Around the same time that the maker of breakout mobile game Candy Crush filed for its IPO, we caught up with eMarketer’s new forecast for digital ad spending in the US.

We were intrigued.

King Digital Entertainment is a well-established game developer that created the perfect storm over the past two years with Candy Crush by harnessing mobile, multi-platform access and in-app purchases.  The company exploded: $164 million in revenue in 2012, $1.9 billion in 2013 and profit of nearly $570 million.

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What captures our attention is the key metrics that drive the King Digital business.

First, mobile.  This delivery platform made up 9% of total revenue in 2012 and 70% in 2013.  They figured it out.

Second, the economics of scale.  King delivered 41 billion games plays in 2013.  It averages 324 million users a month.

Ninety-six percent of users play free.  But those 12 million players that convert to payers spent an average of $17.32 during their game play.

King doesn’t solicit subscriptions.  It sells game aids in .99, $1.99 and $2.99 bites.  The psychology is deft: as a player, you assess how close you are you to beating the level and whether it’s worth spending a dollar to extend for five turns.

This isn’t a new concept — it was built into pinball games from almost the very beginning.  But King masterfully executes the balance between incentive and emotional usury.  If you haven’t downloaded the game and played it, we highly recommend.  You can’t understand this business model without experiencing it.

What relevance do King’s key metrics have to eMarketer’s new forecast?

King is the quintessential example of the app economy.

It does not spend a single dollar on advertising.  The company relies on its network of players to promote its own games.

We are in the inflection point of dual digital economies: the advertising economy and the app economy.

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At TMT, we believe that the rise of the app economy is influencing the change in the digital ad economy.  Engagement is demonstrated to be highly profitable.  The challenges are to engage at scale and to have a business model that promotes profitable conversion.

The days of trying to convert users without engagement are passing quickly.

This is reflected in eMarketer’s forecast.  Low-engagement ad formats such as lead generation, classifieds, banner ads and even search are projected to slow markedly in growth over the next several years.

High engagement formats, including video, sponsorships and rich media, are projected to experience double-digital growth over the next five years.

The successful providers of advertising will give marketers access to a similar consumer experience that King creates in its game.  Easy access to engagement — regardless of the topic — and seamless opportunity to convert to an economic relationship that improves the quality of engagement.  Native advertising, video, sponsorships are all examples of this development, and the trend is only going to increase.  User behavior dictates that it will.

 

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