AdAge today asks “What’s saving the current crop of virtual games from becoming the next Second Life?”, with their answer being game dynamics. I am a huge believer in the power of creatively designed incentives and game-like compulsion loops, but I suspect enthusiasm for badges, levels and points have hit “fad” and “over-reliance” territory.  Foursquare, for example, used gaming very effectively to harness the enthusiasm of early adopters, but to grow to mainstream audiences they need to expand the value proposition beyond mayorships and badges.

I was particularly struck by a quote from Keith Lee of MyTown:

Keith Lee, CEO of Booyah and creator of MyTown, argues such services are not bound for the fate of Second Life because of their competitive aspect. “The difference is that there was no higher level engagement or depth,” said Keith Lee, Booyah CEO, of Second Life’s popularity decline. “It never gave long-term value to users. Our DNA has been long-term value. In this case, it’s real-life benefits and opportunities to do things with friends.”

First, Second Life has not actually seen a popularity decline. The marketing/advertising world holds that opinion because of the 2006 hype and corresponding 2007 backlash, but Second Life has actually grown in size and has incredible engagement from a very enthusiastic user base.  Second Life is only a “failure” when compared to over-inflated expectations (and I was one of the people with over-inflated hopes, that is for sure).

Second, I’m having trouble reconciling “long-term value” with MyTown.  It is relatively easy for games to become popular, but difficult for them to sustain engagement.  The greatest strength of Zynga and Playfish was their ability to cross-promote and constantly move their players from one game to another when interest started to flag. If I had to make a bet on the long term usage and value of MyTown versus FourSquare, I would choose the latter.

Over the last few years, application designers have expanded their horizons in very good ways by learning about game dynamics.  I think designers will struggle to mesh *entertainment* and *utility* as motivators, but I do believe that a positive synthesis can occur.  However, there is a fad underway and we have not yet hit the apex (there is an inevitable implementation lag). That in itself can hurt the efficacy of these approaches.

Game dynamics are not an end-all-be-all solution for everything but rather an interesting way to engage early adopters and increase conversation rates for your intended activity. Long term retention requires a more solid underlying value proposition, so don’t lose focus.

Related

• if you are interested in learning about game dynamics, I highly recommend following Amy Jo Kim (Twitter, Slideshare)
• my overview post on virtual goods (on motivations and compulsions) (Sept 2009)
• great video from Jesse Schnell in Feb 2010 at DICE: Design Outside the Box

Virtual goods have finally been legitimized as a revenue model, rather than a niche (even weird) activity ignored in favor of advertising. Now the concept is spreading beyond its game / virtual world roots, and we’re seeing large numbers of companies trying to figure out a “virtual goods” strategy.

While I believe very strongly in virtual goods as an effective business model, I also think the number of folks trying to get a piece of the market will outstrip the total share of wallet possible. We shall see attempts at virtual goods revenue streams put into place without a clear understanding of the compulsion loops and triggers that drive spend.

I’ve been meaning to write a longer post about vgood compulsion loops for a while now, but time has been limited so I’m just going to start with a few bullet points. If you are thinking about a virtual goods business model, it is worth cross-examining your design against these concepts.

And what do I mean by “virtual good”? Within the context of games and virtual worlds, it is most commonly thought of as a discrete digital item upon which a user/player can exert some level of control, even if temporary. Examples include simple 2D pictures (ex: current Facebook gifts), 2D or 3D avatar or interior design accessories (ex: clothing, animations, furniture), and game pieces (ex: swords, armor, food). They can be functional or purely visual. For the purposes of simplicity, I am also going to treat digital currency and “activity points” as virtual goods.

The Right Environment
Virtual goods businesses don’t work well for hit-and-run or extremely lightweight experiences. They thrive with a game or service with one or more of the following:

• Repeat visitors (high re-playability)
• A sense of community
• A reasonable level of social or gameplay complexity

Purchase Motivations

• Competition: you want to beat others, you are tired of others beating you, or you have strong self-competition and a desire to be the best, thus you purchase virtual items if it clearly helps you achieve that goal
• Impatience: this manifests in two separate ways — the first is a clever use of “activity points” that forces people to pay more to keep on playing (i.e. feed the addiction – this is an example where customer irritation tied with desire leads to opening the wallet); the second is a desire to accelerate progress to “elite” status (tied to competitive motivations).
• Self-expression: often related to aesthetic rather than functional virtual goods (but not exclusively), this ties into the human desire to show off a sense of style / identity / personality, show off an affiliation with a group, or demonstrate a loyalty to a celebrity of some kind
• Gifting: gifting is a strong motivator if you have a definite community (or lots of small sub-communities) — where humans seeks to foster relationships.  As everyone knows, not all gifts are equal, so in a world of free/commodity items, motivated gifters will seek out a more valuable form of expression, either through money or through time (spent earning or creating the gift)
• Entertainment: this seems to appeal more to the female demographic, but shopping (especially if there is a social feedback loop) and/or collecting (especially if there is an overlay of social cooperation or competition) can be strong forms of entertainment

There are two approaches to building a virtual goods business: you can slap them on top of your experience and hope people buy, or you can design the requisite compulsion / motivation drivers into the core fabric of your experience.  The latter strategy ensures a much greater chance of success.

My last post commented on GamesBeat’s articles from Casual Connect, which touched on the challenges old casual game leaders are having with the new world of social games / social networks.  Inside Social Games just posted about PopCap bringing Zuma to Facebook (as well as letting players use Facebook Connect on their own site).

A quick look and you can see some of the major differences to the games coming from Playfish and Zynga: 1. PopCap is not effectively cross-promoting other games in the header (or a sidebar); 2. the game’s only monetization path is through display advertisements (in this case, served by Google).

PopCap has also not copy-edited the marketing language below for the Facebook “Allow Access” screen, not a good sign.

PopCap is known for designing great games, so I think most people are assuming they are going to adapt successfully to this new world.  Porting over old hits is not going to be enough, although those games should be quite effective as “loss leaders” pulling in traffic so that PopCap can cross-promote new games with better monetization and compulsion built in.  It shall be interesting to watch their next moves.

Casual Connect just took place in Seattle and Dean Takahashi over at GamesBeat has done a great job capturing some of the trends in this part of the games world: Part 1 and Part 2.

Some of the most interesting quotes:

• Social games might hit a half billion in revenues this year. In 2007, before a price war began, casual games were an estimated $2.25 billion industry. … In the past year, the “try before you buy” model collapsed.
• Playfish has 8 million daily active users, has raised $21 million, has 200 employees, is profitable, and doesn’t spend money on marketing
• Playdom, which is the leading social game company on MySpace, has 75 employees and is expanding to 200 in the next four months, if it meets its hiring plans. … Zynga is already at 350 employees and contractors, and still hiring aggressively.

While a lot of attention is paid to the relative ease of distribution on the social networks due to viral capabilities that come with those sites, and which are cleverly designed into the games themselves, I do not see journalists paying proper due to the cross-promotional power that Zynga and Playfish have created.

Every time a player engages with one game, they are exposed to the rest of their games through cross-promotional toolbars. I believe this plays a huge role in why Playfish and Zynga’s new games leapfrog to the top of the charts, and it is of course why these companies have become attractive venture capital investments, because the cross-promotion power takes a lot of the risk out of the publisher model (i.e. you’re not simply relying on good design).

I also strongly believe that the microtransaction (virtual goods) business model plays a big part as well, as it not only allows players to get hooked for free, but it is essentially a personalized pricing model, i.e. every player sets their own level of “value” (often as impluse purchases), and this has expanded the overall market size.

Justin Smith had an interesting slide deck at the Social Games Summit where he shared his estimates for monthly ARPUs (average revenue per user):

• “good Facebook” – $0.30 – $0.40
• “good MySpace” – $0.60 – $0.70

Some games can do much better. The Facebook game Battlestations shared some data in late 2008 where they appeared to have around a $1.00 ARPU, although their total user base was much smaller than the active player counts of the big Zynga or Playfish games.  Three Rings Puzzle Pirates, a virtual goods-based game outside of the socnet platforms, has reported getting a monthly ARPU of around $1.50.

I had been guess-timating an average social game figure of around $0.25, so was glad to see that the industry is hitting better numbers.

Within the virtual worlds space, there is quite a range.  My guess for Habbo Hotel gives them an ARPU of around $0.65 (based on a few data points: 2008 revenue of $74M, growth of registered users from 86M to 126M, and a guess that their monthly uniques grew from about 8M to 11.5M over the year).  Smallworlds disclosed that they were on track to hit a $1.40 ARPU. For IMVU, I estimate an ARPU of $1.62 (based on registered users of 35M, an active-to-registered ratio of 3%, and $1.7M monthly revenues from virtual goods).    Second Life (which Jeremy Liew estimated at $9.30) and the more “hardcore” free-to-play MMOGs tend to range between $5.00 and $10.00.

I should note that there is no definitive standard for what “ARPU” really means.  When I am working on P&L forecasts for ESC clients, I focus on a notion of “unique active players” who engage with the game/world at least once that month.  While I focus on conversion rates and average-spend-per-paying-player (or types of player), these ARPU guesses provide a useful sanity check.