On Thursday April 3rd and Friday April 4th, I attended the Virtual Worlds 2008 conference in New York City. This year’s attendance, which rose sharply from last year, serves as a reminder that interest in virtual worlds is exploding.

The conference featured an impressive array of speakers and some really good ground was covered. In-depth session transcripts have been posted on Virtual Worlds News, which is run by the organizers of the event. Rather than post my own transcripts, I’ve put together a series of articles inspired by the sessions I attended. These articles will be posted over the next week.

Virtual Goods Branding 101 discusses the tightly coupled relationship between brands and virtual worlds.

Metrics for a Brave New (Virtual) World discusses the effort to define and standardize metrics for virtual world media.

Second Life is the Industry Anomaly, Not the Standard discusses how the relevance of Second Life is waning as more successful virtual worlds take center stage.

Stardoll: Casual Web Community or Hardcore Virtual World? discusses how Stardoll has defied conventional wisdom about what is and isn’t “hardcore”.

Virtual Worlds Through the Generations provides an analysis of virtual world growth segmented by age demographic.

Zen and the Art of Curated Experiences discusses how virtual worlds are using structured activities to create a more engaging experience for their users.

I’ll add links to the articles as they are posted. So check back here or subscribe to the RSS feed if you’d like to keep up to date.

This article is 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. It is part of a series on Virtual Worlds 2008.

Nic Mitham at K Zero put together an analysis of growth in registered accounts for the virtual worlds industry. He segmented virtual worlds into four categories based on their primary age demographics: up to 10 years old, 10 to 20, 20 to 30, and 30+ years old. When virtual worlds are analyzed through an age-specific lens, very different trends emerge in each segment.

Kids Up to 10 Years Old

Kids oriented virtual worlds are going through explosive growth. While parents have known for a couple years that their kids spend big money in Club Penguin and Webkinz, a wake up call went out to the venture capital industry when Disney acquired Club Penguin for $700 million in August 2007. Since then, there has been massive investment in kids-oriented virtual worlds.

In 2008 and 2009, the competitive environment for kids-oriented virtual worlds is going to get a lot tougher. Big brands, like Mattel and Disney, are making significant investments in the virtual worlds space. Mattel’s Barbie Girls is on its way to becoming the largest virtual world. Disney is investing up to $100 million in a portfolio of up to 10 different virtual worlds.

As toy and entertainment companies move into this space, it’s going to get increasingly difficult for greenfield startups to make a successful play. Although Mattel has found that kids are now more interested in online content than physical toys, there is an undeniably synergy between pairing offline products with online content.

Kids Between 10 and 20 Years Old

Currently, this is the largest segment of the virtual worlds industry. The biggest player, Habbo Hotel, has 90 million registered users globally which dwarfs the 15 million registered users claimed by Club Penguin and the 10+ million registered users claimed by Second Life.

The biggest challenge for virtual worlds targeting this age demographic is migratory exploration. Kids have short attention spans, and if a virtual world doesn’t keep a user entertained, she can easily find another place to play. These worlds can keep their experience fresh by focusing on what kids in this age demographic want: fashion and clothing, music, self-expression, and live events.

MTV’s Virtual Worlds are the shining star here. They currently have 1.2 million registered users and are growing by 4,500 registrations per day. In 2007, vMTV served up 160 million minutes of entertainment with an average session of 20 minutes. Six hundred thousand people visited an MTV virtual world in the last 4 weeks.

MTV’s strategy is to pair its TV programming with virtual world experience; MTV has released virtual worlds for its major properties including The Virtual Hills, The Virtual Real World, and Virtual Pimp My Ride. They aggressively program live events into their worlds. For example, vLES (Virtual Lower East Side) often features performances of local bands from New York’s Lower East Side Neighborhood.

As with kids-oriented virtual worlds, teen-oriented virtual worlds will likely be dominated by large entertainment companies that can create an entertainment experience that spans multiple forms of offline and online media.

Adults Between 20 and 30 Years Old, Adults Over 30

While Second Life is often in the limelight, there is very little activity (and even less success) in virtual worlds for young adults and middle age adults. Second Life, Kaneva, and There.com are the major players. Rather than aggregating mass audiences, this segment seems to be evolving into niche verticals that cater to specific interests. For example, Second Life has over 60 different disease specific support groups. Perhaps there’s an interesting model in taking the CarePages concept into a 2D or 3D virtual world. There are also opportunities in the enterprise space; IBM recently announced that it would host sections of Second Life behind its firewalls so that its employees could use Second Life as a virtual meeting area.

I’m skeptical that virtual worlds aimed at older users will gain much traction. I think these efforts will go the same way as Eons, a social network targeted at the over 50 set. Its not that adults won’t use virtual worlds. They certainly will, but they’ll use the same ones as younger users. Either they’ll co-play with their children (see Confessions of a Middle Aged Webkinz Addict for an amusing account of this phenomenon) or just give into their younger whims like the millions of 30+ players of World of Warcraft.

Virtual World News announced today that TurboSquid has partnered with VastPark to distribute their collection of 3D assets via VastPark’s virtual worlds platform. Currently, TurboSquid acts in a capacity similar to stock photo agencies such as iStockphoto; they provide pre-fabricated 3D assets to game and virtual world developers. These developers use TurboSquid’s assets to augment their internal art teams in the same way that a book publisher might use stock photos to augment their internal art & design team.

However, the true value of a virtual good isn’t determined by the material from which it is made (in this case, the 3D geometry and textures that TurboSquid sells to developers), rather it is determined by the economy and social context within which it is sold. So an asset that TurboSquid sells for $300 in a B2B transaction may generate tens of thousands of dollars in B2C sales if it is used to create a rare, sought-after in-game virtual item.

Accordingly, TurboSquid seems to be shifting their strategy from a stock asset agency to a virtual goods provider. The first step in this shift is their partnership with VastPark. VastPark has been described as “the Ning of virtual worlds”. Using VastPark, anyone can create and share their own virtual world. With this partnership, VastPark’s users will be able to use TurboSquid’s extensive collection of assets to make their worlds richer and more immersive.

Matt Wisdom, CEO of TurboSquid, describes his company’s strategy:

“Ultimately where we’re trying to go is to take 3D to the consumer marketplace. We’ve done very well with sort of stock 3D and the professional marketplace. The big picture is when regular consumers are buying 3D, whether it’s clothes for their avatar or avatars or any representation they want to have online. We’re trying to connect the consumers to the artists in the virtual worlds.”"

Sometimes virtual goods get a bad name. After all, what father wouldn’t load his shotgun at the thought of his daughter getting a Polka Dot Thong on Facebook? And what mother wouldn’t shake her head knowing her teenage son had spent $1 of her hard earned money to send that thong?

Well, virtual goods aren’t all innuendo and frivolity. Sometimes virtual goods can make the real world a better place. Causes, a popular Facebook Application with over 9 million installs, lets users send over 20 different Charity Gifts to their friends. Charity Gifts range from Blankets (a $10 donation to the American Red Cross which is used to purchase two blankets for people suffering from a disaster or emergency) to Baby Chicks (a $20 donation which helps a hungry family in Cameroon start a flock of chicks) to a Laptop (a $200 donation that provides a laptop to a child in a developing country). Charitable donations are made in the recipient’s name and can be displayed on the recipient’s Facebook profile.

The notion of charitable virtual gifts wasn’t lost on the team at Facebook. When Facebook Gifts launched in February 2007, all proceeds for the month were donated to Komen for the Cure. Facebook chose the foundation because Breast Cancer Awareness is the largest cause related group on the site. Today, Facebook Gifts is a for profit enterprise (quite profitable, Facebook made an estimated $15 million in virtual gifts during the first year of the business). However, if you are willing to rummage through a few thongs, you can still find the Pink Ribbon in the Facebook Gifts store.

CarePages is a free website that helps family and friends communicate with a loved who is hospitalized or receiving health care. Patients and their families can create a CarePage which is very similar to a social networking profile page. Owners of a CarePage can leave updates and upload photos, and visitors to that page can leave messages and virtual gifts. Virtual gifts are free to give and organized into helpful categories such as Encourage, Kids, Smiles, and Support.

PrayAbout is a unique social community that has been described as a way to “hack into God’s inbox”. Members of PrayAbout can submit prayer requests. A prayer request is non-denominational prayer that the submitter wishes to be answered. Members can add photos and update their prayers over time. Visitors to the person’s prayer request may leave a message and may light one or more virtual candles for that prayer. Virtual candles can be purchased for about 10 cents to about 25 cents per candle. They can also be earned by inviting friends to the site, receiving candles for a prayer request, and lighting candles for a popular prayer. Lighting candles is a way for the community to virtually hold vigil for a prayer and show their spiritual support to a member in need.

Handipoints is a kid-focused virtual world that puts a different twist on things. Kids earn points by completing chore charts setup by their parents. By completing these “quests”, kids earn “handipoints” that can be redeemed for real world items and bonus points that can used to purchase virtual goods in the Handipoints online world. Online game designers have known for years that players will do almost anything to earn virtual rewards. Handipoints is betting that they may even be willing to do chores.

Virtual rewards provide a very real incentive and virtual gifts add very real value to our online social gestures. We’ve seen virtual goods at work in the most frivolous parts of our lives, but they can have as significant an impact on the things that really matter like standing by a friend in need or teaching kids that positive habits have long-term benefit.

Last week, I attended an event coordinated by the MIT Alumni Association titled “It’s a Small World: How Virtual Communities Are Changing the Ways We Relate”. The event included lectures and a Q&A discussion conducted by Professor Henry Jenkins and Professor Beth Coleman of the MIT Comparative Media Studies Program. There were several interesting threads of discussion including how virtual worlds act as a social laboratory and how avatars act as interpretations of our ideals and fantasies.

I wrote a guest post for Virtual World News about the event. The full story is available here.

According to the New York Times, Chinese experimental artist Cao Fei, known in Second Life as China Tracy, is creating the world’s first virtual art installation. RMB City is a virtual city in Second Life that is meant to be an artistic commentary on the rapid industrialization of China. The virtual city will incorporate elements of famous Chinese landmarks such as the Forbidden City, the Great Wall, and Tianamen Square.

Lombard-Freid Projects, a New York art gallery, is currently exhibiting RMB City. The exhibit is part art showcase and part real estate sales office. Cao Fei is offering art collectors and virtual real estate investors a chance to sponsor individual structures in the city for prices as high as $120,000. Sponsors get two years access to their structure in RMB City and a commemorative artwork at the end of their “lease”.

If Cao Fei is able to get those prices, she may just find herself in the 2009 Guinness Book of World Records for “Most Expensive Virtual Object”. She would be dethroning Jon “NEVERDIE” Jacobs, the current recordholder, who purchased an asteroid space resort in Entropia for $100,000.

Today, Trent Reznor, of Nine Inch Nails, announced a creative merchandising strategy for the band’s latest album, Ghosts I-IV.

Now that Trent is free from the vices of his traditional record label, he’s able to shed some light on how music should be sold in the digital age. The 4 volume, 36 song album will be available in several prices and forms:

For Free. The first volume of the album (9 songs) is being released under a Creative Commons license and are available via the album’s website (which, as of this writing, has fallen over due to demand) and BitTorrent (Trent personally uploaded the album to key BitTorrent sites such as The Pirate Bay).

For $5. The full album (36 songs) is available digitally from Amazon or from the Nine Inch Nails website.

For $10. Get a two-disc set packed with a 16-page booklet shipped on April 8th. Also includes immediate digital download.

For $75. The deluxe edition comes in a hardcover fabric slipcase with two audio CDs, one data DVD (multi-track), and a Blu-Ray disc. Also includes immediate download.

For $300. This limited edition version comes with four LPs on 180 gram vinyl, fabric slipcase, and two Giclee prints. The set is limited to 2,500 copies and is personally signed and numbered by Trent.

Fans, Collectors, and Followers

A couple months ago I conducted in-home focus groups with trendsetting 18-24 year old music consumers in NYC and LA. The music industry’s revenues may be crumbling, but I found that this generation of music consumers is more engaged with their music than any previous generation. They consume music and knowledge about music voraciously through iTunes, BitTorrent, Pandora, Wikipedia, Google, and others.

These avid consumers support their bands by buying t-shirts and going to concerts. They even claim that they prefer to purchase music to support the bands they love. So both Radiohead and Trent experimented with volunteer business models where consumers could download an album for free and then decide whether to pay for it (and in the Radiohead case, how much they wished to pay). Both experiments resulted in mediocre revenue (Trent, in particular, was disappointed by the results).

So if music consumers are more engaged then ever, why didn’t these experiments in voluntary commerce generate more revenue? Because they only appealed to one very specific segment of a band’s listeners - avid fans that are willing to jump the penny gap to support their favorite artists, and the product available to those consumers was drastically underpriced and underpositioned.

During our focus groups, we found that there are three distinct segments of consumers for a given band’s music:

Fans. Fans are the band’s most engaged listeners. They’ll consume all the band’s music and go to lengths to learn about the band’s members, history, and influences. They are also eager to support the band financially - and willing to spend a significant amount of money on concerts and limited edition product. These are the guys that will buy the $75 and $300 limited edition versions of Ghosts I-IV.

Collectors. Collectors love discovering music. They have an ear for the avant-garde and can rattle off 20 sub-genres of indie rock at a moment’s notice. They spend their time trolling Pandora and Pitchfork, and they make the best DJs. Even if they aren’t avid fans of a particular band, they’ll be willing to spend $5-10 to get a high-quality version of an album that’s important to their collection. These are the guys that will buy the $5 and $10 digital and physical box set of Ghosts I-IV.

Followers. Followers are, by far, the majority of music consumers. They find new music through their Fan and Collector friends or from the radio. They’ll happily grab their music off BitTorrent. Maybe they’ll drop 99 cents for a song they love or a ringtone they have to have, but they’ll be hard pressed to buy a full album. These are the guys that will download Ghosts I for free. If they like it, $5 isn’t too much to pay for another 27 songs. If they love it, they might be on their way to becoming full-fledged Fans.

Why will this save the music industry?

For years, the recording industry got away with a one-size-fits-all strategy. They got away with over-charging the majority of Followers and under-serving each band’s most avid Fans. Now that technology has marginalized the distribution power of the recording industry and the recording industry as demonstrated an unwillingness to respond to that transformation, its up to pioneering artists like Radiohead and Nine Inch Nails to come up with merchandising strategies that appeal directly to their consumers. Trent’s strategy provides a well-priced, well-positioned product to each of the three consumer segments: fans, collectors, and followers.

With Ghosts I-IV, Trent may just have hit the nail on the head.

Update: Nine Inch Nails made $1.6 million during the first week of album sales. Clearly, the rest of music industry is leaving a lot of revenue on the table by sticking to an out of date business model.

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.

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.


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 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.


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.


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.


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.