Liveblogging the Virtual Goods Summit: Virtual Goods Success Stories

The first ever Virtual Goods Summit kicked off this morning at Stanford University with a panel on success stories in virtual goods. While many outside of this room may be concerned with whether or not virtual goods can work as a revenue source, these people have proven it. As moderator Justin Hall said, with representatives from Habbo, Tencent, Neopets, and Nexon, "What we’re going to see here in this first panel is four people representing four large institutions who represent millions of people investing in this world."

The growing market for virtual goods has already produced a number of success stories. Are you curious about what it takes to build a successful community or entertainment site with a strong virtual goods component? Our panel of industry experts will share their stories about how they grew their businesses and how virtual goods played a role in driving their success.
» Paul Thind, Habbo
» David Wallerstein, Tencent
» Kyra Reppen, MTV Networks
» Min Kim, Nexon
» Justin Hall, Passively Multiplayer (moderator)



The growing market for virtual goods has already produced a number of success stories. Are you curious about what it takes to build a successful community or entertainment site with a strong virtual goods component? Our panel of industry experts will share their stories about how they grew their businesses and how virtual goods played a role in driving their success.
» Paul Thind, Habbo
» David Wallerstein, Tencent
» Kyra Reppen, MTV Networks
» Min Kim, Nexon
» Justin Hall, Passively Multiplayer (moderator)

Justin Hall: What we’re going to see here in this first panel is four people representing four large institutions who represent millions of people investing in this world.

David Wallerstein: The key note about the China Internet is that it’s really at the very early state right now. There’s really just about 10 percent penetration, and wireless still has a long way to go. It’s important to show this slide [of an Internet café], because roughly 40 percent of usage is taking place in a location like this. Everyone has headphones on and their deep into their experience. This guy has QQ open, but China’s all about multitasking.

We’ve become the number one portal in China by the pageview count. [Slide showing the five leading online platforms.] IM is at the center here, because that’s key in China, and we really radiated outside of that. We have about 28M concurrent users on IM and 3.2 million peak concurrent users for casual gaming, and 62 million active users for the sort of MySpace portal.

Growth strategy: We try to do it all if “it” is valuable to our target demographic. In China, Internet is about online entertainment, not ecommerce. Traditional media is very much regulated by the government, but the Internet has been growing as a space where you can do lots of different things and not always have the government breathing down your neck. And that has a big effect on these models, based on how interested the community is in interacting. In China, people are very naively meeting strangers. It’s very direct.

For IM [UI Screenshot], the UI is always changing. It’s kind of a busy experience. There’s a lot of icons on the left panel there. And these are avatars that we show throughout the service and it will follow you throughout. We integrate a games and pets service into the client, and we integrate all sorts of other value add clients throughout.

But now we’re talking about virtual goods and virtual items. What’s very popular in China is premium instant messaging. We have’t really seen that elsewhere in the world, but one of the main things we’ve done there is a premium IM client. Qzone is sort of a MySpace element, but the whole interface is decorated by the individual, but they have to buy these things and they give us money. [Screenshot]. This flower looks like it would cost about $.25. The average price is about $.60. And all their friends see it, so it becomes more important that you look good. If you launched this without the community first, it would be very risky.  We make all these items ourselves, there’s tens of thousands of them.

These aren’t widgets, these our our own platform. The widget thing isn’t really popular in China. [Screen of Qzone store]. These are the original price, and then for our subscribing members, we discount the items, by roughly 10 percent or so. That kind of interface is really replicated throughout the service.

QQShow, this is our avatar service. This is what got us started in the identity service. There’s a shopping cart of different outfits, and there’s 20,000 or so items, but trillions of combinations.

QQ Pet, we’re very interested in this pet experience. IT’s been one of our most successful drivers. Online games is also very big and important for us. There’s really three types of games, mini-games, and it’s all client based and multiplayer, and then ACGs. These are advanced casual games. They always look kind of like nintnedo games. And then we have MMORPGs. This is probably one of the most important growth areas going forward.

Does this make any money? Yes. [graph of growth for revenue by segment.] This yellow segment of Internet Value added Service is growing all the time and making up about 65 percent of our revenue. Mobile is about 25 now. And advertising is about 10 percent. That’s about 65 million dollars per quarter coming from virtual goods.

Kyra Reppen: I’m going to talk a little bit about Neopets and where we’ve come and where we’re going and then a little sneak peak at the Neopets mall that is launching next week.

[Shows a video intro to Neopets. There are stars and colorful animals flying everywhere. Everyone is excited by the idea that you can buy pets for your Neopets. They’re Pet Pets.]

Reppen: Just a little bit of context. MTV acquired Neopets just about exactly two years ago. MTV’s mission is to serve niche audiences and develop deep relationships with them, and Neopets does all that. It  fits into the digital area that the audience is clearly going.

The Neopets story. The important piece here is that Neopets is an original, and that speaks to the staying power, that there are so many people here and that there are so mayn youth-targeted sites out there, it validates the space. It launched in 1999 as a persistent game, long before the ideas of virtual worlds were forming. It’s the stickiest youth entertainment site.

The virtual economy, the NC Points. There is success within it. What we hear from our audience is that it’s like real life. We empower our audience, the tweens, to roleplay and experience life. There are 750,000 Daily Transactions. And like our heritage with Nickelodeon and MTV, we researched and spoke to our audience. There are four key emotional drivers:
∑ Fun
∑ Self-Expression
∑ Control
∑ Social Needs

Neopets grew purely on word of mouth, but this year we’re tapping into the MTV networks and we’ve seen a great lift, over 20 percent, in traffic and lots of new members.

The mini-shows are launching this Saturday on Nickelodeon. We’ve married the creative teams of Nickelodeon and Neopets to create this great experience.

Business Models. To date we’ve been very successful with advertising and sponsorship, but it’s important to diversify. We’ve experiemented and will continue with premium subscription and licenscing, we’ve announced several partnerships and are going to announce a toy partnership as well.

And the NC Mall: This is launching next week in Beta.

∑ A brand new experience
∑ More options of customizing and self-expression
∑ Complementary to Neopoints economy (no exchange_
∑ Relvatnt themed items related to neopian events
∑ Payment models: launching with PayPAl
∑ Pricing models: we’re looking closely

Why is this going to work? The emotional connection makes the pixels go away and it’s about the experience. Kids have 60 billion dollars in income through allowances and chores.

Some of the key important features are to try before you buy. We provide unique items and animations.  There’s something like 40 different spots that we can add features to [items, features, backpacks, different accessories].

We’re still experimenting with consumer purchasing experiences. Full outfits might add up to a certain cost, there might be packages. We’re going to be listening and learning as we go.

Min Kim, Nexon:  Nexon is probably one of the biggest online game companies that no one has heard of here on the western front. Nexon’s gaming community in South Korea is over a third of the population. We developed the world’s first graphic MMORPG: Kingdom of the Winds in 1995.  We pioneered the item sales business in the late 1990s to move away from subscription.

We’re branching out of Korea on the Korean Media Wave. For typical Asian gamers,  online games look like Nintendoesque style games. Online games were born out the piracy craze in Asia. They make money by beind distributed for free and selling items.

Nexon has a lot of fixed costs that are offset by selling items. [Scren of BnB: CrazyArcade]. This is the second product we had generating money by selling items. It’s very simple, and it still rakes in millions of dollars. Here’s the item shop. Every virtual game has a dressing shop, and this balloon here costs $10. Someone will buy it. And I asked, when they told me, what does it do? Absolutely nothing. Instead of throwing a blue balloon, you get to throw a rainbow balloon.  Every touchpoint the player has to show themselves off, we try to make money. Here’s a character that never really bought anything, and they look kind of lame. Here’s a cooler one that bought more.

We’re trying to figure out where it’s meaningful to buy things. In game you can buy other things some are functional, but a lot of it is decorative. It’s a multi-player environment with millions of other players, so you want to be unique as possible.

What we realized is that we’re selling a service, not a product. We needed to do free gameplay and sell items. The life of a user could be 4 years or 10 years. The items are segregated into decorative and functional. The first gives you a new look to express style and identity. Functional items effect the gameplay or it might give you stat tracking that you might not otherwise have.

[screen of decorative items from Audition]. We’ve localized this experience for the US by offering different skin tones. With functional items, you have to be wary that you don’t ruin the balance of the game.

Why would anyone buy virtual items? Kyra was testing Maple Story, and we gave her some virtual points, and she bought some retro shades and then someone complimented her. It’s all about enhancing the gaming experience, and it’s meaningful. For someone that’s spending 40 hours a month in MapleStory, it’s meaningful to get a new haircut or style.

KartRider is a 3D casual racing game that has reached 220K CCUs in Feb, and we opened a closed beta in the US a few months ago, and we’re looking to see how to open that now. It’s really about item sales. We sell more cars than BMW and Hyundai. We sold 20+million cars while Hyundai and Kia sold 4. Ours are $10 a piece, but still. 

There are items that can be bought with game points and some that can be bought with money. We keep them generally separate, and the ones that buy only with points, it keeps them in the game longer.

Case Study Coke: They put KartRider on pretty much every can, and users were able to use their cokepoints and add to their car. If that user started the race, the entire track would be covered with coke banners.

We brought MapleStory to the US, and there are over 3.5M registered users. In Feb we’ve done over $1.6M with 600K items sold. We just released our prepaid card in January, and a lot of our player base is too young to have credit cards, so now they can buy with more flexibility and frequency.

Audition is showing 100k+ users here with over 50 percent female users. That’s one of the only games in Asia doing that.

Paul Thind, Habbo: [Video intro of Habbo.] Habbo is a new type of youth brand, based on one of the world’s fastest growing communities for teens online. For our users and in our market position, we see ourselves at the center of Music and Entertainment combined with Identity Creation, Gaming, and Communication.

The core of the experience is the user identity and the extension of that is the community. There might be a fraction of the community that is paying, but if you nurture it properly, they push your product for you.

What differentiates Habbo? We have a lot of celebrity guests. It’s a different way to interact with your favorite celebrities. Self-expression. And Community is very strong. We’re community focused, not advertiser focused. 90 percent of our revenue is generated through users. We sell more furniture worldwide than Ikea does.

Metrics: 7.5M unique visitors per month worldwide. The Americas are strong for us with 37 percent and 51 percent come from Europe.  We employ 200+ site moderators and community managers. And 300 full-time employees in 19 countries.

History: We started with a few guys in a room in Finland building a mobile disco for their friends. The first Habbo Hotel localized in England was in 2001. We expanded the concept, similar to a franchise, to extend over 29 communities and 19 country offices.

This year we launched the Habbo homepages, a way to show your friend groups and your status. We just launched the Traxmachine, a sound machine that is being giving away for free for the first month. Anyone can come into your room and listen to the mix you created.

Justin  Hall: What percentage conversion do you get for buying real money to buy fake stuff.

Thind: Up to 15 percent.

Kim: If you do 5-15 percent, you’re doing pretty good.

Wallerstein: I agree.

Hall: Do you see it as gifting or customization?

Kim: We don’t do much gifting because of the fraud issues, but when you customize that is a form of gifting.

Wu: These are all global business, and I’d be interested to hear what percentage of your users come from English-speaking countries and what without.

Thind: 15 percent are without. And the growth opportunities going forward are to focus on those markets where there isn’t this sort of community yet.

Kim: The US is becoming a big market for us, in terms of the amount of money to be spent here. But it’s a dirty answer in the sense that with China the amount of people playing will skew your approach.

Wu: David, you said if the virtual item model would work in China, it would work anywhere. What did you mean?

Wallerstein: I showed those numbers in China, and the users are very different in that the purchasing power varies quite differently and the incomes are lower than ehre. But we see a demand there and there’s not the demand for free things there that we have here. Here if you decorate your MySpace page, you expect it to be free and all advertising page.

Kim: I think a lot of people are ready for this, btu they’re just unaware. They’ve been customizing their MySpace page for a long time, and it’s  just a change.

Wallerstein: So encourage your kids to buy things online.

Hall: How do you create the central economy as the bank if you’re not doing widgets?

Reppen: We all want to be our own central bank. It works if you look at where the products make sense to have product-branded items.

Wallerstein: It’s becoming more and more interesting as we look at what we can do in the US. China is on a different growth path. There everything is client-based. Here people want that to be web-based, but China that’s just not there. The widget thing isn’t popular for one, and to integrate into our service you’d have to integrate into our client, and we don’t allow that usually.

Wu: He’s not mentioning that we’ve opened their QQ API.

Wallerstein: We don’t allow integration for Qpoints, because there’s a lot of fraud in China. If people know that there’s a lot of value attached to your username and password, there would be an entire industry of people setting up “integrations” that just take your information and sell it.

Thind: You control the economy, either through the release of rare items, or, how we do it, through spending caps for teens. It’s important to us to keep users happy, and then also parents happy. We don’t want all their money. We want them to spend money on other things as well.

Audience:  can you guys talk about accepting the payments, especially for Kyra and Paul, where you’re targeting younger communities, and separating cash from point transactions. What are the dynamics?

Reppen: What’s important is that you can’t get an unbalanced, unfair advantage of earning points and transferring that to the cash economy. I imagine that this will be an ongoing balancing exercise. The question about enabling youth to buy Neocash or any of these models, is a challenging one. It’s not going to be dissimilar to doing this across networks. So PayPal has more barriers to entry, but prepaid cards at least offer a retail venue to bring the parent to. But I’m imagining that we’re going to need more opportunities here. The more we get parents involved, the more traditional and easier it is, the more parents understand .

Thind: With Habbo, after integrating payment across 19 countries, it’s a matter of integrating with trusted, local partners who understand our business model and objectives. If we find all those thigns that fit, we can plug in and monetize the virtual world on our model.

Kim: Splitting points and cash, you’d be cannibalizing yourself to put them together. Otherwise why pay if you can just play longer and earn it. We’re an elite group here. If I’d gone to my mom and asked to buy virtual sunglasses, she’d probably smack me. She’d think it’s like magic beans.

Audience: How are teens actually paying for virtual goods in China. Are they putting it on their cell phone? How are you dealing with that in the US, where it’s very different.

Wallerstein: In China we had to do it from scratch. We said, if we’re going to survive, we need to monetize. There’s low credit card penetration, so what we did was partnered with mobile and fixed-line telecom operators. They’re still the most important partners for us, and they take a hefty commission. That’s bad, bad, bad, bad. But they’re instrumental in getting that money to us. By calling a number and punching in your code, you can credit your account and it will be added to your bill. And some mobile services don’t like us charging for PC items. IT has to be mobile.

Kim: The problem for us has also been that the telephone operators are charging way too much. But we do have parents who have shown up in our offices and are happy with the way things are going.

Thind: I can’t emphasize enough how you need to think about your payment method when you launch. When you get your customer used to one method, they’re going to be pretty loyal to it.

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