Why Chinese gamers hit the brakes on App Store sales

While Americans were playing Fortnight, says Morgan Stanley's Katy Huberty, the Chinese found other ways to entertain themselves.

From a note to clients that landed in my inbox last week:

C2Q18 App Store revenue of $3.4B grew 27% Y/Y, consistent growth with C1Q18, according to Sensor Tower. Results are better than the expected 500 bps Services growth deceleration modeled by consensus. Accelerating gaming growth in the US, helped by Fortnite, offset decelerating growth in China...

Gaming related app downloads and in-app purchases continue to drive the majority of App Store revenue, accounting for 72% of App Store net revenue and contributing close to half of App Store Y/Y revenue growth. Globally, gaming app net revenue grew 15% Y/Y in C2Q18, flat vs. C1Q18

However, within this result the US was extremely strong—likely on the heels of the successful Fortnite launch in late March, which brought in more than $100M in gross spend on iOS in its 3 months on the App Store—offset by a weaker China. US gaming growth accelerated 900bps from the prior quarter to 20% Y/Y while China gaming-related revenue decelerated ~300bps to 15% Y/Y growth. We attribute weaker China gaming revenues to 1) the growing importance of entertainment apps (such as short form videos), the second largest revenue generating app category in China, where revenue grew 164% Y/Y in C2Q18 (from 141% Y/Y growth in C1Q18) and 2) the growing importance of mini-programs in apps such as WeChat which provide an alternative to Apple or Google app store content.

My take: Short-form videos? 164% growth? Why hadn't I heard about this? The contrast between China and the U.S. in Huberty's charts is striking.

chinese app store

US app store

Click to enlarge. 

4 Comments

  1. Fred Stein said:
    Another aspect of China is the importance of WeChat, from Tencent.

    0
    July 15, 2018
  2. Robert Paul Leitao said:
    Greater China is Apple’s third-largest regional revenue segment, following the Americas and Europe. Only in FY2015, when revenue in the region rose by nearly 85%, did the Greater China regional revenue segment exceed Europe’s revenue total.

    Each of Apple’s regional revenue segments have unique revenue growth patterns. In fact, from FQ2 2016 through FQ3 2017, the region realized six consecutive quarters of year-over-year revenue declines. FY2018, which ends in late September, will be the first fiscal year since FY2015 the Greater China regional revenue segment delivers year-over-year revenue growth.

    In my view, more important that the rate of Services revenue growth in Greater China in any given quarter or fiscal year versus the rates of growth in the Americas and Europe is Apple’s pace of innovation. Over time, Apple’s pace of innovation will deliver revenue growth in Services and revenue growth as a whole across all regional revenue segments.

    Apple’s technological advances in handset and OS development will spur growth in Services revenue. I expect this fall’s handset releases to not only boost iPhone unit sales, they will also boost Services revenue as Apple continues its push into AR and continues to create a robust environment for developers.

    The fact that Services revenue growth is occurring in Greater China, albeit at a slower rate than in the Americas, portends good news for Apple heading into FY2019 and the release of new handsets with the iPhone X’s innovations incorporated into more handsets in the product line.

    2
    July 15, 2018

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