Opinion: Why user acquisition prices are going through the roof, and why it’s bad news for the mobile ecosystem

It costs a lot of money to acquire users for a mobile game right now. Over the past six months, we’ve heard companies throwing around per-user figures ranging from $1.50 (borderline unaffordable) to $3.00 (insane) to $6 (ludicrous).

For most developers, this is just way too much. Companies are only profitable when they earn more than they spend, and since mobile users are typically hard to convert and not terribly valuable even when they do, it’s either very hard — or mathematically impossible — to break even at these rates.

For example, if a developers buys 100 new users at $3 each, and 10 percent of them convert (which would be a very good rate), then each of those users needs to deliver at least $30 in lifetime value in order for the company to break even on its initial advertising outlay. That figure is high even by the standards of mid-core developers, even though their games typically monetize at a higher rate than most mobile apps.

The amount of time it will take to break even is another issue. While companies like NaturalMotion and Supercell are earning tens of millions of dollars a month, their earnings are special cases, not the norm. Mobile developers measure their average revenue per daily active user (ARPDAU) in the cents. Even if every single daily active user a company had was generating $0.10 a day in revenue, it would take a long time for those users for them to pay for themselves if they were bought for $3 each.

So how did rates become so unaffordable?

One factor is the time of year. Apple just released the iPhone 5, and the company’s hardware releases typically push up the cost of marketing on iOS. User acquisition costs are rising on Android too, as more and more evidence comes out that there is money to be made on the platform. The upcoming holiday season will also compound the problem, as developers rush to catch users as they try out brand-new apps on their brand-new devices.

But aside from all that, there are two large Japanese elephants in the room. Quietly engaged in a turf war, both GREE and DeNA’s U.S. subsidiary Ngmoco are willing to pay top dollar for installs in order to lock up what they see as relatively uncontested international markets.

Both companies have big bankrolls (GREE earned $508 million in revenue last quarter, DeNA earned $609 million) to fund the outlays. Both also view their user acquisition programs as a long-term investments. They pay now for loyal platform users that will monetize across a variety of first and third-party games over the next several years.

It’s a smart strategy for both companies — as big players they stand to benefit from consolidation. According to Eiji Araki, GREE’s senior vice president of social games, his company expects that in two to three years, the mobile gaming ecosystem will look a lot like the traditional one, dominated by two or three large players. Buying your way into an industry at a loss to ensure a future market share isn’t a new business strategy — both Microsoft and Samsung have used it to great effect. But it does mean smaller companies will have a very hard time competing and staying independent.

All of these factors are the reason so many companies are looking to alternate user acquisition strategies. Cross-promotion inventory trading is more popular than ever, with companies like Chartboost and publishers like 6waves, PapayaMobile and even Zynga choosing to leverage their existing player bases as a resource for downloads. TinyCo’s new Tiny Partners program is also designed to help the company avoid the rising costs of user acquisition. TinyCo’s promise to share as much as 75 percent of the revenue generated with its partners is generous, but the move also ensures TinyCo gets top quality advertising with no up-front cost, since the company only pays out when users spend money. Even if TinyCo only takes home $2.50 of the $10 a Tiny Partners program user spends, it didn’t actually have to spend any money or do any work to earn that $2.50 — a good deal for TinyCo indeed.

Facebook’s new mobile install ads could also help. While the ads aren’t likely to be cheaper than current options, the ability to leverage Facebook’s database to target new users based on demographics and interests (while excluding users that have already connected with an app), could make mobile advertising more precise and raise conversion rates.

Altogether though, rising user acquisition costs are bad news for the entire mobile ecosystem — not just the little guys. Discovery on mobile is still difficult, if not broken. One of the most effective ways to get a game noticed is to get it on the charts, but without luck or a rabid fanbase, there’s little guarantee a game will succeed even if its launch is matched with a big, expensive burst-advertising campaign.

In the spring, we began to see developers abandoning Facebook in favor of mobile. They were looking for a platform that wasn’t dominated by a few large players who could afford to pay handsomely to acquire new users for their games. It seems that six months later mobile is moving in the same direction — the only problem is that now there’s no other platform to jump to.