VGSummit2007: Why Virtual Goods Matter: What’s Driving User Adoption?

» Craig Sherman, Gaia Online
» Daniel James, 3 Rings
» Amy Jo Kim, Shufflebrain
» Byron Reeves, Stanford University
» Nabeel Hyatt, Conduit Labs (moderator)

We’re going to talk about why this works for people.

Byron Reeves:

I have a lab here doing psych experiments looking at how people respond to virtual stuff. And the needle points to “real” rather than ‘fiction.” So my answer to why people care about virtual goods is that the human brain is not specialized to differentiate between virtual and real. Close counts — the same neurons fire. Same dopamine releases, same reward structures. My current interest is beyond avatars and stuff, and now is virtual money applied to real behavior. Uses for virtual currency in the real world, not encumbered by regulations — and less psychologically heavy. Interested in how to use it with adults and in enterprise. The lab results seem more applicable to adults!

Doing a company called Seriosity here to try to bring this stuff to the real world. We set up a virtual currency ourselves so you can transact by email, phone, etc, and want to apply it to serious behavior in the enterprise. Our first tests when you create the opportunity to send an email with virtual currency — in a large Fortune 500 company, and I send 1 unit of virtual currency, you will open that email 12% faster. If I send 20 units of currency, you will open it 52% faster. Virtual money changes real behavior.

Amy Jo Kim:

Gives background. My perspective: it’s obvious that it is successful overseas.  Now is the time when the US market is ready for this. In the past it hasn’t been. But now there is enough going on with broadband and blurring of real life and online.  It’s a pivotal time.

My particular interest is virtual goods that incorporate user-generated content. A lot of what we have seen are economies where the goods are created by the company. Great business model, no IP or porn worries. But we are also seeing a real exposion of UGC and content sharing networks. I think particularly here in the US it is important to think to what scale we want to let users make and tyrade stuff. It complicates things, but you cannot stop the floodgates.

An anecdote from There.com: when we launched we had sponsored items from Nike and Levi’s. We also had user tools for skins and models. Quickly, the UGC far outstripped the branded good in popularity. Even though we thought it might happen, it surprised us how much so.

Daniel James:

 Gives background, starting on EssexMUD in 1982. Now CEO of Three Rings.

Longtime believer that the interface is not the issue. What we are dealing with is really deep. Immersion is not about graphics. Matt Mihaly has been making a lot of money from selling virtual items in a text world for ten years.

We do Puzzle Pirates, where people play puzzles to earn currency and then buy hats and stuff. We started out as a subscription game, but the sub was a barrier. We rolled out a virtual currency model called doubloons 2 years ago. As of right now, we are still small, $350k in revenue a month, $250k is in virtual goods.

Where we are going as a company, we think this is the model for online entertainment going forward. I think Club Penguin is doing great at $5 sub, but our lifetime revenue per user is around $100. Some people spend in really small amounts, and some in really large amounts.

We are building a new project, to add to PP and Bang Howdy, a web-based social expression world base don player created content where players upload games, furniture, avatars… called Whirled, should be out real soon.

Craig Sherman:

I think we have all the relevant companies in this space here today!

I run Gaia Online. I came from Family.com, then went to hang out at Benchmark, and was totally taken by the virtual world space and virtual currencies. We wanted something with great value proposition for the customer, and a group of founders with an uncanny grasp of the young customer. Looked for over a year, and along with Redpoint, we found Gaia.

We have around 2m unique visitors, 1m posts a day on messages, #2 message forums on the net. Avg unique visitor spends over an hour a day  every day. We have 50k completed virtual item auctions every day. 12 virtual stores that are more like Amazon where you buy from our 6000 items. At heart, the core experience is like Facebook or MySpace: profile, friendlist, blog.

But from there you go build You, which is an 2d anime avatar. Hangout in a Flash-based MMO, 1000s concurrent. You can play games, write petry/fiction, newspapers, watch real movies or user movies,  do art… an online hangout for teens. Have grown 4x in the last few months with no advertising.

Panel:

Goods are virtual, communities are real! What are metrics for engagement?

Gaia: how to get us the money is a real issue in the US. In our site we skew a little older than Habbo. We have 3 people on staff whose full time job is to open envelopes with single dolalr bills and quarters in them. We have hanging on our wall a user who sent a $5 bill in a $15 fedEx package.

3Rings: You roll out new stuff and revenues go up.  You can see a clear correlation in engagement.

You started with a different business model, so you had two different populations. What’s ARPU for one vs the other, and so on?

3Rings: 1/3 subs, 2/3 microcurrency. Avg revenue per user is actually very similar. But it hides very different curves. In subs, you convert and last a year. But the other side, a bunch of folks spend $3, and the highest end customers are over $10,000. We love them so much, we send them real life stuff and personal notes. Engagement metrics same thing. We built the game hoping for shor session times, but the high end stick hugely. People spend money like it’s a real world hobby.

Reeves: You can use Seriosity’s currency to do stuff that is not tied to the place where the product exists. One evidence for us is who is yransferring to whom, and are they inviting people in… but the really interesting metric has been what are the different ways people can invent to use the currency? The answer is that it works like money but it isn’t… wherever money works, this might help. Internal prediction market, auctioning off scarce company resources, rewarding a friend for bringing a power cord, whatever. So signaling importance, getting feedback.

Do people use it forvanity or tied to achievement?

Amy Jo: We saw the split last panel between decorative goods and functional goods. It depends on what sort of world you are creating. In a gaming world functional goods have more power.  In the social worlds, social meaning is attached to objects that are purely decorative. Decorative items have power granted by the other people in your social sphere. It can be harder for older folks to understand this. I do not think it is coincidence that this is grabbing hold of teens and younger. It is a time of life issue, teen life experimentation. It’s their job. Rapid turnover of identity is what teens are about. It’s much easier to see item sales thru that light.

Gaia; Amy Jo has it perfectly right. All of our items are decorative.  We had one item sell on eBay (which we disallow) for $6000, a halo you wear on your head. It was rare. Rarity is one way to confer value… like a Zenya shirt.

Why do you dislike ebay?

Gaia: whether you are born in Atherton or the Bronx, you can get rich on Gaia. It’s core to us. So we are on the opposite side of Second Life. I think their direction is valid and successful, we just decided to keep the experience independent of the real world. We have 6000 items on the site, almost 7000, and you can only get them with gold from the site. Once a month we offer 2 items that are collectible, for $2.50, and only available this month. The userbase keeps growing, but these old items go up in value. Smart users learn if they use it, it is an investment over time. But we don’t make it obvious and easy. The other example I would give about value of decorative items… we were at ComicCon, had a virtual hat called OMG. It was popular, so we sold it for $2.50. Then we decided to make a real one, and sold them at ComicCon. A guy came over and was pulling out his cash. he said “it’s so cool I can finally buy this… I couldn’t get the real one, but at least I can get the copy… my mom wouldn’t give me the money when it came out…”

You sell functional items on Puzzle Pirates?

3Rings: yes, split is 50/50.  Most functional revenue comes from badges. To captain a crew, you need a captain’s badge. It expires in a month. And it costs $10. Puzzle Pirates is a skill-based game, so even if you buy a sword, if you are crap at swordfighting, you will still lose, so it doesn’t skew the game balance too much.

Byron: Just reflecting on psych literature, the distinction between decorative and functional, and true IQ vs social intelligence, etc — hopelessly confused. In the world they are very intertwined. They will be as such in the real world too. Ways to do both in the business plan is the way to go. The product categories, and two columns in the store, is something that could be reasonably hidden from users.

Gaia: Daniel, did you run into resistanc form users, where they said it was unfair to have those items? Cuse it sounds like you figured it out.

3Rings: This is not something we’ve been great at as a company, how you adjust your pricing. What I have heard from Korean colleagues, they see tweaking the numbers as a core part of the business.

Is that why the secondary markets start to occur? Price disparities from charged price to market value?

3Rings: Possibly. At GDC this year I ran a roundtable and some of the folks from Wizard of the Coast were there. Magic The Gathering has a secondary market and it is seen as sdriving the primary market — people buy more cards because they think they can flip the stuff. But most people then don’t actually sell the cards.

Amy Jo: If you are building an integrated MMO style world with levels and ladders and all that, the issue is very different than if you are building a social sandbox. You have game balance issues, it is much more complex. In a social game, the items will instead affect the social balance. You have to ask what you want to promote in your world –social interactions or what? At There, some stuff some could do and not others. You could get speical teleport powers. And there was hoverboards. We had turbo ones and regular ones. You paid extra for the turbo. That’s great unless you have an organized race and it’s unfair. So you have to have a mechanism to handle the events. But teleportation mostly didn’t affect stuff…unless we did a scavenger hunt with a prize. But usually, it was socially powerful but not affecting the game balance. Functional items can be fabulous, but you have to think about what game users are playing. And if it is going to affect things in a way which makes people bring their friends to the site.

Do users care about how is making the goods in the first place? UGC vs scarcity economy, do users care… in temrs of thinking about where you draw that line?

Amy Jo: I don’t think there is one answer to that. Different audiences will explor ein different ways. In Habbo the goods are made by Habbo, but they are Lego style, so there is a meta-level of content creation. Do the users care that they do not ge’t to make hairstyles? I don’t know. Also, it’s tiny and pixels, whereas in There it was textures, and people cared a lot about who made stuff — and given the audience, they were more excited about the butterfly wings made by someone than by the company stuff. They wanted user stuff because it was more ‘out there.’ That spoke to that community. The other thing we saw was a social dynamic. We had lots of events, people would go to parties, and 90% of the conversation would be “Oh, you got her new shirt?” Good content creators became celebrities in the site. But it’s all about who is the audience. In Gaia, where the audience is into roleplay, they would take well to UGC. Other communities, like Club Penguin, too muhc overhead.

Can you target that audience?

Amy Jo: we knew there woul dbe a strong female component. Lots of empty-nesters in the early days, and we didn’t get as many 20-somethings as we expected.

Gaia: It would be hard to elaborate more!  ut let me argue the dangers of UGC for moment. Quality is one. You hire artists and they make better stuff than the average person. The Long tail is cool in theory but only a small % is high quality. The second thing is that there can be a sort of chaos that hurts your brand, because it is confusing. If you are Disney, it would be a risk. Everything in Disney is coherent and all makes sense. The opposite is true of Second Life, which is a negative for some people, it can be overwhelming and confusing. In our case, we do have a very creative experience in our site, so users making things makes a heck of a lot of sense. We have a 16 year old girl who makes cheesecake slices for 50 gold, within the framework, with a sense of coherence.

If she can make the cheesecake, can she make the table?

Gaia: no, we are very limited in what we let people make. Short answer is, jury is out internally. Could they make that $6000 halo? That would be a problem!

Byron: Can the cheesecake be presented as somehow more genuine and spontaneous?

Gaia: we aren’t that organized and polished as a company ourselves, we were started by comic book artists, so I think we tap that authenticity. IMVU does a great job of high-quality user content, so it can be done.

Byron:  lots of tricks to make pro content that seems to be spontaneous in traditional media.
Amy Jo: I don’t think that will happen, because people on the net as really good at sniffing out bullshit.

Byron: I think it will be a big temptation to have pro content labelle as user content…

Amy Jo: resist the temptation!

A lot of folks in MMO world come out of the playerbase, become community folks… does that make them not part of the family? Anyway, let’s move on to audience questions.

I have an Everquest background… someone on the mgmt team had set up an NPC that you gave money to, and it returned more money. How do you handle or monitor for that sort of problem?

Gaia: it’s a huge issue, we are hard on it. The more success we have, the more problems we have… especially with folks in China gaming the system, earning the currency and selling it on secondary sites… we work hard to tell bots from humans…

Have you guys ever been a victim of someone generating ungodly amounts of virtual currency? And started devaluing your stuff? What is your strategy?

3Rings: I don’t think anyone on the panel has had that happen, but MMOs have. What you do… raph, UO had it?

Raph:  Every single major gaming MMO has… you delete currency, trace the transactions, suck it out.

Gaia: it’s a pain, but that’s right, that’s what you do. And that is why real money fungibilty can be really dangerous.

I work at SOE, and we have Station Exchange, where you can cash out for stuff you sold. Tracing stuff is hard — natural game event where we added a money sink? Or a dupe bug? And there are legal questions too. So cash in and out also opens potential laundering vehicles… it gets just far more complicated.