Virtual Goods Summit 2008 Video Now Available.

I'm sure many of my out of town readers missed the Virtual Goods Summit 2008 in San Francisco a month or so ago. I was there and missed most of the sessions due to intensely interesting lobby convos. So I suggest we both watch them. Believe me, no matter what it'll be more entertaining then this season of Heroes.

Check out the Virtual Goods Summit videos here.

And my notes from the summit (previously published) here.

BTW, just found out my parents finally discovered that I have a blog (I blame Google).

Hi Mom! Hi Dad!

My Favorite Commentary on the Virtual Goods Summit

I've been following Adam Martin's commentary over at his blog T-Machine for a long time. He covered the Virtual Goods Summit for Free to Play and his insights are awesome. Unadulterated, opinionated goodness. His posts came a week after the initial burst of coverage, so if you missed them, here they are.

Virtual Goods and Social Networks

Making Virtual Economies Work

Branded and User-Generated Virtual Goods

Here's some choice quotes from the coverage (bolding by me):

Outspark - Susan Choe
At the end of the day the gameplay will keep some of the users, but not all of them. Half the gamers in our ecosystem come because of social interactions; the gameplay is good, but really the events and social activities is what gets them to come back, even in monster-killing games.

Meez - Sean Ryan
we start with the holiday theme. Then look at what the advertisers want to see. Then we look at the upcoming features, and make sure we have compelling items there. A lot of our prod dev driven by trends/fads in the userbase - pop culture influences etc.

Meez - Sean Ryan - what is a VG? We all talk about it like they’re just clothes, but that’s just one third. Another third is world-features (can I levitate, can I glow like a lightbulb), and final third is privileges, access - “can I sit in a special seat in a public space?” etc. [Adam Martin - think this is the future - VGs that open up new activities, as opposed to merely being about status etc.]

I agree with Sean and Adam. When we designed our virtual goods economy at Tenuki, it was based on Legend of Zelda, i.e. acquiring items that unlocked abilities that opened new areas of the world or new functionality. Players could customize those special items, so functional was tied to decorative. (We had the problem of trying to innovate everything we touched - don't make that mistake. Honestly though, basing all our game design decisions on Nintendo games is probably the smartest thing we could have done.)

The Rock Band Effect and the Historical Value of Musical Performance

IMAGE: My friend Alexis Ohanian performing with his band Breadpig (a band that only plays with Rock Band controllers) at San Francisco's Pier 39.

I read three interesting things this week: an old essay by Ooga Labs founder, James Currier, and a brand-new slide presentation by LoudCrowd founder Nabeel Hyatt, and a news item from Digital Media Wire. Taken together, they've lead me to some interesting thoughts about how music is emerging as a powerful virtual good.

First, the news which I call the Rock Band effect: 3.8 million music downloads for music games per month sold on Xbox Live, which according to Microsoft is 80% of all music downloads for music games.

Second, Nabeel's presentation suggests that the declining value of recorded music is due, not to piracy, but because it's a passive media in a world of active media. I think he's wrong, particularly since he's suggesting live performance is active media, which I don't buy. However, his overall point about digital media being a virtual good is one that you should all take to heart. In the presentation is a graph showing recorded music sales (passive media) declined by 10% as concert ticket sales increased by 15% in 2007.

James' essay is about the economics of creativity, specifically how the value of any creative endeavor changes according to a society's perception of that value. He uses the history of musical performance to demonstrate his point, specifically how the value of live virtuoso performance dropped in status once recorded music emerges, at which point society rewarded the talent of recording music. He's the relevant part of the essay:

People who played in the orchestra were rock stars of their day, and the conductor too. Even the conductor’s son was part of the creative elite. Royalty lavished big bucks on musicians and, I guess sometimes, fell in love with them. That was the technology of the day, and it happened to favor the particular bundle of talents my great great great grandfather had.

Fast forward to 1925 when my grandfather was trying to make it as a cellist in Boston. He got paid for playing his cello at dinner at the Chatam Inn on Cape Cod but he could barely support himself and his bride. When the kids came, he became a machinist and a fork lift driver at a brewery. His creative endeavor no longer paid the bills because radio was availble and the transition was underway in the 20’s from rewarding live music to rewarding recorded music. Later in his life, my grandfather would practice and play the cello for free.

Forward to the 1940’s when my grandfather’s sister, Florence, 20 years younger than my grandfather, loved to sing from the time she was three years old. It was in her nature and she would do it for free. She recorded 8 albums in the 1950’s which were distributed on vinyl and played on radio stations around the U.S. She’s loaded! The technology available to distribute creative endeavors richly rewarded the talent for recording music.

Forward to the 1990’s, when a friend from college who won the Julliard Prize for playing piano, tried to make it as a concert pianist. She was much more talented than my grandfather, but by the 1990’s, the economics of live music had deteriorated to $50 stipend for an hour performance. And it takes her 80 hours to prepare for that hour. She still performs every chance she gets. She’s willing to do it for free today, while my ancestor got to marry royalty 150 years ago for a similar talent.

And now, according to Nabeel's graph, the value of recorded music is dropping as the value of live performance rises (provided it's performed by someone who's talented at recording music).

The news article suggests that music downloads for music games is an incredibly success new vector of music sales.

It's seems that the value music that can be performed by others is on the rise. I'm sure Nabeel would agree, his newest project, LoudCrowd is a music-based game world (Rock Band meets Habbo Hotel).

New musical artists should be thinking about how to optimize their music to be played in a music games. According to my reading of James' analysis, then that's where the new music royalty is going to emerge.

But wait...how does this affect social games.... It doesn't directly. Though as Nabeel suggests, music is a highly valuable virtual good. Now, consider that the music one listens to is one of the key differentiator between social groups. I'm guessing a few of you can come up with a creative way to apply these insights and make some decent money. I know I have some ideas...

BTW, if you want to know if you fit into my social group or Fred Wilson's, check this old post of mine (and the comment from Fred).

My Thoughts on the Virtual Goods Summit

Mea Culpa: I'll be perfectly honest, I only managed to sit through one full session(Daniel James and Andrew Chen's case study on Using Metrics). Not that they were bad sessions, in fact, most of them were very informative. Real data was offered. Unfortunately, as at most conferences, I spend most of my time in the lobby chatting with people. To be fair, I learn a lot of things I can't share on this blog that way, so it doesn't benefit any of you. Sorry about that.

Having said that, I did notice a few things:

• A LOT of payment infrastructure companies were in attendance. You can always tell an industry is maturing when a tidal wave of infrastructure companies descend. It means money is being made, or at least people think money is being made. To be fair, payment is a huge problem. For some reason, I always find it amusing that we haven't mastered the point where money actually is being received from the consumer. You'd think it's be the most important thing to get right.
• As an industry, games still rock. We have an amazing amount of brilliant, friendly, open people in this industry.

Best quote(remember this):

“If you broaden past vanity items and talk about status, because really it’s about status and showing personalization, how you then do that through virtual goods or branded goods is a part of that, but always come back to status.” -- Sean Ryan, Meez

Best Datapoints

Andrew Trader, Zynga: Yoville(virtual world on Facebook), earns in the neighborhood of $4,000-$5,000 a day in revenues across CPMs and micropayments. It's about 50/50 male/female and 2/3 international." NOTE: 2/3 international (question: does that apply to revenues or userbase?)

Daniel James, Three Rings: "Puzzle Pirates (casual MMO) earns $4 per registered user annually. Top 10% of users account for 50% of revenue".

John Hwang, Rockyou: "$20-30 revenue per thousand active daily user on Speed Racing (Facebook social game)." I assume that's per day.

David King, (lil) Green Patch(Facebook gifting game):"very limited percentage of users want to pay, so it avgs out to less than penny per user." Makes sense to me, since the design (lil) Green Patch is not optimized to encourage virtual currency sales.

Daniel James, Three Rings: "CPA leads are not worth it." Reason: unqualified leads don't convert.

Final Thought

Everybody is still quoting Susan Wu's estimated value of the virtual goods marketplace from last year as gospel. That value: $1.5 billion annually worldwide. Keep in mind that value includes secondary market sales of MMO items. Most people quoting that numbers have nothing to do with secondary MMO markets, but focus on decorative virtual goods for virtual worlds or Facebook apps.

I think it's about time somebody created a new estimate of the virtual goods market.

Monitoring Status Messages: Growing Gifts Brilliant Innovation

I was talking to Brian Balfour yesterday, CEO of Viximo, a virtual goods infrastructure provider, and he told me a feature of Growing Gifts that I thought was genius.

Most virtual gifts are bought for the purpose of birthdays, holidays or other special events. Since those events happen infrequently, how do you encourage you users to buy more gifts?

Growing Gifts set up a system to monitor your friends' status messages for negative keywords (crappy, sucks, sad) that might indicate that your friend was having a bad day. Growing Gifts sends you a message suggesting you send your unhappy friend a gift to cheer them up.

Brilliant. Selling is all about your call to action. Buy a gift to make you friend feel better is a damn good one. "Show them you care" is another one. First one to guess who's call to action that is in the comments gets a shoutout in my blog next week.

How to Make a Successful Social Game: Use Gifting

As I mentioned yesterday, (lil) Green Patch, an extremely simple game where you grow a garden and sent plants to your friends is the #1 game on Facebook. Read on and discover how and why they succeed.

This is Important: Facebook is a Communication Platform

It is not a gaming platform. Not yet, at least.

The primary reason people use Facebook is to communicate with friends. Messaging, wallposts, status messages, poking, commenting, etc.

The act of sending a gift leverages the communication aspect of Facebook. A gift, after all, is primarily a way of telling someone that you're thinking of them. And gifting is massive important to strengthening relationships:

Gift giving has long been a favorite subject for studies on human behavior, with psychologists, anthropologists, economists and marketers all weighing in. They have found that giving gifts is a surprisingly complex and important part of human interaction, helping to define relationships and strengthen bonds with family and friends. Indeed, psychologists say it is often the giver, rather than the recipient, who reaps the biggest psychological gains from a gift.

Thanks, NY Times!

The last sentence is the important one. The giver enjoys the act of giving.

Gifts Can Replace Invites

Motivating users to send their friend an invitation to your game is getting harder, especially since Facebook disallowed incentivized invites. Gifting solves this problem. A gift is basically an invite that the receiver wants, and one that motivates him to install that app. The pleasure of sending a gift motivates the sender. Provided the gifts are compelling enough to send on to more friends, then you have everyone's favorite goal, virality.

The key is having gifts worth sending. For each gender, worth is calculated differently.

Gender Differences in Gift-Giving

Men are practically minded when it comes to gifts. A man will more likely send a gift that has use, for instance an item that allows his friend to play better in a game.

Women uses gifts as an emotional proxy. They want to send gifts that express something about themselves and their relationship to the recepient, for instance, a gift that has a heart and a nice message.

However, if you're going to favor one type of gift over the other in your game design, opt for gifts for women. Women are more likely to send gifts to both men and women, while men usually only send to women (and generally only women in whom they are sexually interested).

Working Gifts into Your Game Design

Ha! Like I'm going to tell you. If you need help I'll be happy to consult for you. :)

Seriously, you have to do the hard work of making gifting an organic part of game play. Or just take the easy route, and clone (lil) Green Patch like Sea Garden did.

Virtual Goods Summit 2008 Announced for Oct.10th

After last year's very successful Virtual Goods Summit, Charles Hudson decided to do it again this year.  It's definitely going to be bigger.  Since last year, the default monetization option for social games companies has become virtual goods.   Advertising just isn't cutting it.

Here's the link.  You can sign up for early bird pricing. $349.00.

http://vgsummit2008.eventbrite.com/

How to Price Virtual Goods: Anchor Pricing and Free Gifts

With the flurry of virtual goods soon to come to market in the gaming space, the question consistently raised to me by gaming folks is: how do I set a price for a virtual item?

My stock answer: as high as possible.  After all, the value of a virtual item in the eyes of a consumers is established by price as much as by the quality of its graphical representation (i.e. no cares about Susan Kare).  So now, I'll tell you why I think you need to price things as high as possible (i.e. as much as the top 1% of consumers will pay - after all that's where most of your revenue will come from, anyway - just ask Mike Sego of (fluff) friends or Daniel James of Three Rings.)

Anchor Pricing

It's all about anchor pricing.  An anchor price is the price we expect to pay for something in a particular category.  For example, I expect to pay around $1.50 for a cup of black tea.  This morning, I paid $4.10 for a cup of black tea and I felt ripped off even though it was supposedly premium tea.

For most American consumers, virtual items are an entirely new category and therefore have no anchor price.  As an industry, we have the opportunity to establish them, here's what the blog Neuromarketing says about setting anchor prices for a new category:

"The more interesting challenge is how to deal with new products for which consumers have no clearly established anchor price. Ariely’s research (from the book Predictably Irrational which I recommend - Bret) shows that anchor pricing for such products is quite fungible, and marketers would do well to avoid inadvertently establishing a low anchor price. If a higher anchor price can be established, then offers involving lower prices will be attractive to consumers. Apple’s iPhone marketing has done a good job of using anchor pricing to keep demand strong. When they first released the iPhone, it was at a price of $499 to $599, establishing the initial anchor for what the unique product should cost. To the chagrin of early adopters, they dropped the price by $200 after only a few months - creating an apparent bargain and stimulating more sales. When they introduced the iPhone 3G, pricing was as low as $199, and they sold a million phones in three days.

There are many reasons why marketers start with a high price initially. One big one is to work the demand curve, i.e., get a high price from the portion of the market willing to pay that much before dropping the price to reach a larger number of customers. A key benefit of this strategy for new products, though, is that a high anchor price is established in the minds of customers, making each subsequent reduction a bigger bargain."

A decent argument for starting your prices high.  But unfortunately when it comes the category of virtual gifts on Facebook you have some history with which to contend.

Free Gifts on Facebook

When your virtual items live on Facebook, two anchor prices may affect consumer perception: One dollar and FREE.

Facebook charges one dollar for their virtual gifts, and for many Facebook users this was their introduction to virtual goods as a category.  Of course, then Free Gifts, with their motto "Gifts should be free" came along and established free as the anchor prices for virtual gifts.  Other apps followed, and now millions of free gifts are exchanged on Facebook.

But a virtual goods strategy on Facebook expects users to pay for the same thing they were used to giving for free.  Crap!  Before we all descend with torches upon Zach Allia (the creator of Free Gifts who now works at SGN), keep the following in mind:

Fortunately, as I stated earlier, the value of a virtual item is established by price.  When giving a gift, a consumer will generally opt for a gift with a perceived value that mirrors the value that person has for the relationship.  For Xmas, you give your girlfriend a Kate Spade purse, while you give you second cousin a discounted Kwanzaa card...if he's lucky.

The key to pulling virtual gifts away from the free price point is to make the price point egregiously clear to the gift recipient and anyone who sees it on their profile.  It may be crass to leave the price tag on a gift, but with a virtual good how else can someone know if the picture of a teddy bear is worth one dollar or ten dollars?

Of course, the problem arises when a two very similar teddy bear pictures are priced vastly differently by two different app makers.  This problem doesn't arise when you control the economy as in virtual worlds like Habbo Hotel or Whirled.  However, in an open economy like Facebook where prices for a virtual item can be set by anyone with a little PHP knowledge and access to Google Images, the maintaining higher prices is pretty impossible.

It's my speculation that the need to maintain artificial (non-market determined) prices will be the most powerful reason for social games company to establish their own destination site using Facebook Connect to leverage the social graph, but maintaining their own context where they can control their virtual economies.

And if that doesn't work, we can always sell Zach Allia's body parts, at a healthy markup, of course.

Using the Virtual Goods Model on Social Networks

Sean Ryan, CEO at Meez, wrote an excellent blog post forwarded to me by my good friend Sidney Price of Social Emotions.

In the post, Sean suggests that Facebook take the Cyworld approach and monetize via virtual goods.

Here's the core reason, and one that I've spoken about before (so naturally I agree):

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status? It's so basic, and is sometimes overlooked.

It is overlooked and it is super-important. You have to know why people buy virtual goods if you plan to sell them. At Interplay, I was talking to someone who provided me with an interesting theory about why Koreans and the Chinese are massive consumer of virtual goods. He suggested that because teens in those countries are required to wear uniforms in school, thus not allowing to express themselves through clothes as teens do in the US, that their outlet for self-expression becomes virtual goods and decorating their homepage.

Obviously, the need to decorate is alive and well in U.S. teens as evinced by a five minute survey of Myspace pages. Check out how many status brands like Gucci and Playboy that you can spot. (yes, Playboy is status brand - especially with young female teens - I'll let you figure out why.)

By Sean's estimates, social networks can earn the following through a virtual goods model.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases. That compares to $3-5/year in advertising from a unique user.

I assume they are based on looking at Cyworld, QQ, and Sean's own experience at Meez, though he does not discuss how he arrived at the numbers, so feel free to be incredulous.

Another Reason to Love the Virtual Goods Business Model: Virtual Worlds Make Cash from Charging for Virtual Items that Promote Movies

I recently found an Adweek article (courtesy of Kzero) about how various movie studios are using virtual worlds in their promotional strategies. Some of it is pretty interesting:

Movie Clips as emoticons

In April, Viacom's Paramount Digital Entertainment signed a partnership agreement with Makena Technologies, making thousands of movie clips from the Paramount movie library available on There.com, an online virtual world. Visitors who purchase the clips can use them to communicate with others by having their avatar "speak" lines from movies while the actual clip plays in a small window. Links allow users to purchase DVDs of the featured movies.

According to the article, There.com is charging about a dollar for one of these video emoticons.

Movie Props as Virtual Goods

Two months ago, to promote the theatrical release of Paramount's The Spiderwick Chronicles, the site sold props from the film, such as an animated raven for 25 Habbo coins ($5) and a chest that opens for 5 Habbo coins ($1).

So basically, players pay to promote movies to their friends, and the virtual world gets a cut. Need I say more?

SGN v. Zynga Round 3 - SGN buys 1 million active users

I have a suspicion that brand advertisers don't really get the social networking app arena. Why? Because Zynga and SGN have both been buying up apps with lots of dead installs. Dead installs are only useful for two things, cross-promoting your others app via email (against Facebook's TOS), or pitching to advertisers as reach. You know, "reach", how many users engage with your site/app in a given period. For instance, SGN is pitching 50 million installs, though I doubt less than 10% of those user will interact with a SGN game in the next six months. However, advertisers might well read 50 million installs and get excited. It's like politics in Chicago, even corpses count.

Regardless, SGN needed to do something. Their core game apps: WarBook, Jetman, Fight Club, and Street Race have seen massive dropoffs in usage since their peak, losing more than 70% of their traffic - from 700,000 DAU in mid-December to just under 200,000 DAU as of today. It's hard to pitch yourselves as a traffic acquisition method to other game developers if you don't have the traffic.

The recent acquisitions (esgut, Nicknames, Friend Block, Oregon Trail, Free Gifts) have added over 1 million active users to their core userbase. Wow. Did I say dead installs, because that's some LIVE traffic.

However, SGN made some excellent strategic purchases that add more value to their company then just traffic.

The guys as esgut make apps that show a clear understanding of the nature of social networks: Entourage, Superlatives. These apps are about showing off your connections with your friends which is really at the core of social network usage for anyone under the age of 21. Nicknames shares this understanding as well.

Until Friends for Sale! came out, not many people realized the value of linking friendship display and games. SGN clearly does, and I hope with the guys at esgut and Nicknames on their team, we'll see some games coming from them that connect more deeply with friendship values.

However, the brilliant move was acquiring Free Gifts. I'm sure that Shervin (CEO of SGN) is looking to create a virtual goods economy. Free Gifts is Facebook's top gifting app, making it a great launchpad for premium virtual goods integrated into SGN's game network.

Games+friendship+virtual goods. Now we're getting somewhere.

Virtual Goods and the Community values of Facebook

Above: The most popular sticker from Bumper Sticker, Facebook's most popular self-expression/gifting app.

For all practically purposes, virtual goods cost nothing to create, they're infinitely reproducible at no cost, and distribution costs are nil. To put in other words, their marginal cost is zero.

Chris Anderson, editor of Wired, is fond of saying:

Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing.

So, virtual goods, in theory, should cost nothing. Except, they don't.

Why? Because marginal cost applies (mostly) to commodities. Virtual goods are not a commodity. They are luxury goods. Exactly like a Gucci handbag. Or a Rolex. You buy these things to show off your status, usually wealth. The more expensive an item is, the more perceived value it has in the community. However, you can't simply declare that a urinal is worth a million dollars and expect someone to buy it...unless you're an artist. The item's worth has to be aligned with the value of the community.

With traditional luxury goods, craftsmanship and uniqueness are the value that the community uses as justification for prices 100x greater than marginal cost. I say justification, because the luxury goods purchaser is primarily seeking the status value of the object, because goods of equal craftsmanship and uniqueness can be had at near marginal cost.

With virtual goods, craftsmanship is irrelevant - no one really cares if Susan Kare created your icon. Yet. I imagine as the virtual goods market matures, we'll see brands emerge based around rockstar designers. Especially, if virtual goods become portable among virtual communities.

But until then, uniqueness rules the roost. People want something special that gives them status and allows them to express their unique identify. Rare items serve both. So a virtual community creates artificial scarcity, by limiting the copies of a virtual good.

But it's easy to imagine a virtual good that no one wanted no matter, despite its uniqueness. For example, I just created a 75x75 orange square in Photoshop. I'm selling it for 250,000 dollars. I doubt I'll find a buyer for this unique virtual good (but I'm hopeful).

Each virtual community has different values and for a virtual goods to have value, it must reflect those values. In World of Warcraft, players value things that help them kill more monsters. The item's core value is functional (it helps achieve a task). However, the color of the item is equally important because it signifies status. For instance, in WoW, orange armor is "legendary". In Habbo Hotel, furniture is valuable because decorating your room, it the primary means of differentiating yourself, as well as the core single-player activity.

It's easier for individual games/sites to define the value of the community. After all, those communities are largely self-selecting. If you didn't value armor, you wouldn't be playing WoW. If you didn't like decorating your room, Habbo Hotel is much less interesting.

So what are the core values of the Facebook community? People in the know, will tell you that self-expression is a core value of the social network crowd. Great, but what values do they want to express?

Let's look at the top gifting apps on Facebook to get sense of the values expressed.
Bumper Sticker (938,239 DAU, 72% female): female friendship, humor/wit, sexuality, love
Lil Green Patch (358,095 DAU, 77% female): concern for the environment
Free Gifts (159,487 DAU, 66% female): random, but cute. Couldn't pin down values
Hatching Eggs (146,761 DAU, 69% female): cuteness (all cute animals), holiday events
Growing Gift (189,817 DAU, 75% female): holiday events.
Pieces of Flair (117, 176 DAU, NA): humor/wit
Stickerz: (103,593 DAU, NA): humor/wit

Looking over the list, purely gifting apps (Free Gifts, Hatching Eggs, Growing Gifts) all resemble Hallmark cards: warm, funny, emotional, cute event-driven. Values uses to describe the relationships we have with others. Unsurprisingly, these apps are dominated by women who traditionally value interpersonal relationships more than men.

The self-expression/gifting apps (Bumper Sticker, Pieces of Flair, Stickerz) appear to be wittier, darker, yet still cute. But at the core, Facebook users are trying to express how funny and intelligent they are. I think that makes sense for a community dominated by college students and the college educated.

Bottom line: Facebook users value intelligence and humor...and cuteness. If you're creating virtual goods for Facebook, you'd be advised to design with those factors in mind.

Wow, that was long post. I should have just said, if you want to understand Facebook users, go to Hot Topic.

I just relaunched this blog to focus exclusively on social gaming. Before this week, however, I was also writing about entrepreneurship in general. Since you're probably looking to avoid advice on how to be more productive, etc., I've compiled a short list of social gaming related posts (and virtual worlds because there are some interesting overlaps).

So the greatest hits so far:

Puzzle Pirates v. Club Penguin

A Review of Kaneva, a virtual world

Ebays stops trading of virtual goods

Wiicade.com - Trespasser in the Walled Garden

Game Geek - I Like it Long and Hard, so Kill Me.

Starbucks Survey: Ever Heard of Second Life?