Back in June, a TV investigation in the UK revealed how the Habbo Hotel virtual world was being used by sexual predators to groom kids for abuse. Investors fled and retailers wasted no time in pulling Habbo Hotel gift cards from their shelves. Sulake was in big trouble.

Then, a month ago, the company released the Habbo API, which it said would allow developers to launch their socially-enabled games on what was to become a platform in its own right. The API is still only available to Finnish developers – it will open globally in November – but a blog post on Monday from Sulake CEO Paul LaFontaine showed the platform approach was going to be the only way forward for the firm:

“Habbo is going back to its roots. It has always been a place to meet and enjoy time with friends. We are going to focus specifically on the features and services that makes finding new friends and sharing with old friends enjoyable. This means new features, fresh themed entertainment and a variety of games […] The Sulake organization will be restructured to better serve the community needs.”

Sulake employs around 130 people around the world – 90 of them are based in Finland, and up to 60 of those people are now for the chop. Redundancy consultations have begun, and may take up to six weeks.

According to LaFontaine, the move is necessary in order for Habbo to focus on its new core strengths.

“We have to become more lean and transition the business into what it’s really good at; that is, the friendship features inside Habbo and the moderation features for keeping it safe,” he told me.

Hopeful reinvention

As I recall, it was a lack of effective moderation that led to Habbo Hotel’s downfall in the first place, allowing the service to be used for highly age-inappropriate communications and worse. But anyway, LaFontaine reckons this is the type of core service that Habbo will be able to offer third-party developers who want to target the 13-19-year-old age bracket.

Specifically, Sulake will manage the apps’ social features, virtual currencies and discovery.

“We’re now able to give a really good launch platform for games and other entertainment applications,” he said. “Last week we launched a game – one third of users of the site trialled the game on the weekend. When you can deliver that to a developer, that’s a great partnership. A small developer can launch on Habbo and be live in 12 countries and have global monetization capabilities right out of the box.”

Four games are apparently already running on the platform. As for expansion, LaFontaine said Habbo would not be a platform that’s “flooded with hundreds of games”, but would rather stick with what proves to be successful.

“We’ll bring a game in, giving it great initial traffic and then rotate it in or out based on merit,” he said.

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Earlier this week a report by the U.K’s Channel 4 News alleged that Habbo — a cute, blocky isometric environment which lets young users chat to each other — had become a haven for pedophiles, pornographic chat and inappropriate content. It also accused the site of knowing about the sort of activity that was taking place but failing to do anything to stop it: an image totally at odds with the site’s family-friendly style.

That led to venture capital Balderton, which had been an investor in Habbo’s parent company Sulake since 2005, to return its shares in the company and shut the door on the business. And now the company’s largest shareholder, 3i, has followed suit.

The Daily Telegraph reports that 3i will be cutting the cord:

3i, which has a 16 per cent stake in Habbo, said the revelations were “challenging” and announced it would be resigning from the site’s Finnish parent company Sulake.

In a statement, 3i said: “3i has actively supported the Sulake board in determining the right course of action in these very challenging circumstances.

“Following a board meeting today, we have resigned our board position and will cease to be a shareholder in the company.”

That boils down to nearly 30 percent of shares being ditched by investors, although it’s not entirely clear whether 3i and Balderton had effectively given up on the investment already, since Habbo has been struggling to make money for some time. Given that 3i gave up on venture capital entirely in 2010, the investment is unlikely to have had many defenders inside the company.

It seems that the decision by Sulake CEO Paul LaFontaine to mute all conversations across the site — effectively turning off all chat and putting the world on life support — was not enough.

No doubt 3i’s decision was also influence by the fact that a troika of British retailers have also taken a stance against Habbo, with chains Tesco, WH Smith and Game all deciding to pull the company’s gift cards from the shelves. Although it may not entirely kill off the company’s user base, it’s starting to look like it could have dealt a crippling blow to the business.

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Why do campaigns like these work where others have failed? I discussed that at a presentation I gave at the Web 2.0 Expo this week in New York. Here are my main reasons, packaged into three tips for future marketers:

Worlds With User-Created Content Are Good Marketing Venues:
Habbo Hotel from Finland-based Sulake Corp. reports strong results from its marketing of real-world products, primarily those associated with pop stars and TV/movies. Jeremy Monroe, Sulake’s North American director of marketing and business development, attributes this success to Habbo’s open-ended, creative game play. “At its core, Habbo is about social interaction, having fun building a world for self-expression and creative experiences,” Monroe told me. “Products…that exemplify these traits or can add to the existing sandbox of user-generated content game play are a great start.” (While Second Life is entirely user-created, its most notoriously unsuccessful marketing campaigns failed to leverage this aspect of the culture.)

Market to the Web 2.0 Ecology Around The Virtual World:
Because virtual worlds are by their very nature dynamic and synchronous, a tremendous amount of activity related to them actually takes place elsewhere, in the Web 2.0 content-sharing ecology — screenshots sent to Flickr, machinima uploaded to YouTube, blogs and conferencing systems where users discuss their latest experiences. In Gaia Online, for instance, 30 percent of user activity occurs in the site’s messaging boards compared with 10 percent in the virtual world itself. To capitalize on this for the Scion campaign, Gaia VP Joe Hyrkin told me, they offered Scion-branded “driver’s licenses” that Gaia users could add to their forum signatures.

Serve Existing Community Needs:
With Second Life, new users enter a strange, overwhelming world without many objects in their inventory, and are usually too intimidated to talk with the locals. To serve this need, the agency behind a promotion for IMAX created “buzz agent” avatars who cheerfully engaged “noobs” in Second Life’s Welcome Area, offering them tips on using the interface — all while handing out “Harry Potter” memorabilia and directing them to IMAX’s retail site.

Of course, while these success stories might encourage marketers to take a second look at Second Life and other virtual worlds, the metrics of success still haven’t been agreed upon. That’s why many are eagerly awaiting a Forrester Research report that will try to define and standardize virtual marketing ROI. So am I. Stay tuned.

Disclosure: I gave a single paid speaking appearance at Gaia Online about my Second Life book.

Image: Gaiaonline.com

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But why incorporate all those Web 2.0 streams into a virtual world? I put that question to Mitch Olson, co-founder of Outsmart, the New Zealand developer behind Small Worlds.

“We wanted to create a virtual world that engendered emergent properties and behavior,” Olson told me. “Emergent in the sense that novel and sometimes unexpected results are created out of a
multiplicity of relatively simple interactions.” They plan to publish the first of their APIs in coming months, he added. “[U]sers should expect to see a lot of Web 2.0 widget and game content in general.”

SmallWorlds is expected to launch commercially in August, at which point they’ll offer upgraded “premium” accounts at $5.95/month; they plan to bring in additional revenue through advertising and virtual item sales. As such, they’ll debut in a highly competitive field, going up against Metaplace from Raph Koster and Whirled from Three Rings, both of which have a similar, web-based MMO angle, and are expected to hit the market soon. Indeed, SmallWorlds is about to enter a big world of casual next-gen gaming.

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