VGSummit2007: Virtual Goods Success Stories

» Paul Thind, Habbo
» David Wallerstein, Tencent
» Kyra Reppen, MTV Networks
» Min Kim, Nexon
» Justin Hall, Passively Multiplayer (moderator)

David Wallerstein, Tencent

Chinese net penetration is atill only at 10.5%, 35.2% wireless. Korea is at 73.5 and US at 69.3. Internet cafes are still the top means of reaching the Internet. (Shows picture). Everyone is using headphones. This user is using QQ. China is all about multitasking…

4000 employees, 30% is R&D staff. #1 portal in China. #1 IM provider in China – 254m active user accts. #1 blog site in china (62m active accts), 22% QoQ. #1 casual games portal, 3.2 peak concurrent users, rising 17% QoQ. Leading wireless player too. Our target demo is 15-34 yr old users. Net is about entertainment, not ecommerce, in China.

Traditional media is very regulated by the government, but the Net is growing as a space where you can experiment. Games are very important. People very interested in community and communication. In China people are very interested in naively meeting strangers, not like the US.

(Shows UI of QQ IM.) As you see, kind of a busy experience. Heavy avatar usage across the entire latform — full body avs of who you are chatting with. These carry thru the entire platform. It is like a portal, covering IPTV, games, etc.  Premium Instant Messaging is very popular in China. Extra storage for mail, photos, better iltering, security lock, etc. $1.25 a month (10RMB).

QZone is like CyWorld/MySpace.  Monthly sub + item purchases. All the background wallpapers, the icons, everything on the blog page is for sale. Typical item is 25 to 60 cents (2-5 RMB). Think MySpace, where you have to pay for every bit of customization on the page. You have to have the community first to pull this off… We make all these items ourselves– 10s of thousands of them. The whole widget thing is not popular yet in China.

Here’s an online store. Here’s an item for sale for 3 QQ, and if you are a member subscriber, you get a discount to the item to 2.7QQ.

QQShow is the avatar service. 20k items for sale in the shopping mall. Again, monthly sub + items.  QQPet service — they run around on your desktop. 54m penguins, RMB10/mo sub package, plus items, and you buy stuff for the pet like Coke. You can take it to shop, teach it, etc.

Games break into minigames (what we call casual). They are all client-based multiplayer games integrated with the IM. ACG’s or advanced casual games. They are like Nintendo games, like Mario Kart type. 306K PCU. Then MMORPGs. 212k PCU. Minigames, 48 games launched.

Does thi smake any money? Slide showing huge growth esp in 2006. Today ads are 10%, 65% Internet value-add services now, from 41% back in 04. Mobile is 25%. Ad market in China is tiny.

Kyra Reppen, NeoPets

Shows video of Neopets explaining the service. 400m registered users. Kinds spend more time on Neopets than on another other youth entertainment site.

MTVNetworks acquired NeoPets 2 years ago. MTVN’s mission is to superserve niche audiences, with deep emotional connections. Neopets had that. It is part of the Kids & Family group alongside Nick.com, Shockwave, etc. Kids, teen, tween, moms. Gaming is a huge driver in this audience. We follow the audience, and the audience is clearly going digital. Over 600m gameplays a month across those sites.

Launched in 99. 40m registered users, 30,000 avg daily new activated accounts. 11m avg monthly unique users. 300m monthly game plays. It’s in 11 languages.

Important that it is original.  It was made successful by listening to its loyal audience. And it’s rich in detail.

750,000 daily transactions in the NeoPets economy. Bank, Shop, Neohome, and NeoDAQ. What we hear from users is that it is like real life. There are 22m player-run shops. 250,000 Neopian millionaires, and 6 billionaires.

Audience wants fun, self-expression, social needs, and control. Virtual worlds service this audience with playing games, custiomizing, communication, etc.

Where we’re going: events, new site design, mini-shows, Neohomes , pet customization, and Neovision. We had events, but we have never marketed it, and now we will thru MTVN. We saw a huge lift — 20% lift in traffic. Neovision is a new broadband player where audience creates Neopets videos. Minishows launches on Nick this Saturday. (Shows a video of one — it’s done in Flash).

Business models:

• ads and sponsorshops has been our primary model, but diversification si v important for us
• premium subs
• licensing — merchandising, boutique till now. Announce din 08 we will do mass retail, and harperCollins for books.
• Virtual Items sales

Introducing new NCMall, partnered with Nexon. Complementary to Neopoints (no exchange). Launching with PayPal payment. More options for customization and expression.

Why do we think it will work? Because digital is “real life” for this audience. tech is invisible to them. he emotional connection makes the pixels go away. Users are demanding and buying digital entertainment experiences. Kids ages 6-14 have 60billion in income from allowance, chores, etc.

(Shows sneak peek of mall). Try before you buy…

Q: do you have expectations as to what the users will actually buy?

We’re looking at full outfits adding up to a cost — like $10-15 as a package. But we will be listening and learning as we go.

Min Kim, Nexon

I think Neopets is going to do really well. 🙂

(Shows video of Kart Rider, but it  doesn’t work).

Interruption: Nexon makes more revenue than Facebook and has lots greater reach.

One of the biggest online game companies. S Korea’s largest privately owned game company. Casual games leader, publisher, development. 1/3 of S Korea is player of Nexon games, 18m subscribers. First graphical MMORPG in 1995, Kingdom of the Winds. Pioneered item sales in late 1990s. $230m revenue in 2005, 85% from item sales. The rest was ads.

China, Japan, Taiwan, Thailand, Malaysia/Singapore, US, and Europe, via partners and licensing.

Shows pics of card games, Fortress, PangYa, Kart Rider, Mabinogi, Special Force. Special Force is making around $5m from item sales.

Bus models:

• No subs.
• No box.
• We take a loss when there’s a download.
•  CS, etc.
• All ofset by selling items.

BNB Crazy Arcade, released 2001. 700k CCUs in Sep 2004 in China. One of the first to make money from item sales. Multiplayer trapping other players in bubbles. Continues to make millions. All the bubbles cost money. This balloon costs $10. What does it do? Nothing. But when you play, instead of throwing the blue balloon, you throw this one. In the lobby, user icons are all decorated with upsells… expect for the lamer who looks boring. 🙂

During the game you can buy the neddle, which actually affects the gameplay — but most of it is aesthetic stuff, decorative.

It’s a service, not a product. Life of a user can be 3-4 years, some playing after 10 years.

Decorative items, functional items, and items that are both. Have to maintain a careful balance between the two. Functional might also be things like stat tracking for your character.

Decorative items samples from Audition: hair, clothing. Only 4 slots, plus skin tone.

Functional items generate high sale,s but you have to watch out for game balance. XP boosters, pets, money, lives, powerups, powerful vehicles, etc.

Why do people buy stuff? They look cool, showmanshiop, self-expression, competitive advantage, friendship, community. Bottom line, it enhances the game experience and it is meaningful.

Kart Rider case study. 15 subs, 25% of the SK population. 220kPCU in Kores in feb 2005. In closed beta here in the US, done really well. Primarily item selling, plus some product placements, co-promos, leagues, and in-game ads, PCcafe sales. “We sell more csars than BMW and Hyundai,”: 170k MiniCooper karts when they did the minicooper launch in Skorea. 20+m virtual cars sold.

There is game money earned in the game, and microcurrency. Most users do not buy stuff. What we try to do is have a clear divide between items you can buy with game points versus cash points. The game points keep the nonpayers in the game and increase retention for everyone. The longer they stay, the more sense it makes to spend real money.

Coke put Kart Rider on every single Coke can. And you can take the Cokeplay points and buy a balloon for their car, which when used and the race is won, the whole racetrack turns Coke-themed.

So, is this all only for Asia?

We brought Maple Story to the US. 3.5m registered users in Feb, getting to 4m now, 600k items sold, $1.6m revenue. More than half our audience is young w/o credit cards, and we just released the prepay cards, so we expect the number to climb. Audition is over 100k registered here. 50% female. And Kart Rider here showing good results.

Paul Thind, Habbo

It’s Midsummer’s Day in Finland… I am getting a lot of drunken text messages from there. 🙂

(Shows video of Habbo).

So it’s a youth brand, fastest growing teen community online. Habbo lies between Gaming, Communitcation, and Identity Creation. There’s elements of all of these. The core is really the user, and what our teens are interested in: music, pop culture, celebrities, music, pop culture, etc. An extension of that is community. If you nurture that properly, they will push your product.

What do teens do? make friends, see celebrity guests, meet people, see what others think is cool, be part of an exclusive community, self-expression, play games.

A lot of celebrity guests: Ozzy Osbourne, Ali Lohan, My Chemical ROmance, Ashlee Simpson.

24/7 moderation, silenot monitoring. 90% of revenue from users, not ad focused. Revenues are north of $60m. We sell more furniture worldwide than IKEA.

•  User profile: 49% male, 51% female
• 70% 13-16
• 86% students
• 1.7m uniques per month
• 117 unique daily, 7.5m uniques a month worldwide, 80m chars creates, 75k created daily

300 fulltime employees worldwide in 19 countries, and 200 of them are moderators. Also developed VMK and Coke Studios.  Started with Mobiles Disco, in 1999. Then a snow war gam. Then Hotelli Kultakala, then Habbo in 2001. 29 communities in countries.

Habbo homepages offer seamless integration of rooms to homepages.

Habbo Trax just launched this week, which user-generated music. A free sound machine. For a dollar you can buy loops. Then you have a loop based track editor.

Bottom line: focus on the community.

Panel session

What percentage of users buy stuff?

Habbo: we don’t release the info, but it’s a minoroty.

Nexon: If you did anywhere from 5-10% you’d be doing good.

Do you see a percentage breakdown of gifting vs customization?

Nexon: we don’t have gifting in the States. But in games it’s a mix of both. In Asia gifting is a very big portion — gifts of customization. I think Cyworld is the same thing…

These are all global businessess. What % come from English-speaking countries, and what are the growth opportunities?

Habbo: 50% come from English-speaking. Growth opps are in the markets themselves not being developed enough.

Nexon: The US becoming a big market in terms of money, but pop numbers, well,China is just huge. But US is important revenue-wise.

Tencent: 99% of our users are in China, a few 100k in US. We will be launching more here tho. But the users are very different in China vs US in terms of purchasing power, but we see huge willingness to buy there. Here the common notion is that stuff should be free. The potential here is tremendous though. It will happen, just fundamental.

Nexon: I think a lot of folk are ready just don’t know it– ringtones, MySpace, etc, doing it without knowing it.

Tencent: start encourgaing your kids to buy stuff online. 🙂

You don’t use widgets, you inveted your own. So may folks here plan to be on your sites. But if each of you are central bankers and keep it closed, how do you balance open web 2.0 with the tensions of keeping control?

Neopets: it’s really about the business models and where it goes. there will definitely be opportunities to partner, where it makes sense. But it’s going to be an economics question.

Tencent: it’s becoming more interesting as we think about the US, bc China is on a different growth path — clients are very popular and totally accepted there. Whereas here, it’s about ajax and tags. We can bundle things with our clients, and to integrate you would have to integrate into our client. There is a lot of online fraud, so we do not let others trade our QQ coins. Fraudsters put up sites saying “we now support QQ coin” to phish for passwords and then clean out people’s accounts.

Nexon: for us widgets would be games. Outside of that, we wouldn’t do it.

Habbo: control is important. We only allow teens to spend a certain amount of money, even. Very important to keep the community — and importantly, the parents, happy.

Can you talk about the mechanics of accepting payments? Esp for those who target younger communities? You also mentioned that you separated cah from points, why?

Neopets: it’s important to separate so that you can’t unbalance games, or unbalance economy through playing the games. It is an ongoing battle. In terms of enabling youth to buy… it is challenging. They ask a parent to spend the money. PayPal has more barriers to entry, whereas prepaid cards give a retail venue to bring the parent to. We are going to need more opportunities here. The more parents get used to this, the easier it will be. ITunes is a great example.

Habbo: accessibility for teens is key. With us, 7 years of integrating 150 payment methods in 29 countries.

Nexon: really impressive figures there. As to why to split the two sorts of currencies… you don’t want to mix the game items and the customization items. People are getting used to this model…

How are teens in China and Korea paying, on cellphone bills? Will there be friction in the US market for that?

Tencent: In China we had to build the payment platform from scratch back in 2000. We had a huge userbase and no ad market. Very low credit card penetration in China too. So we partnered with mobile and more importantly fixed line telecom operators. (They take a very hefty commission!) But they get the fees paid to us, and it’s a great business for them too. Very easy — pick up phone, dial a special number, fee-based number, and by punching in stuff, you credit your account, it goes on your phone bill. Looks just like a long-distance charge. The mobile operators don’t like us to charge for virtual PC products on mobile, just forthe mobile items. 🙂 We use prepaid cards too.

Nexon: Habbo has done a lot with SMS. In the US rates need to come down.

Habbo: think about your payment network when you launch! Customers tend to be loyal to a payment method. We do SMS in the US now.