Liveblogging the Virtual Goods Summit: Are Virtual Goods the Next Big Business Model?

Co-organizer Susan Wu brought us back from break to moderate a panel on whether virtual goods would be provide the next big business model. As Tim Stevens from Dopelganger said, "I’d like to answer the question. Yes." With discussions ranging from the secondary markets in trading provided by Sparter, discussed in detail with us last week, to transaction fees, the panelists quickly decided that the discussion shouldn't be whether it's the next big business model, but how to do provide them most effectively.

   

Are Virtual Goods the Next Big Business Model?     Online advertising has been a growth drive for many of the leading properties on the web today. Is advertising the best business model in all cases or are there situations where virtual goods can be a strong complement? What does it take to build a strong business model around virtual goods? These and other topics will be the centerpiece for this panel discussion. » Kevin Efrusy, Accel Partners » Tim Stevens, Doppelganger » Dan Kelly, Sparter » Susan Wu, Charles River Ventures (moderator)

Stevens: I’d like to answer the question. Yes. Doppelganger connects people with music with each  other. We take all that and put it into a dance, urban structure. It’s an experience that the user could get if they had access to the Lower East Side, the Sunset Strip, or Times Square. We take a vibrant environment and overlay it with activities that are relevant to the user. It’s a way to engage in a career and lifestyle that happens to be delivered online. We’re different  from folks that have an aesthetic overlay to a social networking tool. We’re about the aspirational lifestyle.

Efrusy: We’re an early stage VC firm. My own background is that I do consumer and Net investing. It must be an early space if someone like me is allowed to be up on the panel instead of the audience. I made a trip to Korea a couple of years ago and came back just blown away with what places like Nexon are doing and sat down and asked where’s our virtual goods strategy.

Kelly: Sparter builds commerce solutions to virtual item trade. You you can see it in Sparter which build gamer to gamer commerce. WE believe virtual item trade is here and it’s only going to get bigger.

Kim: Nexon is an online game developer/publisher that started out in South Korea in 1994. We pioneered the virtual item trade in the ‘90s. We saw a lot of traction and good user behavior, and that gave us the confidence to come here to the US. And MapleStory is doing very well.

Wu: Speaking of numbers, how do you estimate the size of the overall market. Dan, you’re a derivative market. You grow with the primary market.

Kelly: We’re in our infancy, so I don’t think you can look at our transactions for it, but you can look at what eBay was doing before they started cracking down. It’s easily a billion dollar market.

Wu: How big is the primary market?

Kelly: There are some people in the audience who have done some research into the aggregate market. If you look at the WoW subscription market as well as the secondary market, there’s a disparity because of the speedbumps put into place.

Wu: These are big numbers, right? Why aren’t more content developers and producers looking at this as a viable business model? What was the reaction for you, Kevin?

Efrusy: The first reaction is that it was too dorky, but then they came back an said that it’s an expression of social capital. If I had a startup doing this kind of revenue in virtual goods, I’d be ecstatic. There’s no cost of sales for it.

Wu: Are there any statistics you can disclose? The only thing I’ve gleaned is that Obama is the #1 recipient of gifts. Is that still true?

Efrusy: I’m a pretty lame user, but I get a dozen of them. These are mostly from people I know,  but some others, which I find a little unusual.  I think what Facebook is doing right now is rudimentary compared to what can be done.

Stevens: The key is the expression of social capital. We see this out of our virtual world. It’s not the item itself, it’s what the item represents. It’s the way to reach out in a way that’s different from email. One of our partners is Rocawear. We enable our users to buy Rocawear clothes. A lot of our users can’t do that in the physical world, but they can here. They get exactly the same emotional power walking around with those jeans on in the virtual world as they do in school. That’s why it’s the next big model.

Kim: It has to do with value and use. You look at iTunes and people were paying a dollar to download because it’s very easy to do and we know what music is. You look at MySpace and skinning pages, and it’s easy, but it’s much easier with CyWorld, and it’s one step away from charging for that.

Wu: Facebook is really immersive in spite of not being 3D or graphical. The more immersive your relationship becomes, what else is possible?

Stevens: You can imagine in this particular context, Jay-Z was a founder of Rocawear, and he sold that portion of his empire off, but you can take these kinds of experience and tie them together. There’s music available to people who want to make music but don’t know how. You get a professional to provide the base level and, by the way, here’s clothes you can wear while doing it. And you can do this collaboratively with your friends in a virtual environment. And then you’ve done something that’s exportable in the virtual world. The music studio cost you $2 an hour to rent. It costs you the time to rent, but it gives you the tools to compose the music and then transport that wherever you want.

Wu: You’ve been aggressive in coordinating brand advertising. How does that break down with virtual goods?

Stevens: It’s roughly 50/50. I think over time the ad component will become more dominant. I think the early iteration of virtual goods is the content creator creating things. As the advertising community understands that this isn’t completely new and craft messages that have storylines to htem and items associated with them, you’ll see a blending of advertising and virtual goods.

Wu: Min, you showed a cool screen shot of MiniCooper’s tie in with KartRider. Did they pay you for that?

Kim: I can’t disclose, but we have done a lot of campaigns that we have been paid for. But I don’t think for us the advertising will exceed virtual goods, because that’s not what we do.

Wu: I havea question for Kevin. It seems like the gifting service on Facebook is experimental.

Efrusy: Definitely. But it’s a real opportunity for people to engage with the platform. People like you in the audience can build on the platform. If you take a fairly immersive experience and build it on top of the platform, you have expanded the community. It’s not about embedding widgets. It’s about taking full advantage of the platform, understanding all the relationships between people, the geographic data, the preferences. I think about what you can do with KartRider on top of it, and it’s incredible. We had a March Madness application that was built over a weekend, and it was the number one or two March Madness application on the Internet.  However does this first is going to own the virtual goods economy on Facebook.

Wu: I don’t think there’s any barrier to someone in the audience from going out and creating a virtual gifting platform that’s better and totally dominate.  I would invest. One of the questions I have for Dan is why you think content providers aren’t paying attention tot his market.

Kelly: Well for the consumer there’s no difference between the virtual economy and the real. For them, it’s real. The debate about virtual isn’t meaningful. What is is what the industry going to do to make it more important to produce good content and not label our consumers criminal. We reward them for spending money and time. Publishers are having a hard time because it presents a lot of thorny issues. But it’s  very possible to construct a solution to give your consumers what they want and do what you want as well. I have yet to find someone in the history of economics that can give an example of the secondary market that has destroyed the primary market. It just provides liquidity.

Wu: Doppelganger has control over the market, Min has the same, is that concern for the producers?

Kelly: Yes, but the concern should be about maximizing ROI. If my server on WoW had charged me all of my fees up front for subscription, I wouldn’t give it to them. As long as we protect their IP rights, they need to pay attention to their own subscriptions. The typical seller on Sparter is someone who makes enough to pay WoW for free. That’s increasing gameplay. And the value goes to and from gamers, not to an enterprise. It’s a slam dunk for the industry, but we have to build a standard that rewards good behavior.

Wu: Min how do you feel about secondary markets?

Kim: No comment, but I want to go back to talking about providing content. The broadband potential wasn’t there before, but now everyone is coming together and saying this is the next big thing. But a lot of people don’t have the courage and they’re waiting for the examples to come out of people making money.

Wu: Do you think people like Facebook experimenting and having success legitimizes it?

Kim: Definitely. If it makes sense in Facebook, it makes sense elsewhere.

Kelly: There’s a lot that can be done in nontraditional models with making products accessible through free to play models.

Stevens: There’s a big distinction between a console game, which is a lot like a movie that you consume in one burst, and a virtual goods experience. A Virtual goods experience there isn’t going to work. You need a n emotional experience for you to open up your wallet and spend$1 on a virtual good.  I think the innovation is going to come, but nontraditional publishers are going to be driving it.

Kelly: I want to reinforce that because I was at a conference where they said real money trade is a function of a bad game. If you have a bad game, you don’t have users. If you have a good game that also promotes people spending money to get more out of the experience, you haven’t failed. Consumers want to deepen their experiences, and we need to support that.

Kim: And there are a lot of companies that are growing from the bottom up like Club Penguin and others like Viacom that are coming down,

Wu: How do you get people on the system?

Kim: We’re releasing prepaid cards through Target, and it has real value out there for the people that are purchasing the cards.

Wu: So Kevin, the Facebook platform changes it from being an advertising supported medium to something that’s transactional. How are you experimenting with that further?

Efrusy: I can’t comment on what they have in the works, but what I can say is that there have been a lot of questions about how to do it. It’s not how we tax people who are making money on Facebook. It’s how do we help them get really, really rich. We say let’s build tools that help them do that, and they don’t have to use them, but they’re there. It’s like Google creating a revenue stream for businesses that didn’t used to be there. But when I look for businesses, I look for ones with very healthy third-party ecosystems. Any economist realizes that these healthy third-party system grows users. Like wireless carriers, any time they open up their service to let people interact with other users, they just grow and grow and grow, but it’s hard to open up.

Kelly: We’re out talking to developers because we want to link the markets. Our pitch is that there are a lot of people here that want to develop an item-based model. And people are ready for it. They don’t get a choice, though. If gamers want to do it, they’re going to. If they don’t, they won’t. You want to make it easy for customers to sample things and try them out. You want them to be in a position that they can try things out and then sell them back on the secondary market if they don’t like them. A secondary market will grow your primary market.

Wu: I want to echo that. If you look at the enduring consumer Internet companies, they exist because they foster entrepreneurs on the Internet.

Kelly: The real barriers are things like fraud and micropaymenys. If we can solve that, we provide a clean marketplace.

Audience: I have a question about the secondary market. The primary markets are upset over things like spam. Can you help that go away?

Kelly: I can’t say it’s going to go away, but I do support the effort to make in-game spam go away. I’m tired of it. What we can do is create the market and create the walls. Let’s give users a place to trade where spammers are punished. WoW has 8.5M subscribers, and they can’t look at the transactions that happen. Sparter, however, is only focused on transactions. If we see someone who comes on with an unusual allotment of currency, we can see that. Botters and dupers have to move their currency fast. If they lose their account and the market, it’s hard to sell then. There will always be a grey market, though. But this is also an example of a lawsuit in Miami. We don’t want someone outside the industry to say here is what the solution is. We’ve got to solve the problem. We don’t want the courts to be the arbiter.

Kim: What do you say about the publishers handling their own market?

Kelly: It’s obviously their right. It’s the obligation of publishers to operate the best game service. We view secondary markets as a very unique game focus. We say focus on your specialty. It’s a buy versus build analysis. And if there’s a unified market where trades are happening, we can ban someone for actions in one game who then cannot come back and trade in another game.  We need to organize.

Wu: I have a question for Kevin. How much do you believe in the virtual goods business model?

Efrusy: I think this is here to stay. Virtual isn’t the right word. How much utility do you get out of real flowers outside of looking at them.

Audience: Smell

Efrusy: Some people are allergic. The response isn’t to the item. It’s to the gesture. I think the danger is that you don’t have the sort of business model of the rest of the world. Some business models are better suited to advertising and some aren’t. Virtual goods is probably similar, but I’m not smart enough to say exactly what characteristics are necessary.

Stevens: I’d echo that a hundered percent. The aspect of this is taking virtual goods and advertising and making it part of the xperience that you’re delivering out to your audience space. In sort of an immersive virtual world, we see CPM in the low 20s and in video moving up to the 60s. The engagement is just different.

Wu: It’s like putting little advertising stickers on bags of crack. [laughter]

Stevens: The key is integrating. Think Times Square. Why do you go to Times Sqaure? There’s advertising and neon and stores nad things to do. Take that experience and then apply the virtual world on top of it, that makes sense. Just slapping advertising into a virtual world is going to give you lousy CPMs.

Audience: I had a question for Dan. You seem to position yourself as a clearing house, do you have a relationship with Blizzard over whoever buys and sells illegitimately to be banned?

Kelly: no. We’d love to, but I think that will be a long time coming. We manage the trade outside of it. We think it’s in the interest of the game industry to distinguish between the value of the goods and the gameplay. We think the publisher should not be held accountable for the value of the goods. The one thing we think they’re responsible for is that we don’t think it’s fair for the publisher to say you can’t trade.

Our mission isn’t to aggregate items. Our goal is to give gamers an alternative to the black market. If that takes place in-game or outside, we’re indifferent. We want the data to restrict the quality of the market over time.

Audience: I’m excited about the prepaid cards at Target. I think getting cash from the consumers into our worlds is more interesting than the debate over whether the worlds are virtual. How much is the transaction fee in Korea?

Kim: I can’t say, but the transaction fee for SMS is just too high. We’d like to do something between 10 and 30 percent. That’s a pretty safe place to be. As more products role out, that’s probably going to go down, and we’ll have more leverage. We’re looking forward to that.

Wu: Do you think that’s possible to get by having a common currency with GoPets or Entropia or others?

Kim: I don’t think people want the responsibility to manage that.

Efrusy: The benefit of currency that’s different is that you can print more to drive behavior. You can give it out as a reward.

Audience: I had a question about mobile. Have you seen models of premium SMS used to pay for virtual goods or transfer funds outside of the US?

Kelly: I think Habbo has proven that’s a great model. We don’t do it yet. We want to. I think we all agree that we want to give consumers an efficient way to pay.

Kim: Nexon makes a lot of money off of SMS payments. We just want to make it as easy as possible.

Stevens: It’s going to be a driver. The problems of getting currency in are going to be solved. The 60 percent transaction fees just don’t make sense, but as more come in, the prices will come down.

Audience: Dan, do you think your structure provides enough efficiency for publishers to provide a white market solution?

Kelly: We like to think so. We’re approaching people on those levels. The average buyer on Sparter is saving about 40 percent from buying to a B2C. We’re highly sticky as well, so we’re delivering a quality experience. I think because that’s all we’re doing, it’s efficient. It’s also nearly costless for us to add another game.

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