I have been exploring the reality of smartphone apps as a business. There is no question that we consumers love to download apps, in particular free apps. The question is – is there business case in them? Couple a months ago, I did the first major study of the economics of smartphone apps, which focused on the futility of the paid apps. That article has been widely referenced as a landmark study to expose some myths in smartphone apps.

However, we did not have the data yet on the advertising side. Perhaps there is real money in the advertising in smartphone apps – as most of free apps feature advertising from AdMob, Google and the like. Today, I can finally report on a particular case study of an early super-hit of the free apps space. In fact this is a story about a game that earned Apple’s awards for the best free iPhone game of 2009. How much ad money out of 10 Million game downloads?

10 Million Downloads
Wooden Labyrinth 3D by QvikFinnish game developer Elias Pietila is the founder of Qvik. The company developed the incredibly successful "Wooden Labyrinth 3D" game for which he won the game design award from Apple’s iPhone App Store in 2009. The game is now on all other major platforms as well, like Android and Ovi, and has achieved over 10 million total downloads. The game is free and is both highly rated and popular.

Elias spoke at the Mobile Developer Camp and gave very candid numbers and facts, about how they were able to monetize the game, through advertising. I think this speaks volumes about the overall opportunity of advertising in smartphone apps – or the lack thereof.

So Qvik had that rare beast, a chart-topping game on the Apple iPhone App Store. They were achieving millions of downloads. But the game was free. So how to monetize that? Advertising sounded like a good idea and in 2010 Qvik launched in-game advertising.

108 Million Ads Served
Well, for ads served, out of the total user base of 10 million Wooden Labyrinth 3D game users, they served a total of 108 million ads. Almost 11 ads served per game player on average. Looks good so far.

What of the gamers, did they like the ads? Did they click on the ads? Here is where in-game advertising gets tricky – it is intrusive to the gaming experience. But yes, Elias shared with us the total number of clicks. 1.1 Million. Yes. 1 percent click-through rate! Only. Only one percent. For all that interruption of the gaming experience it would mean 99 ignored ads, for every one actually clicked upon. And Qvik was only paid for those ads that had click-through.

So right from the start – while in-game advertising is fresh and new and ‘novel’ – and may have novelty value – the performance is so poor it is nearly as bad as internet web banner ads. Worse than search word ads. I think we already have learned a very valuable lesson here. If all those millions of game developers enable in-game advertising, we will see monstrous amounts of ads ‘served’ while extremely few are actually achieving anything we could possibly consider ‘interactivity’ or ‘engagement’ or anything meaningful in terms of digital advertising platform success. As this is a case study, we have to monitor these facts and see, but this kind of bombardment of audiences can explain why the numbers of mobile ads exploded last year by all the major ad networks like Admob etc.

Total Ad Revenue: 30,000 U.S. Dollars
Mobile Advertising is increasing in pace, but does it pay up? According to initial reports, the answer is noBut what of Qvik and its revenues? Now comes the painful part. Out of 108 million ads served, Qvik earned a total massive income of… 24,000 Euros (about 30,000 US dollars). So in terms of ads served, Qvik’s income was zero point zero two cents per ad. 0.02 cents. Not 0.02 Euros, 0.0002 Euros per ad served! Over 100 million ads sent, 30,000 US dollars earned. This is quite demoralizing as it was a lot of pain for a little gain. Yes, for a game developer who had a free game, it is ‘better than nothing’ but only barely so. Remember this income arrives years after the game is developed and launched, only if it achieves the millions-of-downloads level of exceptional game success and received incalculable amount of free advertising through different media – from blogs to mainstream press and TV.

If we calculate it across the total number of Wooden Labyrinth 3D games downloaded, Qvik has earned a "massive" 0.24 Euro cents (0.3 US cents) per game download. One quarter of one Euro cent, or almost one third of one US cent, per downloaded game. That’s the cruel reality of a Qvik business case.

Let’s take a lesson out of this. Last year Supercollider blog did the analysis of ‘average’ and ‘median’ for app downloads including free apps. This math is skewed very heavily by the few hits like Angry Birds, Bejeweled 2 and Wooden Labyrinth 3D who all scored millions of users. Bear in mind even the reported average download number is only 25,000 – that is not the median figure. In fact, Supercollider reported that 54% of all apps receive less than 1,000 downloads.

What of Real World if Your App is Not a Hit?
If you are lucky to be better than half, and you achieve 1,000 total downloads of your cool free game – you are ahead of the curve! You are a ‘success’ – while a modest one. You are better than the half of all your global competitors. And now, if you achieve 30 US cents per download through your in-game advertising, the ad revenue you can hope to achieve is If your game reaches modest levels of ‘success’ and you monetize that, and if you are as successful at it, as the highly popular game Wooden Labyrinth 3D was back in 2010, then you would be lucky to earn… 3 US dollars out of in-game advertising.

Remember – half of all apps created get less downloads than that. And if advertising is your model, you could earn 3 dollars per year. If your game was developed at the very bottom range of what is reported (top end being about 50,000 US dollars, typical costs reported in the 25,000-35,000 dollar range, the very bottom at 12,000 dollars per smartphone app) – so if you developed the game very cheaply, it cost you only 12,000 dollars, and you made no updates to it during its lifespan, and you achieved the 54th percentile downloads (1,000 downloads) and you monetized that through in-game ads, you would break even in… 4,000 years. I think we need some developments in human life-spans to be able to enjoy the fruits of our labor, if this is the method..

Early Metrics
So the metrics are out of this early case study. In-game advertising for exceptionally successful multi-million download free game in smartphone apps – for all in-game ads served, you might get 1% click-through rates. For all ads served, you might get 0.02 cents – 0.0002 Euros/Dollars – per ad. And if measured by game downloads, you might earn a massive 0.3 US cents per game downloaded – or to put it in another way, you need 300 game downloads to earn one dollar. For advertisers, this is a horribly bad ‘copy’ of the failing banner ad concept from the internet. For the free app developers, the reality of advertising is exposing yet another aspect of this as a myth. Currently, there is no magical Eldorado in smartphone apps. Not by paid apps, not by advertising either. It may become a relevant market opportunity in the future; it is not so today.

Thank you Elias for excellent insights out of your great success as a game developer, and modest success as a smartphone app game entrepreneur.

If you are involved in the smartphone apps space, and have not read it, please take the time to read the analysis of smarpthone app economics. The article is from last year and I will eventually do a total rewrite and update of it, but the logic is 100% sound and no new facts have emerged to discredit any major conclusion of that landmark analysis. And if you are from the advertising side, please consider this article about mobile marketing (beyond smarpthone apps) and where response rates of 25%-45% are the norm, if done the ‘right way’ using the most advanced methods today. Yes, you can have great mobile advertising but today, that is not via free smartphone apps.

And if you want to read a real book on the mobile industry including a chapter on the smartphone apps space, my 10th book is the only one of my 11 books that is totally free, you can download it now from Lulu. It is called the Insider’s Guide to Mobile and runs 350 pages. It even has a foreword by the CEO of today’s hottest topic and company in mobile, Raimo van der Klein who runs Layar, the Augmented Reality company. Download the unrestricted pdf file at this link from Lulu: Tomi Ahonen Insider’s Guide to Mobile.