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How Do iPhone Game Companies Make Money?

If you’ve got an iPhone, there’s a pretty good chance you’ve heard of Tapulous.

tapulous
tapulous

The company’s games — “Tap Tap Revenge” and its many spin-offs — have had over 15 million downloads, with over 11 million unique users and over 500 million games played. That’s pretty impressive for a company that’s only 16-months old.

All totaled, there are 12 titles in the company’s hit series, which borrows heavily from Activision’s “Guitar Hero” franchise and EA’s “Rock Band”. What started as an homage to those rhythm games has evolved —and now offers custom editions of the game featuring artists like Lady Gaga and Weezer.

Sure, it’s popular— but there are a few caveats to those eye-popping numbers. iPhone downloads count both free demos and paid games — and free is always more popular. So how does a small (16 person) developer make a profit, when it gives away more copies than it sells — and only gets $5 when it does rack up a sale?

For Tapulous, it’s a matter of combining several revenue streams.

Like many developers, Tapulous initially focused on income from downloads. That all changed in October 2008, though, when the company added Katie Perry’s “Hot & Cold” to the game.

Over 250,000 people clicked through from the game to the iTunes store. Nearly a quarter of those reportedly purchased the song. It proved to be a wake up call for the company—and the record labels.

Tapulous earns an affiliate fee for steering people to iTunes. Record companies, seeing the traffic the company’s games can drive, have in turn agreed to a low royality rate per song to get their artists in the game.

It has, so far, been a strategy that has worked well for all parties. Tim O’Brien, head of business development at Tapulous, says the iTunes click-through rate currently ranges between 3 percent and 10 percent, depending on the song.

Affiliate income from Apple is just part of the equation. Tapulous also generates cash via in-game advertising — and has recently begun working with Hollywood studios to run integrated marketing campaigns in its games.

Paramount sponsored the game’s “Track of the Week” featured download this summer to promote its “G.I. Joe” film. And Fox gave players the opportunity to create custom themes for its film “Jennifer’s Body”. (The winning theme was distributed in-game with the film’s title song.)

Another campaign, this time centered on a Universal film (which O’Brien declined to name), is set to launch next week.

Even those free game downloads have a sales hook to them—as they upsell the custom editions. To date, the upsell has moved over 500,000 units—bringing in nearly $2.5 million.

With the company’s newest title—“Tap Tap Revenge 3”—players will be able to purchase in-game avatars and will have a wider selection of known songs to choose from (and purchase). The rates are easy to digest for consumers—two tracks run $0.99, while six cost $2.99—but still add up quickly.

The continued growth and expansion of the “Tap Tap” franchise is somewhat ironic, given the marked drop-off in music genre titles for traditional gaming platforms. Year-to-date, the genre is down nearly 50 percent on the Xbox 360, PS3 and Wii.

“Tap Tap Revenge is more of a casual gaming experience,” says O’Brien. “The power of the iPhone is when you’re waiting for the bus and you’ve got 90 seconds and want to play something fun, you can do it. With ‘Rock Band’ and ‘Guitar Hero,’ you can’t do that. Also, the price points for entry are a lot different. With ‘Rock Band’ and ‘Guitar Hero,’ you have to pay $100 to get going.”

Tapulous’ model is, in many ways, a combination of gaming’s new and old revenue-generating ways. Shareware—letting users play a limited part of a title and charging a premium for additional content—gave birth to some of the industry’s biggest franchises, such as “Doom” and “Duke Nukem,” while in-game advertising is one of the newer tricks in game maker’s bags.

The company’s next effort will be the launch of a new franchise—“Riddim Ribbon”—which will combine music and racing.

Beyond that could lay non-music games—but only if the company can find multiple ways to make money off of those as well.

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