Obviously, the biggest topic of the day is the economic downturn. Most conversations I've had with platform developers, virtual worlds-focused agencies, or and middleware providers are optimistic about growth potential over the next few quarters, but with a few caveats.
"We suspect that the best virtual worlds will remain relatively counter-cyclical, as they provide a cheap form of entertainment," explained Electric Sheep Company COO Giff Constable. "However, business models that relied on advertising and sponsorships will be under pressure, while those who chose subscription models for young kids or micro-transaction models for teens/adults will stand stronger. Advertising spend is going to shrink and concentrate, and it is going to focus on highly measurable areas. Ad agencies will probably stick to what they know best. We also expect enterprise experimentation budgets to shrink, as businesses cut back on non-core IT projects, however a counter-pressure to that will be the need to reduce travel costs. We still see solid interest in building large-scale youth worlds. This will not be start-ups, but rather companies that have a strong real-world property that they can leverage and who know that virtual worlds are a necessary competitive, and potentially very profitable investment in their future."
The notion that advertising-based business models will take a downturn is near universal, with the Wall Street Journal reporting that agencies and brands across the country are slashing their experimental advertising budgets. The concern is already showing in staffing and redirections of focus at various businesses, though it's worth noting that the overall visible effect has been relatively limited in scope thus far.
In fact, with different business models, other worlds are still seeing growth.
"Digital good sales within IMVU are still going strong," said IMVU CEO Cary Rosenzweig. "In IMVU, members buy credits which are then used to buy digital goods. Credit sales are still strong. In fact, so far in October, our growth rates have actually accelerated, whether compared to year ago, or month-to-month. Over 90% of IMVU’s overall revenue is from the sale of virtual credits used to buy digital goods. Less than 10% of our revenue comes from advertising sales. We’ve always focused our business model on the consumer, not the advertising market. While IMVU is 'free to play,' our goal is to deliver a consumer experience so outstanding that many users will pay extra to enhance the experience further. Because our virtual credit revenue is strong, so is our overall revenue."
Similar results are apparent for GMG Entertainment, which works with retailers and virtual worlds to place prepaid cards in stores across the country. The cards, which provide a way for users without credit cards to purchase virtual currencies and goods or give them as gifts, offer a solid correlation for the strength of virtual goods. While GMG CEO Rob Goldberg says that prepaid cards across the board, not just his or those for virtual worlds, took a dip in September, they've sold in record numbers since the beginning of this quarter, with last Sunday representing an all-time high. He expects that trend to carry through the holidays.
"We see that while obviously the overall recession is going to hurt people's spending, we think that as people look to escape the real world a little bit more, they'll spend definitely more time and probably more money in the virtual world. A luxury item in the virtual world is a whole lot cheaper than in the real world. The big ticket items, cars and HDTVs, are suffering and will continue to suffer, but you'll find that people spend more time at home, which leads to more time online," he explained. "As for virtual goods, our business is at the beginning stages, really, as more retailers understand this is where consumers want to spend time and money. I think as we add more locations, by the thousands, you'll see more consumers and more money. With Christmas gifts, someone may not know what to get their husband, wife, or child, but if they see it at the store, that's an option. So I think for us and our partners, the next year won't be as bad as it is for ad-supported or even subscription worlds."
That's not to say that it's a time to sell virtual goods and then go out and spend, spend, spend. Sequoia Capital warned its portfolio companies to slow down last week, and businesses across the board are following suit. Goldberg points out that GMG, in spite of his growth projections, is still buying coach tickets for travel. Constable says the Sheep have already adjusted--they went through cutbacks at the end of 2007--and are looking at different business options.
"We shifted the team from an orientation around taking marketing or enterprise projects into existing virtual worlds, to a team that could design and build great stand-alone VW destinations," he explained. "We also invested in our own Web-based technology platform which we call 'Aspen.' That investment has been paying off, and we are seeing robust interest in the kind of large-scale, innovative worlds we can build using Aspen. We suspect that uptake in the lightweight WebFlock application will be hurt by the economic downturn, although we are actually seeing a fair amount of interest in using it for money-saving virtual conferences and tradeshows."
However, there's a hidden benefit to the downturn in advertising. While ad revenue is dropping, it may be bad for the sellers, but it's great for the buyers.
"Unlike many virtual worlds that rely heavily or exclusively on advertising for revenue, IMVU sees a net benefit when online advertising rates fall, as they are in this economic downturn," said Rosenzweig. "Simply, we spend more on online banner advertising for acquisition than we earn on advertising revenue. When advertising rates fall, we earn a little less ad revenue, but we are able to accelerate customer acquisition. We get more bang for our buck."
It may be a small consolation for worlds that rely on advertising revenue now, but Goldberg says that in the long term it may actually prove a boon. GMG helps to promote its partners, and while virtual worlds are still a relatively small market, the lower prices of advertising offer a potential to raise their overall profile--something to keep an eye on for whenever the economy bounces back.
"We're not excited about that, but it's a silver lining," Goldberg explained. "If the recession isn't going to last 20 years, building greater audience awareness without spending more money? Over the long term that builds more business."
[Electric Sheep CEO Sibley Verbeck also just posted about a virtual recession on his own blog. It's well worth a look.]
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