map to the growth of the market."

Ngmoco didn't like what it was seeing at other companies either -- in the first few quarters of 2009, the average price in the top five paid apps was only $1.68, and that basically consisted of a few big name premium apps like Rock Band bringing up the average from 99 cents. At that rate, said Young, a company would have to keep a game in the top five for 365 days straight (a relatively impossible task, he said) to make only $12 million. In short, it wasn't possible, in the paid app section of the store, to make a quality application and profit off of it long term at scale.

Still, Ngmoco did believe that usage patterns on the iPhone still showed that there was a market to be found, so it went to phase 3 -- "Freeing ourselves," Young called it. He and his company decided that an app was a trade with customers -- customers would pay money to have the company fill out their free time. And that's how the company attached itself to the concept of DAUs.

DAUs, explained Young, are "daily active uniques" -- all of the people who log into an app to play with it daily, the number of unique users per given day. The company is also interested in dollars (actually cents) per DAU, or the average number of cents earned per daily user. 250,000 users may play your free app every day, but only 2% may actually pay for it using in-app purchases. If that money total equals $5000, Young said that's like 2,000 users (the average number of downloads for the top list of paid apps at the time) buying your app for $2.50. In short, you don't need to have a paid app at all -- you just need to monetize usage for that 2%.

And so in July of 2009, Ngmoco began its push for freemium. The company looked at its library, and killed or shelved everything that it didn't believe would be viable in a free-to-play model. After that, it had only two titles ready to go: Eliminate (which was called Eliminate Pro in the App Store, because that was meant to be the premium version, and the name never got changed), and Touch Pets. It also purchased a social MMO called Epic Pet Wars, and let it operate on its own, silently watching and learning what they could about how it all worked, all while "seeding" its own Plus+ network.

And that worked. Eliminate and Touch Pets both went to the #1 spot on the App Store on their releases, and Touch Pets is still growing -- it had its highest-grossing day on Valentine's Day of this year. "Vision became math," said Young, and he was convinced he had something. The design of both of those apps actually drove DAUs, and more DAUs meant more engagement, which meant more in-app purchases, which meant more profit. Ngmoco, Young believes, has "tangibly connected" game design to business success in a model that it can replicate. And he believes the biggest game in this model is yet to come -- if Ngmoco can make a game with 10 million DAUs, and design it well enough to get more than five cents per DAU, then "that would be a really, really big business."

One more round of financing, this time $25 million, and Ngmoco is taking the freemium model off to the races. Godfinger and We Rule are currently in beta (which, in the strange environment of the App Store, means they're only released in the Canadian region, not only because "we like them and they seem nice," Young joked, but because they are 5% of the global audience and happen to map pretty nicely to 75% of Ngmoco's business, in the US and the UK), and the company is planning a whole slew of titles for this year.

Next, Young ran through the three ways he believes this model is completely rethinking game design. First, it's doing things different in terms of development: traditionally, a large team of people works for a long time on a game, and once it's been through QA and testing phases, the game is released, with possible DLC afterwards. When Ngmoco started making games, it did things a little differently -- much shorter development times, highly instrumentalized (to track customer usage), with a team of five to seven people for fairly constant updates (to keep users engaged).

But under the freemium model, the plan looks very different in three major ways. First, development only takes a few months, and only until the company develops an MVP ("Minimum Viable Product") -- a game that's not yet finished, but polished enough to be released. Then there's a limited period of testing in Canada, and then the game is not released, but simply made "live," at which point a small team of different people (because developers tend to get tired of a product soon after release, Young said) oversees it through "active," "sustain," and eventually "sunset" phases.

The business model is also very different -- in a freemium model, the few subsidize the many. Young compared this to old-school arcades, where only a few "very engaged users" (about 2%, he pointed out) were constantly dropping quarters into arcade machines, even though lots of people came and played them. "Free to play is the new quartersink," he said, and then went further to say that in Ngmoco games, the "core compulsion loop is limited" even further by social interaction and gameplay mechanics (like Eliminate's Energy), which means they have an even better chance to "motivate" users than arcades ever had.

And this, said Young, is the real shift in the business -- the design of games can directly increase retention, which can directly increase profits. Ngmoco can "build designs as beautiful engines" that will scale with its audiences. And its goal is to create games that require monetization not simply as a gate to content, but as an "enabler" -- instead of preventing enjoyment while not paying, it wants to "enable" enjoyment for users who are "motivated" to pay.

Time can also be used as a gameplay variable, said Young, and the company is planning to use push notifications to increase engagement -- your games will send you notices that you need to take some action or that something has happened, and you'll be pulled back into becoming a DAU. And Young ran through the various ways that companies would be able to monetize those DAUs -- they can sell ads in the apps or use links to sell other apps on the store, or they can sell virtual goods directly to customers (Touch Pets, said Young, is making about $2.87 per transaction, and Eliminate is making about $2.17 per average transaction, which he expects will be low for them in the future.

Finally, Young said that hits will look very different under this model -- apps will make the Top Grossing chart in the app store, but being in that chart will be the result of their sales, not the reason for them. And he believes that Ngmoco's biggest game is still to be made -- all of the Plus+ apps average about two sessions per DAU (in other words, most people log into them about two times a day), Ngmoco apps as a whole log about 3 sessions per DAU, and We Rule, the first big release with lessons learned under this model, logs about 5.

Young believes that when Ngmoco finally gets its "superhits" going, the revenues will put other handheld gaming platforms "to shame," and even approach the revenues of mainstream console games. "This is the biggest transition since gaming began," Young told the crowd, and finished his address to rapturous applause.