Virtual Worlds Management, the leading media company tracking the virtual worlds industry, has announced findings from a comprehensive study of accountable transactions showing that venture capital and media firms have invested more than $425 million dollars in 15 virtual worlds companies during the fourth quarter of 2007. Of the $425 million, $375 Million was invested in 13 companies and the remaining $50 million consisted of two acquisitions. Fourth quarter numbers are up from $220 million having been invested in 23 virtual worlds-related companies in Q3 2007. In the third quarter Disney also announced its $700 million acquisition of Club Penguin. No comparable data is available for Q4 2006.

Investors during the Q4 2007 period include: Omnicom, Alloy Ventures and Storm Ventures, Vickers Financial Group, DHX Media Ltd., Benchmark Capital, Canaan Partners, GrandBanks Capital, Hummer Winblad Venture Partners, Trinity Ventures, Rustic Canyon Ventures, Providence Equity Partners, Charles River Ventures, Kodiak Venture Partners and Pequot Ventures, Gigamedia, Sony and Time Warner, Microsoft and BigFish Games.

“Most of the investors in Q4 were venture firms,” said Christopher Sherman, Executive Director of Virtual Worlds Management. “Sony and Time Warner, the only two media companies investing during the period both opted for Gaia Online. Meanwhile Omnicom invested in virtual worlds agency Millions of Us, and television personality Pat Sajak became a significant shareholder of Numedeon. The largest investment by far was ZeniMax’s $300 million financing from Providence Equity Partners.”

Four of the companies that raised funding are squarely focused on the youth and kids virtual worlds market: Gaia, Hidden City, Numedeon and Star In Me. The close proximity of the online game industry to the virtual worlds industry can be seen in the recent funding news as well. Many of the software companies who received funding service both the online game industry and the virtual worlds industry. Indeed of the total 15 companies who received funding six are squarely in the game business as well as the virtual worlds business.

It is worth noting that the Zenimax investment is only partially focused on virtual worlds, showing a still prevalent industry bias towards PC and console games. Zenimax owns game publisher Bethesda Softworks, but is also launching Zenimax Online Studios to tap into the massively multiplayer online game and virtual worlds markets.

Link [ Article ]

Today, information workers use technology pervasively to get their jobs done — to communicate with others, complete tasks, and learn new skills,” opens the new report by Forrester, “Getting Real Work Done in Virtual Worlds,” before explaining that “No matter how well integrated today’s collaboration and communication tools are, the experience is still a far cry from actually ‘being there’ — whether ‘there’ means sitting at the same conference room table with team members or working in the trauma bay at an emergency room learning to use a new piece of medical equipment.” But that experience, Forrester says, can be too pricey, hazardous, or inefficient to really work. Enter virtual worlds.

Imagining a world–and, it seems, predicting one–where everyone in a company has an avatar that interacts in an environment simulating the best of the physical world (all the communication without the “acrid-smelling empty coffee pot in the kitchenette”), Forrester envisions meetings where distributed participants are more engaged and are supported by technology like 3D models. digital white boards, real-time recording and playback, and more.

In short, Forrester’s new report is prepping workforces for the time when virtual worlds revolutionize business as much as the Web already has. And it cites numerous examples of how the technology is already there. In side-by-side tables comparing the Web and more traditional collaboration tools and spaces to virtual worlds, the benefits are clear: more immersive communication than teleconferencing, more cost-efficient (though still unwieldy) non-verbal communication than most video setups, and much more purposeful collaboration tools than IM or email, to name just a few.

The report also cites existing projects as success stories. Among many others, the Institute for Avanced Study at Princeton University is using Qwaq to bring together international astrophysics research teams, and mental health therapists in Camden, N.J., us Forterra’s OLIVE platform to help disturbed adolescents work through traumas. On the business side of things, Forrester lists projects undertaken by IBM, Intel, Sun, and many others as proof that virtual worlds can ease long-distance, and even same-room, collaboration with many different tools.

But the report isn’t entirely rosy. Forrester rightly notes that there are many factors holding back virtual world adoption. From confusing, game-like interfaces and problems of credibility to more technical problems like bandwidth requirements, bug-heavy clients, and integration with office productivity software, Forrester notes that virtual worlds may not be ready for prime time in many enterprise-level businesses.

But that only means companies should prepare now.

“The costs of establishing a small, relatively secure presence in Second Life are typically so low as to be expensed in many organizations,” says Forrester. “The real costs are the employee hours it takes to create a useful space and working environment.”

The time to experiment and establish best practices is now. While individuals already involved in virtual worlds may not glean too many new recommendations from the report, it’s a compelling argument for why everyone else should join up.

For a full copy of the 24-page report, which is relatively inexpensive at $279, visit Forrester.

Article [ Link ]

ABN Amro and Diageo have revealed details of the ways they are working in virtual worlds.

Joe Little, who works in BP’s chief technology office, said the company has identified 3D interactive web and virtual worlds as the breakthrough technology for 2008.

The company is using virtual world environments for strategy planning, global collaboration and anonymous counselling for staff.

Speaking at the Virtual Worlds Europe conference this month, Little said, “BP is engaged in virtual worlds because of our dispersed workforce, team members working on several global projects, periodic travel restrictions, an ageing workforce with a lot of knowledge to impart and a tough graduate market.”

By mid-2008 BP executives hope to increase the use of virtual worlds, especially for collaboration, marketing public education, mentoring, learning and development and refining business processes. Other opportunities include using virtual worlds for process safety training and educating consumers in alternative energy concepts, Little said.

Dutch bank ABN Amro is using the virtual world Second Life for recruitment and for one-to-one meetings with prospective employees.

Daan Josephus Jitta, ABN Amro’s senior vice-president, direct channels and innovation, said, “The 2D internet is excellent for simple ­human-machine interaction, but the 3D social internet enables ready human-to-human interaction, or anonymous avatar-to-avatar communication.”

He said future uses of virtual worlds would include customer contact, consulting and financial planning. However, financial services would not yet be offered through virtual worlds because of the need to resolve regulatory, ID management and security issues.

Drinks manufacturer Diageo has piloted a Second Life events-based programme to boost creative productivity among its global research and development teams. The teams are using the technology for brainstorming, co-development and training, said Dele Alanda, Diageo’s global digital marketing business partner.

However, Dutch drinks group Heineken backed out of Second Life following regulatory uncertainties over the ability of people aged under 21 in the US to view drinks advertisements.

Article [ Link ]

Exodus

The appeal of online virtual worlds such as Second Life is such that it may trigger an exodus of people seeking to “disappear from reality,” an expert on large-scale online games has said.

Virtual worlds have seen huge growth since they became mainstream in the early years of this decade, developing out of Massive Multiplayer Role-Playing Games.

And the online economies in some match those of real world countries.

Their draw is such that they could have a profound effect on some parts of society, Edward Castronova, Associate Professor in the Department of Telecommunications at Indiana University, told BBC World Service’s Digital Planet programme.

“My guess is that the impact on the real world really is going to involve folks disappearing from reality in a lot of places where we see them,” he said.

Varying involvement

Dr Castronova, who has written a book on the subject entitled Exodus To The Virtual World, drew parallels to the 1600s when thousands of people left Britain for a new life in North America.

“That certainly changed North America - and that’s usually what we focus on - but it certainly changed the UK as well,” he said.

There will be a group of people who spend all their lives there, and the question for me is, how big is that group?
Edward Castronova

“So what I tried to do in this book is say, ‘listen - even if the typical reader doesn’t spend any time in virtual worlds, what is going to be the impact on him of people going and doing this?’”
And he predicted that everyone will be involved in a virtual environment within ten years - although the level of that involvement will vary.

He said while some people will be colonists - “the virtual frontier opens up and off they go and disappear” - others will just use virtual worlds to get together with distant family and friends.

But he stressed there will be a group of people that spends all their lives there, and that the big question is the size of this group.

“We forget how many people there are, and we have to ask ourselves, how exciting is the game of life for most people out there?” he said.

Escape and Refuge

The appeal, he said, is not for those in a good job, but for those working low-paid, low-skill jobs. “Would you rather be a Starbucks worker or a starship captain?” he asked.

But he also stressed that since virtual worlds are social, he sees increased interaction in them as a step forward.
And he also highlighted the difference between seeing them as an “escape” and as a “refuge.”

“If reality is a bad thing, and people are going into virtual worlds to reconnect, the word you would deploy is refuge,” he said.

“A father of two spending 90 hours a week in a virtual world because he doesn’t like his wife - I would say that’s escapism, and it isn’t anything you would say is good.

“But if it’s a heavy-set girl from a small town who gets victimised just because her body isn’t the ‘right’ kind of body, and she goes online to make friends because she can’t get a fair shake in the real world, then I would say the virtual world is more of a refuge.”

Story from BBC NEWS [ Article ]

Consumers are increasingly using technology to customise the shopping process to their specific needs. Retailers must understand how consumers are interacting with their brands as this will have a substantial impact on how retail operations will evolve in the future.Predicts 2008: By 2010, 20 percent of global Tier 1 retailers will have a marketing presence in online games and virtual worlds.

Virtual worlds are expanding rapidly. To date, Second Life has nearly 11 million registered ‘residents’ who spend in excess of $1million every 24 hours buying property, items or experiences in-world. Similarly, Gartner expects the popularity of online gaming to continue to expand.

These virtual worlds and video games are emerging as places where consumers can shop and retailers need to be ready to respond to this growing demand. Gartner recommends that retailers:

* Expand your definition of customer touchpoints to include virtual worlds and online games.

* Develop trial criteria prior to launching a presence in virtual worlds and measure the results.

* Monitor innovation in retail activity in virtual worlds and online games, particularly if you are targeting a younger demographic.

* Target the right environment for your customer: In Asia/Pacific this might be in online games. In North America, younger generations may be in social networks such as MySpace and The Sims2 while Generations X and Y may be in Second Life. In addition, it could be in retail with H&H collaboration with The Sims2 namely the Sims2 H&M Fashion Stuff.

Predicts 2008: Through 2012, the number of consumers using mobile phones to shop will increase at an average of more than 25 per cent per year. Gartner expects Asia and Europe will take the lead.

Mobile commerce has been viewed as an emerging new sales channel for retailers for some time now but retail revenue through mobile phones is currently insignificant, much less than 1 per cent of total sales.

However, as mobile phones evolve in form and function, the impact ofthe mobile phone on retail sales is set to increase.

Through 2010, consumers will use the phone as part of their shopping activities to search, browse, find locations and check stock. Eventually, consumers will use mobile phones to purchase merchandise and an example of this includes event tickets. Gartner’s advice to retailers
is:

* Plan how consumers will access your retail sites via mobile phone over the next two years. Decide what information and activities they will want to ‘pull’ to their devices and what you need to do to ‘push’ that information and invest accordingly.

* Decide if the mobile Web will be simply an extension of your website or and entirely different interaction touchpoint. If you want consumers to access you via the mobile Web today, you must deal with the specifics of each major carrier. Start out small, with very limited capabilities.

Link [ Article ]

Harvard Business School recently brought together six influential industry members in the field of massively multiplayer online virtual worlds to conduct a panel on the present and future of a burgeoning market space.

“I’m far from exhausted in the online opportunity,” said Mark Kern, who left his tenure as team lead of Blizzard’s World of Warcraft to found a new company, Red 5 Studios, dedicated to expanding the genre and market reach. He envisions a future of virtual worlds composed of ’synthesized content’, produced by artificially intelligent game design systems which would take an hour of a player’s free time and provide them “the ultimate experience catered toward that hour.”

Who’s Actually Playing?

In the meantime, numbers that he has seen indicate that only about 15 percent of core gamers engage in MMO games and worlds. Philip Rosedale — founder of Linden Labs, the company behind Second Life — added that his numbers indicate perhaps only a one percent market penetration in general. In a marketplace that could sustain hundreds of millions of players, current endeavors have only millions.

Philip went on to say that there is “a lot of growth yet to happen. Probably a lot of change, consolidation — all the companies that you’re seeing will probably go through a lot of evolution.” Lacking clearly defined guides or genres, it is “not a mature market,” and the space is like a vacuum.

The ROI Situation

Regarding the barriers of entry that new MMO developers face, Curt Schilling — founder of the recently established 38 Studios — said: “There are a few barriers here, and at the top of the list is going to be, and always will be, money.” Few developers are internally funded, and, “when you’re sitting in a meeting with venture capitalists, they are… Most of them are about ROI.”

The focus on return on investment poses a challenge to new developers in the MMO space, because there is not yet a common-knowledge business model to calculate risk from.

Curt’s company, fortunately, is similar to Blizzard in that it is entirely internally funded. “You have to meet deadlines, milestones, you have a budget — all those things — but when you can set those on your own, and you are creative, and you have responsibility to your team and to the product. It’s different.”

Mike Hirshland, of Polaris Venture Partners — which works closely with Turbine Inc., producers of online renditions of Dungeons & Dragons and Lord of the Rings — said that Curt’s view of VCs is exactly right. “Three letters: R O I.” He then shed light on the sort of capital needed for these projects: Large-scale MMO projects to date require three to five years of development time, at a cost of thirty to sixty million dollars to get the title launched, with substantial investments over time in order to regularly introduce fresh content.

To further complicate matters, the primary distribution channel is still in the form of boxed retail. “From a VC perspective,” said Hirshland, “thinking about it is tough, challenging.”

Where’s It All Going?

Mark Kern, whose studios are supported by seventy million dollars in venture capital, noted that these projects are steering closer to Hollywood every day. “There is no possible way that we can do what it is that we want to do cheaper and quicker. VCs have asked us, ‘Could you do something that costs a little less and comes out a little quicker?’ Yeah we could, but it wouldn’t be what we’re going to make.”

The fluid nature of these games and worlds provides developers — and investors — new opportunities to monetize user experiences: Cable internet and television provider, Comcast, likens the amount of time and money players spend in MMO virtual worlds to the amount of time and money spent on premium television channels, or Video On Demand services. In the Asian market, developers of MMO projects in South Korea have honed a system similar to America’s highly lucrative ringtone market.

Philip Rosedale expounded on the Korean system: “Anybody know Kart Rider? Kart Rider was really an interesting thing. Korean game, very successful, about 100,000 online at a time. Lightweight — very lightweight. The company made money by selling stuff that you would attach to your car; what’s fascinating is that a lot of the stuff they sold was just cosmetic.”

“They actually found that they could drive a hundred million dollar a year business,” he noted.

Making Players Count

On the topic of monetizing Second Life, Philip explained that Linden Labs sells virtual land to its users for a standard monthly rate. The cost varies only by virtual acreage, and what players do with the land has no effect on the rate that Linden Labs will charge them. “You’ve got to use flat fees, you’ve got to use simple treatments on things.”

Second Life’s greatest draw for users, however, is the ability to produce and even sell their own content: “The interesting thing about user-generated content is that if there is any impediment to people creating it, they won’t.” Philip related the unsolved challenges of interface and infrastructure of MMO virtual worlds today to that of web browsers and the state of the internet in years past.

Chris Carella — CCO of Electric Sheep Company, an advertising firm which focuses on virtual worlds, and has worked with clients ranging from the NBA to MTV — agreed with this view. Employees of Electric Sheep Company have even gone to the lengths of developing a more browser-like prototype interface for Second Life, to ease ergonomics.

Corey Bridges — co-founder of Multiverse, with a background in marketing for corporations such as Netscape and NetFlix — agrees with these sentiments as well, and thinks that “the notion is enabling this entire medium to be opened up. Not by ’somebody made a werewolf suit’, but by somebody saying ‘oh, here’s a new use for virtual worlds’, along the lines of wikis, as-such, didn’t exist ten years ago.”

“The technology could’ve supported wikis ten years ago,” he continued, “but it took some evolution of somebody saying, ‘Hey, let’s try this.’ And then blogs, and podcasting — these sort of things have come up organically.”

A number of of panelists hope to blur the lines between virtual worlds like Multiverse, and the web browser as we know it. Corey’s view is that once a platform can be developed which makes experimentation attractive and economically feasible, people will experiment. “And that’s where you get real innovation.”

Less a matter of ‘if’, and more a matter of ‘when’, MMO virtual worlds, the panel concluded, will become the context and interface for hundreds of millions of users, facilitating billions of dollars in transactions.

Link [ Article ]

Whether you’re making a casual MMO like Maple Story or a virtual world like Habbo Hotel, here are 10 ways to remove game-killing barriers to entry and create the largest possible addressable market.

1. Free to Play

The Free to Play business model is here to stay - and growing every day. In an entertainment world filled with endless choices, asking someone to pony up $50 before they can play a game is rapidly becoming a non-starter. The focus now is on getting players through the front door, keeping them happy, then monetizing 5-15% of them. Non-paying customers become ‘content’ for the paying minority, so don’t think you can ignore them.

2. Integrated Graphics Support

‘If our games required a video card, we’d lose 80% of our audience’
- Min Kim, Director of Game Operations, Nexon North America

‘Graphics are not important - the mind models the situation’
- Daniel James, CEO, Three Rings

Enthusiasts who purchase the latest, greatest video card make up just 4% of the market. Integrated graphics (i.e. no dedicated video card and therefore lower graphics performance) accounts for over 60% of all new computer sales. It would be foolish to develop a Free to Play product requires a video card when success in the F2P sector is partially reliant on addressing a large market and monetizing just a small fraction of your player base.

3. Multiple, regionalized payment systems

Finding the right payment method is a key success factor for Free to Play products. When a user finds a payment method they’re comfortable with, they are fiercely loyal to it. But there are nearly as many payment methods as their are markets. Erik Bethke of GoPets says his company utilizes 90 different payment systems worldwide in order to address the local preferences of each region and make it as easy as possible for users to pay.

Many factors influence payment method selection. Credit card penetration in China is low, so billing customers via their land-line telephone provider has become a widely used payment system that provides excellent security in exchange for high surcharges. In Europe, SMS payments are hugely successful and carriers take anywhere from 10-30% surcharges versus the 40-50% fees of North American carriers. PayPal, checks, points cards and more are also used.

We have three people on staff whose full-time job is to open envelopes with single dollar bills and quarters in them. The users can’t figure out how to get the cash to us. One user sent in a $5 bill in a $14.95 FedEx package so it would get to us on time.
- Craig Sherman, CEO, Gaia Online

4. Little or no download

Get users into a game as fast as possible. If your game requires the user to download client software, make it as small as possible and give the user something to do while they wait for the game to download and install (i.e. setting up their character).

But better yet, make your game in Java, Flash, Shockwave or Silverlight so it’s playable within a browser. A game delivered via Java applet (i.e. Puzzle Pirates, Bang! Howdy, Runescape) can be downloaded and installed in under a minute. A signed Java applet will even avoid tripping a user’s installed spyware detectors.

Only ~30% of players actually tolerate downloads at all, the other 70% preferring to play online. I believe this percentage of download-intolerant players is increasing.
- Daniel James, CEO, Three Rings

5. Deferred sign up

How many times have you been faced with filling out a mandatory sign up form before you can starting playing a new game? The barrier of filling out one more form and becoming a member of yet another online site/network/game/etc that might eventually spam you - before you even try the product - is a huge barrier to entry.

Why not let a new player name and create their character, enter and start experiencing the product, then ask for sign up information along the way? A game that gets this right is Maid Marian’s Shockwave MMO Sherwood Dungeon, which allows you to start playing immediately after you enter your desired character’s name. Despite its simplistic graphics and lack of server-side character saves, Sherwood has attracted over 1M users to its Free to Play ad-supported game.

6. Easy to understand world/lore

Pets, penguins, pirates, party goers - these are some of the most successful Free to Play virtual worlds and games. If you want to keep your game’s potential market big, utilize commonly understood worlds, characters and rules as often as possible. There are exceptions of course, but generally the more jargon and fiction you graft onto your property, the greater the barrier to entry for new players.

7. Quick to play core

Build your game or virtual world around a quick-to-play core mechanic that loops into a larger meta-game. A game that can be played in small 5 minute chunks that feed into a higher purpose.

The casual MMO Puzzle Pirates was designed with short play sessions and a solid meta-game in mind. However, the average Puzzle Pirates user spends 2.5 hours per day in the game - 30 days a month. And while some players do drop in and leave, others spend up to 9 hours a day in-game. Ultimately, the game’s short compulsion loops keep players online longer than traditional, longer compulsion loops that take 30-60 minutes to complete.

8. Warp, don’t walk

Spending precious minutes walking to destinations is, for many, a significant barrier to entry and a big waste of time. Many games and virtual worlds allow ‘warping’ between areas to avoid long marches or simply a point-and-click interface with the world.

9. Spending limits

It seems counterintuitive, but enforcing spending caps on some or all of your player base (depending on your product’s demographics) may actually increase your user base. Habbo Hotel puts spending caps on all payment methods to control the influx of cash into their economy but also to allay parents’ fears. Users can spend money only on 2-3 predefined days of the week.

Limiting how much a player can spend spend in a short period of time benefits the game by reducing parental concern and decreasing incidents of buyer’s remorse in new players.

10. Secondary markets
The presence of a secondary market can drive the primary market. Wizards of the Coast had this observation, as told by Daniel James at this year’s Virtual Goods Summit:

Wizards of the Coast had some interesting things to say, that secondary markets, for example of Magic Online, have been incredibly valuable in driving the primary market. People will buy way more cards in the primary market because they know they can flip them. Mostly they don’t, though, they just hold onto them. Which is a great tip for people thinking about this.

So embrace secondary markets as more users will choose to participate in your primary market if they believe they can sell their goods to others when they’re done the game.

Sources

Integrated graphics stats

Sherwood Dungeon stats

Quotes & Puzzle Pirates Stats via Virtual Goods Summit

Link [ article ]

The IGS organizers are continuing to put online key video lectures from this year’s Independent Games Summit, which took place at Game Developers Conference 2007 last March as part of the yearly Independent Games Festival - and which will again appear as part of GDC 2008 next February.

The eighth lecture is from Three Rings co-founder Daniel James, noted for his role in creating successful PC casual online title Yohoho! Puzzle Pirates. His San Francisco-based company has also released Independent Games Festival prize-winner Bang! Howdy and is working on the user-created online game experience Whirled.

This talk features James’ caustic, battle-tested opinions on a variety of topics around online games and being an independent operator in the game business - and goes into notable detail regarding Three Rings’ monthly revenues and splits between products, as well as methods of growth and mistakes not to be made.

Link [ article ]

Research by Virtual Worlds Management reveals 33 companies raise $196.8 million, two companies acquired for $810 million.

Virtual Worlds Management, the leading media company tracking the virtual worlds industry, has announced findings from a comprehensive study of accountable transactions that venture capital, technology and media firms have invested more than $1 billion dollars in 35 virtual worlds companies in the past 12 months, from October 2006 to October 2007. The announcement comes just prior to the Virtual Worlds Conference and Expo taking place October 10-11, 2007, at the San Jose Convention Center in San Jose, California. The investment numbers and the future of the industry will be discussed in depth at the conference.

Of the $1 billion, $196.8 Million was invested in 33 companies. Significant investors in the space include Redpoint Ventures, Charles River Ventures, Intel, and Rustic Canyon Partners. Media companies are also making sizable investments, including Disney, CBS, Time Warner, and GE/NBC Universal’s Peacock Equity Fund. The remaining $810 million went to two acquisitions: Walt Disney’s $700 million acquisition of Club Penguin and Intel’s $110 million acquisition of 3D virtual worlds graphics technology company Havok.

“Investors are not just venture capital firms, but also include major technology, media and entertainment companies,” said Christopher Sherman, Executive Director of Virtual Worlds Management. “The amount of money invested in this period of time is staggering. We don’t see any slowing in the market adoption of virtual worlds technologies and expect investment in the space to continue. In fact the market is growing significantly, with the rate of adoption of virtual worlds increasing as the technology matures and has more to offer both consumers and enterprise customers.”

Investment spanned the entire virtual worlds value chain, including technology platform companies, virtual worlds developers, service providers and tools providers. Business models of the companies raising capital vary, ranging from advertising and subscriptions to virtual item sales, to enterprise software licensing, hosting and services.

Link [ article ]

The following 10 revenue models allow some or all of their associated game or virtual world to be played for free. The ordering is quite unscientific and I’m sure I’ve missed something obvious or messed up a detail. I leave it to the internet to correct me.

1. Virtual Item Sales

A well familiar revenue model first established in Korea and now the dominant model in Asia. Nexon - makers of KartRider, MapleStory, Audition and more - are widely seen as the leaders in this area, doing $230M of gross revenue in 2005 (the most recent year for which they’ve released figures), with 85% of that revenue coming from virtual item sales.

Virtual item sales is the practice of allowing users to purchase functional, decorative, or functional & decorative in-game items for use in and out of gameplay. A virtual item system usually uses two currencies - an attention currency (users earn virtual money via in-game activities) and a real money-based currency (users buy virtual money using real money). Typically, 5-15% of users opt for the latter currency and the influx of real world money is what provides the virtual item sales revenue stream.

What’s so compelling about virtual item sales is the unlimited ARPU (average revenue per user). According to Daniel James, CEO of Three Rings, some hardcore Puzzle Pirates users have poured more than $10,000 apiece into the game via virtual item purchases. To reach that contribution level via a World of Warcraft-style $15/month subscription would take a user 55 years.

While extremely shaky sources peg the overall size of the virtual item sales market at $1.5-2B this year, without an NPD-esque measurement organization there’s no way to verify that number.

2. Subscription Tiers

Runescape, the Java MMO from Jagex, is one of the leaders in the tiered subscription space. A tiered subscription model allows users to play the core game for free, but those that desire access to elite weapons or other game content, must pay a small ($5/month) subscription fee. Over 1 million of Runescape’s 6+ million users have opted into the tiered subscription program, grossing $60M annually for Jagex.

Dungeon Runners, an NCsoft free to play MMO, offers a similar $5/month subscription package that affords players access to the elite items, a bank and the ability to stack potions. It also gives subscribers server queue priority.

3. Advertising

Several different forms of game-related advertising revenue streams have popped up in recent years. Firms such as Massive,IGA and Double Fusion do big business in in-game advertising for clients such as EA, Activision, THQ and Microsoft. Game ad agencies typically serve up static ads (ads that ship with a product and never change) or dynamic (ads that are updated in real time via the net) within game products that are contextually appropriate for advertising (i.e. sports, racing, or contemporary shooters).

The size of this conventional in-game advertising market is currently pegged at $100-200M, according to well-placed industry sources. However, the number and quality of games with dynamic advertising enabled is escalating dramatically. So much so that Yankee Group predicts the in-game ad market will reach $732M by 2010.

But other, more emergent forms of in-game advertising have been at the forefront of enabling free to play. Examples include:

• Google Adsense PPC ads (see recent post on Maid Marian, grossing $800K/year from Google Ads alone)
• Sponsored item sales (Habbo Hotel)
• In-game video ads (Real Networks)

4. Real Estate or ‘Land Use Fees‘

Second Life is the biggest legitimate player utilizing this revenue model whereby virtual land is sold leased to individuals. Monthly lease fees range from $5 to $195, depending on the size of land in question. Users may also purchase their own island for a one time fee of $1,675 in addition to a monthly fee of $295.

Approximately 70% of Second Life’s revenue comes from land sales and maintenance fees. Of course the virtual land ownership revenue model doesn’t come without headache, as the Bragg vs Linden suit has proven.

Entropia Universe uses land auctions as a revenue stream, but a recent headline-making $100,000 land sale has been called into question as the successful bidder is an employee of Entropia’s developer, MindArk.

5. Merchandise

In what’s become a phenomenon of Furby proportions, Webkinz plush toys and their associated Webkinz World have taken the pre-teen set by storm. Users purchase a $15 Webkinz plush toy at retail and enter a secret code to activate the associated virtual character in Webkinz World. Beyond the retail plush toy purchase, there are no additional fees for playing in Webkinz World.

Two million Webkinz toys have been sold since April 2005, with more than 1 million of those users registering their pet online. That’s more than US$20M in retail sales in just 24 months. Products such as Bratz/Be-Bratz are quickly jumping on this bandwagon.

Another successful merchandise-based revenue model is collectible card games, or CCGs. Neopets launched a CCG in 2003 and just this week MapleStory became the latest free to play game to go this route, announcing a partnership with Wizards of the Coast. Consumers purchase real-world MapleStory collectible cards that come with codes redeemable for exclusive in-game content in the MapleStory MMORPG.

6. Auctions & Player Trades

In June 2005, Sony set up Station Exchange on select Everquest II servers. Station Exchange facilitates player to player trade of in-game items - including the provision of an escrow service - in return for a 10% closing fee as well as listing fees ranging from $1 (items and coins) to $10 (characters).

While Station Exchange recorded only $274K in net revenue in its first year of limited release, it was enough for Sony Online President John Smedley to declare it the future of RMT. Read the SOE Station Exchange whitepaper for more.

Entropia Universe - a world in which virtual items actually decay with use and require real money to repair or replace - utilizes first party auctions as their primary revenue stream. This means that instead of merely facilitating player to player auctions and taking a cut (a la Station Exchange’s eBay model), Entropia auctions items directly to their players.

Entropia items sell for ludicrous sums, with rare weapons auctions closing at $26,000, land auctions for (allegedly) $100,000. The May 2007 auction of five in-game banking licenses brought in $404,000, total. Ironically, Entropia takes no fees for player-to-player auctions.

In the wake of this success, watch for third party virtual item auction houses such as Dan Kelly’s Sparter.com to offer developers and publishers a cut to ensure the (exclusive?) cooperation of their products.

7. Expansion Packs

The best known example of expansion packs as a primary revenue model is the Arenanet product, Guild Wars. Likened by Richard Garriott to a series of fantasy novels, Guild Wars relies not on monthly subscription fees for its revenue, but on the sale of successive expansion packs for $29.99.

The game’s creators argue that the thin-pipe origins of their technology allow their game to be run far more economically than competing titles, enabling this no-subscription free model.

Over 3 million people have purchased the previous three Guild Wars products (Guild Wars, Guild Wars: Factions and Guild Wars: Nightfall) with those numbers set to surge again with the release of Guild Wars: Eye of the North on August 31, 2007.

8. Event or Tournament Fees

Netamin’s free to play, ad-supported Ulimate Baseball Online uses event fees as an additional revenue stream. UBO’s Pay to Play tournaments cost $5 per player to enter and offer cash prizes up to $4,500.

Shot Online, a free to play/virtual item sales golf MMO, also charges users to enter tournaments.

Third parties such as Valve’s Tournament.com and Groove Game’s Skillground.com are getting into the pay to play tournament scene as well. These sites charge charging entry fees for game tournaments for games such as Half-Life 2 and Counter-Strike.

9. TrialPay

At the recent Virtual Goods Summit and again at the Seattle Casual Games Conference, I bumped into representatives fromTrialPay. TrialPay is a third party facility that allows customers to pay for products (i.e. games) by trying or buying from advertisers.

What this means is that when you go to pay for a casual game or purchase virtual currency, you can instead select from a demographically targeted list of special offers. Trying or buying one of these offers - from merchants such as Avis, Geico, Vonage, etc - allows you to get your game purchase for free, as the offer merchant has paid the game provider for acquiring a new customer on their behalf.

TrialPay claims that this allows game developers to earn more per user, as some offers pay game developers upwards of $50 per user (as opposed to the $20 a casual game might normally charge).

Someone from TrialPay can jump in and give me a more relevant example of their system’s use in the game space, but all I could find was a casual games company called Dreamquest Games.

10. Donations

Clocking in at last on the list is of alternate revenue streams is player donations. Raph Koster recently blogged about meeting up with the Kingdom of Loathing guys at ComicCon in San Diego. Raph reported that while KoL’s revenue is ‘definitely indie,’ their primary revenue stream of player donations is a sustainable one.

According to Wired, the donation revenue has allowed creator Zack Johnson to quit his day job and hire six employees to help improve and maintain the product.

That’s what Maid Marian founder Gene Endrody would call a ‘lifestyle business,’ but I suspect most of us wouldn’t scoff at it or any of the above revenue models.

Link [ article ]

Whether you’re making a casual MMO like Maple Story or a virtual world like Habbo Hotel, here are 10 ways to remove game-killing barriers to entry and create the largest possible addressable market.

1. Free to Play

The Free to Play business model is here to stay - and growing every day. In an entertainment world filled with endless choices, asking someone to pony up $50 before they can play a game is rapidly becoming a non-starter. The focus now is on getting players through the front door, keeping them happy, then monetizing 5-15% of them. Non-paying customers become ‘content’ for the paying minority, so don’t think you can ignore them.

2. Integrated graphics support

‘If our games required a video card, we’d lose 80% of our audience’
- Min Kim, Director of Game Operations, Nexon North America

‘Graphics are not important - the mind models the situation’
- Daniel James, CEO, Three Rings

Enthusiasts who purchase the latest, greatest video card make up just 4% of the market. Integrated graphics (i.e. no dedicated video card and therefore lower graphics performance) accounts for over 60% of all new computer sales. It would be foolish to develop a Free to Play product requires a video card when success in the F2P sector is partially reliant on addressing a large market and monetizing just a small fraction of your player base.

3. Multiple, regionalized payment systems

Finding the right payment method is a key success factor for Free to Play products. When a user finds a payment method they’re comfortable with, they are fiercely loyal to it. But there are nearly as many payment methods as their are markets. Erik Bethke of GoPets says his company utilizes 90 different payment systems worldwide in order to address the local preferences of each region and make it as easy as possible for users to pay.

Many factors influence payment method selection. Credit card penetration in China is low, so billing customers via their land-line telephone provider has become a widely used payment system that provides excellent security in exchange for high surcharges. In Europe, SMS payments are hugely successful and carriers take anywhere from 10-30% surcharges versus the 40-50% fees of North American carriers. PayPal, checks, points cards and more are also used.

We have three people on staff whose full-time job is to open envelopes with single dollar bills and quarters in them. The users can’t figure out how to get the cash to us. One user sent in a $5 bill in a $14.95 FedEx package so it would get to us on time.
- Craig Sherman, CEO, Gaia Online

4. Little or no download

Get users into a game as fast as possible. If your game requires the user to download client software, make it as small as possible and give the user something to do while they wait for the game to download and install (i.e. setting up their character).

But better yet, make your game in Java, Flash, Shockwave or Silverlight so it’s playable within a browser. A game delivered via Java applet (i.e. Puzzle Pirates, Bang! Howdy, Runescape) can be downloaded and installed in under a minute. A signed Java applet will even avoid tripping a user’s installed spyware detectors.

Only ~30% of players actually tolerate downloads at all, the other 70% preferring to play online. I believe this percentage of download-intolerant players is increasing.
- Daniel James, CEO, Three Rings

5. Deferred sign up

How many times have you been faced with filling out a mandatory sign up form before you can starting playing a new game? The barrier of filling out one more form and becoming a member of yet another online site/network/game/etc that might eventually spam you - before you even try the product - is a huge barrier to entry.

Why not let a new player name and create their character, enter and start experiencing the product, then ask for sign up information along the way? A game that gets this right is Maid Marian’s Shockwave MMO Sherwood Dungeon, which allows you to start playing immediately after you enter your desired character’s name. Despite its simplistic graphics and lack of server-side character saves, Sherwood has attracted over 1M users to its Free to Play ad-supported game.

6. Easy to understand world/lore

Pets, penguins, pirates, party goers - these are some of the most successful Free to Play virtual worlds and games. If you want to keep your game’s potential market big, utilize commonly understood worlds, characters and rules as often as possible. There are exceptions of course, but generally the more jargon and fiction you graft onto your property, the greater the barrier to entry for new players.

7. Quick to play core

Build your game or virtual world around a quick-to-play core mechanic that loops into a larger meta-game. A game that can be played in small 5 minute chunks that feed into a higher purpose.

The casual MMO Puzzle Pirates was designed with short play sessions and a solid meta-game in mind. However, the average Puzzle Pirates user spends 2.5 hours per day in the game - 30 days a month. And while some players do drop in and leave, others spend up to 9 hours a day in-game. Ultimately, the game’s short compulsion loops keep players online longer than traditional, longer compulsion loops that take 30-60 minutes to complete.

8. Warp, don’t walk

Spending precious minutes walking to destinations is, for many, a significant barrier to entry and a big waste of time. Many games and virtual worlds allow ‘warping’ between areas to avoid long marches or simply a point-and-click interface with the world.

9. Spending limits

It seems counterintuitive, but enforcing spending caps on some or all of your player base (depending on your product’s demographics) may actually increase your user base. Habbo Hotel puts spending caps on all payment methods to control the influx of cash into their economy but also to allay parents’ fears. Users can spend money only on 2-3 predefined days of the week.

Limiting how much a player can spend spend in a short period of time benefits the game by reducing parental concern and decreasing incidents of buyer’s remorse in new players.

10. Secondary markets

The presence of a secondary market can drive the primary market. Wizards of the Coast had this observation, as told by Daniel James at this year’s Virtual Goods Summit:

Wizards of the Coast had some interesting things to say, that secondary markets, for example of Magic Online, have been incredibly valuable in driving the primary market. People will buy way more cards in the primary market because they know they can flip them. Mostly they don’t, though, they just hold onto them. Which is a great tip for people thinking about this.

So embrace secondary markets as more users will choose to participate in your primary market if they believe they can sell their goods to others when they’re done the game.

Sources:

Never Mind the Polygons #6 had a more intimate feel than usual due to exams for the games programming students. Nonetheless, an audience of over 50 developers spanning several regions once again converged on Friar Gate Studios, with guys from Eurocom and Monumental out in force.

The discussion was intense at times, covering subjects including games marketing, launching and retaining new IP, and the MMO marketplace. Our panel guests this time, Alan O’Dea (Monumental) and Nick Burton (Rare), spent plenty of time on the mics alongside Iain and Dan. Judging by this and the last event, the quality of the discussion is going up and up, as is audience involvement.

As ever, send us an email via polygons@pixel-lab.co.uk if you want to be added to the Polygons mailing list. Future mailings will all have an unsubscribe link in them.

Panel

• Nick Burton, Rare
• Alan O’Dea, Business Development Manager, Monumental Games
• Iain Simons, Director, GameCity
• Dan Marchant, EM Media / The Obscure Consultancy

Link [ Website ]

Analysts Identify the Five Laws for Virtual Worlds During Gartner Symposium/ITxpo 2007 Emerging Trends, Analysts Say IT Leaders Must Take the Initiative to Innovate.

San Francisco, California. By the end of 2011, 80 percent of active Internet users (and Fortune 500 enterprises) will have a ‘second life,‘ but not necessarily in Second Life, according to Gartner, Inc.

Gartner analysts are examining the hype and reality around virtual worlds during Gartner Symposium/ITxpo 2007: Emerging Trends, being held here through April 26. Gartner‘s advice to enterprise clients is that this is a trend that they should investigate and experiment with, but limit substantial financial investments until the environments stabilize and mature.

‘The collaborative and community-related aspects of these environments will dominate in the future, and significant transaction-based commercial opportunities will be limited to niche areas, which have yet to be clearly identified,‘ said Steve Prentice, vice president and distinguished analyst at Gartner. ‘However, the majority of active Internet users and major enterprises will find value in participating in this area in the coming years.‘

Meaningful corporate use of public virtual worlds/platforms will lag considerably behind individual consumer use as enterprises struggle to develop appropriate and relevant business models. As enterprise try to define their role in the virtual world, Gartner has identified five laws for companies participating in the virtual world. They include:

First Law: Virtual worlds are not games, but neither are they a parallel universe (yet). The initial reaction of many business leaders when faced with virtual worlds is to dismiss them as a mere ‘game‘ of no benefit to the enterprise and something to be banned for wasting compute resources and time. Many of those that see beyond the gaming elements immediately veer toward questions such as ‘How do we exploit this as a sales channel?‘ This reaction is equally incorrect and potentially even more damaging to the enterprise. ‘Growth in virtual worlds is significant but lower than it appears; the overall population of non-game virtual worlds is still small compared to massively multi-user online games (MMOGs) and the totality of community-oriented and niche-targeted environments,‘ Mr. Prentice said.

Second Law: Behind every avatar is a real person. Gartner said people can‘t be fooled by the fantasy elements in the virtual world. There are unwritten rules and expectations for behavior and culture are developing. Enterprise users must consider their corporate reputations.

Third Law: Be relevant and add value. Many commercial companies have established a virtual world presence, but none have converted it into an effective, profitable sales channel. There has been criticism of early corporate entries into the virtual world, Second Life, related to the showrooms usually being empty and lacking atmosphere. While there have been a limited number of individuals who have earned more than $5,000 per year from their virtual world businesses, most corporations will see minimal revenue gains in the market at this time. ‘Do not expect to undertake profitable commercial activities inside most virtual worlds in the next three years,‘ Mr. Prentice said.

Fourth Law: Understand and contain the downside. Enterprises face serious questions, such as ‘Could activities in the virtual world undermine or influence my organization/brand in the real world?‘ With significant portions of the virtual economy based on adult oriented activities, questions of appropriate behavior and ethics also arrive. In-world behavior can be a problem in public areas; annoying interruptions can range from unintentional arrivals and erratic behavior from new residents whose avatar control is still suspect to misdemeanors such as graffiti, to more-concerted protest activities designed to disrupt.

Fifth Law: This is a long haul. Today‘s multiplicity of virtual environments has developed through the convergence of social networking, simulation and online gaming. There are many new entrants, whose stability and scalability are not yet established. There is significant probability that, over time, market pressures will lead to a merging of current virtual worlds into a smaller number of open-sourced environments that support the free transfer of assets and avatars from one to another with the use of a single, universal client.

Gartner recommends that enterprises should experiment with virtual worlds, but not plan massive projects, and look for community benefits rather than commerce. ‘Find enthusiasts within your enterprise and support them. Understand the implications for access to open virtual platforms from within the enterprise and the risks involved,‘ Mr. Prentice said. ‘Despite the concerns within companies, don‘t ignore this trend. They will have a significant impact on your enterprise during the next five years.‘

Link [ article ]

March 28, 2007. Next month DFC Intelligence will be publishing its latest research on the massively multiplayer online game (or MMOG) market. This is a well-established, but often misunderstood, segment of the interactive entertainment industry. The success of World of Warcraft (WoW) from Vivendi Universal Games is leading to interest and investment in the segment that is far above what its current market size and usage can support. Therefore we feel it is critical to look at some of the factors that could separate the handful of winners from the many losers.

Perhaps the most important point to note is that there will be a great deal of money lost. Since the emergence of the current MMOG market, which we pegged as 1997, there have never been more than a handful of hit products in a given market at the same time. In North America there has been one product (Ultima Online, then Everquest, then World of Warcraft) which stood head and shoulders above a small group of second tier products that had 25-50% of the top game’s subscriber base. Never in the over thirty year history of massively multiplayer games has there been more than five top-line products in existence at one time in a given market. Even then, the top two or three games have always commanded between 85% and 90% of the market

Below that level, there have been niche efforts and upstarts. Despite the increasing variety and number of MMOGs in the market, this quasi-network effect appears to be strengthening, not weakening. The good news, thus far, is that the overall pie does seem to be expanding. That is to say, the niche efforts now sometimes have 50,000 subscribers instead of 5,000 and the mid-level games have 150,000 subscribers instead of 50,000.

The announcements from a variety of well-capitalized companies about new MMOGs in the market is a sign that WoW’s success seems to have touched off another in a series of boom-bust cycles in the online game realm. The prize is so big that people have a hard time averting their eyes. That some companies are devoting huge sums of money to capture market share has not prevented smaller companies and passionate development shops from attempting to enter the fray. As DFC Intelligence tracks it there are currently more than fifty potentially viable MMOGs in various stages of development or private and public testing. This does not count the numerous efforts championed by two or three developers that have no chance of ever seeing the light of day. This also does not count the incredible number and variety of games being produced in Asia, not just in Korea but in China, Taiwan, and Singapore. Some of these efforts are backed by publicly listed companies with millions to throw at the world’s MMOG markets.

If history in this industry is any indication, most of these games will disappear, to be replaced by other passionate optimists. The track record of small, independent efforts with MMOGs has not been good. The track record of large, corporate efforts in the online game realm might even be worse.

MMOG games have very long development cycles and are notorious for missing initial release dates, often by several years. As we predicted, the success of World of Warcraft has resulted in the funding of many MMOG products. This last MMOG boom occurred in the 2000-2002 timeframe after the success of EverQuest. Despite numerous MMOG products being funded, EverQuest remained the largest Western MMOG until World of Warcraft was released in late 2004. Most of the projects funded in the 2001-2002 period were delayed or never released. Two of the largest products that did ship in 2002 were major disappointments, Earth and Beyond and The Sims Online, both from Electronic Arts. A major problem with both these games was that they were released with many bugs as publisher EA was in a hurry to recoup its significant investment. In 2004 there were some major MMOG projects that were cancelled well into development, including Ultima Online: Odyssey, Microsoft’s Mythica and Warhammer Online. Until World of Warcraft came out, interest in releasing an MMOG was clearly on the decline.

For the market to expand, consumers will have to be converted from more standard interactive entertainment experiences to the MMOG paradigm. This has proven more difficult than many market observers expected. A big reason could be that until very recently, the products in the market were basically variations on a theme. Aside from some expected product failures due to inexperience, bad customer service and/or poor hardware and bandwidth maintenance, the products compete with each other in terms of genre, interface and playing style.

Another issue is the limited business model. Until recently, most MMOGs were only offering consumers the subscription business model, which limited their payment options. Younger consumers, without access to a credit card or unable to get their parents to agree to a $15 a month payment (“That’s as much as cable!”), have been underrepresented in the MMOG space. The average age of an MMOG player was about 25 years old. As discussed in detail in our report, more affordable games like the digitally distributed Runescape by Jagex are finally bringing younger players to the genre. Runsecape has 850,000 subscribers at $5 a month and it was never released at retail. This group of consumers have proven to be a lucrative force in the rest of the interactive entertainment market and they could be the true key for expansion of MMOGs. With the introduction of other business models, such as the Korean imported free-to-play/digital item sales model, the market could broaden even more.

Still, time is an asset too and MMOGs are the most time-intensive of all online gaming products, requiring from five to twenty hours per week for a satisfying experience. One of the big draws of these products is the community of other players which the customer is drawn into; it is one of the reasons players spend that five to twenty hours per week playing the game. Players can’t and won’t invest time in more than one or two MMOGs at any one time; for most, it is just physically impossible to do more. This is likely to result in the great bulk of the coming games experiencing some initial success, as they are ‘test driven’ by the players, only to be abandoned for other games that better meet the technology, playing and social needs of more customers. This has been a major problem for MMOG developers and operators in the more competitive markets of Korea and China.

One of the biggest trends of note in the MMOG space is the products that have experienced success by providing games for underserved segments of the market such as science fiction fans, teenagers, or children. Other games have catered more to fans of purely social worlds, changed game settings, or played with the game mechanics to incorporate new ways of “fighting.” Examples are Eve Online (science fiction), Habbo Hotel (teens), Second Life (social worlds), Toontown Online (children), City of Heroes (setting change), and Puzzle Pirates (game mechanics changes). Many games have introduced different revenue models in an effort to draw customers.

In short, there is clearly a great deal of room for innovation and growth in the over crowded MMOG market. Unlike much of the traditional interactive entertainment market, it is not feasible to slap a popular license on an MMOG and hope to collect a big paycheck. Success with MMOGs requires a disciplined approach to product development, technology, operations, customer service, emerging trends and a solid understanding of the overall competitive landscape. The MMOG business is not for the faint hearted and those that do their homework clearly have the best chance of success.

DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry.

Article [ http://www.dfcint.com/game_article/mar07article.html ]