Virtual Goods: The Next Big Business Model?

Conference host Susan Wu moderated an afternoon panel addressing the question of whether virtual worlds are “the next big business model” at the Virtual Goods Summit.

Tim Stevens of Doppelganger
Kevin Effrusy, general partner with Accel Partners (investor in Facebook)
Dan Kelly, CEO of Sparter
Min Kim of Nexon

Susan: How do you guys estimate the size of the overall virtual goods market?

Dan: It’s easily a billion dollar [secondary] market. Consumers have told us these things have value, the industry now is trying to reconcile that with their business model.

Susan: These are big numbers. Why aren’t more content developers and producers looking at this as a viable business model?

Kevin: If I had a startup doing that kind of revenue on virtual goods, I’d be ecstatic. It’s incredibly high-margin, you have no cost of sales and no sales force associated with it.

Susan: Is Barack Obama still the #1 recipient of virtual gifts on Facebook?

Kevin: I got a dozen virtual gifts on my birthday, and if I’m getting a dozen and I’m lame, it’s actually probably a pretty substantial business. But what they’re doing right now is very rudimentary compared to what they could do.

Tim: As you say, it’s expression of social capital. It isn’t the virtual item itself, it’s what that item represents. It’s a way to reach out in a way that’s different than email. One of our partners is RocaWear, and we enable users to buy virtual RocaWear. It’s scaled down to a way it makes sense with their wallet and pocketbook. And they get exactly the same emotional power from walking around in those RocaWear jeans in the virtual world as they would at school.

Susan: Facebook is one of the most immersive and engaging social network experiences. The more immersive your relationship wtih the user becomes, what kind of business models become possible?

Tim: You can take these kinds of experiences and connect them together. Music available to a community of people who want to make music but don’t know how. And by the way, you can wear these clothes within the environment while youre engaging in this. And you can do this collaboratively with your friends. You imagine taking all of that, the music studio costs you $2 an hour to rent, gets you an opportunity to access this space, build on these beats, transport that wherever you want.

Susan: How does revenue from advertising and virtual goods break down for y ou?

Tim: Roughly 50/50. Over time, my expectation is that the advertising component will start to get more dominant, virtual goods less domainant. Whjy? Because the early iteration of virtual goods has been content-creator creating it. As advertising community starts to understand this is something completely new, advertisers can start to craft messages that have storylines associated with them. Over time you’re going to see the blending of advertising and virtual goods delivered to the very different models we all have here.

Min: I think it’s really going to differ market to market. It depends on what type of business you’re running. For us, advertising will never outpace virtual item sales.

Kevin: The gifts on Facebook have been an experiment. It’s worked really well, but I think the real opportuinity is for the audience to take advantage of the platform. What people could do here is, if you take a fairly immersive experience and build it on top of a social network, you have rocket fuel for accelerating your commuinity. It’s about taking advantage of the entire functionality of the paltfrom. It’s about understanding relationships between people, and you can take advantage of that and build unbelievable applications.

Susan: Why aren’t more content peroducers paying attention to this market

Dan: We’ve got a lot of people focused on this space, but we’ve been debating what’s virtual and what’s not. There’s no debate among consumers. For them, it’s what has value to them. The thing about virtual isn’t meaningful. What is important is, what is the industry going to do to organize the market so that we get as much benefit, and reward producers of good content. Publishers and developers in North America have been having a hard time with this market. But it’s very possible to construct a solution that gives consumers what they want, and gives you what you want to construct your business model.

Susan: Does Facebook’s success with this model help legitimize it for all of us.

Min: Absolutely.

Dan: I think there’s going to be more value realized in gaming from non traditioanl publishers in North America. You want to make your product as accessible as possible. Publishers will come around, but it’s going to take some time to make a change in their business model.

Tim: There’s a big distinction between a console game, which is a lot like a movie, and virtual goods type of experiences. In that type of model it isn’t going to work. You have to create an emotional connection into the experience for you to open up your wallet and spend a dollar. Innovation will come, but it will be for non-tradiitonal companies being big players in this. Why do users actually open their wallets and buy these kind of goods? It’s because they have a connection, and you have to earn that trust.

Dan: Some people say real-money trade is a function of bad design. I couldn’t disagree more. If your audience is willing to not only buy your box and subscribe but also pay someone else for a virtual good, that’s success. So we need to support that.

Susan: The Facebook platform turns Facebook from being an advertising supported consuimption mediaito something extremly transactional. How might you experiement frther in ways that aren’tnecesarily advertising supported?

Kevin: The way the team there is thinking about the platform — there’s been a lot of questions about whether there will be a tax emerging on people who make money on Facebook — but it’s not how do we tax people who are making money, it’s how do we help them make even more money. Let’s build tools that will help people get really, really rich. Businesses with very healthy third-party ecosystems are the ones I want to invest in. These healthy third-party markets grow businesses.

Dan: A secondary market will grow your primary market.

Susan: I want to echo what Kevin and Dan are saying. The reason Google, eBay, Amazon, exist is because they lower the barrier for entrepreneurship.

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