How a Freemium Model Depends on Sticky Situations

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How do you wring revenue out of free games? Glu Mobile (NAS: GLUU) does it by charging tiny fees for in-game advantages.

The company just reported third-quarter results. Revenue jumped 9% year-over-year to $16.9 million, driven by quadruple the year-ago period's smartphone-based sales. Smartphone games now make up 57% of Glu's total GAAP revenues. Above all, the quarter proved the value of the "freemium" business model, in which you give away the proverbial razor handle and charge for the blades of in-game goodies. Freemium sales made up 77% of smartphone revenues.

The trick is to make the games good enough that gamers want to spend money on doing better in the game world. The stickier the game, the bigger the trickle of spontaneous microbuys.

The bulk of Glu's smartphone sales come from the Apple (NAS: AAPL) iOS ecosystem, but that's starting to change. From the second quarter to the third, the importance of Android sales doubled from 15% to 30% of the total smartphone take.

CEO Niccolo de Masi bemoaned the fragmented nature of the Android platform. Developers for Google's (NAS: GOOG) platform must optimize their products "by handset manufacturer, by OS version and even by the storefront through which consumers discover games." Sounds odious, doesn't it?

That being said, de Masi thinks his company is better positioned than anyone else to handle this diverse market, which would turn the challenge into a business advantage. Among other strategies, Glu is a launch partner for the Amazon.com (NAS: AMZN) Kindle Fire and its custom-made app market. I haven't yet seen any rebuttals to the "better than anyone" claim from Electronic Arts (NAS: ERTS) or soon-to-go-public studios Zynga and Rovio, all of whom sport larger Android profiles than Glu does today. But it's always good to have goals, you know.

Glu is a powerful little arrow, aimed straight at the heart of the mobile gaming industry. The company aims to turn a profit in 2013, meaning that today's investors should brace themselves for a bumpy ride over the next year or so. Mr. Market rarely treats cash-burners like this one with much respect, no matter how large the payoff at the end of the tunnel.

There are many ways to skin a cat, and just as many innovative methods to turn a profit from the smartphone explosion. Glu is showing you one way. This Motley Fool free video report goes down a very different path. Watch it now to see how one largely unknown chip company is leading the charge in a very investable way. Did I mention that the report is totally free?

At the time this article was published Fool contributor Anders Bylund owns shares of Google, but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Amazon.com, and have also recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Fool has a disclosure policy.

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