J.P. Morgan on Virtual Worlds: "Two Audiences, Two Differing Growth Curves"

In J.P. Morgan's new report, "Nothing But Net: Outlook for Global Internet Stocks in 2009" [PDF], analysts point to a diverging market in virtual worlds. Just as at the beginning of 2008, Morgan is largely bulllish, though with more reservations, on youth-oriented kids virtual worlds. It's less excited, though, about the adult market and virtual worlds overall.  I think, however, that we'll begin to see more convergence in the markets and, hopefully, success.

"We think that, although virtual worlds have yet to reach the status of mature companies, they are not, taken as an aggregate, positioned for further rapid growth.  We think the market is ultimately one that should be seen as consisting of two parts – virtual worlds for children/teens and ones for adults– with diverging longer-term growth prospects," explains the report. "We think virtual worlds for kids/teens are a product with strong promise, and one that could continue to achieve mainstream status in coming years. To the contrary, we think virtual worlds aimed at adults face greater challenges in the U.S."

"We think it is telling that virtual worlds have proven successful among kids, who have limited social options, and in places such as Finland, where external factors such as climate may limit users’ offline social options.  As such, we think the ability of virtual worlds (as distinct from video games, which target a different, more male demographic) to achieve mainstream penetration has not yet been proven," continues the explanation.

I  disagree to some degree. Kids and teens worlds are still the hot spot for virtual worlds right now and likely will be next year, but there's a host of products just out in the last half of '08 and more planned for '09 targeting the 18-34 market.

Morgan cites, as an example of the slowed adult market, Lively, Kaneva, Active Worlds, Second Life, and IMVU. All of these are essentially open-ended platforms for virtual worlds and engagement, without a significant level of planned content or user experiences and mostly that require downloads and installations. That's not the case in kids worlds, and it won't be for many adult worlds of 2009 either. That's not to say those worlds won't grow--IMVU's explosion is hard to argue with--but the alternative may lure in more casual users.

Morgan points to kids' limited offerings for entertainment--they're stuck indoors after dark--as a source for growth in the social atmosphere of virtual worlds. That's an increasingly strong motivator for adults' online activity as well. I've spoken to more than handful of casual game, MMO, and virtual world developers who are creating in Flash specifically because their working-age audiences can access log in from the office without calling the IT department in to do an installation.

I think 2009 will bring a larger adult audience to virtual worlds, not because the concept has gone mainstream and users are accepting it, but because developers are working with and accepting more mainstream concepts. The overall population certainly won't eclipse kids worlds this year or maybe even the next, but I suspect the growth rates will start to look more similar sooner than J.P. Morgan thinks.

One thing that I do think is interesting from an investment standpoint is that the analysts note that "’08 growth [was] somewhat tepid. Unique users at several virtual worlds were lower Y/Y in ’08, suggesting that their appeal may have been more limited than even we had expected."

While most worlds cited show growth--and some impressively so--it's harder to pick the same sorts of clear leaders that we see in the social networking space. Or, rather, it's easy to look at worlds like Club Penguin and Habbo as  success stories while also seeing slower growth in hundreds of other worlds.

The overall space for youth virtual worlds seems to be growing rapidly even while growth at specific sites may not dazzle investors to the same degree. As we've said before, there's a lot of room for small successes in the industry. It may be, especially now, harder to get funding, though.

Comments

[Steven Kuik]

The immersive turnaround on visualisation of the web experience has crossed the point of no return in 2008. Steady growth is always better than explosions. Despite what JP morgan says on growth, they are right on the mistaken effort it will take to speed up growth in terms of overall acceptance and 3D activities. That's because real growth (and explosion)will come with the arriving of a lot of teens to the adult age and the demand for behind the firewall solutions. Look at web 1.0, 2.0 and even current wireless internet development. At the end of the day people, and the way they accept, adapt and act) will not change over time. So get ready in time and pay attention on timing your costs and investments while your building.

Steven Kuik
COO www.DXExchange.com

[mcfly]

Growing up on an atari console and an apple
pc with that ole dungeon/maze game....
and then graduating to Sonic the Hedgehog
(which led to tekken etc.) at 21..
I consider myself first generation gamer.

What will happen to these kids interest
as they get older..after having been
"raised" in virtual environments? Their
interest in VR is embedded like Tv.

The development of higher, adult themed
VR is something that needs focusing.
Being 40 today is not the same a decade
ago.