Three months ago, Freeverse founder Ian Lynch Smith boasted to the New York Times that the iTunes App Store "is the future of distribution for everything." Moving forward, the developer of numerous bestselling iPhone games including Skee-Ball, Flick Fishing and Moto Chaser will no longer be marketing paid iPhone apps. The future, it appears, is all about freemium.
"Model of the future"
After 16 years of developing games for the Macintosh, iPhone and other platforms, Brooklyn-based Freeverse was just acquired by relative upstart ngmoco. Founded in 2008 and based in San Francisco, ngmoco in concert with the acquisition also raised $25 million in its third round of venture capital financing. Unlike Freeverse, which would typically charge 99 cents to download its applications, ngmoco lets consumers download hit games like Eliminate Pro and Touch Pets Dogs for free. Players are then required to make in-app purchases after a certain number of levels are completed. All Freeverse games will eventually migrate to this new pricing model.
With the new venture round, ngmoco to date has raised more than $40 million in financing. The latest transaction was led by Institutional Venture Partners (a backer of Twitter, Zynga and TiVo), and included follow-on commitments from existing investors Kleiner Perkins Caufield & Byers, Norwest Venture Partners and Maples Investments.
Increasingly, the iPhone app developers who are embracing the freemium business model are the ones attracting serious capital. All of the developers that comprise the $100 million Kleiner Perkins iFund - which invests exclusively in companies that make applications for the iPhone and iPad development platforms - participate in in-app commerce, said partner Matt Murphy.
"Freemium is the model of the future," said Murphy, in an interview earlier this year. "It's all about finding a mass audience and learning how to monetize it. There will be a lot of experimentation around this."
Murphy added that games are not the only types of iPhone applications that will succeed by offering free initial downloads and then further transaction opportunities down the road. He pointed to utility apps as well as the iconic music identification app Shazam (which applies charges after five music tags per month) as wider examples of in-app commerce.
Freemium on the iPad
As Apple begins shipping its iPad tablet computer next month, traditional media companies are paying close attention to how consumers embrace in-app commerce. Magazine publishers in particular are experimenting with ways to give away free sample downloads, and then later convert a significant percentage of those users to paying and perhaps recurring customers. Sports Illustrated's SI Swimsuit 2010 app, for instance, has been downloaded more than 400,000 times since its debut on February 9. To date, Time Inc. has converted nearly 8 percent of those users to customers of the $1.99 premium version.
With a 10-inch diagonal screen, many hope that the iPad will be a more natural place to consume premium magazine and video content. 
"If you're looking for content on the small screen, you likely won't be flipping through from cover-to-cover," explained Jeanniey Mullen, chief marketing officer for Zinio. Nearly 100 magazines currently use Zinio publishing technology to distribute content on the iPhone, and eventually the iPad. "Publishers will be able to do a lot more with this page-through device."
Maybe they can even make a living charging for digital content.
