Can Virtual Currencies Help Bridge The Gap Between Free And Paid Content?

Virtual goods in Second Life

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.

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