Notes from VC panel at Gamesbeat March 25, 2009Posted by jeremyliew in games, games 2.0, gaming, Venture Capital.
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Prepaid cards continue to drive online game revenue March 20, 2009Posted by jeremyliew in freemium, games, games 2.0, gaming, payments.
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Two interesting announcments on prepaid cards this week.
Game currency cards — gift cards players can use to pay for subscriptions or virtual goods in online games — are getting traction. Coming on the heels of a similar report from GMG Entertainment, InComm said today that its game currency card business grew 200 percent in 2008.
Incomm is one of the two leaders in prepaid cards broadly (e.g. for Bed Bath & Beyond, Red Lobster etc) and has been making a concerted push into online game cards over the last couple of years.
Virtual Worlds News also reports on some useful stats from Playspan’s Ultimate Game Card:
21% of customers receive an Ultimate Game Card as a gift; 79% bought it for their own use
48% of customers between 14-18
36% of customers have bought 4 or more cards
The infrastructure of prepaid cards is one of the key elements that is unlocking the growth of free to play games in the west today.
Next weeks games conferences March 18, 2009Posted by jeremyliew in conferences, games, games 2.0, gaming.
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GDC is next week, and still focused on console and AAA PC games. I’m speaking at a couple of satellite gaming conferences that are more focused on online gaming, my area of investment interest.
On Sunday March 22nd I’m moderating an 11am panel on Marketing and Distributing Flash Games at the Flash Gaming Summit. Unfortunately this conference is already sold out.
If you’re at either conference, come say hi.
Consumer Internet Predictions for 2009 December 11, 2008Posted by jeremyliew in 2009, Consumer internet, games, games 2.0, gaming, Internet, predictions.
First let’s take a look at how I did on last years predictions:
1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.
Grade: B-. We’re seeing much greater scale on social media and online video advertising, with a standard emerging for online video, and movement towards a standard for social networks. In-game saw some progress but not as much.
2. Structured web emerges.
Grade: C. Notwithstanding the Powerset acquisition, the structured/semantic web hasn’t been a real theme for 2008.
3. Games 2.0
Grade: A. This year was a breakout year for social networking games, web based games and free to play games. I see this growth driving several of next years predictions as well, as you’ll see below.
Now on to new predictions. Note that the remainder of this article is cross posted at the Wall Street Journal.
Last year, consumer Internet startups sprung up left and right, looking for U.S. traffic growth and relying on the robust growth of the advertising market to make money. We enter 2009 looking down the barrel of a recession. In this environment, I predict the following trends for consumer Internet companies:
1. Consumers seek cheap thrills
Even in a recession, people will still want to be entertained. The Great Depression saw resilience and even growth in movie ticket sales as one of the cheapest ways for people to entertain themselves. As this economy tightens through 2009, we’ll find growing numbers of “time rich-cash poor” consumers seeking today’s lowest cost methods to entertain themselves. In general, this will benefit two categories of consumer Internet companies.
First, social media and social networks. These are free and endlessly entertaining. As mainstream media companies cut costs, the relative value and quality of user generated content increases. MySpace, YouTube and Facebook all rank in the top 10 Web sites by aggregate time spent according to comScore. The most popular applications on Facebook and MySpace are all games, entertainment and lightweight communication, and these can provide endless hours of entertainment for users. It isn’t just Facebook and MySpace that will benefit though. Smaller social media sites that have built enough of a critical mass to have a self sustaining community will also see growing usage over the next year.
Second, games. Games are one of the most cost effective means of entertainment available. While a $10 movie ticket can provide 90 minutes of entertainment, a $60 computer game can easily provide 50-100 hours of entertainment. Free-to-play web based games make this math even more compelling, whether they be casual game portals like Pogo, virtual worlds like Gaia or massively multiplayer games like Runescape. The Web site with the highest amount of time spent per visitor in October was Pogo.com with 444 minutes/visitor. Number two was Yahoo, with just 291 minutes/visitor in the same period. Games in general, and free games in particular, can provide a lot of cheap thrills.
2. Trading real money for virtual goods
In Asia people have been paying real money for virtual goods for years. It is the primary business model for games and Internet companies in China and Korea, far more important that advertising. We’re starting to see similar behavior in the U.S., also led here by online games and social networks. On the back of the rise of social networks and games, 2009 will be the first real breakout year for this business model in the US.
To people who do not spend time on social networks, it seems crazy that people would pay real money to buy each other virtual gifts – pictures of things ranging from birthday cakes to hugging penguins – and then display them on their profile pages. But estimates peg Facebook’s digital gifts sales in the $35 million – 50 million range this year. As more human interaction moves online, these social tokens of appreciation move online in parallel.
In the same way, gamers are more than willing to buy virtual goods In 2007, Nexon made $30 million selling virtual goods to U.S. players of their games. These items either allow players extra powers in the game (e.g a bigger gun), or allow players to customize the way that their character looks (e.g. cool sunglasses). People want to win, and they want to look good doing it. Dozens of other games companies are now employing this model in the U.S.
Why would this recession be a time for virtual goods to take off in the U.S.? It actually has nothing to do with the economy, Rather, two new payment mechanisms are becoming available now that allow gamers, many young and without credit cards, to play these games to their full capacity. The first is that prepaid game cards are now being sold at retail, with Target leading the charge. The second is incentive marketing. If a player take an action (like signing up for a ring tone service, or completing a survey) the advertiser who benefits will fund the purchase of that players desired virtual goods. One virtual world company, Gaia, used to have three full time employees who did nothing but open envelopes of cash that their teen and ‘tween players sent them to buy virtual goods. Since rolling out their new payment mechanisms, their revenues have doubled and they no longer have to open envelopes full of pocket money.
Asia and Europe have led the US in the adoption of free to play games because they have had good alternative payment mechanisms in place for longer, including mobile payments and credits available for sale at internet cafes. Now the U.S. is ready to catch up.
3. Web 2.0 leaders pull further away from the pack
In a recession, when advertising budgets are cut, there is a flight to quality among advertisers. Size and “brand name” are good proxies for quality. Advertisers will want to buy advertising on big, well known websites. The big online media companies like Yahoo and AOL will benefit from this. However, they are already so big that they cannot escape the overall shrinkage of ad budgets.
On the other hand, many Web 2.0 companies, like Facebook and Digg, have build large user bases but have not yet built out their capacity to monetize their traffic. These companies will see the benefit of the advertiser flight to quality. However, as they are only now building out their sales forces, they will likely continue to see strong revenue growth in 2009.
4. Online ad prices continue to fall, alternatives help make up some of the ground
The Internet advertising market, like all markets, responds to changes in supply and demand. In the current recession, demand for advertising is likely to decrease. At the same time, supply of online inventory, page views, is continuing to increase. Social networks and other social media sites in particular are creating masses of new inventory. As a result, the price of online advertising will continue to fall in 2009.
Targeting may mitigate some of this fall. Better targeting is steadily improving the effectiveness of direct response advertising (the equivalent of TV infomercials). This targeting takes many forms, but all have demonstrated an ability to lift conversion rates over “run of network” advertising. As targeting technology improves, and as the data that publishers and networks collect about users increases in quantity and quality, we will see a better ability to match the right ad to the right person, and charge more for that ad.
5. Getting serious about monetizing non U.S. traffic
The U.S. led the way on the internet, and for a long time the U.S. dominated overall Internet usage. In the past couple of years this situation has changed. China passed the U.S. as the country with the most internet users this year. Top sites like Yahoo, MSN, Facebook and MySpace all have more users internationally than in the US. Serving an international user costs the same as serving a U.S. user, but making money from an international user is much harder. In 2009, I expect Internet companies to get serious about making money from their international traffic.
The US market represents about half of all online advertising, which is partly what makes monetizing international traffic so difficult. Building up direct ad sales teams (and networks) internationally will partially help to bridge the gap, but this will not be enough. As noted previously, in Asia direct monetization models (i.e. selling things directly to users) have proven to be a better business model than advertising. U.S. companies will need to understand and embrace the direct monetization models that have worked well overseas, principally mobile monetization, premium subscriptions models and digital goods models based on selling greater functionality, scarcity or status.
Silver linings to dark clouds
These trends will benefit some internet companies but disadvantage others. I hope that your company finds the right way to navigate these shifting shoals. Let me know if you agree or disagree with these predictions, or if there are other trends that you think I’ve missed.
We’re excited to invest in Casual Collective November 18, 2008Posted by jeremyliew in games, games 2.0, gaming.
I spent way too many hours playing Desktop Tower Defence last year. When I met Paul Preece, the man who destroyed my productivity for months, and heard that he was working with David Scott, a guy whose game Flash Element Tower Defence had even more gameplays than DTD, I was quite interested in hearing about what they were working on next.
I’m a big believer in applying the principles of web 2.0 to gaming: fast development cycles, user generated content (ie multiplayer games) and a direct to consumer distribution model (often free and viral).
Casual Collective, Paul and David’s new company, is applying all these principles to create a free-to-play social gaming site, and Lightspeed are excited to be seed investors in the company. In addition to the newest version of DTD and FETD, check out some of the new great games there, including the real time naval strategy game Desktop Armada, an addictive social wordgame called Farragomate and the joyful platformer Buggle Stars. But don’t expect to get much done today!
Which companies might prosper in an ad recession? October 13, 2008Posted by jeremyliew in advertising, Ecommerce, freemium, gaming, Lead gen, recession, subscription, virtual goods.
I have previously posted on which online media companies will survive the ad recession. Clearly, all online media companies will feel the advertising recession, but some companies will hold up better than others.
But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.
Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.
Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire. Compete recently noted the marked drop in “in market auto buyers” over the last two years for example – down 37%:
Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending. Unfortunately, the news for Starbucks isn’t good. Notes Seeking Alpha:
There was a time when getting a coffee at Starbucks Corp. (SBUX) – whether a basic “tall bold” or a souped-up venti concoction – was considered a relatively cheap treat, though those of us with a daily Starbucks habit might think otherwise.
However, a report from RBC Capital Markets analyst Larry Miller indicates that even that daily cup of store-bought java is one of the victims of the credit crunch. Mr. Miller lowered his 2009 earnings estimates – to $0.90 from $0.95, and said:
[The move] reflects our proprietary survey work, which suggests Starbucks sales continue to weaken as consumers are changing their habits and brewing more coffee at home.
This does not bode well for small ticket discretionary spending.
One potential brightspot may be gaming. The games industry has historically been considered counter cyclical. The argument has been that for $50s you can buy a game that will give you 50-100 hours of enjoyment, versus $10 for a 2 hour movie or $5 for a magazine that you’ll finish in an hour. Free to play games make this argument even more compelling. Free to play games may be able to take advantage of cheaper customer acquisition costs in an advertising recession.
For other forms of discretionary small ticket spending, the jury may still be out.
How to take money from children (for your online game or virtual world) September 29, 2008Posted by jeremyliew in games, games 2.0, gaming, mmorpg, payments, prepaid cards, virtual goods, virtual worlds.
Virtual Worlds News noted last week that:
PayByCash announced … that over 50% of its US transactions were coming from its Ultimate Game Card, a prepaid card that supports over 150 virtual worlds and games, like Club Penguin, Nexon America, and IMVU. Previously U.S. consumers favored PayByCash’s direct debit options…
I’d guess one explanation for the transition, and one to watch, is that adults are more likely to set up debit options… Kids and teens, who seem to be driving much of the consumer-oriented virtual worlds growth, simply pick up cards at retail.
It is an important statistic as it really underscores the importance of prepaid cards as a payment mechanism for free to play games. Min Kim of Nexon noted in his presentation at Austin GDC this year that:
“Retailers are taking notice of card sales, and support will grow. Retailers love the regular customer, and coming back for cards is a given. Once you’ve purchased one card, statistics say you’ll probably buy another.”
Target has certainly taken notice, with 26 gamecards available for sale now, including Nexon, Neopets, Gaia, Habbo, Acclaim, gPotato, Stardoll, Zwinky, Big Fish, 3 Rings (Puzzle Pirates) and Wild Tangent. A wider selection is available in their physical stores.
I’ve spoken to several free to play publishers with prepaid cards at retail and they have seen this payment mechanism come to represent from 20-50+% of their virtual goods revenue, which is consistent with the percentage that PayByCash has seen. As Virtual Worlds News speculated, it is the games and virtual worlds that skew towards kids and teens that have the greatest proportion of revenue coming from prepaid cards.
However, publishers tell me that their sales from their own-branded prepaid cards are many multiples of their sales from PayByCash. A Game X player is simply far more likely to buy a Game X card than to buy PayByCash’s Ultimate Game Card. In fact, many publishers tell me that even though they already took the Ultimate Game Card as a payment mechanism, when they launched their own-branded card into retail, they saw a sizeable, immediate, incremental jump in ARPU. Their existing players, who had previously wanted to be able to pay them but didn’t know how, now were able to do so.
Nabeel Hyatt, CEO of Conduit Labs, has previous noted that this could create more of a problem than an opportunity:
In all, there are now over 25 digital content cards being sold at retail. I’ve been tracking this and that’s over double what it was six months ago. That means that at least a dozen online communities, and probably a dozen more in the next six months, are going to be submitting themselves to the vagaries of the retail shelf-space business. That’s a business the online web folks have little to no experience in, and one that a lot of traditional gaming vets were excited to get out of.
I am more optimistic. Retailers love prepaid cards. These cards have no inventory carrying costs and no shrinkage (theft) problems because they are only activated at the checkout. Furthermore, the cards are small and high value, creating high $s/square foot, one of the key metrics at retail. In my local Safeway (picture below), there are 6-700 prepaid giftcards for sale (for everything from Red Lobster to Bed Bath and Beyond) – one indication of how much retailers love this product.
Nabeel is right though – getting retail distribution is not something that is core to the DNA of most online game publishers. Most of the publishers that I’ve spoken with work with one or more of Blackhawk, GMG Entertainment and Incomm to get their cards into retail.
For people interested in learning more about prepaid cards into retail, the Virtual Goods Summit on October 10th looks to be a good event, specifically the 10:30 panel ,”Making Virtual Economies Work — Lessons from the Leaders” where the CEO of Playspan (which owns PayByCash) will be speaking, and the last panel of the day, “Getting Paid – Build a Dominant Payments and Billing Strategy”, where the President of GMG Entertainment will be speaking. If you’re going, use “JEREMYLIEW” for 10% off of General Admission on registration.
Habbo profitable on $38m of revenue in 2008 H1? September 25, 2008Posted by jeremyliew in games, games 2.0, gaming, habbo, virtual worlds.
The Helsinki based virtual goods operator Sulake saw a profitable first half in 2008. According to Kauppalehti, net profits were around 400 000 euros. The revenues rose approximately 20% to 25,6 million euros for the first 6 months of 2008. Majority of the sales came from sale of virtual goods in Habbo Hotels world wide. According to the company, the annual growth for 2008 will be around 30%.
Jussi Laakkonen also notes from the same source:
Sulake’s 22 M€ [of investment from 3i] is [quoted] from Kauppalehti, the leading Finnish business magazine, which calculated the total losses incurred by Sulake from its founding in year 2000 to end of year 2007 using public records. VC money raised is more than this.
Update: Virtual World News pulls in conflicting revenue reports over time for Habbo.