How Pokemon Go revolutionized the app business

It's a Pokémon Go world now. The rest of us just live in it.

By now you've probably heard of the smash hit mobile game that's taking over smartphones. It has already blown past Tinder's number of daily users and is on track to overtake Twitter.

The basic idea of the game — based on a '90s craze of earlier titles — is simple enough: You wander around and capture small creatures called Pokémon. Literally. You go outside, stroll down the street, go to the park, observe your surroundings through your smartphone camera, and the Pokémon show up on the screen when you find them. You can also go to Pokéstops — actual locations in the real world that double as places to get items and power-ups — and Pokémon gyms — where you can train the creatures to fight. You can make in-app purchases with real cash, which is how the game makes most of its revenue.

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But this isn't just a cultural moment or a breakthrough for gameplay. It's a potential revolution for the business models of the booming app economy.

The quick history of that economy — as laid out by mobile industry analyst and Clayton Christensen Institute fellow Horace Dediu in an interview with The Week — goes like so: When Apple's app store first opened in 2008, developers had to figure out how to make money off this weird new world. So initial prices for apps were all over the place. Then within a year most everyone converged on 99 cents or so. They also began experimenting with advertising within the apps: So the Facebook app, for example, is free, but the ads you come across within it now generate 80 percent of Facebook's total revenue.

But while selling ads worked well for some, they weren't great for game apps. That's when developers figured out they could offer the games themselves for little or nothing, then have players purchase additions and expansions to the games as they went along. "In-app purchase was a big watershed event around 2011 or 2012," Dediu said.

Gameplay itself was also evolving. Angry Birds figured out the basic physics of interacting with the screen — touch, drag, pinch, and zoom — which then took off everywhere. Then titles like Clash of Clans developed multiplayer games where people could interact, build characters, and become invested in the ongoing narrative of the world over time. Finally, the developer Niantic figured out augmented reality — using smartphones' camera and GPS capabilities to let players move around the real world — with a game called Ingress.

Now Pokémon Go — also developed by Niantic — has brought it all together. The augmented reality, the in-app purchases, the ongoing character development, the multiplayer worlds. "Engagement is a whole different level," Dediu continued. "Your commitment is no longer sitting there and tapping or staring at your screen. Your commitment is getting in your car and going somewhere."

That commitment has already generated plenty of stories: Mass gatherings of players; people randomly meeting during gameplay and becoming friends; families with a new adventure to do together; and even people with depression getting up and going outside. There have also been some hiccups: People finding Pokémon in hospitals and public bathrooms and funeral homes, for instance. The software that decides where to put Pokéstops and Pokémon gyms is apparently a mix of automation and crowd-sourced input, and it's occasionally placed them in some strange and inopportune spots — like people's homes and police stations and the Holocaust Museum in D.C.

It's not just a gaming technology, it's a social technology — and making it work in ways that respect social norms will probably take some trial and error.

But all that real-world social activity of people physically going places is also "the sort of commitment that retailers lust after," as Dediu put it. For a while now, the online economy has been thought of as an antagonist to the physical world's economy: Online retailers like Amazon are destroying brick-and-mortar retailers like Barnes and Noble, precisely because they encourage people to stay put. Now suddenly an innovation in the app economy has reversed the flow: The online world is driving people out into the real world. "That to me is the big watershed here," he continued. "This product managed to get people to leave their homes."

That opens the possibility for what Dediu called the "online to offline" shift, where transactions in the online economy push people into transactions in the brick-and-mortar economy. So far, all of Pokémon Go's purchases still happen within the app. But you can see movement on the horizon: A pizzeria in Queens bought some "lures" in their game — devices which attract the Pokemon to a location — causing players to congregate there, and their sales spiked 30 percent. Businesses are already looking into how to become a Pokéstop or Pokémon gym, or how to get location-oriented ads in the game to attract people to their storefronts — a practice Niantic already pioneered with the likes of Jamba Juice and and Zipcar, says Motherboard.

Soon, Dediu said, we could see things like "if you go to this shop and capture this character then you'll get a discount."

There are, of course, problems. Some observers worry Pokémon Go and the app economy could just keep contributing to regional inequality: Sucking up revenue from millions of players and concentrating it all in one corporate behemoth in one city. And it's hard to see how the Pokémon Go business model could revive depressed regions — you'd have to pump more money into them than you take out. But it could reduce harm, by encouraging a system where Pokémon Go's developers and owners strike deals with thousands of local retailers and small businesses to keep gameplay interesting.

The ironies here abound: Video games, long derided for turning people into couch potatoes, are suddenly the spark for social vibrancy. The online economy, long accused of killing brick-and-mortar shops, could now help revive them.

In many ways, it's a testament to the smartphone itself: It's a far more unique gaming console than a Playstation or a Nintendo Wii. A smartphone can do GPS location, camera, geo-fencing, motion sensors, and it fits in your pocket and can go almost anywhere. So it opens up entirely new ways of thinking about the way gaming and the app economy can work.

So while Pokémon Go may stick around or go the way of Angry Birds, Dediu is bullish on the approach of gameplay and experience Pokémon Go has ushered in. "I expect we'll see dozens of others coming up and being successful storytellers with this genre," he said.

"This is where innovation happens. It's not just the interesting gimmick. It's when you couple it with network effects and clever ways of making money. And then it sticks and builds and builds."