Earlier this month, right as the video game industry began gathering for the annual E3 trade show, Apple enacted a policy change and began rejecting apps (and app updates) that incorporated advertising-based rewards and social sharing. That opened the company up to plenty of uncomfortable meetings and after-hour party run-ins with peeved developers and publishers.

Many of the complaints centered around the ‘danger’ of Apple nulling-and-voiding apps simply on the basis of advertising rewards. While many in the industry agree the company needs to police (and punish) developers who threaten Apple’s rankings, game makers were upset with the lack of delineation. Rejecting apps for sabotaging rankings is one thing, but what about those that offer rewards as an alternative to cash-based transactions on their free-to-play games?

Despite the popularity of the free-to-play model, fewer than 3% of the overall player base makes in-game purchases. App monetization in free-to-play games is even more dismal, according to a recent study by Swrv, the reports indicates that, “50% of revenue is derived from the top 10% of those players who do make purchases. Expressed as a percentage of total players, this group represents a 0.15% of the total players in any given month.”

“For most developers and publishers, this [advertising-based] revenue stream is desperately needed,” says Kathryn Morrison, Director of Business Development at RadiumOne, which provides incentivized and non-incentivized videos and interstitials. “The common practice of incentivizing a short video preview of the game, followed by a non-incentivized option for the user to download, is a widely used and accepted model for game publishers – and Apple is wiping it out completely.”

Apple, to its credit, apparently listened to what its partners had to say. This week, Apple adjusted its decision, opting to focus on ranking manipulation rather than advertising-based rewards in apps.

That’s good news. Incentive-based rewards system is a good work-around for the dismal in-app purchase numbers and one that benefits End-users, Developers & Publishers, and Advertisers. Here’s how:

End-Users – Players are cheapskates. That’s inarguable – and, frankly, a bit understandable. But in many games, rejecting in-app purchases puts them at a disadvantage, and rather than putting additional effort into a game, they’ll delete it and download something else. Rewards-based incentives enable that user to advance and continue to enjoy the experience. (And the longer a player sticks with a game, the more likely they are, at some point, to conduct an in-app cash-based transaction.)

This rewards system also gives players a little more flexibility (e.g. for obtaining a special shield or sword, they can opt for an advertisement from Coca Cola, BMW, or Hotels.com), something they appreciate.

Developers & Publishers – Hunting for whales isn’t cheap. It has become increasingly difficult for developers to find paying players to support the free-to-play ecosystem. User acquisition costs began to skyrocket last year, giving an advantage to publishers with deep pockets, who can afford big burst campaigns to acquire users. In-game rewards, like advertising-based ones, give smaller developers and publishers the opportunity to monetize the 97% of their audience that play without paying.

Easing in-game frustrations through methods like this also helps developers better retain their player-base – something that’s much cheaper than acquiring new ones. And it allows them to generate revenues to create additional content for the game (another key tool in keeping players hooked) as well as new apps, which keeps the Apple ecosystem thriving.

Breakout apps that are ad-supported can generate as much as $100,000 per month, according to IDC/AppAnnie. And apps in the 75th to 90th percentile can generate $10,000 per month (from both incentive-based and traditional ads).

Advertisers – For many companies, native advertising has provided a unique opportunity to connect their brands with users in a meaningful way. Rather than being intrusive annoyances, the marketing messages can offer value to consumers (via coins, gems, power up or whatever token the game offers). Ads also become interactive, letting companies gather information as users take a survey, click through for more information or utilize some other creative method that makes the brand part of the game/app experience.

While Apple may have scaled back its restrictions, the battle to ensure advertising is accepted as another form of in-game currency is far from over.

Apple does not currently benefit from advertising-based rewards in same fashion it does from micro-transactions (where the company obtains 30%). And seeing as the App Store now makes over $1 billion per year for Apple – representing between 2-3% of its overall gross margin, it’s going to protect its interests however it can.


Image: Courtesy of Synthetic Idea

Disclosure: Ross Avner is consultant at RadiumOne where he works directly with RadiumOne Engage business development and partner management teams interfacing with Developers and Publishers.

Ross Avner is the principal and strategist for consultancy firm Point A2B, where he advises companies on digital media, game products, and business development. Ross is the former Head of Yahoo! Games and has been part of the games industry for over 12 years in both startup and corporate roles. You can follow Ross on Twitter @rossavner and write him directly at ross@point-a2b.com. This article originally appeared on LinkedIn, and has been reprinted here with the author’s permission.