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Virtual goods and micro-transactions have been driving the billion-dollar online games industry across Asia for years. And deals like EA’s $…

Virtual goods in Second Life
photo: moggs_oceanlane

Virtual goods and micro-transactions have been driving the billion-dollar online games industry across Asia for years. And deals like EA’s $400 million buyout of social gamer Playfish, and Activision’s new virtual pets addition to World of Warcraft, show that virtual currencies have now evolved into a viable business model for big gaming companies here in the U.S.

But virtual currencies aren’t just helping game companies make money — social networks like Facebook and Hi5 have developed their own virtual goods businesses, in an effort to monetize their millions of users in a way that display ads just haven’t been able to.

The widespread adoption has also created a real market for tech companies like LiveGamer that can power all these transactions, and even get kids in on the action by offering payment options that don’t require a credit card (or parental consent). So if virtual goods can help social networks make money — what about online publishers? paidContent talked to a group of investors and startups currently in the space, to figure out whether virtual currencies can help support the U.S. online publishing market overall.

The right economic climate: Though some ad forecasts, earnings reports and statements from execs are pointing to an online ad market rebound, investors like Warren Gouk, managing director of Cascadia Capital, and Rick Heitzmann, managing director of Firstmark Capital, say that the ad model for online publishers has changed — permanently. “The economic environment we’re coming out of had a negative and profound effect on the way publishers generate revenue,” Gouk said. “They lived and died based on display ads; now they’re being forced to diversify.”

As we’ve reported, diversification means testing out things paid iPhone apps or trying to raise subscription pay-walls. Heitzmann says subscriptions aren’t the most viable option — simply because a majority of people still don’t place a high enough value on the content they consume online — but also because many are concerned about job stability. “People want to pay a dollar for a chunk of content when they want it, not sign up to pay $10 per month for the next 12 months,” Heitzmann said. “That makes the case for a micro-payments or pay-as-you-go plan.”

Getting people to pay in increments is easier than you’d think: Second Life is not the media darling it once was, but the virtual world remains the prime example of a successful virtual currency here in the U.S. In Q3, parent company Linden Lab said it processed $150 million worth of peer-to-peer transactions, up 54 percent year-over-year. IM and chat-based virtual world IMVU said it doubled its revenue this year — from just under $3 million in Q308 to over $6 million in Q309 — and achieved profitability, mostly through “increasing the sale of virtual currency,” said CEO Cary Rosenzweig.

But virtual currencies — which, broadly defined, are online payment systems that let people trade real money for intangible items — don’t have to be tied to an immersive world. Gouk notes that TV fan community Buddy TV recently added a virtual goods platform, letting its visitors send TV show-related gifts, like a rose from The Bachelor, or a kiss from *Meredith* on Grey’s Anatomy; that’s in addition to its main revenue stream of display and video ads.

Readily adaptable payment platforms already exist: Spending money to promote, set up and manage a virtual payment system is not something that most online publishers want to do, so it helps that there are a slew of white-label payment platforms available. eBay (NSDQ: EBAY) just launched PayPal X, an open-source e-commerce platform that lets developers build multiple payment options into their apps.

A publisher could partner with a startup like Cash.io or Spare Change to add a PayPal X app to their site, and start charging for specific articles, reports or videos. The PayPal connection means that readers wouldn’t have to enter credit or bank account info; publishers could let them make a one-time payment for a bulk amount of virtual currency, then buy content at their leisure. “You’re starting to see these virtual payments capabilities show up on sites from traditional publishers like Hearst, Conde Nast and Scripps,” Gouk said. “It’s exposing this niche way of paying for things to a mainstream audience.”

The success of the Kindle has shown that people will pay for content that conveniently comes to them, so offering pay-as-you-go mobile access via branded currency is another option. Companies like Zong, Nokia-backed Obopay and oneTXT have platforms that let people pay for, then download content to their phones. “None of these companies really has the scale yet to make this attractive to a major online publisher,” Heitzmann said. “But I suspect that *Apple* is already working on a mobile payments platform that goes beyond i-Tunes.” *Amazon* too, as it recently partnered with mobile content provider Handmark, to let people buy mobile games and apps through their Amazon (NSDQ: AMZN) accounts.

Future acquisitions and investments: Both Gouk and Heitzmann said they expect to see increased M&A activity in the virtual payments space. Gouk suggests that we’ll see deals like AdKnowledge’s buyout of KITN Media, parent company of SuperRewards. “There is a push to create a broader sort of ad network that can collect intelligence on actual purchase behavior, then use that to serve more targeted ads,” he said.

Heitzmann is more bullish on the gaming side — look at Hearst Interactive’s investments in casual games site VoxPop and China’s I Got Games (per ISG), for example — as he says that online publishers want to see the virtual goods model pay off incrementally before launching a site-wide platform.

  1. Old media cannot adapt to a virtual currency model due to being rooted in a position of privilege instead of talent.

    Virtual currency will put the consumer in charge of determining what content matters as they vote with their debits for certain content.

    How will Rupert Murdoch respond if the consumer want to pay-to-read more liberal articles in the WSJ when he want to push a conservative agenda?

    How about you tech bloggers who want to push your tech friends in your dailies but find out your consumers are using their virtual dollars to buy paid content about people other than your tech friends?

    The bottom line is the current style of entitlement/privilege editorial cannot handle the truth of consumer raw demand for certain type of content and the old media will stick to trying to control the propaganda until they are replaced by a true content delivery model unbiased by editorial control…

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  2. @ed I think that the media co's are being forced to shift and try diff't things now, as they've watched the record industry fumble and almost die.

    That doesn't mean they'll magically all adopt virtual currencies, but the ones that do try it, and see real revenue growth, will think about making it a permanent option.

    As for being a tech blogger — I don't push any of my "friends'" companies in stories. If I try a product or service and genuinely believe in it, I would report it that way. If I like a product, but see where it can be improved, or where the revenue model has holes, I'd also report that.

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  3. I do not see old guard media making this kind of leap and I believe they are too scared of the inevitable outcome.

    It would be frightening to find out a senior veteran columnist can't sell more than 500 articles a week from virtual currency while some writer fresh out of college sells over 200,000 due to consumer demand.

    No one at a tech company cares if 80% of their customers want to buy their avatar pink turtlenecks but an editioral board does care if the customer want to buy content that clashed with their bias and direction such as pushing a conservative/liberal agenda. That is the rub.

    I only see a scenario consisting of new breed intermediary content aggegators using metrics to determine what kind of content consumers are paying for and use this data to fulfill consumer demand.

    Once the content aggregators involved into demand fulfilment, the editorial board at these independent papers will seal their own fate, just my 2010 prediction.

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  4. i suspect you missed an important point, http://www.virtualgoodsnews.com/2009/11/bodega-lets-gamers-cash-out-virtual-currency.html

    bodega launched the first marketplace to enable users who paid for or earned virtual goods the place to trade them…

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  5. @Mark Interesting post, though the cashing out and trading of the currency is more applicable to the virtual world or game model, than it is for online publishers.

    That's why I tried to focus on virtual currencies — as opposed to just virtual goods.

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  6. Greg Golebiewski Thursday, November 12, 2009

    I have to add, Znak it! (www.znak-it.com) was developed JUST to do that: to help content providers monetize their offer without the need to develop their own payment gateways or costly system integration, and still be able to get up to 94% of the revenues the content generates.

    We created the system two years ago — a way ahead of the current debate — and presented at the Web 2.0 Expo in SF, Digital Innovators' Summit in Berlin, and many other places.

    Perhaps, we were too early, too innovative (the Znak it! idea originated during one of these all-gets-in creativity workshop by Idealab) , and too disruptive for the community; at that time the add-networks and SEO were kings — not the content, as it should be. But I am glad to see that this is changing. Even paidcontent.org have finally noticed that virtual currency CAN be a way to pay for online content ;-)

    Maybe one day we all will simply Znak it! or Znak as we surf the net, instead of searching for the wallet and the credit card number, dialing who-knows-whom to get yet another PIN, or being bombarded by unwanted ads and Secret Crush scams.

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  7. Jott Assistant has had that type of bulk virtual currency for some time. http://jott.com/jott/jott-assistant-signup.html ("Pay-as-you-Go" plans allow you to buy chunks then use it at your leisure). Much less of a commitment than signing up for a monthly plan. I would guess that most Jott users buy those chunks.

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  8. Try to think that virtual currencies *can be valued* higher than for just virtual goods for games.

    At all levels, we buy into the concept of virtual currency. Look at airline miles, hotel points, etc.

    At Embee Mobile, we are converting our currency (Embee Minutes) from Facebook into real goods and services. You can find out more info about our app: http://apps.facebook.com/mobilewallet?ref=22

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