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The rapid rise of social games has been a hot topic in the technology scene; however, this explosive growth has led some critics to suggest that social gaming is a bubble that is bound to burst. But just as blogs, tweets, and YouTube videos have become a fixture of the new web, so too will social games. I think we will come to regard social gaming as no less critical to social networks as wall posts, photo sharing, and friending. My guest post on Mashable, Cracking the Mainstream: Why Social Gaming Is More Than Just a Fad, discusses why social gaming is here to stay.

Earlier this month, leaders from the barely two year old social gaming industry gathered in San Francisco at the Social Gaming Summit 2009. It’s hard to believe that in only two short years, Facebook launched the first social networking application platform, most of the other social networking players have followed suit, and an estimated 14,000 social games have proliferated across those platforms.

The 500+ attendees at the Social Gaming Summit included representatives from top social networks, major game developers, and a wealth of infrastructure vendors, such as Offerpal Media and Zong, who have sprung up to support this rapidly growing industry. The emphasis was largely on issues of player acquisition and retention with particular emphasis on monetization and deployment of virtual goods as a key contributor to revenue generation.

Until recently, Internet companies in the United States have lagged far behind the curve in the sale of virtual goods. By most estimates, customers spent about $1.5 billion a year on virtual goods globally in 2007. Tencent Holdings, a publicly traded Internet media company based in China, runs perhaps the largest virtual goods business in the world, with hundreds of millions in annual revenue from virtual goods in online games, social media, and other applications.

In December, Jeremy Liew of Lightspeed Venture Parters made his prediction for the consumer Internet for 2009:

“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.”

We’re only half-way through the year, and it looks like Jeremy’s prediction is already proving true. It’s estimated that the total revenue generated by companies running applications on Facebook’s platform will outstrip Facebook’s own revenue in 2009. Social gaming is leading the pack here, and rumor has it that major social gaming players, such as Zynga, are making upwards of $50 million on an annualized run rate.

Venture Capitalist Bill Gurley sees this phenomenon as the answer to the monetization problems faced by Facebook, MySpace, and other top social networks which are struggling to meet revenue expectations in the face of an increasingly difficult advertising market. He ended the article by emphasizing that Wall Street was all set to welcome this new business model.

Social Gaming Trends

Leaders from the social gaming industry revealed some important trends in social gaming during the summit:

Virtual goods work with mainstream consumers

Sebastien de Halleux, COO of Playfish, said his Pet Society game sold 20 million virtual Christmas trees and ornaments last holiday. Players paid up to $2 for each virtual item and many players spent more on virtual trees than the average person spends on a real Christmas tree. Sebastien noted that a real Christmas tree is seen only by a handful of family members and close friends, but Pet Society’s virtual Christmas trees and ornaments can be seen by hundreds of online friends. This is just one way in which online behavior is driving new trends in consumer spending.

Brands are playing a vital role in social games

John Pleasants talked about how Playdom’s Sorority Life sold $100,000 worth of virtual Volkswagen’s over a two day period. Brands have struggled to find a strong role in the traditional video game market and advertising on social networks has been plagued by poor performance. However, social games offer brands a powerful promotional and merchandising vehicle and both brands and social game developers have been quick to embrace this opportunity.

Social games have unlocked the latent value in social networks

Despite having large and fervent audiences, social networks have had a hard time monetizing their user bases. Industry experts debated whether the answer would come from traditional display advertising, integrated sponsorships, lead generation, hyper-targeting, or direct user monetization. Well, the social gaming industry are proving that “all of the above” is the right answer.

Virtual goods provide both a way to directly monetize social networking users and a way to weave advertising opportunities into the social fabric of a site or app. But no one anticipated that social games would also unlock a valuable new form of lead generation marketing. Offer platforms, such as Offerpal and Superwards, allow users to earn virtual currency by completing lead forms, and they share the revenue generated from these leads with the application developer. Anu Shukla, CEO of Offeral, cited that 30 to 40% of players will bite on offers. As social networks find ways to become part of the social gaming economy, they’ll open up new revenue channels and drive their ARPU (average revenue per user) to significantly higher levels. In an extreme case, Adam Caplan, CEO of Super Rewards, discussed a social game player who bought $30,000 of virtual goods for use in two different games.

The Future of Social Gaming

The Summit highlights the fact that the Social Gaming industry has and will continue to have phenomenal growth. In a relatively short period of time, social games have proven that selling virtual goods is a viable business model in North America and that social networking audiences can generate significant revenue. Strategy Analytics recently released a forecast projecting that microtransaction revenue will grow from $1 billion in 2008 to $17.3 billion in 2015. No doubt, social gaming will be one of the driving forces behind this growth.

What will social gaming look like when it turns 3? I can’t know for sure, but here are some thoughts:

  • Social networks will monetize by providing virtual currency. Hi5, one of the social networks that followed Facebook’s lead by offering an applications platform has also learned from Facebook’s biggest mistake—not taking a share of revenue from applications and social games that run on its network. Rather than taxing applications for inclusion on its network, Hi5 opened up its Coins virtual currency to be used by app developers. This strategy provides value across the board by giving users a single currency that is accepted throughout the social network, giving developers access to a broadly-adopted microtransaction system, and giving Hi5 a way to share in microtransaction revenue. Facebook followed suit by launching the Pay with Facebook feature last month.
  • Social games will spread to new devices. Although social gaming started within social networks, every major social game developer is bringing their content to new platforms such as the iPhone. With the introduction of in-app payments earlier this month, iPhone developers will now have the perfect microtransaction system to build their content on—iTunes. However, these games are staying close to their roots; many are based on the Facebook Connect API which allows developers to access elements of Facebook’s application platform outside of Facebook on a diverse array of devices. Facebook recently announced that it will provide Facebook Connect on Xbox Live, which means that we’ll start to see social games on video game consoles.
  • Social games will spread to niche and international social networks. Wikipedia’s list of social networking websites includes over 150 sites, and the list leaves off many large international social networks. Social games are key to monetizing social networks, and we’ll see both lightweight and more involved social games become a key part of any social network which is serious about monetizing its users.
  • Traditional game companies will continue to stand on the sidelines. What was the very first hit social game? It’ll probably sound familiar—Scrabble, well actually Scrabulous. Launched shortly after the release of the Facebook Platform, Scrabulous is a social game, based on Scrabble, that was released by two brothers who became the first lucky prospectors in the social game goldrush. Rather than recognizing their good fortune in finding a new, rapidly growing medium for their games, Hasbro quickly got to the business of shutting Scrabulous down and didn’t find time to release its own version of Scrabble on Facebook months later, after major players such as Zynga had staked their claim. None of the traditional game companies have played a significant role in social games to date, and this will likely continue until the major players, such as Electronic Arts and Activision, wake up to the opportunity and start acquiring players like Playdom and Zynga.

Social gaming will continue to evolve at a whirlwind pace, and will be one of the major drivers behind the global explosion of virtual goods revenue. If you’d like to stay up to speed on these developments, I recommend checking out the upcoming Virtual Goods Conference which is part of the Engage Expo (September 23-24, 2009 in San Jose, CA) and the Virtual Goods Summit (October 29-30, 2009 in San Francisco, CA).

VentureBeat has a great article today that discusses how virtual goods are starting to pan out for Facebook game application developers.

According to the article, popular Facebook application (fluff)friends is making an estimated $1.00 per month per daily active user and Mob Wars is making an estimated $2.60 per month per daily active user. At those levels, (fluff)friends is expected to make $1.3 million annually on a base of 112,229 daily active users and Mob Wars is expected to make $15 million on a base of 483,824 daily active users.

All of this is very encouraging in light of the fact that the value of Facebook ads continues to fall. Advertising on Facebook applications is valued at between 7.5 cents and 50 cents per thousand ad impressions (CPM). Each daily active user would need to generate thousands to tens of thousands of advertising impressions per month in order to generate revenue on the same level as virtual goods based businesses.

We’ve seen the same thing since we launched Viximo’s virtual gifting system on the Birthday Calendar application on Facebook. In order to compare virtual gifting with social network advertising, we look at total virtual gifting revenue divided by impressions of the virtual gifting offering. This gives us a metric which is roughly comparable to CPM. To date, we’ve been generating an equivalent CPM with virtual gifting that is about 10 times higher than the typical CPM for social network advertising.

Its been a long time since I posted to the blog. Launching our product, growing Viximo, and lots of summer activities have conspired against me. My goal is to get shorter posts up on the blog at least once a week. Wish me luck, and please stay tuned!

Tucked away in Room 5 on the ambiguously named “Technology & Results” track at the Virtual Worlds Conference, Matt Palmer and Glenn Ginsburg presented a session titled “Stardoll: The Next Level of Engagement”. Stardoll not only represents the next level of user engagement, it also represents the state of the art in brand integration and virtual goods business models.

Stardoll’s Audience

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Spreading Like Wildfire

Stardoll has over 16 million registered accounts and is adding 35,000 new accounts per day. But Stardoll doesn’t suffer from registered account bloat; the site reaches 7.8 million unique users per month. Those users generate 600 million page views over 35 million visits per month. Even at a modest CPM, that’s a whole lot of revenue, but Stardoll’s business doesn’t rely on banner ads. Instead, Stardoll relies on virtual good sales and integrated sponsorship. As result, they simultaneously achieve a higher revenue per user and provide a better user experience. But more about that later.

Perhaps you’re thinking that this growth must be the product of a massive, expensive, unsustainable media campaign? Not a chance, Stardoll hasn’t spent a dollar on paid media. Growth is driven by viral buzz and press exposure.

Global Appeal

Stardoll is an international phenomenon. It was started by a Finnish woman who wanted to share her passion for fashion with her friends and family. Today, the 60-70 employee company is headquartered in Stockholm, but commands a global audience (44% in the U.S., 46% in Europe, and 10% in Asia). The site has been translated into 15 languages and additional translations, such as Japanese, are on the way.

Girl Power

Not suprisingly, Stardoll’s audience is primarily female (93.1% female, 6.9% male). The site appeals at a universal level to its key demographic – a demographic that has been notoriously difficult to reach in a meaningful way. Stardoll is attaining scale without diluting their core audience; it has the highest concentration of teen girls of any online service.

In addition to teenage girls, the site has found a surprising audience – their mothers. 81% of mothers visit Stardoll weekly and 63% visit the site without their daughter. Co-viewership on that scale is virtually unheard of on the web.

Stardoll’s “Gameplay”

Who Knew Putting On Clothes Could Be So Much Fun?

At Microsoft Game Studios, we urged our first party developers to identify their game’s core fun as early as possible. Once that core fun is identified and refined, building a great game is actually pretty straightforward. For Halo, the core fun is aiming and shooting with a variety of well-balanced weapons. For Age of Empires, the core fun is establishing an efficient unit production pipeline.

The Stardoll team knows that their core fun is dressing a paper doll. Apparel is dragged off hangers and onto the paper doll. It can be placed anywhere on the screen, and that simple mechanic yields a good deal of fun. Want to give David Hasselhoff that much needed gangsta look? Drag his pants down low. Think it’s about time for Avril Lavigne to ditch that good girl look? Low rise pants and a little cleavage couldn’t hurt.

Stardoll builds on that core fun with an array of thousands of dress-up and make-up options. This gives Stardoll’s entire audience, from Goth girls to Glam chicks, a powerful way to express their unique identities.

From Solitary to Social

Stardoll’s dress-up function acts as the foundation for a broader experience that looks a lot like other virtual worlds. Stardoll users get their own space, called a Suite room, which they can decorate to suit their tastes. A new chat feature lets a user share the dress-up experience by inviting a friend to her Suite room.

The heart of Stardoll is StarPlaza, an online shopping mall that features Stardoll’s internal brands, such as Fudge and Pretty in Pink, and real world brands, such as DKNY. Stardoll also features an active aftermarket, called StarBazaar, where users and buy and sell items in their wardrobe. Basically, its a virtual vintage shop.

To date, all of the apparel and other virtual items in Stardoll have been designed by Stardoll’s creative team. StarDesign is a soon to launch feature that allows Stardoll’s audience to create their own fashions. The combination of StarPlaza, StarBazaar, and StarDesign will enable Stardoll’s users to participate in a rich virtual economy based on the fashion they love.

Stardoll’s virtual world features are complemented by features that are more commonly seen in social networks. Each user is given a profile page that looks a lot like a typical social networking profile page. However, due to the site’s younger demographic, the contents of the profile pages are limited. Girls can’t upload photos, but they can express themselves with images of their MeDoll and a variety of profile customization options. Stardoll also features Clubs that are similar to Facebook Groups. The Clubs feature was launched five months ago and there are already over 500,000 Clubs in the system.

Stardoll’s Business

Virtual Goods Done Right

Six figure real estate deals in Second Life and massive gold farming in World of Warcraft are what get the media’s attention when they talk about virtual goods. But Stardoll is the company that has flawlessly unlocked the power of the virtual goods business model.

The first key to Stardoll’s success is that they’ve found a genre of virtual items that are truly valuable to their audience. Celebrities and their fashion are an aspirational obsession for millions of people around the world, and Stardoll taps directly into the vein of that obsession. That same insatiable desire to look trendy in the real world translates, without skipping a beat, into the online world.

The second key to Stardoll’s success is that they provide an incredibly rich platform with which fashion brands can reach their demographic. As soon as fashions hit the runway or the retail shelf, they are available in Stardoll. If a girl thinks her MeDoll looks cute in that new pencil skirt from DKNY, she can run out that day and grab the very same skirt from her local brick and mortar mall. That same branding extends beyond just apparel. MeDoll make-up is provided under the Sephora brand and jewelry is based on designs from Heidi Klum’s jewelry collection.

All of this makes Stardoll one of the most powerful branding and lead generation tools thats ever been available to the fashion industry. They have even had consumers ask when Stardoll’s house brands, such as Pretty in Pink, will be available in brick and mortar stores.

Advertising Done Right

Stardoll doesn’t fall back on banner ads to augment their virtual goods business. Instead, they weave marketing messages into the features of the Stardoll experience and, as a result, create an advertising experience which is fun, engaging, and far more powerful than static banner ads.

For example, during a recent advertising campaign for Disney’s movie Enchanted, Stardoll took scenes, characters, and costumes directly from the movie and incorporated them into the world. As a result, Stardoll’s users could immerse themselves in the fiction of the movie and develop an attachment to the movie world before Enchanted even hit screens. In a unique twist on banner advertising, Stardoll offered a poster that users could hang in their Suites. That poster was hung in hundreds of thousands of Suites and generated millions of ad impressions. Stardoll’s approach to advertising generated everything from casual brand impressions to deep engagement in a way that added value to the audience’s experience and was elegantly integrated into the site’s core activities.

Stardoll provides a similarly rich branding platform to actors and music artists. Every celebrity featured on Stardoll has their own unique URL so that they can use their Stardoll presence as a promotional vehicle. In addition, Stardoll often runs explicit promotions for celebrities and musicians who are featured on their site. For example, Stardoll recently ran a contest where a member of their audience was flown to an Avril Lavigne concert and got to meet her backstage.

Stardoll’s approach to advertising highlights some important lessons:

  • Audiences want advertising, but only for the brands they care about
  • Audiences want to chose the brand messages they receive; they don’t want those messages pushed to them
  • Just as in the real world, online brand associations are powerful personal identifiers
  • Engagement is maximized when branding is woven into the core activities of the site
  • Above all else, advertising should be fun for the user, not a distraction

A Model for the Future

Although virtual goods have resulted in extraordinary success in Asia, there has been some doubt as to whether virtual goods would become a mainstream business model in Europe and the U.S. When Cyworld recently close its doors in Europe, some people asked whether virtual goods would ever be relevant outside of Asia.

Stardoll is proof positive that virtual goods have a very promising future in Europe and the U.S. The Stardoll team has hit on a recipe that is uniquely engaging to their core demographic, and they are leveraging that recipe to provide maximum value to their users and their advertisers.

I’m glad that I stumbled into Room 5 at the Virtual Worlds Conference. Stardoll is defining the future of virtual goods today — and I’m amazed that they’ve flown under the industry radar for so long. Stardoll has captured the attention of 16 million girls around the world, but they don’t even have a Wikipedia page.

This article is primarily inspired by Virtual Worlds By The Numbers: Today and The Future, a session in the Marketing and Entertainment track of Virtual Worlds 2008 conference in New York City. The panel included Yuanzhe (Michael) Cai, the Director of Broadband & Gaming at Parks Associates; Jack Myers, President of Myers Publishing, LLC; and Joey Seiler, Editor of Virtual World News. It is part of a series on Virtual Worlds 2008.

In the face of significant competition, the biggest challenge for a new virtual world isn’t attracting new users, its retaining them from month to month. This challenge is particularly acute for virtual worlds targeting a younger demographic who have short attention spans and often migrate between worlds.

In the past, it seemed that the best practice for retaining virtual world users was to provide an open world that put the social aspects at the front and center of the experience. This reflects the notion that virtual worlds are open playgrounds rather than lightweight video games.

Today, there’s an evolution that is happening at both the micro level (i.e., for each individual player) and the macro level (i.e., for the industry as a whole). As the initial social novelty of a virtual world wears off, users seek out more structured activities to keep themselves entertained. Open virtual worlds, like Second Life, give players the tools to create their own structured activities. Tringo, a multiplayer game created by a resident of Second Life, is a great example of how a single user’s efforts enriches the overall world.

However, relying on users to keep themselves entertained can be a tricky business — especially when greener pastures are just a click away. In Designing a Gameless Game, Sulka Haro discusses how Sulake enriched the Habbo Hotel experience with game-like elements and structured activities. In some cases, this involved canonizing ad-hoc activities into formal mini-games and in other cases it involved adding lightweight mechanics that act like the jungle gym on a playground. These additions have helped Habbo achieve its impressive growth.

Michael Cai presented data that confirms today’s conventional wisdom that users want more game-like experiences from their virtual worlds. When users were asked why they participate in virtual worlds, they answered:

  • 36% to play games
  • 29% to escape real life
  • 21% to create and manage an avatar
  • 19% to interact with other members

But, as designers add game mechanics to virtual worlds, there’s a danger of virtual worlds losing their distinct identity and being subsumed into MMORPG’s. Jack Myers described what users want in a different way. He proposed that users don’t necessarily want gameplay, they want “curated experiences”.

That’s a brilliant way to describe what users want because its so much more open and appropriate than thinking in terms of gameplay alone. The curator of a user’s experience can take many forms: game mechanics, tutorials, community managers, virtual companions, other users, and even the user himself. And the experience can take many forms as well. It can be as simple as traversing the world or as sophisticated as creating parts of that world.

Ultimately, curated experiences are a way to suggest goals to a user and guide that user to achieving those goals. When a virtual world’s users don’t have goals, wanderlust sets in and that world risks losing its hard won audience. Like an accomplished museum curator, virtual world operators must act with a subtle hand to guide their audience to the most compelling parts of their collection.

Erik Bethke, CEO of GoPets, conducted a session on how to apply MMO principles to any experience to make it more engaging. For good coverage of his talk, check out Worlds In Motion and Lightspeed Ventures. You can get the slides for the session here.

Erik’s talk focuses on a really powerful observation: the mechanics that make massively-multiplayer games so successful have universal appeal. While there has been some good thinking about how to apply general game mechanics to make applications more fun, MMO mechanics can have a much more powerful impact because they are derived from the social dynamics that are core to social media.

Virtual gifting is a common use case of virtual goods for social media sites. Facebook Gifts is the most well-known example, but other sites have had success with virtual gifting including LiveJournal, Hot or Not, and Dogster/Catster. Current examples of virtual gifting are distilled down to their essence – select a gift and send it to a friend.

Erik’s session highlights a number of ways that virtual gifts can be taken to the next level.

Leveling, Questing, and Crafting

Leveling, questing, and crafting are three of the most important mechanics of MMOs.

Leveling is the concept that there should be well-defined rungs as a person climbs an achievement ladder. This is something we all experience in our jobs, but other examples are just as powerful. How many of your have stuck with the same airline, through thick and thin, to make sure that you got “elite” frequent flyer status? Thats just a form of leveling.

Virtual gifting is exactly the sort of activity that could benefit from an achievement ladder. Like combat in an MMO, virtual gifting is initially very compelling but can loose its luster after the thrill has worn off. If virtual gifters earned levels as they sent or received more gifts and if those levels came with tangible rewards (such as an increased selection of available gifts), then users would be more likely to stay engaged over time. In addition, “elite” gifters would have an elevated status in the community which enhances their sense of achievement and projects a model for other users to emulate.

Some of the free gifting applications on Facebook have implemented simple leveling systems, but, to my knowledge, none of the “official” gifting programs have done this.

Questing is a mechanic were players are given explicit tasks to complete throughout the game experience. Players receive significant rewards when they complete a quest – rewards which are generally higher than what can be earned by the equivalent amount of ad-hoc play. As a result, quests encourage certain play patterns and thereby keep people engaged by structuring the gameplay experience. The “Profile Completeness” indicator on sites such as LinkedIn and OkCupid are great examples of “quests” outside of the game industry.

Right now, users give virtual gifts for holidays, birthdays, and “just because”. Its a completely self-directed process and one which is easily interrupted. Virtual gifting would be more enjoyable if there were little quests like “give gifts to three new friends”, “give gifts to three members of the opposite sex”, “give three charitable gifts”, or “give all the gifts in a particular set”. The social networks have a rich enough set of data about users to come up with really interesting virtual gifting related activities.

Crafting is a gameplay mechanic where player’s can transform less valuable resources into more valuable resources by investing time, skill, money, and creativity. Just as productivity is the engine of the real economy, crafting is the engine of many virtual economies.

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Facebook Gifts encourages a form of crafting by suggesting that members chain gifts together to form innuendos, but this can go much further. How about allowing users to craft new gifts by uploading photos? What about using the gifts that a person has received as resources to create a new gift? For example, give the user an editor to create a bouquet of flowers – but they can only use the type of flowers that they’ve received as gifts.

Embrace Hardcore Users

Erik points out that even the most casual experiences have hardcore users – and those hardcore users have found something pretty fun to do in your application. Hardcore users will be 1) the largest revenue generators, 2) the product’s biggest evangelists, and 3) exemplars for the rest of the community.

Believe it or not, there are hardcore virtual gifters. These virtual gifters are generally women who are hubs of their social networks. They use lightweight social gestures, like sending virtual gifts and writing on friend’s walls, to maintain their friendships. Hardcore virtual gifters introduce new users to the virtual gifting feature and keep the flow of gifts going by encouraging others to reciprocate.

Virtual Gifting 2.0

The success of virtual gifting defies common notions of value, but Facebook and others have proven that people are willing to pay real money to enhance the social impact of their gestures. Sending a virtual gift is what Erik would refer to as a transaction – the basic unit of gameplay. But transactions lose much of their meaning when they aren’t driven by a broader set of measurable goals. Today’s virtual gifting features are just beginning to scratch the surface of a much deeper social media experience that can be unlocked by applying MMO mechanics.

With all the focus on the electronic entertainment industry, its easy to forget that the video game industry has a long lineage that extends back to tabletop games. Tabletop games consist of traditional board games (e.g., Monopoly), pen-and-paper role-playing games (e.g., Dungeons and Dragons), collectible card games (e.g., Magic: The Gathering), and miniature wargames (e.g., Warhammer).

Of course technical advances have thrust electronic entertainment, including video games and virtual worlds, to the forefront of the broader games industry, but the tabletop games segment still attracts both a large casual audience and a smaller, but highly dedicated hobbyist audience. The tabletop gaming industry’s largest trade show organization, Gen Con, draws an audience of over 27,000 consumers to its U.S. Gen Con event.

The collectible card packs and miniatures that form the nucleus of many hobbyist tabletop games is the closest real world analog to the in-game virtual items that are driving the growth of the virtual goods economy. We can gain a new perspective on how to create engaging virtual goods experiences by looking to the example set by collectible card games and miniature wargaming.

Collectibility

Tabletop game manufacturers take significant steps to enhance the collectibility of their trading cards and miniatures:

High Production Value. Each trading card or miniature is designed to have high production value and adhere to an overall artistic theme. This focus on design enhances collectibility by making each piece an “art object” that can be admired and collected based solely on its aesthetic value.

Collectible Sets. Trading cards and miniatures are often grouped into sets of varying size. At the highest level, Magic: The Gathering groups cards into categories based on five different colors. At a more granular level, Magic: The Gathering cards belong to dozens of different sets ranging from 92 cards to 422 cards. By grouping cards or miniatures into sets, tabletop manufacturers take advantage of the natural tendency for people to collect and complete groups of things.

Booster Packs. Collectible card games and collectible miniatures are often purchased as part of booster packs. Booster packs are sealed packages of cards or figurines that contain a small, random assortment of items (5-15 cards or 3-10 figurines). Purchasers of booster packs can generally expect to get at least one rare item per pack. As a result, these packs appeal to the same “lottery mentality” that makes slot machines so compelling.

Uncommon and Rare Items. The supply of trading cards and collectible miniatures is constrained by manufacturers in order to introduce scarcity into the market for their collectibles. Items are typically categorized as common, uncommon, or rare. Scarce items typically have a unique look and higher functionality than their more common counterparts which further increases their value. For example, there are less than 10 copies of the most rare Pokemon cards and these cards trade for thousands of dollars.

Deck Construction. The rulesets of many collectible card games and miniature wargames require players to construct a deck or army by selecting a limited set of items from the player’s full collection. Oftentimes players construct a gameplay deck of fifty to sixty cards from their collection of hundreds or thousands of cards. Players construct decks based on what they know about their opponent, the strategy they wish to employ, and any variants to the game’s rulesets that are in place. This dynamic encourages players to amass as large a collection of cards as possible so that they have the most strategic options when they go to play the game.

The collectible nature of trading cards and miniatures is a significant revenue driver for the tabletop games industry. As a result, tabletop game manufacturers can afford to give their rulesets away for free while generating a lot more revenue per customer by selling collectible content. Virtual world and MMO operators in Asia have already figured this out and now that model is beginning to be adopted outside of Asia.

Personalization

Personalization of miniature figures is an entire cottage industry unto itself. Miniatures are typical sold as cast metal figures that must be painted before they are ready for the tabletop battlefield. For some players, figure painting is an integral part of the hobby, and for others its a job best left to professional figure painters. For the most serious hobbyists, there are even miniature painting competitions.

Personalization goes beyond mere painting. Some hobbyists alter the appearance of their miniatures by swapping parts of their figures, such as heads and arms, with parts from other miniatures or part collections purchased as “conversion kits”. Many wargamers also spend considerable time designing and constructing the battlefield scenery on which the miniature wargames are played.

For many hobbyists, personalizing miniatures and battlefields is actually more fun than playing miniature wargames. Tabletop game manufactures figured out a long time ago that personalization adds an entirely new dimension of enjoyment to the gaming experience.

Functionality

At their heart, trading cards and miniature figures are simply game pieces like a rook in chess. They aren’t just decorative, they are functional. Trading cards in particular have detailed functionality that is described on the card itself – for example, a particular Pokemon card might be able to steal a card from the other player’s deck. Many virtual items, such as a sword in World of Warcraft, are also functional, but there are still lessons to be learned from tabletop games.

For example, scarce items are generally more powerful in both tabletop and video games. However, game balance issues are much more acute for tabletop games due to the need to support fair competition. In other words, a player with the most rare cards should never be the defacto winner in a Magic: The Gathering tournament. How then do collectible card games tackle this issue? Rare cards have more powerful and unique functionality, but they require significantly more resources to deploy (i.e., they are only an advantage if the player has the tactical wherewithal to find the right time to deploy the item).

This alludes to a second lesson from the collectible cards industry. Oftentimes, the functionality of different cards can be used in concert to get a greater combined effect. Players call these combo decks, and these combinations further enhance the collectible nature of trading cards.

So while MMOs have learned the basic lesson that functionality should be proportional to scarcity, there is fertile ground for innovation in thinking about how to balance the impact of rare items on the economy and how to leverage interactions between a player’s collection of virtual items.

Tradability

In many respects, tradability is a knock on effect of the collectable and functional nature of trading cards and miniatures. However, tabletop game manufacturers also take deliberate steps to enhance the tradability of their products.

Firstly, tabletop games are designed to be highly social. When players gather into ad-hoc groups or at formal events, trading naturally occurs. Secondly, manufacturers deliberately create an economy where one man’s trash is another man’s treasure. They do this by creating clusters of items that work well together (so that a player with an existing collection is naturally inclined towards that cluster) and ensuring that booster packs contain a range of items, including rares, from several different clusters. As a result, every time a player buys a booster pack, he may get items that he doesn’t want but are valuable to his friends.

Tabletop game manufacturers know that a vibrant trading community may not directly generate revenue, but it does enhance engagement with the manufacturer’s product and indirectly drives booster pack sales. Instead of prohibiting aftermarkets, MMO operators should be following the lead of their tabletop brethren and doing everything they can to foster an active aftermarket.

Lessons for the Electronic Entertainment Industry

There is currently a raging debate about whether the MMO industry will move to a free-to-play model with virtual goods driving revenue or whether monthly subscriptions will continue to be the modus operandi outside of Asia. As today’s game designers envision the future of MMOs, they will be well served by looking to the past for inspiration on how to create a virtual goods economy that both enhances the game experience and maximizes the revenue opportunity.

Update (3/2/2008): Take a look at Saga which bills itself as “world’s first collectible online real-time strategy game”. Instead of charging a monthly subscription fee, they generate revenue by selling booster packs of troops for $2.95.

Last week’s Game Developer’s Conference put the limelight on the rapidly growing game industry, but it also highlighted a significant pain point – virtual good sales create very real accounting issues for successful virtual worlds and MMORPGs.

The video game industry has been way ahead of the game when it comes to implementing a variety of business models and accepting a variety of billing methods. In this case, necessity has been the mother of invention since many of the industry’s young consumers don’t have access to credit cards. Sulake, the makers of Habbo Hotel, have been particularly innovative in this space. The company accepts 186 different payment methods in 31 countries including credit card, SMS payments, money orders, and prepaid game cards available through major retailers such as Target and Walmart.

Sulake even manages to pass some of the transaction costs to consumers by varying the exchange rate between cash and coins, Habbo’s in-world currency, based on the billing method used and amount of currency purchased. Consumers get as little as 5 coins per dollar for high transaction cost billing methods such as prepaid cards and as much as 6 coins per dollar for low transaction cost methods such as credit cards or ongoing subscriptions.

Now that the industry has figured out how to get money into the system, it’s now faced with the challenge of keeping it there. The industry faces a number of challenges:

  • Lack of Parental Consent. If a child fails to get the consent of his or her parent before making a purchase, that parent can have the charge reversed. Although there may not always be sound grounds for reversal, credit card companies often side with parents regardless of circumstances. This not only results in customer service overhead for the virtual world or online game operator, it can result in lost revenue from the sale of limited edition or exhaustible items which cannot be reclaimed.
  • Outright Fraud. In many of the major virtual worlds and online games there have been cases of fraud where a user converts cash into in-world credits, uses those credits to purchase a rare item, sells that item for real currency on a sanctioned or unsanctioned aftermarket, and then cancels their original credit card payment. As a result, the user commits a form of “cybertheft” by profiting from virtual goods that the user never paid for. In some cases, the operator can recover the payment, but the credit card dispute process is time-consuming and often biased to the cardholder.
  • Stored Value Accounting. For years, airlines have had to keep significant liabilities on their books related to the accumulation of frequent flyer miles. The industry faces a similar problem. Should operators recognize revenue when cash is converted into in-world currency? Should the accumulated balance of all in-world credits by accounted as a liability on the balance sheet? What happens if a user abandons their balance? Should users have the right to claim a cash credit for their account balance at any point in the future? The answers aren’t clear.

As Joshua Jaffe mentions in his TechConfidential.com article, there is no turnkey payment solution that addresses the unique needs of the video game and virtual world industries. Certainly, with the emergence of economic platforms like PlaySpan and TwoFish, we’ll start to see industry-wide platforms and best practices related to payment collection, chargeback risk mitigation, and fraud deterrence.

About

Virtual Goods Insider covers the burgeoning economy of in-game items, avatar customization, virtual gifts, digital media, and other goods that exist purely in digital form. It is written and published by Ravi Mehta, a veteran of the online gaming and consumer media industries.

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