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Game developers on social networks can expect $1.20/mth/Daily Active User August 29, 2008

Posted by jeremyliew in advertising, business models, games, games 2.0, gaming, social games, social gaming, virtual goods, virtual worlds.

Inside Facebook has a terrific interview with $uperRewards, one of the two major CPA ad networks for social networks (and increasingly outside of social networks as well). [Offerpal is the other major CPA ad network for social networks]. In the interview the $uperRewards team give some great stats and advice for game designers:

On who to focus on when thinking about monetization:

You should support all kinds of players well, while remembering that your hardcore users will generate 90% of your revenue….

…Also, keep in mind at that a majority of the revenue generated per user is generated early in the lifetime of the users’ interaction with the games. People spend money developing their characters, climbing the leader board, and unlocking new elements of the game. Once their character is strong, they have many prizes, and have unlocked all the levels – naturally there is less desire to complete offers and pay. It is those top guys though that motivate the little guys to climb and thus spend.

On what monetization a game developer can expect:

The core metric we use is dollars per click. We hope our developers can get 25% of their daily active users through a Super Rewards page at some point. Of those, if the economy is balanced correctly, you should see a 40-50% click through rate, and ultimately a net 8-10% conversion rate. Developers get about $1.00-$1.50/conversion for US users, but less for international users. We’re lucky to get $0.06/conversion in China, but we have games operating in Europe and other parts of Asia at $0.25 and up.

So assuming all of a developer’s traffic is US traffic, the developer could see up to $83 per day per thousand DAUs. However, on an average basis across all geographies, we are about half that number. It goes without saying that there is a wide distribution around the average based on quality of app and balance of virtual currency economy.

$83/day x 1/2 x 30 days = ~$1200/mth per thousand DAUs, or $1.2/mth per DAU. That sounds like real opportunity. When Facebook rolls out an API for micropayments, this number will likely go up even further.

Promising numbers for game developers.

Read the whole interview.

It will be harder to raise Venture Debt for a while. August 27, 2008

Posted by jeremyliew in financing, start-up, startup, startups, venture debt.

Many startups use venture debt to extend their runway beyond the capital that they raised from venture capital investments directly into the company. David Hornik wrote a good overview of venture debt a few years ago, all of which is still relevant today.

Some things have changed since then however. The WSJ reports today on how tightening credit markets are hitting venture debt firms

Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.

venturewireThe latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer…

…Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years….

…Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.

Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.

This tightening in credit will hit some venture debt lenders harder than others. Lenders who can fund venture debt from deposits (e.g. SVB, Comerica) or who do not themselves leverage their equity to make more loans will not be as affected. However, it is likely that all lenders will be more cautious. Additionally, as some firms will have less “dry powder” with which to lend, there will likely be less competition for venture debt providers, meaning that terms for venture debt may get less attractive to startups for a little while.

How to interview key hires August 25, 2008

Posted by jeremyliew in hiring, HR, interviewing, start-up, startup, startups.

Startup founders often need to hire people into areas that they don’t know anything about. This can be a technical founder hiring a VP marketing, a business development founder hiring a VP Engineering, or a product management founder hiring a VP Ad Sales. Often these hires are some of the most importantthat a company makes as they fill the holes in a founding management team.

There are three things that you should test a potential hire for:

1. Technical Skills
2. Cultural Fit
3. Performance Skills

Technical Skills: These are the skills strictly required to do the job. They are typically based on training or past experience. Examples include ability to program in Ruby on Rails, ability to run an Search Engine Marketing campaign, ability to sell 6 figure ad deals to movie studios etc. Resumes provide a good first screen for technical skills.

If you do not know anything about the field of the candidate that you’re hiring, your ability to discern their level of technical skills is limited. You should have a domain expert (who does not need to be an employee of the company – advisers, investors and friends can fill this role) interview your candidate to make sure that their expertise matches their resume. Having more junior employees within that function interview the candidate (ie having the team interview the boss) can be helpful but is not always enough. Often more junior employees don’t fully appreciate the full scope of their bosses’ jobs.

Cultural Fit: Companies are groups of people, and all groups of people have culture. This can include styles and modes of communication, work norms, modes of decision making and many other elements that can be difficult to define. Any team members can interview a candidate for cultural fit.

You have to be careful not to let “cultural fit” become a code word for suppressing diversity. The key question to ask is not, “Is this person different from the norms of our company culture?”, but “Could this person be effective in their job given the norms of our company culture?”. For example, consider a startup comprised only of recent engineering graduates with a norm of getting to work around noon and working until 3am, that is considering hiring a VP of Marketing who has to leave the office at 5pm to pick up her kids from daycare. It isn’t reasonable to ask if the VP Marketing will be in the office at midnight. It is reasonable to ask if the VP Marketing will be able to do all the required communication and coordination with the engineering team during the five hours that they will both be in the office together.

Performance Skills: Whereas Technical skills tell you if a person can do a job, Performance skills tell you how well they can do a job. These include characteristics such as attention to detail, problem solving, initiative, leadership and team work. Anybody can interview a candidate for these characteristics. However, there is a trick to doing this effectively. Asking someone “how tolerant are you of ambiguity?” is not a good differentiator. One of the most effective techniques I have come across is called behavioral interviewing. When I was GM of Netscape I put my entire team through the Skill Analyzer training from Novations to learn this technique of interviewing. I thought it was extremely helpful in creating a structured, standardized interviewing process.

Later I’ll talk about some of the key elements of Behavioral Interviewing.

Amazon’s EBS Will Push Enterprise Apps to the Cloud August 22, 2008

Posted by John Vrionis in Cloud Computing, Infrastructure.

Amazon announced Thursday that its Elastic Block Store (EBS) feature is now available to all of its EC2 Web service customers. This is a big deal. The move rounds out Amazon’s offering and provides a full storage suite that is delivered as a service.

S3 and EC2 previously combined to be Amazon’s storage and compute services but lacked many of the critical elements needed to push enterprise class applications to the cloud. The previous holes didn’t matter much for non mission critical applications or batch jobs, but they were prohibitive for enterprise customers who need flexibility in the software stack and guaranteed service levels. With EBS, Amazon is sending a strong message and hosting providers should take notice – the Ecommerce giant is planning to be a significant player in the fight to offer cloud services to enterprise customers.

According to Amazon CTO, Werner Vogels, adding the Elastic Block Store offers customers “persistent, high-performance, high-availability block-level storage which you can attach to a running instance of EC2.” Vogels goes into further detail about the components of Amazon’s offering in his blog.

EBS volumes, which range from 1GB to 1TB, can be mounted as a file system or as raw storage. What this means is that customers can now deploy applications that work with any number of relational databases or file systems, not just the software stack specified by the cloud vendor (an example would be SimpleDB in Amazon’s case). This is critical to enterprise class customers because they are not going to lock themselves into a niche technology just to work with a certain service provider, while startups have been more willing to deal with this constraint because the cloud offered such a cost effective way to get an app up and running.

The EBS upgrade is a major move towards offering enterprise developers the flexible and reliable infrastructure they absolutely must have combined with the cheap and easy access to cloud resources they love. There are still plenty of questions about true reliability and performance that need to be answered before we see a massive migration, but this is a major step forward in providing the necessary building blocks.

Amazon was always going to be a tough competitor to beat on cost, but by adding flexibility and reliability to its story the implication for hosting providers is they will have to find another way to differentiate. My prediction is that we’ll see hosting providers attempting to move up the stack and looking to offer application management and monitoring solutions on top of their infrastructure as a way of separating themselves from Amazon. That’s good news for startups in that space like Singularity (a Lightspeed portfolio company), WeoCeo and Rightscale.

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.

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.

BestBuy launching prepaid cards for online games August 20, 2008

Posted by jeremyliew in business models, games, games 2.0, gaming, mmorpg, virtual goods, virtual worlds.
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Although some still doubt that free to pay games have a viable business model, this month’s launch of game cards at Bestbuy may change some minds. Reports Virtual Worlds News

Stardoll, Meez, AdventureQuest, and Gala-Net have all partnered with GMG Entertainment to launch individually branded prepaid cards at Best Buy. The Meez card will come with an exclusive virtual good, and Stardoll, which has previously worked with GMG Entertainment, is expanding its prepaid offerings to include a $15 card that will unlock various virtual goods.

I’ve noted in the past that prepaid cards at retail are an excellent way to monetize MMOG players. Earlier this year, Raph posted on the game card endcap at Target who have pioneered this category.

Sean Ryan
, MEEz’s CEO, notes:

So why should anyone care about old-line retail stores and physical goods when we’re all selling cutting edge virtual goods? Isn’t it all going to be virtual? The reason is that retail still matters a great deal, especially when addressing a somewhat unbanked audience like teenagers. We all know teens acquire an estimated $60B each year, whether it’s from allowances or part-time jobs – however, they don’t have an easy way to send it to their favorite virtual world or Massively Multiplayer Online (MMO) game company since they don’t have credit cards, are not happy borrowing them from parents, and aren’t as comfortable with PayPal, even though it can be linked to a checking account. Plus, teenagers still go shopping a lot, and that retail foot traffic is incredibly important since it provides another way to reach that audience when they’re not online. Finally, parents or friends are more comfortable giving gift cards these days so it’s easier for a teenager to ask grandpa for a $10 Meez card for graduation vs asking for cash – it’s a big Win/Win for the category.

Retailers are notoriously data driven when it comes to what they will give floorspace. Music is already getting cutting back according to Silicon Alley Insider:

… the three big retailers who comprise most of the industry’s sales — Best Buy (BBY), Wal-Mart (WMT) and Target (TGT) — will likely make significant cuts in the amount of floorspace they devote to CDs. We are hearing predictions of cuts that range from 20% to 40%, with Wal-Mart making the most aggressive pullbacks.

If retailers are giving shelf space to free to play games, that is a big vote of confidence in their future.

Ad standards starting to work for online video; social media next? August 19, 2008

Posted by jeremyliew in advertising, social media, social networks, video.

For a long time I’ve been calling for standards in social media advertising. Today if an advertiser wants to make a social media buy across multiple social sites, they will need to build different creative for each of the different social media advertising products on each of the major companies, Facebook, MySpace, Bebo, Rockyou, Slide etc.

Until recently, online video has faced the same problem. But in May the IAB approved new online video advertising standards.

Two studies have shown a positive impact from the establishment of the standards. Reports Wired:

Riddled with inconsistencies, video advertising has been a difficult marketplace to tap into. Advertisers are often forced to tailor creative for each video ad purchase, which is a big turnoff to advertisers looking to make big buys. Meanwhile, long, poorly formatted ads lead to a high rate of attrition by alienating viewers.

In May, the Interactive Advertising Bureau implemented standards to help streamline video advertising. Today, Break Media, an entertainment community for men, and Panache, a video advertising delivery-platform, released a study showing high rates of success with video ads since the standards went into effect.

Over an 11-week period, the study tested the success of the four standard formats for in-stream video advertising established by the Interactive Advertising Bureau: pre-roll, interactive pre-roll, non-overlay ads and overlay ads. Tracking advertisements for three large corporations — Honda, T-Mobile, and truTV — the study found that viewers had a high tolerance for pre-roll and overlay ads.

All of the four formats had extremely high click through rates. Completion rates for 15-second pre-roll ads were 87 percent, and 77 percent viewed videos with overlay ads for at least 15 seconds.

“Getting major advertisers major advertisers to move and turn into video advertising is going to take time,” says Panache CEO Steve Robinson. But he is enthusiastic about the new standards: “now you can just do the creative and know that it works.”

NewTeeVee notes another positive study:

Meanwhile, in a study of 100 campaigns and nearly 65 million impressions, Tremor Media measured 80 percent completion rates for both 15- and 30-second pre-roll ads. While the study’s size makes it more significant, Tremor did not look at click-through rates. Tremor said it actually saw slightly higher completion rates for 30-second ads than 15-second ones, attributing viewer willingness to watch longer ads to their placement next to high-quality content.

For Social Media to be a business we’ll need to see similar standards for social media advertising. This is why I think AOL buying Bebo is good for the industry. With AOL joining Fox as major media companies with a “dog in the fight”, hopefully we’ll move more quickly towards standards for social media advertising.

Managing fraud when selling virtual goods August 18, 2008

Posted by jeremyliew in fraud, games, games 2.0, gaming, mmorpg, virtual goods, virtual worlds.
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Worlds in Motion interviews Vindicia‘s Gene Hoffman about the science of MMO fraud, but the lessons apply to any virtual goods business. Hoffman notes:

The first question about MMO fraud is whether there is a real currency resale market. If there is a way to create cash directly or over on eBay, there will be real fraud attempts to use stolen credit cards to create cash.

Even though there is no actual “cost of goods” for virtual goods, MMOGs need to worry about fraud (as measured by credit card chargebacks) because if your chargebacks get over 1% for a protracted period, Visa, Mastercard and Amex will remove you as an accepted merchant. This will dramatically effect your ability to monetize your users.

Game operators need to worry about not just real fraudsters, but also “friendly fraud”; real players who really did buy the goods, but just don’t want to pay:

On the back end, many MMOs have a very hard time tying their chargebacks to the actual accounts and shutting those accounts off. That means that customers have learned that they can chargeback their transactions to get credit or money back and often still play next month. We actually see this happen around Thanksgiving as chargeback volume spikes so that people have more Christmas spending money.

It is relatively easy to reduce fraud rates by making gross business rules that block whole classes of potential customers that fall into higher risk categories. But in a business where your cost of goods is zero, the opportunity cost of “false positives”, where you turn away many good customers in order to stop a small number of bad customers, is very high. As Hoffman notes:

…we have noticed across all our gaming clients when it comes to fraud is that the 1% chargeback rate is really a marketing budget.

Having your chargebacks too low often means you aren’t being aggressive enough on the customer acquisition side. One of the real side benefits of a large customer base is that the denominator in your chargeback rate is quite large and offset by very safe and trustworthy transactions.

Those two processes create a virtuous cycle that allows you to push hard to sign new customers up if you have someone like Vindicia really watching the chargebacks on the back end.

In general, there are two ways of managing fraud:

1. User based approaches (such as Vindicia’s) look to identify both good actors and bad actors across multiple virtual goods merchants, creating a network of trust. These approaches lend themselves to being outsourced to an expert third party.

2. Behavioral approaches look to correlate certain “in game” behavior with likely fraud (e.g. a new player with a level one character who attempts to buy an expensive high level item within 5 minutes of registering). These approaches typically need to be handled on a game by game basis.

The best operators of virtual goods businesses apply both approaches.

What experiences have users had with managing online fraud by their customers?

One in seven video games downloaded rather than bought at retail August 12, 2008

Posted by jeremyliew in distribution, games, games 2.0, gaming.
1 comment so far

NPD released its latest report on the gaming industry yesterday. While the headline is that Extreme Gamers (just 3%) play an average of 45 hours per week and bought 24 titles in the last three months , i was also interested to see the inroads that digital distribution has made:

The Advent of Digital Purchases
In total, gaming consumers indicated approximately 14 percent of games purchased in the past 3 months were digital downloads. Avid PC Gamers had the highest incidence with 27 percent of their purchases being digital. In terms of content, more than half of Extreme Gamers and just over a third of Avid PC Gamers stated they would definitely download a feature to enhance a specific game that they own.

This is partly a function of the increased importance of the PC as a gaming platform, and the growing number of casual gamers:

Of the 174 million gamers who personally play games on PC/Mac or video game systems, 3 percent are Extreme Gamers, 9 percent are Avid PC Gamers, 17 percent are Console Gamers, 14 percent Online PC Gamers, 15 percent are Offline PC Gamers, 22 percent are Young Heavy Gamers and 20 percent are Secondary Gamers.

The rise of free to play games, almost all of which are downloaded, is another driver of this trend.

Digital distribution, and hence the ability to variablize marketing and distribution costs is one of the key drivers of games 2.0.

When can paying people become counterproductive? August 11, 2008

Posted by jeremyliew in business models, game design, game mechanics, games, mmorpg, social media, user generated content.

I’ve posted in the past about how points can be used to drive user behavior.
Last week the Washington Post explored when play becomes work, and talked about some of the downsides of using rewards systems:

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

The implication for social media and user generated content businesses is that creators create for love, not money, and that paying them with money may in fact be counterproductive. Instead, creators want adulation.

One interesting counterpoint might be the gold farmers inside World of Warcraft. When people play MMOGs for money, do they still play for fun? Anecdotally, it appears that they do. So when do rewards work and when are they counter productive?

But rewards and punishments are not always counterproductive, Benabou said. He drew a distinction between mundane tasks and those that carry meaning for people. In the first case, Benabou argued, rewards and punishments work exactly the way economists predict: They get people to do things.

External rewards and punishments are counterproductive when it comes to activities that are meaningful — tasks that telegraph something about a person’s intellectual abilities, generosity, courage or values. People will voluntarily perform intellectually arduous work, for example, because it gives them pleasure to solve a puzzle or win a game of wits.

“If I pay my kids to do their homework, I am saying, ‘You will get this if you do your homework,’ but I am also saying, ‘Homework is not likely to have intrinsic rewards,’ ” Benabou said. To the extent that a child is doing homework because he or she enjoys the challenge, or wants to demonstrate intelligence and diligence, the homework has meaning beyond the task itself, and Benabou predicts that offering a reward will backfire.

In most cases when it comes to user generated content, the creators do consider their work to be meaningful. So pay attention to how you pay them attention.