Why Raising Investments in Mobile Game Development Became More Difficult in 2024 — A Column by Azur Games

Today, how much will it cost to develop a mobile game and what margin can be expected from it? Dmitry Yaminsky, co-founder of Azur Games, shared his insights in his column.

Dmitry Yaminsky

During the pandemic, the margin of the mobile games market kept growing, surpassing trends. Even after that, the market remained attractive despite some deceleration in growth. It allowed for high margins or substantial profits when selling shares. But now, the situation is not so clear. Everything has changed.

It might seem that the hypercasual games market (hereinafter — HCM) still holds a huge share of installs, contrary to the usual predictions of its demise. In 2023, the segment accounted for 26% of all mobile game downloads. However, while a few years ago almost every project had a chance to succeed, now out of 1,000 new games, there may not be a single hit. Moreover, looking at the installation distribution graph, the lion's share belongs to older projects that continue to be developed and supported by publishers using a model close to GaaS. Yes, you can and should work in this market — our HCM division alone received over 2 billion installs last year. But you also need to give a sober assessment of the profitability of this direction.

A similar situation is observed in the casual market — previously, obtaining funding for a prototype without metrics was not too difficult. The success rate among such projects was 1 in 10-15. Now, however, companies rarely are willing to invest in projects without initial metrics. Exceptions are teams with impressive backgrounds, but this does not negate the extremely high competition in the market.

All this means that it's almost impossible for a small young team to deliver a successful project. There are success stories, but focusing on them is making a typical survivorship bias mistake. Market growth has slowed, advertising effectiveness has decreased, and margins have become ordinary, market-average.

From now on, to develop a successful casual project, you must include in the costs a team of several dozen people, remembering the necessity of several attempts before managing to release a project ready for scale.

Let's take a more detailed look at how business has changed in terms of costs and profitability over the past few years. We'll examine the HCM segment and the business models for casual and midcore directions, which have become some of our priorities for further development.

What Has Changed

Three to five years ago, HCM games were at their peak and were often developed by one to two people. A “bare” core mechanic with relatively simple visuals was enough to rise to the top and achieve more than 50% margins, considering rev-share. Little attention was paid to effects, production as such, details, UI, etc.

HCM games then and now (Rise Up: Balloon Game and Merge Archers: Bow And Arrow)

At that time, this led to a huge wave of developers who became pioneers in this direction, capable of succeeding in business with relatively small investments. They only needed to spend $2-5 thousand, most of which was covered by the publisher, to have a 1 in 20 chance of launching a project that not only paid off the time spent but could also scale up purchases to several hundred thousand dollars per month.

If we talk about 2023-2024, by this time the team composition for HCM has undergone significant changes and looks something like this:

• 1-2 programmers;
• game designer;
• art manager;
• VFX specialist.

And this is the minimal setup for one prototype. In some cases, the size of an HCM unit today can reach up to 10 people. Remember, out of 20 projects, none might succeed or even break even. Thus, it becomes necessary to increase the number of such units within one studio, further decreasing margin.

Ultimately, we frequently have studios with 3-4 such units developing multiple projects in parallel, while maintaining a high quality standard. Studios can easily hire modellers, artists, and level designers for specific positions. Simply having a core mechanic is not enough to reach the top; you need to work on overarching gameplay, monetization points, level funnels, and polish effects and animations.

Many publishers also connect their own specialists to work with partner studios. These include producers, game designers, marketers, analysts, sound designers, ASO experts, and more.

As a result, the average cost of developing a project with decent metrics, considering all iterations, can easily exceed $20,000, which should again be multiplied by the number of attempts required to release a next hit. This turns into a typical VC scenario, where only one out of dozens of projects might succeed.

Margins and Costs

Now the most interesting part — the current average margin for HCM projects is about 10-15%. The typical team composition is:

• one or two programmers;
• game designer;
• art manager;
• VFX specialist;
• possibly, studio head.

Maintaining such a team, considering average salaries and additional expenses, will cost approximately $30,000 per month, factoring in rev-share between the developer and publisher. Without a publisher, team maintenance costs would increase significantly due to the need to hire marketers, lawyers, and more, but we're not considering that option right now.

To break even with such a team:

• you need a project with marketing spend of $500,000 per month or higher with a margin of at least 15%;
• you must consider the need for repeat investments to maintain or grow current turnover;
• you need reinvestments in new project development to sustain growth.

We also don't forget about previously invested funds, because they are deducted from revenue share until the overall profit reaches zero; only then can we talk about any profit.

Not such a rosy picture for an entrepreneur, right? In fact, this turns out to be a not very high-margin story, comparable to traditional offline business. Ultimately, average investments in this direction pay off in 1.5-2 years, after which they begin to yield market-level profits.

Developing an HCM game now takes 2-4 months, and you need to pay salaries all this time. Even if you successfully reach release and start buying traffic, you can't spend $500,000 on user acquisition in the first month. Spending will need to ramp up gradually.

As a result, approximate figures for a team burning $30,000 after several months of development and having a successful product with a 15% margin might look something like this (using the common HCM profit distribution ratio of 40 to 60):

So, it will take a long time to break even, and it's not certain the months spent on prototype development won't be in vain. You'll likely have to start over until you create a working product.

Casual and Midcore

Railroad Empire

Here the math gets even more interesting and usually depends on the project itself. But the most interesting part for those investing in a project is the average chance of success. On average, 1 out of 10 projects succeeds, ensuring break-even of all investments in the remaining nine projects over 2-3 years.

Investment costs for developing a casual project range from $500,000 (initial investment) to $2-3 million (if the project reaches release). At one stage, it may become clear that the project failed to find its market fit, which means the invested funds are gone.

Now let's break down where the figures come from and what are the main stages of casual/midcore development. The bare minimum:

1. Assemble an initial team of 15-20 people (assuming the studio works with a publisher, not independently).
2. Create the first game prototype within a year.
3. Gather base metrics (at this point, it is decided whether to proceed with development or the initial investments are never seen again).
4. If all goes well, the project shows promise and spens at least break even, scale the team for comprehensive work on the project (by this stage, the studio's monthly burn rate will be at least $70,000).
5. Full-fledged game development over several iterations until full release (can take up to two more years).

This means the margin of a successful casual/midcore project should cover an average of $10-15 million in unsuccessful investments. Of course, the success rate might vary, but overall, the market picture is about this. Also, understand that purchases for such projects also increase gradually, so for some time, even with spends over $300,000, the company will break even by reinvesting all profits into development and marketing spend growth.

Let's summarize the figures for a casual/midcore project for a team burning $70,000 after a few years of developing a product that has actually reached release. We'll use a realistic margin of 80%, considering organic growth, which can be 30% for casual/midcore. Studio profit share — 50%.

There's another interesting aspect with midcore. In the final columns, you can see that the burn rate on the team increases. The numbers vary for everyone, but the essence is that the team needs to grow gradually depending on spending. Sometimes costs are overstated to keep up with growth, causing issues that are addressed by hiring additional specialists. But hiring a large team right away makes no sense; it's too expensive with a high risk of project closure.

Time to Consider Diversification?

Mobile game development and the IT industry in general have ceased to be gold mines where you can jump in and turn profits on a growing market. Now, it is not such a high-margin story; it's mature industry for serious players with a comprehensive approach, accumulated expertise, and low chances of success for individual companies. To work in it, it's advisable not just to know how to develop games but to love what you do.

Why has obtaining the first round of investments become more challenging? Investors are primarily concerned with returns. Global goals never change, so your studio must offer market returns. That is why the volumes of investments and deals involving major players have significantly decreased in recent years.

Founders of gaming studios need to understand — their projects must deliver profits comparable to other industries. Offline business is traditionally perceived as "not cool" for those working in IT until it shows higher margins.

Take a simple example — the restaurant business. For clarity, let's imagine opening a restaurant in the UAE — tax conditions are simpler there, almost non-existent, making calculations easier. The budget for opening a quality restaurant ranges from $3 to $6 million, with a payback period of 2 to 4 years.

A common scenario is revenue allocation as follows: 25% goes to food, 25% to staff, 25% to the premises, and 25% of revenue is net profit. This is an average figure, given the high seasonality of this business.

Using a common revenue of $500,000 per month, you get:

• food — $125,000 per month;
• staff — $100,000 per month;
• premises — $150,000 per month;
• net profit — $125,000 per month.

The chances of establishing a revenue-generating food service venue (or store) are higher than launching a profitable game. Yes, the restaurant business cannot scale at the same level, but it is much more stable.

In mobile game development, profitability on projects has generally declined, successful launches are much rarer. Consequently, young teams without accumulated expertise find it harder, and major publishers and developers are forced to adapt and abandon hopes for extraordinary short-term profits.

Quality of the product and long-term operation are coming to the forefront. Developers sometimes must swallow their pride in striving to create a "dream game" and focus on business. Sometimes teams entirely lack the desire to operate a studio, and in such cases, it's ideal to enlist a strategist who can provide all the infrastructure and offer precise business assistance.

The choice is individual, but always remember — the market speaks the language of finance, and you must keep this in mind with any investment. This means that companies that not only know how to create games but also understand all business aspects establish themselves in the industry.