Liveblogging the Virtual Goods Summit: Why Virtual Goods Matter

In the second panel of the day, representatives from Gaia, Three Rings, Shufflebrain, and Stanford discussed what's driving user adoption of virtual economies. As Byron Reeves of Stanford pointed out, "Why people might care, then, is that the human brain is not specialized to differentiate between virtual and real. Close counts. The same neurons fire when an avatar smiles at you as when a person smiles at you." What followed, though, was a discussion on how to make that closeness even more relevant: how to approach transactions, user-created content, and secondary markets.

Why Virtual Goods Matter: What's Driving User Adoption?
    Virtual goods offerings continue to garner more momentum in the marketplace. Why do consumers want to spend their money on items that only exist in a virtual context? Is it even appropriate to make a distinction between what motivates people to invest in virtual goods as opposed to real-world goods? Join us for a conversation about what motivates people to invest their own time and money in digital goods and why virtual goods matter.
» Craig Sherman, Gaia Online
» Daniel James, 3 Rings
» Amy Jo Kim, Shufflebrain
» Byron Reeves, Stanford University
» Nabeel Hyatt, Conduit Labs (moderator)

Reeves: I’m a professor here at Stanford. About 50 yards away I have a lab that’s been interested in researching the points between fact and fiction and where the needle points in how people react. The needle points far closer to real than fiction for most purposes. Why people might care, then, is that the human brain is not specialized to differentiate between virtual and real. Close counts. The same neurons fire when an avatar smiles at you as when a person smiles at you. The same dopamine is released when you’re rewarded with virtual money as real money. My interest is virtual money applied to real behavior. I think there might be some real uses for virtual money in the real world. It’s not encumbered by the same regulations, and it’s more playful. I’ve been interested in thinking about this in the real world, and especially with adults. The results from the lab are far more applicable to adults. I’m a cofounder of a company here called Seriosity. We’ve established a virtual currency and a way to transport it over the most  common means possible. And we’re interested in applying that now.

The last thing I’ll mention is the results from the first test of this. What happens when I can send you an email message with virtual currency attached. IN a large fortune 100 company, you’ll open that email 12% faster than if I send no currency. If I send 20 units, you’ll open it 52% faster than if I send no currency. Virtual money changes real behavior.

Kim: We’re a design consultancy, sitting at the crossroads of game design and social media. My perspective is that it’s pretty obvious that this is pretty successful overseas. Now is the time when the US market is ready for this. In the past there hasn’t been enough going on with broadband penetration and young people blurring the line between online life and real life. My specific interest, and why I’m here, is in virtual goods incorporating user-generated content. We’re seeing an explosion of user-generated content on social networks. Particularly here in the US, it’s important to think of how we want to allow users to trade those goods back and forth.

There’s one anecdote from when we launched. We had some powerful sponsored clothing goods. We also released some tools for users to create their own goods. Very quickly the user-generated goods far outstripped the sponsored goods.

James: I hope you’re right. My background goes back to Text Muds. In 1992 I was a wizard on an Essex Mud. I’ve been a long-time believer that the interface is not the issue. What we’re dealing with is the experience. I disagree that immersion has to do with graphics more than how your mind models it. Three Rings was started to make PuzzlePirates, a casual MMO. They use currency to buy fancy hats and houses and so on. We built it as a subscription, but after a year or so, we realized the barrier of entry was a real problem. We wanted to enable someone to play for free for a long time and give us a bit of money and hten a bit more money and then a lot of money over a long time.

We do a bout 350K a month in revenue, 250k of which is virtual items sales. When you look at the people in other worlds with a $5 subscription, you look that the lifetime value is maybe $100. Where we’re going is a web-based social expression world based on user content. That’s called Whirled and should be coming out soon.

Sherman: Gaia has about 2M unique visitors and 1B posts total on our message boards. The average unique visitor spends at least an hour a day, making it probably one of the stickiest sites on the ‘Net. In our case, we have about 50k groups hosting virtual auctions. We also have 12 stores that are more like an Amazon-type space. The core experience is that like going to MySpace, you make a profile and a blog. From there, you build you. It’s a 2D, anime style avatar that represents you. It’s the first Flash-based MMO on the planet. You can play games and submit to the newspaper and watch movies, real or user-generated. It’s an online hangout. We’ve grown about 4x in the last months in terms of traffic and sales.

Hyatt: You’re going to hear a common theme throughout the day that although the goods are virtual, the communities are very, very real. What are the types of metrics you look to measure engagement.

Sherman: I have one concrete example that’s kind of fun. In the last panel, someone asked how you get the money in. Our site is skewed a little older than Habbo, 13-24. That said, we have three people on staff whose job is to open up envelopes with single dollar bills and quarters. We had a user send in a $5 bill in a $15 FedEx package to make sure to get it to us on time.

James: You need a prepaid card. The obvious thing is you rollout new stuff and your revenues go up. I think you can see a very clear correlation between releasing new stuff and the adoption.

Hyatt: You started out with a business model, so in some cases you have different populaces. What do you see as the differences in revenue?

James: The surprising thing there is that we’re about 1/3 subscription 2/3 microtransactions. Across the board, the revenue is about the same per user, but it disguises curves. With microtransaction, we havee some users who spend $3 and that’s it. Our most valuable customers spend $10k. There’s not many and we love them. We send them stuff, but that’s the curve that we have hidden. This is their hobby.

Reeves: I’ll say something about Seriosity. You can use this currency to do a whole lot of different stuff that’s not actually tied to the place the product exists. You can see who’s transporting it and why, good ROI metrics like that. But the other thing you can see is what are the ways people can invent to use it? It works like money, but it isn’t. And places it might be difficult to use currency, you can use instead. You can use it to signal importance and give feedback in a management sense. Exporting that out of there into the real world is our metric.

Hyatt: It’s worth delving a little more into use cases. In most cases you see it used in one group for vanity uses and in another for powerups and that sort of thing. How do you think about your audience and how they think about their goods?

Kim: I’ll speak more broadly there. We saw in the previous panel a difference between decorative and purposeful goods. I’d draw the same distinction. It depends on the world you’re creating. In a gaming world, the gaming goods attract the most draw. In the social worlds, what we see is that it is the social meaning attached to objects that are purely decorative. Decorative objects that have no in-world power are granted that power by other folks in the same sphere. It’s not just differentiating yourself and preening in front of your friends. It’s not coincidence that we see a lot of worlds that grab hold of teens. It’s a time of life issue. People experiment with different identities then. You question who you are and there’s rapid turnover in the nature of being a teenager.

Sherman: I think Amy got it perfectly right. All our items are decorative. Nevertheless, two examples: We had one item sell on eBay. We try to stop that usually, but we had one item sell for $6k. It was rare, and rarity is one way of conferring value to things in the real and virtual world. People notice and recognize that you care about it.

Hyatt: Why do you discourage people from trading that way?

Sherman: Our core concept is that you can get rich in Gaia and experience things there. We want it to be separate from who you are. And both ways work. Second Life emphasizes the trade of real money, but you just have to figure out how you want to go. Once a month we offer two items called collectibles that cost $2.50 and are only available in that month. The supply stays the same while the demand grows up as our users grow.

The other example illustrates the value of decorative items. We were at Comicon hat, and we had a virtual hat on the site called the OMG hat. We decided to make a real one and we were selling it at the event. A guy came over, and he was 19 or so, and he said, “Thank God I can finally buy this. I couldn’t get the real one, but at least I can get the copy.” 

Hyatt: Daniel you sell functional items as well, right?

James: the split is about 50/50 in terms of how much we bank. Most of it is from badges that give you certain privileges. And those are microsubscriptions that let you be a captain or something. It may cost $10, and that’s the price of a subscription, but not everyone will use it.

Puzzlepirates is mostly a skill-based game. You can buy a fancy sword, but if, like me, you’re crap at swords, you’re still going to lose. I want to come back to secondary markets.

Reeves: Let me say one thing first about the literature here. These things in terms of functional and decorative items are totally hopelessly confused. We wouldn’t think that I shouldn’t bring decorative items to convince you to do something in addition to the intellectual point. Offering a business plan to do both, is key, I think.

Sherman: Daniel, did you run into resitance and have to tweak those levels?

James: That’s something that’s difficult with virtual goods that we haven’t been very good at about how you adjust your prices and react to users. Our Korean partners say they constantly tweak the numbers to manage value.

Hyatt: Do you think that’s why these secondary markets occur? The price disparity?

James: Possibly. There’s a couple things I want to mention. At the GDC this year, some guys from Wizards of the Coast had some interesting things to say, that secondary markets, for example of Magic Online, have been incredibly valuable in driving the primary market. People will buy way more cards in the primary market because they know they can flip them. Mostly they don’t, though, they just hold onto them. Which is a great tip for people thinking about this.

Kim: If you’re building some sort of world with a gameplay world vs something that’s more social, you have to think about gameplay and balancing much more closely. If you’re building more of a social world, they won’t wreck that balance. They affect only the social balance. If you want to promote social intereactions, you offer items that promote social powers. For example, in There, you could get special teleportation powers or turbocharged surfboards vs regular ones. That’s great unless you want to organize a race. You have to have some sort of mechanism to deal with events like that. But with Teleportation, unless you’re doing a scavenger hunt, it’s only socially powerful to be able to take a friend and teleport to a place others might not be able to get to.

Hyatt: Jumping off, I’d love to talk about whether users care about who’s making the goods. When you think about the building of goods, where do you draw the line between user-generated goods and controlling the economy?

Kim: I don’t think there’s one answer. Habbo is very good at that in that the goods are created by the staff, but users do all the configuration inside of rooms. That’s a meta-level of content. Do the users care that they don’t get to create their hairstyles? I don’t know. And there’s so few pixels so that limits what you can do. At There, given the audience we attracted, they cared much more about the quality and the goods that were created by each other, both for the visual effect (it was more out there, and if you’re in a virtual world, why be constrained?) and for the social dynamic. People would go to parties, and it seems like 90 percent of the conversation was about the content creators. The creators who were talented became the celebrities inside.

You always have to say who is the audience? In Gaia, where there’s a lot of creativity already, that seems important.

Hyatt: Did you target that audience?

Kim: We knew there would be a lot of female participation, and there wound up being a huge group of the casual gamer demographics. But we thought we’d get more college users.

Sherman: This is a very complex issue. One issue is quality. Artists that you hire after looking really hard for them make better stuff. The long tail is cool in theory, but there’s often a limited amount of good stuff. Another is that it can affect coherency if you’re trying to create a consistent experience. For Disney World, for example, it makes sense because everything fits. Second Life is more chaotic, and one of the negatives is that some people find it overwhelming because it’s the Wild West. The jury is still out, and everyone needs to look at their own audience. 

Reeves: There are so many interesting histories of media. The trick is to make it seem spontaneous and user-created, but behind that it’s all very carefully orchestrated.

Kim: I don’t think that’s going to happen. On the Internet, people are really good at sniffing out bullshit. It’s different than with traditional media. I think it would be a huge mistake.

Reeves: I’m not talking about an explicit relabeling, but it would be a terrific temptation.

Hyatt: I think the line gets blurry. Especially in an MMO background, often people that become community managers come from the player base.

Audience: As far as virtual economies, I came from Everquest, and someone from the management team had set up an NPC where you would give him money and he would give back more money. How do you protect for fraud?

Sherman: We work really hard on it. It’s a huge issue. The more successful we get, it seems like more companies, especially out of China, are working out ways to game the system and sell currency on other systems.

Audience: Have you ever been a victim of someone generating ungodly amounts of currency and spreading it around like mad?

James: I don’t think anyone here has seen that, but MMOs have had that.

Raph Koster: Every single major MMO has had a dupe bug. You go through and start confiscating currency and you track back to where it originated and stop it there.

Sherman: Those things happen to us every few months. We waste a lot of our developers’ time tracing the currency and sucking it back out. That’s why one of the things like Second Life that’s a really easy fungible, exchangeable economy is dangerous.

Audience: I work at Sony Online. You can cash out of your currency there. It gets far more complicated there. You have to look at whether it’s a natural game event or a dupe. Do we manipulate the economy then? And it’s a legal issue then of creating scarcity. When you allow people to cash in and out of the system, it becomes far more complicated and a potential laundering tool.

Joey Seiler
www.VirtualWorldsNews.com
joey (at) showinitiative.com
(512) 535-8650
skype: joey.seiler.vwnews