Virtual Goods Summit 2008
Moderator: Susan Wu (Ohai)
Panellist: Susan Choe (Outspark)
Panellist: Lee Crawford (Twofish)
Panellist: Christopher Donahue (Live Gamer)
Panellist: Karl Mehta (Playspan)
The vendors on this panel - Twofish, Live Gamer, and Playspan - seem to be sitting in areas of potentially huge value-add, but ... they also seem to be targetting their offerings at solving the problems that their customers don't necessarily need solving, and would be better off solving themselves.
This isn't so unusual, of course - middleware providers would always rather do something easy and high-margin that the customer could do themself in-house than do the risky, hard, thing. And, to a certain extent, it behoves customers well to have a vendor that is doing some easy revenue-generating stuff: it decreases the chances that the vendor will go out of business having lost too much money trying to sole "too difficult" problems.
Chris Donahue from Live Gamer took a timeout at the start to be clear about his defnitions of Primary Market and Secondary Market (allegedly he encounters some confusion among audiences about this; this is a bit surprising to me - the terms are very well established - but if he's seen that confusion, it's worth reproducing here)
primary market = publisher selling items to user
secondary market = player to player trading of already-purchased items
Finally - Susan Wu (the moderator, from Ohai) showed once again her tenacity in pushing difficult questions on the vendors especially. It probably doesn't come across very well, but she did a good job of trying to get details and info out of them - they were good at refusing it.
My commentary in [square brackets]. This is not a literal transcription, I've elided, ommitted, and expanded things for clarity.
Outspark (OS) - we do a virtual playground, where each game we publish is like a ride in a Theme Park. Pretty soon we're going to roll out a TP "main street", where the playerbases of the different games will mingle and mix. We have 5 published games, one of which is flash-based VGs. 3 million reg users, 2 million monthly uniques, mostly USA. Users are mostly 16-25.
[Outspark is the one game/world Operator on the panel (along with the moderator, Ohai, which is an Operator-to-be, but still too stealthy to have released much detail yet)]
PlaySpan (PS) - we're a B2C that lets publishers monetize the secondary market from their VG economies.
Live Gamer (LG) - we provide marketplaces for people to sell stuff, both primary and secondary markets.
Twofish (2F) - ERP for VWs and online entertainment. Combine commerce, banking, and inventory management. Allows economic management and other advanced high-level things like that.
Ohai (O) - [after requesting a show of hands] 10% of the audience thnk that VGs will be 50% or more of their revenue streams
O - are people building their econ-management tools all proprietary? when does it make sense to buy them?
OS - fraudulent people come in and tend to buy huge amounts very fast. So you then have to quickly call your business partner and ask them to add filters to catch and prevent that stuff.
PayPal are nice, but they don't do this very well yet. [my interpretation]
We have 75% of our users are USA, so they tend to be less fraudulent. Poland, Turkey, Malaysia, China etc all have much higher fraud levels.
O - [to the one operator on panel:] what are you outsourcing these days?
OS - we have not outsourced primary market at all. When we started, 2 years ago, the business aspects were new to a lot of people in the market. Product Management of VGs just didn't exist except at a very small number of companies - people who know how to plan out their products online, what to release, how much, at what range of prices, when.
[this is a particularly interesting and good point: Product Management / Retail experience is one of the things that has and will set apart the big winners in the VG area from everyone else. Having worked with some ex-Retail people in the past I've seen first-hand how very very far behind the "standard practices" the vast majority of online games, virtual worlds, and virtual-goods companies are. IMHO, if you're in this area, find someone who used to be a senior product manager in retail, for one of the giant retailers, and hire them]
We have signed with LG for the secondary marketplace [she didn't actually say, but she glanced at LG when she said this, and Chris unsubtly looked away. If I've guessed that wrong, please shout in the comments ]
PS - this has to be done outside the game to legitimize the game, to show that there is a cash-out place that is not inside the game [this is hard to accept as stated; it sounds more like marketing spiel to me than a ring of truth - although I think there IS some legitimization possible, if you're already making the decision to play the game (and probably being part of the primary market), then as a consumer you should already have all or most of the legitimization you wanted. I can see obvious benefits to market speculators and traders, which has knock-on-benefit for the game, but it's a bit more subtle than what the PS person actually said].
LG - trying not to become a money-holder, because that causes you to become subject to regulations about being a bank etc. We spare the providers from those headaches.
If even inside the secondary marketplace the only person you can sell to is the publisher, that creates suspicions that the publisher is artificially controlling the market.
[Again, this sounds more like marketing/scaremongering to me; IME players generally don't think that far ahead. If you don't trust the game operator, you don't play the game. Also, let's compare this to the current "standard" alternative: secondary market run as a black market by illegal operators. And you're claiming that consumers would have an issue trusting the game operator? I'm not convinced]
O - as an operator, should I be building the secondary marketplace immediately / from launch?
OS - you need some depth of market, you need probably a couple of hundred thousand dollars a month of primary market before you want to start getting directly into the secondary market.
But people in your world will start doing it themselves whether you encourage them or not, so you watch them and keep tabs on how big it is becoming, and respond to it when appropriate.
O - really, as operators, we just want to know: how do I book more revenue? What are the KPIs?
2F - the first thing you have to understand is the interplay between return-visits and level of monetization per visit, because that's a major friction that succeeds or fails.
O - I have a PhD statistician working with me, so I'm lucky, but what should everyone else be doing who doesn't have that? What do you do with all these logs of data?
2F - most importantly you need realtime access to the data, that's what we give, is that platform that is able to work in realtime.
[really? why? Most of the stuff you want / need to do doesn't work in realtime: you want to track how one purchase influences another one minutes or hours later. Again, sounds to me more like propping-up the marketing features of the product than an actual "Operator Pain" that's being fixed]
LG - if you don't have a secondary market, someone else will build it for you and take the revenue. I think it's a lot less contentious to have it at launch, easier to get it built-in from the start.
[To the "someone else will build it for you" - YES! ]
OS - actually we track vast amounts of metrics ourselves, we always have. I think this no new news for most game publishers, and it should be in the key metrics that you look at already.
[from me, yet another: YES! - and this is part of why the vendor claims in this panel were uninspiring; they implied that no operator has a metrics operation. Given how much people have been shouting from the rooftops about metrics for the last few years (Everyone from companies like Bungie and Compete to individuals like Dallas Snell, Andrew Chen, Darius Kazemi), it's amazing to think that any serious operator would not by now be doing extremely comprehensive - and mostly "real time" - metrics]
O - most of us are not merchandising experts; what best practices (organizational, cultural, and stats choices) are there?
OS: [asked question, show of hands] only about 5% of people are interested in getitng their secondary markets up and running
[This was a big surprise, and it's a pity it wasn't repeated as a question at the end. This suggests that a lot of the attendees at the conference were - at least when they arrived - naive about the size and value (both direct and indirect) of secondary markets. I'm guessing that by the end of this session, quite a lot would have been converted]
At the end of the day the gamepay will keep some of the users, but not all of them. Half the gamers in our ecosytem come because of social interactions; the gameplay is good, but really the events and social activities is what gets them to come back, even in monster-killing games.
2F - is this profit centre, or something to prevent someone else taking it from you and causing you problems that way?
LG - both. I think it's had a bad name to date because it was an illegitimate black market to date, not publisher-sanctioned. Unsafe, all sorts of problems. Also, as publisher, if you control it, you can instigate some game-design rules in the market, e.g. allow everything except avatar-sales.
[this is very contentious - and very interesting, because very few people have tried it yet. I've seen wildy varying opinions within the operators on what will happen to the community and consumer markets if you start interfering in this way. My economist friends suggest the appearance of a tertiary market: they believe there will always be a free market wrapping any non-free market. I tend to side with them]
OS - we want to get into secondary market, because we want better escrow-management of the goods being traded (so people don't get ripped off in private sales, and then come blame us as operator, uncaring we weren't involved or aware of the trade)
O - you acquired SOE station exchange, and you increased the volume?
O - what was the average transaction size, and what is it now?
LG - cant' talk about SOE, but the average price is $50-$60 per transation now, which is a substantial increase. Also increased volume.
[look at the SOE Station Exchange Post Mortem, published last year, for more info - it's freely available on Google]
We don't get to affect the gameplay, we don't operate it - but we've provided a better experience to users in the marketplace, and we've proved it. We've reduced fraud numbers, and given more reassurance.
OS - also, the reassurance of residual value causes secondary to increase primary
O - actually, I dont think most gamers understand or care about residual value
[hmm...interesting disagreement there between the Susans. Again, I'd side with the Economists: this is probably a matter of what the actual good being traded is, especially: how expensive is it? The higher the initial purchase price and the lower the re-use value to an individual, the more likely that the market will be aware of and moved by residual values]
OS - I was told I could triple my primary market with secondary trading (by one of the vendors here). I don't know about triple, but definitely you see a big up in primary.
2F - the big benefit of secondary markets is that it creates a currency trading place between "time vs. money"
[interesting - I would expect that to already happen in game, or already be banned in game. If it's banned, and you have operator-sanctioned secondary marketplace, then they'll be banning it in marketplace. If it's sanctioned in-game, then it's probably already happening in-game. Certainly, there can be good reason for trade to ALSO happen in the secondary market, but it's not the logical predicate that the Twofish rep claims here. Again, this leaves me questioning exactly how much the vendors understand the realities of world-operation]
O - what should my operating margins look like? Taking into account customer service, fraud management etc?
PS - 10% fee, and split it with the publisher (secondary market)
O - that's gross margin, I really want to know operating margin. What's a good rule of thumb?
LG - I think that's unique for every single environment or operation
O - I disagree; ultimately this becomes a high-volume retail business, so it should settle down
LG - OK, then you can apply standard retail numbers to it. If you're talking about the entire operaitonal environment, it's too variable.
For the LG Exchange for EQ2, I could tell you [but he doesn't, despite Susan Wu's repeated attempts]. In general we take 10% market from revenue share from publisher, after COGS.
2F - I think it's a "how long is a piece of string" question
Q: how do you figure out the pricing spread of your goods in primary marketplace?
OS - you have to test price points. when you tweak the price just a little bit, 10/20/30%, you'll see movement in the volume sold. But to start, you have to go out and do standard business research before that.
O - we're trying to solve it by running tests on random samples.
Q: when seeding your economy to get it launched, to what extent do you use free credits and how?
OS - the law of internet is that when you get users used to free stuff they will expect it forever more.
O - I think it of as animal behavioural training, like training a dog. You give out free credits for e.g. putting in their real name, real email address. So ... you're getting them used to the idea that "credits" come as a result of "doing something".
OS - I would say just don't give currency away for free.