Question

In 2017 , Apple reported that since its iTunes App Store had opened in 2008 , third-party app developers had earned more than \$60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. Given this outcome, would we expect individuals and companies to continue developing games in the long run? Briefly explain.

Short answer

It is likely that some developers will continue to develop games as long as they are breaking even, driven by factors such as passion for game development, the prospect of creating a hit game, or potential future market conditions that may allow for increased profitability. However, in the long run, absence of profit potential may cause some developers, especially those without a distinct competitive advantage, to exit the market.

Step-by-step solution

Understand Market Forces

In this scenario, there seems to be a significant disparity between the total earnings of the app industry and the average earnings of individual developers. This indicates that the market is saturated and highly competitive. It is important to understand that in such scenarios, companies or individuals will continue to create and develop games as long as they are at least breaking even.

Consider Long-term Sustainability

As long as companies or individuals are breaking even, they are covering their costs and are not operating at a loss. However, for long-term sustainability, the potential for profit is crucial. In a highly competitive market, those with unique, high-quality offerings that meet customer needs are more likely to generate profits.

Draw Conclusions Based on Market Behaviour

Given the information provided, it is reasonable to assume that not all developers will continue to develop games in the long run if they are only breaking even, especially those without a distinct competitive advantage. However, some may still decide to stay in the game development market due to factors such as passion for game development, the prospect of creating a hit game, or potential future market conditions that may allow for increased profitability.

Key concepts

Sustainable Business Model

In the world of app development, a sustainable business model is paramount for long-term success. Sustainability in this context means that a business can maintain its operations and growth over time without exhausting its resources or being outcompeted by rivals. In the app market, this often requires a keen understanding of consumer preferences, continuous innovation, and efficient resource allocation. For game developers, beyond breaking even, sustainability involves strategies that increase user engagement, explore new revenue streams such as in-app purchases, subscriptions, or ad models, and manage development costs effectively.

Given the formidable earnings from the app industry, it’s evident that success is attainable, but developers must be cognizant of scaling their operations in a way that their costs don't outpace their revenue. A sustainable model in game development might revolve around creating a recognizable brand, retaining a loyal user base, and consistently offering fresh content to maintain users' interest. In essence, while the app market is crowded, there is a path to sustainability, and it’s carved by systematic planning, adaptability, and the creation of value that resonates with users.

Profitability in Competitive Markets

Competitive markets, especially in the digital realm like app development, require astute strategies to achieve profitability. Earning a profit can be challenging when numerous competitors are vying for the same audience's attention. Profitability is determined by the company's ability to generate revenues that exceed its cost of production, marketing, and distribution. In highly saturated markets, differentiating one’s product and efficient cost management are keys to success.

The app development market is known for its high competition, with myriad games offering similar experiences. To profit in such a market, developers can focus on creating a unique value proposition. This could be an innovative game mechanic, a captivating storyline, or social features that encourage sharing and community building. Additionally, leveraging data analytics to understand user behavior and optimize marketing strategies can help reduce customer acquisition costs and increase conversion rates. Developers can also implement a 'freemium' model, where the game is free to play with optional payments for enhanced experiences. Hence, while the competition is fierce, profitability is still within reach for those who can effectively stand out and operate efficiently.

Break Even Analysis

A break even analysis is a fundamental financial tool that calculates the point at which total costs and total revenues are equal, meaning no net loss or gain. In the context of app development, this means the point where the cost of creating and marketing an app is equal to the income generated from the app. It’s a crucial metric for any developer to understand their venture's financial viability.

To conduct a break even analysis, one must consider all costs associated with developing and deploying an app—including software, hardware, personnel, marketing, and ongoing support. Revenue streams will typically encompass app sales, in-app purchases, subscription fees, and advertising revenue. By understanding the break even point, developers can make informed decisions about pricing strategies, budget allocations, and potential market expansion efforts. Those who hover around this point could either revise their business strategies to foster greater growth or decide that the business cannot achieve a desirable level of profitability and may exit the market. In summary, understanding and applying break even analysis provides valuable insight into whether pursuing or continuing with game development is a financially sound decision in a competitive marketplace.