Virtual goods have been used extensively in Asia for years, but are now coming into their own as a business model in the U.S. With that growth comes media attention — including articles like today’s piece in the New York Times, “Virtual Goods Start Bringing Real Paydays“. The entire thing isn’t awful, but I have to take the journalists to task for a few pieces of idiocy:
1. The lead sentence: “Silicon Valley may have discovered the perfect business: charging real money for products that do not exist.“
Excuse me, Claire Miller and Brad Stone, but what exactly do you think all software is? Or any business based on intellectual property rather than physical manufacturing? I know that sensationalism brings readers (witness the phenomenon of Glenn Beck), but really now…
Of course, while I might protest, I also know this is how the media works: fan up hype on a new tech, and then wait to tear it down.
2. “Analysts estimate that virtual goods could bring in a billion dollars in the United States and around $5 billion worldwide this year — all for things that, aside from perhaps a few hours of work by an artist and a programmer, cost nothing to produce.“
Wow, once again in one sentence they manage to insult every non-manufacturing-based profession. Replace that with: “The legal services market is estimated at $250 billion worldwide – all for things that, aside for a few hours of work by a lawyer or paralegal, cost nothing to produce.” Okay, maybe that’s a bad example since people love to resent lawyers! Insert entertainment and media, advertising, banking, and huge swathes of technology, tourism, healthcare, hospitality, etc etc
Never mind that you not only need to pay those “artists and programmers”, but you have to design, create, market and support a game or online community that has millions of users and effective virtual good compulsion loops. I’m not saying that the margins cannot be very good for the winners, but that in itself is not unique (cough: Google, Microsoft, etc).
3. “For outsiders, the selling of virtual goods — items with no actual value in the real world — might seem the very definition of a swindle.“
OK, this one I don’t blame the journalists for because it is true; there are people that simply have a hard time understanding what it means to pay for something intangible because they’ve never really examined what it means to pay for things like software, movies, music or anything experiential. Maybe if they received a cardboard box in the mail every time they bought a virtual good, these people would feel better. Then they can be idiots AND bad for the environment.
The journalists do have a good quote on exactly that from a Pet Society player who says, ““It’s an experience, like going to the movies.” They do also quote Moshe Koyfman over at Spark, saying “It’s not about the good itself, it’s about the underlying human emotion or desire.”
But I’ll blog my dissatisfaction anyway. 
<3% Conversion
For those actually in the social games space, the data point to note is the stat from Zynga that less than 3% of users buy virtual currency/goods. That is lower than many virtual worlds and MMOs, but not surprising given the scale and nature of social games (which should also have lower infrastructure and support costs than virtual worlds/MMOs). (here’s some information on historical ARPU levels)
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Giff – been a long time, it was pretty awesome to stumble across this post thx to a tweet by eric ries and see that you and i are on the same page on this topic!
Scott, how nice to hear from you. It *has* been a long time since Trilogy days. Thanks for comment
Giff– well put. It's clear that industry insiders have a better grasp of the nuances than journalist that have to cover all things Internet. Not exactly fair to mainstream publications, but what are they to do– employ experts in every arena? They are counting on their sources– and former spammers like me aren't exactly talking to the press but on rare occasion.
Of course they have to rely on sources, but these are smart journalists who understand how to research a story. Agreed no journalist is ever going to understand the complexities of a market because they have to be broad & shallow across many sectors, but these aren't amateur hour bozos. They thought this spin would play well.
Hey Giff, nice rant. But to cut Brad and Claire a little slack (yes they should know better), my guess is they mis-communicated the intent of what they were trying to say: It’s about the value proposition.rnrnI have talked to many people who don’t understand why anyone would pay for a virtual item and in fact are very judgmental about those that do. Sadly, most of these same people have never used the products that sell virtual goods and have misinformed opinions.rnrnPhysical goods have a value proposition that virtual goods/electronic delivery have yet to achieve for the mass market. That’s the chasm that needs to be crossed. That is changing and is probably being led by the masses with downloaded music which is now the preferred way to enjoy the music experience. rnrnBut the music consumption experience is significantly different and supports the growth and acceptance of digital downloads. Users are able to listen to that downloaded music via various devices on their terms (mobile device, car, home, etc). That convenience makes it ok with downloading it and never touching the physical media. The value proposition has been transferred from owning of a CD to the convenience of portability and not storing physical goods.rnrnWhen the virtual hat is transportable and available on the users preferred device of the moment, we’ll have broader mass market acceptance of virtual goods sales. The silos of virtual worlds and experiences selling unique goods specific to their products with unique virtual currencies will continue to impede the broader market acceptance. rnrnI’m confident this will be solved – just a matter of time.rnrn
Hey Giff, nice rant. But to cut Brad and Claire a little slack (yes they should know better), my guess is they mis-communicated the intent of what they were trying to say: It's about the value proposition.
I have talked to many people who don't understand why anyone would pay for a virtual item and in fact are very judgmental about those that do. Sadly, most of these same people have never used the products that sell virtual goods and have misinformed opinions.
Physical goods have a value proposition that virtual goods/electronic delivery have yet to achieve for the mass market. That's the chasm that needs to be crossed. That is changing and is probably being led by the masses with downloaded music which is now the preferred way to enjoy the music experience.
But the music consumption experience is significantly different and supports the growth and acceptance of digital downloads. Users are able to listen to that downloaded music via various devices on their terms (mobile device, car, home, etc). That convenience makes it ok with downloading it and never touching the physical media. The value proposition has been transferred from owning of a CD to the convenience of portability and not storing physical goods.
When the virtual hat is transportable and available on the users preferred device of the moment, we'll have broader mass market acceptance of virtual goods sales. The silos of virtual worlds and experiences selling unique goods specific to their products with unique virtual currencies will continue to impede the broader market acceptance.
I'm confident this will be solved – just a matter of time.
Thanks for the comment David. Here’s my take:rnrnPeople paid for digital music before it was portable. It just wasn’t crazy because… it was paying for music, which has long been done… just like paying for a paper greeting card, or paying for a movie, or paying for Adobe Photoshop… all seem normal because they’ve been around a while, when actually these things really aren’t that different. That’s the root of my rant, although the “just a few hoursof work by an artist and a programmer” quote is also pretty ridiculous.rnrnIn many cases, virtual goods are just a different way to self-meter how to pay for an interactive experience you like. It’s not the good itself that has value, but the experience.rnrnPeople don’t have a problem with someone paying a subscription, but get all snarky when someone buys a virtual sword or hat. You could argue that the main difference is that the virtual good method enables personalized pricing / spend. In both cases, someone is just paying for a game they really enjoy.rnrnSo I hate the knee-jerk, thoughtless, judgmental attitudes. They might be very *human* and normal but that doesn’t make them not *stupid*.
rnrnI don’t put a lot of weight on portability of virtual goods because their value is created within the context of an experience (game or otherwise). A virtual good totally untethered from a great game experience probably has extremely poor compulsion behind it. Until there is a metaverse where portability of identity and look (visual self-expression of self) is relevant, and I don’t think that’s happening *anytime* soon, portability isn’t that relevant.
Thanks for the comment David. Here's my take:
People paid for digital music before it was portable. It just wasn't crazy because… it was paying for music, which has long been done… just like paying for a paper greeting card, or paying for a movie, or paying for Adobe Photoshop… all seem normal because they've been around a while, when actually these things really aren't that different. That's the root of my rant, although the “just a few hoursof work by an artist and a programmer” quote is also pretty ridiculous.
In many cases, virtual goods are just a different way to self-meter how to pay for an interactive experience you like. It's not the good itself that has value, but the experience.
People don't have a problem with someone paying a subscription, but get all snarky when someone buys a virtual sword or hat. You could argue that the main difference is that the virtual good method enables personalized pricing / spend. In both cases, someone is just paying for a game they really enjoy.
So I hate the knee-jerk, thoughtless, judgmental attitudes. They might be very *human* and normal but that doesn't make them not *stupid*.
I don't put a lot of weight on portability of virtual goods because their value is created within the context of an experience (game or otherwise). A virtual good totally untethered from a great game experience probably has extremely poor compulsion behind it. Until there is a metaverse where portability of identity and look (visual self-expression of self) is relevant, and I don't think that's happening *anytime* soon, portability isn't that relevant.
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