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Why sell branded virtual goods? Advertising or ecommerce revenue? August 20, 2008

Posted by jeremyliew in advertising, business models, digital goods, games 2.0, mmorpg, virtual goods, virtual worlds.
5 comments

Yesterday’s WSJ noted that retailers and manufacturers were increasingly selling their branded virtual goods inside virtual worlds:

Retailer Kohl’s Corp. this month launched a new line of apparel, but the plaid skirts and printed T-shirts won’t be sold in its 957 stores. Instead, it’s selling them on Stardoll.com, a virtual community for teens and tweens where kids can fork over “Stardollars” — purchased online at a nominal sum — to buy apparel for their online characters…

This month, casual-wear maker K-Swiss Inc. and lingerie and swimwear designer Eberjey rolled out virtual clothes on There.com. And in late July, retail pioneer Sears Holdings Corp. opened its first online boutique featuring back-to-school apparel and dorm-room furniture on teen site Zwinky.com

Virtual Worlds News noted a few other brands also participating on There.com

… music merchandiser Bravado, and the Country Music Hall of Fame and Museum are now peddling their virtual wares in There.com. Each will establish specialty shops to sell branded goods for There.com avatars. There.com has sold virtual goods as part of brand campaigns before, most recently for NaCo, but has also popular for large, branded environments, such as those for Scion, Coke, and CosmoGIRL!.

So far the brands seem to be getting good results; according to Virtual Worlds News:

Yesterday’s Wall Street Journal article on apparel marketing in virtual worlds reports that the Zwinky boutiques “logged 750,000 visitors and sold 850,000 virtual items during their first 16 days through mid-August.” Meez CEO Sean Ryan followed up on his personal blog that 700,000 Sears items have been adopted so far by his users. There’s likely some overlap in users, but that’s over 1.5 million branded items distributed in just two of the properties. The campaign will run through the end of the month

However, these retailers and manufacturers are not selling virtual good for the revenue. Rather they are doing it for the promotion and advertising. Says the WSJ:

“It’s really a way to get shoppers to test-drive your product,” said Carlos Mejia, chief financial officer of Eberjey, a maker of lingerie, swimwear and sleepwear. The brand, which largely sells to women ages 20 to 45, hopes to attract teenagers with its virtual line.

Penney decided this year to put back-to-school outfits on Yahoo after learning that, during a seven-week experiment last summer, 1.5 million avatars wore its clothing on Yahoo and 5 million Penney outfits were tried on. “It casts a very modern, current light on the brand with teens,” says Mike Boylson, Penney’s chief marketing officer. Before Penney’s presence on Yahoo, “perhaps J.C. Penney wasn’t on their radar before,” he says.

Sears is marketing its virtual boutiques on billboards in the virtual world, and is hosting daily fashion shows on the site promoting its products through the end of August.

Adds Richard Gerstein, the Sears CMO:

Teens and tweens are making more and more of the purchase decisions, or at least influencing that decision. Mom already knows that Sears provides trusted value and quality, but we need to prove to the teens and tweens that we have the apparel and styles to help them “arrive” at school this year with confidence…. And as we continue to expand our outreach to the tween demographic it is increasingly important to expand our marketing strategy to include the mediums where tweens are spending most of their time.

The focus on marketing can create a tension within virtual worlds about how to price these virtual goods. On the one hand, to drive revenue and create value in the brand, you want to price these items at a premium. On the other hand, to get the broadest possible reach and trial, you want these items to be at the free tier. Online trial will hopefully lead to more real world sales. Anecdotally at least, it seems to be working:

The online pitches are striking a chord with Jen Rediger’s daughters, 13-year-old Tyler and 9-year-old Kenzie. In the first week that the Kohl’s store opened on Stardoll, they spent about 70 Star Dollars, or $7, on virtual skirts and shoes. Ms. Rediger, 32, an interior designer who lives in Hoschton, Ga., says she doesn’t mind her daughters being exposed to such marketing because “it’s not worse than what they see on television.”

Tyler has already asked her mom to take her to Kohl’s to buy the real versions. “They look really cool on my doll,” she says. “It’s my style so I think I’ll wear it a lot.”

Facebook has already taken this approach with its branded gifts. I suspect that we’ll see the model move more firmly in the direction of advertising, with most branded virtual goods being made available for free.

Great agenda for the Social Gaming Summit on Friday June 12, 2008

Posted by jeremyliew in conferences, digital goods, game design, game mechanics, games, games 2.0, gaming, social games, social gaming, virtual goods, virtual worlds.
9 comments

I’m very excited about the Social Gaming Summit on Friday that I’m co-producing. The program looks fantastic:

10:00am What Makes Games Fun?
» Erik Bethke – CEO, GoPets
» Dr. Ian Bogost – Founding Partner, Persuasive Games
» Nicole Lazzaro – President, XEODesign, Inc.
» John Welch – Co-Founder, President & CEO, PlayFirst (Diner Dash)
» Me (Moderator)

11:00am Casual MMOs and Immersive Worlds
» Daniel James – CEO, Three Rings (Puzzle Pirates)
» Kyra Reppen – SVP and GM, NeoPets
» Min Kim – Vice President of Marketing, Nexon America
» Patrick Ford, VP Marketing and Community Development, K2 Networks
» Joey Seiler – Editor, Virtual Worlds News (Moderator)

1:30pm Asynchronous Games on Social Networks
» Siqi Chen – Founder, Serious Business (Friends for Sale)
» Blake Commagere – Founder and VP Engineering, Mogad (Monsters apps – Zombies, Vampires etc)
» Shervin Pishevar – CEO, Social Gaming Network
» Mike Sego – Developer, (fluff)Friends
» Andrew Chung – Principal, Lightspeed Venture Partners

2:30pm User Generated Games in Social Networks and Virtual Worlds

» Jeremy Monroe – Director of Business Development, Sports & Entertainment, North America, Sulake Inc. (Habbo Hotel)
» Ted Rheingold – Founder, Dogster and Catster
» Cary Rosenzweig – President and CEO, IMVU
» Craig Sherman – CEO, Gaia Online
» Dean Takahashi – Writer, Venture Beat (Moderator)

4:00pm Building Communities and Social Interaction In and Around Games
» Jim Greer – CEO, Kongregate
» Amy Jo Kim – CEO, Shufflebrain
» Mark Pincus – Founder and CEO, Zynga Game Network
» Dave Williams – SVP, Shockwave, AddictingGames
» Brandon Sheffield – Writer, Gamasutra (Moderator)

5:00pm Monetization and Business Models for Social Games

» Jameson Hsu – Co-Founder and CEO, Mochi Media
» Matt Mihaly – CEO and Creative Director, Sparkplay Media
» Mattias Miksche – CEO, Stardoll
» David Perry – CCO, Acclaim
» Ravi Mhatre – Managing Director, Lightspeed Venture Partners (Moderator)

Attendence is limited to 400 and it looks like it is going to be a full house. Hope to see some readers there!

Nexon’s Maplestory sold $30m of digital goods in the US in 2007 May 27, 2008

Posted by jeremyliew in digital goods, games, games 2.0, gaming, mmorpg, virtual goods.
13 comments

The WSJ had an article on Friday about Nexon and the virtual goods model. Not new news to most readers of this blog but some good information nuggests in the article:

Prepaid cards used to buy Nexon game items are now the second best-selling entertainment gift card at Target Corp. stores in the U.S., after cards for Apple Inc.’s iTunes Store, Target says…

Nexon’s biggest hit in the U.S. so far is MapleStory, an online role-playing game popular with teenagers in which players assume the identities of warriors, magicians and thieves and collectively fight monsters. The game has 85 million users globally, of which 5.9 million are registered in the U.S. Last year players world-wide bought more than 1.3 million articles of clothing and more than one million hair makeovers for their MapleStory characters. Nexon’s U.S. revenue last year more than tripled to $29.3 million from $8.5 million the prior year.

With $30m in US sales and 6m US registered users, assuming a 20% “active player” rate and 10% “buyer rate”, that implies an ARPU of $20/mth which sounds about right and is consistent with number we’ve seen from games in Asia. It sounds like the US will be following very similar models of virtual goods monetization that we’ve seen in Asia.

Monetizing MMOG players without creditcards through retail May 21, 2008

Posted by jeremyliew in business models, digital goods, games, games 2.0, gaming, mmorpg, virtual goods.
3 comments

Raph’s latest post says that there is a market glut of MMOGs, but most of them will survive. In passing, he shows a picture that is worth a thousand words:

MMOG cards at Target

… here is the rack of game cards available at Target — snapped this weekend, and strongly reminiscent, finally, of similar shots I have taken in Korea, Japan, and China. For years, there was no such rack in the US. Then it was just a couple of cards, and only at some checkouts. Now it gets a rack right between the TV box sets and the top pop albums (you can see REM’s latest CD there, abandoned on the top shelf).

Besides the cards you maybe expect to see, like Club Penguin, WoW, and Zwinky, there’s also a large stack of ‘em for gPotato games (Flyff, Shot Online, etc) And Acclaim, which make their living by bringing over games from Korea. There’s WildTangent cards, and the Gaia cards are almost sold out. The diversity is interesting, as is the lack of cards for most of the core gamer MMORPGs. The strong presence of the often-marginalized Korean games is telling.

One of the challenges in monetizing MMOGs through virtual goods in the US has always been finding a way to sell them to young players who don’t have credit cards. Gaia even employs 3 people whose sole job it is to open snail mail envelopes full of cash that people send in for virtual goods.

Pre paid cards at retail are an excellent way to monetize this audience. I have heard from a number of MMOG companies that they have seen a substantial increase in both ARPU and velocity of spending since releasing these cards. Watch this space.

Virtual Goods and Real Money Trade: Paving the paths March 13, 2008

Posted by jeremyliew in business models, digital goods, facebook, friendster, games, games 2.0, gaming, myspace, social networks, virtual goods.
2 comments

As I read the coverage about the real money trade in MMOs panel at GDC, I was reminded of danah boyd’s thoughts on why MySpace took off and Friendster did not, which notes in part:

Friendster killed off anyone who didn’t conform to their standards, most notably Fakesters and those with more creative non-photorealistic profiles. When MySpace users didn’t conform, they were supported and recognized for their contributions to evolving the system.

A good analogy to both situations is what to do when faced with a nice green lawn on a college campus. Some students will always cut across the grass, leaving worn paths. There are three solutions to this problem:

(i) Erect a fence around the lawn and put up some “keep off the grass” signs. This keeps the grass green and pristine, exactly as the landscape architect imagined it, but forces unhappy students to go the long way around to their classes.

(ii) Do nothing, let students cut across the grass and tramp mud into classrooms.

(iii) Pave the paths. Students take the shortest paths, no mud in classrooms, and the rest of the lawn stays green.

Friendster put up “keep off the grass” signs. Myspace paved the paths.

Now if you ask students as to what should be done about the muddy paths, they’ll probably suggest option number one. But its those same students that created the paths in the first place! It is more important to watch what users do than what they say. Facebook is facing a similar dilemma with its apps right now.

Games companies have the same issue with virtual goods. The abundance of real money trading markets for virtual goods tell us what users want to do (despite their vociferous claims to the contrary). If game developers don’t pave these paths, they risk muddy classrooms or unhappy students.

Free to play arguments February 27, 2008

Posted by jeremyliew in advertising, business models, casual games, digital goods, freemium, games, gaming, virtual goods.
3 comments

At GDC the argument continues over whether free to play and microtransactions are the future of games, or whether single sale and subscription models will continue to hold sway.

As I’ve opined in the past, the economic principle of marginal cost pricing suggests that free to play models will become dominant. At a round table on digital goods business models at GDC, one of the EA folks working on Battlefield Heroes noted that their surveys found that hardcore gamers and older gamers objected the most to digital goods, but that casual and younger players accepted it without comment. If the future of gaming is about breaking beyond the hardcore to the mass market, those defending the old models may be missing the larger opportunity.

Russell Carroll has an interesting post at GameSetWatch that sheds some further light on this issue. It is ostensibly about piracy in the casual game business and opens with the stat:

“It looks like around 92% of the people playing the full version of [the game] Ricochet Infinity pirated it.”

Carroll asks, if piracy can be stopped, can sales be increased by 12x? (i.e. would all the pirate players buy). After looking at all the methods by which the company could reduce piracy, and the impact of these methods on both downloads and conversion rates, he concludes:

As we believe that we are decreasing the number of pirates downloading the game with our DRM fixes, combining the increased sales number together with the decreased downloads, we find 1 additional sale for every 1,000 less pirated downloads. Put another way, for every 1,000 pirated copies we eliminated, we created 1 additional sale.

Though many of the pirates may be simply shifting to another source of games for their illegal activities, the number is nonetheless striking and poignant. The sales to download ratio found on Reflexive implies that a pirated copy is more similar to the loss of a download (a poorly converting one!) than the loss of a sale.

Think about this from the other direction. Currently, for every 1000 players, 80 bought the game and 920 are playing a free, pirated version. So the company makes around 80 x $20 = $1,600. If they were to eliminate piracy, they would sell one additional game, so their revenue would be $1,620.

At a recent panel on casual games, Alex St John said that he was able to sell advertising to support casual games monetizing at 15c/gameplay and that he was sold out of inventory.

To make $1,620 on advertising at 15c/gamplay, the 1000 players would on average need to play the game about 11 times each, which doesn’t seem unreasonable. (This assumes that the source of advertising dollars will be scalable.)

If you add to this a digital goods opportunity, the alternative becomes more interesting. Daniel James (CEO of Three Rings) has said in the past that the ARPU from digital goods is about the same as that from subscription, but with a distribution curve that looks more like a power curve – some heavy spenders and a long tail. An industry rule of thumb for digital goods monetization is around 5-10% of players will pay. Applying the same metrics to this game suggest a digital goods revenue stream in the $1,000-$2,000 range, incremental to the advertising revenue.

And finally, this doesn’t even begin to address the question on how many more players will play the game if the free period is not limited to 60 minutes. These incremental players all become candidates for monetization by both advertising and digital goods. Crossing the Penny Gap can dramatically cut the universe of users, as Josh Kopelman has noted before.

I would advise game designers to consider baking digital goods and advertising opportunities into the core mechanics of their new games so that they have the flexibility to explore both these business models as well as the proven subscription model.

UPDATE: Carroll has more data on his casual game pirating experience here.

Freemium service models – paying for convenience in games February 20, 2008

Posted by jeremyliew in asynchronous gaming, business models, digital goods, freemium, mobile, subscription, virtual goods.
4 comments

Last week I noted that free-to-play games will become increasingly dominant. I’ve also noted in the past several use cases for the digital goods business models that will be one of the primary monetization mechanisms for free-to-play games. Selling increased functionality can result in user dissatisfaction if players perceive that the only way that they can “win” is to buy more powerful in game functionality. This can be managed through the use of a dual currency system, as Matt Mihaly noted in a guest post.

One other monetization mechanism that free-to-play games can offer is services. Some games, especially real time strategy games, can be somewhat inconvenient to play because they require constant monitoring and occasionally require actions to be taken in game at a certain time. Gameplay can inconveniently interfere with other activities, like work and sleep.

Travian is a good example of this. In Travian each action takes a certain amount of time, and there is no way to “queue up” orders (e.g. if you want to upgrade your mine after you’ve finished upgrading your farm field), or to “schedule” orders to be carried out at a certain time (e.g. if you want to time a raid on another village to be coordinated with another attack). Instead, Travian requires a player to be in the game at a specific time to give an order.

Offering a player the ability to queue up orders or schedule orders as a premium service is a non controversial way to monetize users. Players who do not want to play can be just as effective as players who are willing to pay (they just need to be able to get online at the right times to give their orders). Players who pay for the service are paying simply for convenience, not for additional in game power.

Managerzone‘s mobile premium service is another example of such a service. As I noted previously, the mobile service gives a player certain alerts and allows a player to take a number of actions in the game from their mobile phone, without having to log on to the website from a computer. This makes the game much more convenient to play, but again doesn’t disadvantage a player who choses not to pay for the mobile service since they can still do everything from the website. It looks like Blizzard may also be considering a mobile version of World of Warcraft.

I’d be interested to hear from readers of other examples of games monetizing premium services.

High prices can increase perception of value January 29, 2008

Posted by jeremyliew in digital goods, framing, signalling, virtual goods.
7 comments

A recent study by Stanford and Caltech found that increasing the perceived price of a bottle of wine increased the ACTUAL and perceived enjoyment that tasters derived from drinking the wine:

According to researchers at the Stanford Graduate School of Business and the California Institute of Technology, if a person is told he or she is tasting two different wines—and that one costs $5 and the other $45 when they are, in fact, the same wine—the part of the brain that experiences pleasure will become more active when the drinker thinks he or she is enjoying the more expensive vintage…

The study

The researchers recruited 11 male Caltech graduate students who said they liked and occasionally drank red wine. The subjects were told that they would be trying five different Cabernet Sauvignons, identified by price, to study the effect of sampling time on flavor. In fact, only three wines were used—two were given twice. The first wine was identified by its real bottle price of $5 and by a fake $45 price tag. The second wine was marked with its actual $90 price and by a fictitious $10 tag. The third wine, which was used to distract the participants, was marked with its correct $35 price. A tasteless water was also given in between wine samples to rinse the subjects’ mouths. The wines were given in random order, and the students were asked to focus on flavor and how much they enjoyed each sample.

Results

The participants said they could taste five different wines, even though there were only three, and added that the wines identified as more expensive tasted better. The researchers found that an increase in the perceived price of a wine did lead to increased activity in the mOFC because of an associated increase in taste expectation.

The ability of “framing” to impact perceived value is consistent with the signalling function of digital virtual goods in the gifting use case.

Facebook digital gifts worth around $15m/year January 23, 2008

Posted by jeremyliew in 3423228, digital goods, facebook, gifts, virtual goods.
33 comments

Although Facebook has primarily focused its monetization efforts on advertising, it has also experimented with digital goods. There are three typical use cases for digital goods; (i) increased functionality (ii) self expression and (iii) communication. Facebook’s Gifts fall into the third category, whereby a particular communication is emphasized because a gift has a price associated with it, thereby creating some scarcity value.

Facebook creates a certain fixed number of each type of gift. When the number remaining for any particular gift drops below 100,000, Facebook displays the number left. The most common size runs are 100,000 and 1,000,000 but they range as high as 10,000,000 and as low as 15,000.

We noted the number of available gifts of each type over a seven week period to be able to better understand the sales rate of digital gifts. Excluding free gifts, we found that the average number of sales per week for a gift was 846. Since there were 322 gifts available for sale when we completed our last survey (Jan 8th), that implies that Facebook is selling just over 270k digital gifts per week. At $1 per gift, that implies an annual run rate of just under $15m. Facebook sometimes allows users to pre pay for gifts at a discount if you buy multiple gifts, so this number may be slightly lower.

The top four fastest selling gifts were the only four free gifts, all sponsored by an advertiser. On average these gifts were given at a rate of over 150k/week. This is a rate almost 200x faster than the regular Facebook gifts and speaks to the penny gap.

Holiday themed gifts (e.g. Santa hat, eggnog, Happy New Year!) dominated the list of top selling paid gifts, averaging 4,755 sales per week. Romantic gifts (e.g. “Be Mine” cookie, chocolates in a box) also sell better than average. This reinforces the use case of communication as these gifts all have a clear communication overtone, relative to gifts without a clear message (e.g. an espresso bean, a beach ball or a lemon).

WordPress doesn’t let me upload excel spreadsheets, so a .pdf is available below.

Facebook gifts analysis

I suspect that as we see more social games emerge on Facebook we will see digital goods that take advantage of the other two use cases, increased functionality and self expression.

NOTE: I updated this estimate in September 2008 and concluded that Facebook was on a run rate to sell $35M in digital gifts.

EA launches free to play MMO for Western users January 21, 2008

Posted by jeremyliew in business models, digital goods, games, games 2.0, gaming.
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Although EA has experimented with free to play MMOs in Korea before, Battlefield Heroes, being launched this summer, is its first free to play MMO aimed at a western market. They will be employing a digital goods model to monetize. With EA now joining Sony and other big western game publishers to employ this model, it is starting to look pretty mainstream. Battlefied Heroes will be more casual than previous incarnations in the franchise. NY Times notes about EA’s Korean launch, FIFA:

E.A.’s most recent experiment with free online games began two years ago in South Korea, the world’s most fervent gaming culture. In 2006, the company introduced a free version of its FIFA soccer game there, and Gerhard Florin, E.A.’s executive vice president for publishing in the Americas and Europe, said it has signed up more than five million Korean users and generates more than $1 million in monthly in-game sales.

Players can pay not only for decorative items like shoes and jerseys but also for boosts in their players’ speed, agility and accuracy. Mr. Florin said that while most users do not buy anything, a sizable minority ends up spending $15 to $20 a month.

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