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?