Gold Rush 2.0

As the overseas launch of the iPad approaches, and the United States prepares for the arrival of the 3G models of the tablet system - which are likely to bring with them a significant surge in demand, if the pre-order figures being bandied about are realistic - many developers will be casting their minds back to statements made during the gadget's much-hyped launch in January. In particular, some will recall the promise of a "second gold rush" - a new wave of success for app and game developers, comparable to the heady early days of the iPhone and iPod Touch.

The concept of a gold rush brings to mind the unbridled optimism of realising that there are untapped veins of profit waiting for the right people to come along and exploit them - open pastures as yet untouched by the big corporations who dominate other sectors of the market, ready for small, enthusiastic and innovative people to move in and make their mark.

Students of history, however, will point out that real gold rushes also tended to have much darker consequences. Battles between rival prospectors and a wanton disregard for the environment meant that the human and ecological costs of gold rushes could be immense, leaving behind a barren, scorched landscape and dusty, desperate towns filled with those who couldn't afford to escape to greener pastures. There's a good reason why many of the most bleak Westerns are set in the aftermath of a gold rush.

In other words, it's worth taking a closer look at where the iPhone gold rush has left the market before we all get too excited about the prospect of doing it all over again on the iPad.

There's no question but that the iPhone has been an immense success as a gaming platform. Software revenues on the device have overtaken the PSP in the United States, according to some measurements - and even if other metrics are more dubious on this claim, the fact that a platform where games almost all cost less than $5 is even in the same ballpark as one where the games cost $25 or more is astonishing.

Moreover, it's undeniable that much of that success has fallen into the laps of small, plucky developers rather than the established publishers. Larger publishers have certainly had hits on the iPhone, but most of the platform's runaway successes have come from newcomers or independent developers. Their success is enabled by Apple's largely agnostic approach to publishers, with the firm much more willing than other platform holders to promote worthy indie efforts over the heads of less appealing titles from industry behemoths, and is amplified by the low overheads of small studios, who can therefore enjoy far more of their success as profit.

Not all of the promised land's rivers, however, run filled with milk and honey. Huge problems have emerged in the iPhone game market - problems which the iPad risks repeating, or simply carrying over.

The most obvious problem is pricing. From a consumer perspective, the iPhone offers extraordinary value, with many great games selling for under $2 - and some good titles going for under $1, or even for free. This is the result of intense competition on the platform, which has pushed prices down closer and closer to the App Store's lower limit (79 cents, or 59 pence) as the device's lifespan has extended. What started out as price points for simple, cheap games have gradually become ingrained in consumers' minds as being the price point everything should aim for - and more expensive software has to work very hard indeed to justify its pricing.

Of course, if a game creator can sell something for $1 and make a profit from it, then he is perfectly entitled to do so - that is the market at work. Game publishers may be unable to compete with that, since they have much larger overheads and costs, but the beauty of an open market is that it allows small, nimble companies with low costs and good ideas to undercut lumbering, inefficient rivals.

The problem is that, in conversation with iPhone game developers, it seems increasingly obvious that many of them cannot sell their titles at $1 and make a profit from them - but feel forced to opt for lower price points in order to win the consideration of consumers in the first place. They are playing a risky gamble, hoping that by establishing the game as a success they will create an opportunity for profit down the line. In doing so, they give the vicious circle another hefty push, ensuring that other developers, too, cannot break out of this destructive cycle.

Just as gold prospectors scorched the earth behind them, so too have developers on the App Store critically damaged the ecosystem in which they operate. The extent to which prices on the App Store have collapsed are not the result of a healthy market - they're the consequence of a perversion of the dynamics of the market by developers willing to sell at a loss in order to make a land grab, forcing others to follow in their footsteps and keep the downward pressure mounting.

The consequences of this problem will reach out and touch the iPad, too. Already developers attempting to launch products at higher price points on the iPad are being hammered in reviews for "profiteering" - a dirty word in some quarters, perhaps, but hardly unreasonable if you're one of the iPhone developers who's been sucking down losses on your games for the past year.

Two solutions present themselves. The first is for Apple to enforce more tight price controls on the App Store, raising the lower boundary for games to bring an end to this destructive cycle. That, however, won't happen - and nor should it. Quite laudably, Apple views itself as being beholden to one group of people only, namely those who buy its hardware. With no significant vested interest in the software end of things, it's not particularly concerned about pricing, and would prefer developers to work things out among themselves.

The second solution, then, is the one that must come to pass - and that's the abandoning of up-front pricing for games entirely. If it's not possible to sell App Store titles for 79 cents each and make a profit, then companies must turn to other solutions. In-app purchasing and advertising are the two obvious candidates, along with a version of the old shareware model from the heyday of the PC platform - but there may well be other business models out there as well. In particular, the launch of Apple's own iAd network - a shot across Google's bows if ever we've seen one - should make game developers sit up and take notice.

For years, commentators have argued that "freemium" models such as these could be useful additions to existing business practices. On the iPhone at least, events have overtaken such ideas. An understanding of Freemium on this platform isn't just a nice-to-have - as developers plough salt into the ruins of the pricing tiers on the App Store, Freemium may well be the only way for good games to capitalise on one of the world's fastest growing gaming platforms.