Should ‘UNO™ & FRIENDS’ cut out non-paying customers from its ecosystem?

Introduction:

Gameloft’s ‘UNO™ & FRIENDS’ is the number 1 free card game on Android with over 50 Million downloads. One can download the game for free and play the addictive game with players around the world, until free coins run out and after watching a few ads. If a customer still does not make an in-app purchase to buy coins (in-app Products range between $1.99 and $6.99 per item), customers are not allowed to play further.

Is Gameloft’s strategy right? I hypothesize that Gameloft’s marginal cost to let a non-paying customer continue to play can be recovered through other monetization means, including more ads for Gameloft’s other games or commercial products and refer a friend. King, the developer of Candy Crush Saga, pursued other monetization means and has ~55x more downloads i.e. 2.73 Billion customers (Nov 2017), of which only 2.3% (Feb 2015) were paying customers who contributed an average of $23.42 per month (Feb 2015). In contrast, in Q1 2017, Gameloft’s revenue and profitability declined, and UNO™ & FRIENDS was not listed as a key performed for Gameloft.

It appears as if Gameloft chose to only serve customers who are willing to make in app purchases. Had Gameloft not been stringent, perhaps, it could have emulated King’s success. Well, it is late for Gameloft to course correct as its license with Mattel expires in June 2018. But what should Gameloft’s successor do — retain all customers or only paying customers?

Analysis:

This is one of those blogs wherein I would like to learn more from the comments section. I have analyzed this situation using some frameworks I picked up in B-school to start the conversation. I am not convinced that I know why Gameloft chose this strategy. Please share your insights in the comments section.

A simple thumb-rule that applies well is that in the long term, customers who do not generate revenue to cover their marginal cost should not be retained. However, in the short term to achieve strategic advantages, firms can offer products below their marginal cost. Even if Gameloft was unable to cover its marginal cost from non-paying customers, perhaps trying to provide the game for free in the short term, and expecting more downloads might have given Gameloft two advantages: first, reduce its marginal cost, and second, leverage the larger customer size to charge more money per advertisement to offset the reduced marginal costs. Conducting A/B tests to check whether allowing customers to continue playing for free would have helped Gameloft to test this framework.

Another school of thought is that revenue/profit maximization can be made by retaining customers who are both satisfied and loyal, so that customers feel exclusive and the firm can earn maximize revenue and profit by providing a high quality service. For example, Ferrari and Lamborghini attract few niche customers and charge them a high premium, while Nissan and Ford attract a lot of customers and charge them a small premium, and yet both these categories of car manufacturers are successful in their own accord. However, in my understanding, what differentiates cars from mobile games is that no passer-by would drop his/her jaw or look in awe at a customer who is playing UNO™ & FRIENDS, while they would do so when they look at a customer driving a Ferrari or a Lamborghini. Hence, this framework also does not explain why Gameloft did what it did.

Do you have any hypothesis or do you know the rationale? Please let me know your insights through the comments section below!