FreeToPlay.biz

Raph Koster of Metaplace gave a video interview with F2P.biz during last month’s Austin Game Developers Conference. It was embargoed until just recently, so here it is now. Thanks, Raph!

Virtual Goods Summit 2008

Moderator: Mark Wallace (Wello Horld)
Panellist: John Hwang (RockYou)
Panellist: David King ((Lil) Green Patch)
Panellist: Shervin Pishevar (Social Gaming Network)
Panellist: Andrew Trader (Zynga)

Summary

Shervin and Andrew continued to be as cagey at this conference as they have been at all the other conferences (e.g. GDC) over the past year or so. In the light of their secrecy - even when appearing on a public panel (hey, guys - if you’re asked to appear on a panel at a conference, what do you expect? Of *course* people are going to want to ask you interesting and probing questions! If you don’t intend to answer them, howabout you just decline to speak on the panel?) - we can only guess at their motivations.

Some of their comments suggest, variously, that their current status and success are not rosy, and that they either have some worrying naivety in fundamentals of online games and online communities - or that they’re pursusing deliberate campaigns of misdirection of their competitors. Personally, given the secrecy and apparent lack of interest in being part of the usually open and sharing community of worldwide game-developers, I side with the latter.

RockYou came out looking a lot more open and honest by comparison.

My commentary in [square brackets]. This is not a literal transcription, I’ve elided, ommitted, and expanded things for clarity.

Wello Horld (WH) - How big is the market?

Lil Green Patch (LGP) - market size estimates - it’s really hard for us to judge.

Social Gaming Network (SGN) - we’ve done a little over 120m goods exchanged. [???]

Zynga (Z) - we look aspirationally at Nexon’s MapleStory, the volume of VG that they do.

WH - Where are we in terms of the market?

Z - They have to be items that users find valuable. e.g. WhyVille, from a demo standpoint it mirrors FaceBook, 200,000 active users, 4 or 5 thousand dollars a day in revenue. 50/50 male/female, 2/3 international (non USA).

LGP - 6 or 7 years ago virtual flowers were being sold on Hot-or-Not, so we’re optimistic that it’s been shown already that this is strong; this is not just coming from FB.

RockYou (RY) - it’s definitely in the mainstream in other countries, maybe not so much in the USA.

WH - what kind of ARPUs are you seeing?
[had to be asked 3 times to get answers, particularly from Zynga and SGN, who've been very cagey on this all year]

Z - there’s disadvantages to being on a SN, because the networks control the users. So .. fraud and cheating become much bigger problems, because the operator is indirected (can’t get hold of enough per-user metadata to be able to make good decisions on whether a transaction is probably fraudulent or not).

Herein LIES A GREAT OPPORTUNITY (subtle hint) .. FB and other platforms should become a payment-processing provider, since they can leverage the control they do have.

SGN - the future for all of us lies in exploring stand-alone sites

[and here you see it: this is how they could destroy traditional online games, by growing out of their fast, lean, rich SN existence into traditional places for online games.

But only if they have some revenues to prop them up, which makes the continued refusal to talk about ARPU rates interesting for their non-SN equivalents to mull over]

WH - do you see people coming in and getting engaged and staying … or leaving?

LGP - we added media and experiences that if you don’t login for a while,  you miss out on loads of unique stuff.

Z - in YoVille we enabled trading so that users can buy and sell stuff to each other, which is remarkably powerful for building community. That’s done a couple of things:

1. It encourages them to buy stuff, because of secondary market [partly refuting Susan Wu's opinion this morning that the residual value in VGs won't increase volume of primary market]
2. It also leads to limited-number items appreciating over time, allowing for speculative trading

[speculative trading is a particularly powerful market driver - ask any Economist - and it's great for an operator as it represents revenue from non-users that should cost you almost nothing to service]

SGN - some things in FluffFriends have appreciated to values of hundreds of dollars each. You should focus on the core community, and give what they want, while realising that often what they ask for isn’t actually what they want.

[c.f. Richard Bartle's rant about how "game players are NOT professional game designers; they don't know what they want, but believe they do" from last year]

WH - what’s happening in FB and other SN’s, is just what’s happening in typical online games. In that context, we know the average life of a user is a little under a year. Do you see different numbers?

[well ... kind-of. Actually, that might be an average, but usually the medians are either a lot less - 4-6 months - or a lot more - 1.5-2.5 years]

Z - those estimates feel very high.

We found scores of users who found that the slot machines were tilted slightly towards the user, so they made bots and hit them with huge volumes to play the odds. Those weren’t cheats, just power users, and it’s really hard sometimes to tell the difference between cheaters and simply good players.

[this seemed to be that he was trying to make a point about the different types of users, and how it's hard to distinguish between them. Or, in the context of the refusal to talk about ARPUs, you might think this was a simple attempt to evade the question :)]

RY - we aim to have a fine balance between charging money, and giving players advantage for paying

[I thought the USA-based SN-gaming companies were redressing the mistakes of mainstream online USA companies that have cost them a lot of their competitiveness in the Free to Play arena, but maybe not. Give up the fairness argument!]

We see double-digit, $30/$40 [he revised this to $20/$30 when pushed by other panellists] per thousand daily actives. I’ve seen up to 75, but we don’t see them that high.

230,000 people

[hooray for Rock You for actually saying anything about their monetization and user figures!]

SGN - it’s really healthy, but we’re not disclosing

[Shervin was particularly firm and insistent (almost aggressive) on this point. To be honest, I'm getting fed up of seeing him (and Andrew, usually) choosing to give panel talks at industry events and being like this. Off the top of my head, such steadfast refusal to be public about figures usually means they're bad, no?]

LGP - if you look at Google’s core business it’s microtransactions already, from the start. I think most of the web is about moving from major publishing models with editors and so on to “let a thousand flowers bloom”.

Z - YoVille has so many items now that we’re looking at merchandising best practices as pointers.

SGN - we’re looking at doing the reverse of WebKinz, real world goods that are tied from online virtual items.

[that's very interesting; on the one hand, it'll be very interesting to see digital VG items mirroring back into real-world items in a recursive kind of way.

On the other hand, it's even more interesting that one of the two most famous SN-based gaming companies is trying such a variety of product/monetization diversification so early in their company existence.

I'm beginning to wonder if this signals a strategic plan of "get out of SN gaming as fast as we possibly can, leveraging our assets in that arena to kick-start businesses outside of Facebook that are actually viable from a revenue perspective"]

WH - what about iPhone stuff?

SGN - with iGolf, we’ve reached 2m downloads, and we’re looking at updating the games in future to make them more and more social over time.

Z - it’s great, but there’s even more opportunity for it to be an SN platform, because all your address book is there, etc. Will be interesting if/when Apple takes it more in that direction.

[and because it's a personal communicator ... a phone ;)]

WH - where can SN’s change and help you?

SGN - get a payment system integrated at the SN level. No more filling out PayPal forms, separate logins, etc - get it all seamless in one system.

RY - yeah, that’s the main thing - ways of being able to monetize on the SN. We’ve also noticed that users on the SN often don’t want to sign up to yet another account. Sharing the revenue with the SN, everyone wins.

Z - and fraud is a very big deal. All of the payment-processors still make it very difficult, with lots of overhead and difficulty to get payment up and running for yourself.

WH - what worked for you in the early days, what you would say to newcomers trying to leverage SN’s to break through into success?

SGN - I think the SN’s can do a much better job at the discovery process. Ways for users to find entertaining stuff to do. Leveraging stuff about using your friends as a recommendation channel, etc.

[I think there's a massive opportunity here, but of course it needs access to rich interconnectedness data for the individual user accounts]

Z - with YoVille it was all about the fact that the users could do self-expression that made users want to share with their friends. Our users decided early on to hold beauty pageants.

LGP - I think it’s still pretty much wide-open. There was a lot of things tried early on, some of which was really abusive of the users, and that’s been cleaned out now.

Z - actually I think the barriers to entry are rising really quickly, because of increased expected production quality, depth of content, application complexity, so I think it’s actually getting really harder for newcomers.

RY - so what he’s saying is don’t compete with us, just come and sign with Zynga instead
[score 1 to RockYou there for the second time in this panel for standing up to the Zynga/SGN hegemony ;)]

SGN - you can still make 5k/10k/15k a month as an independent FB developer, and we need to have indie developers, so that’s good, and people should carry on doing that. We’re a network, so we want to work with indie developers and have them alive.

[they're both sounding very like early mainstream games publishers: cagey, self-focussed (this is not a bad thing, unless you are a developer working with them), and telling developers to do all the innovation - and risk! - for them]

Q: [I couldn't hear this question, no mike, panel moderator didn't repeat question. Answer was very non-specific, most panellists declined to answer]

Q: cognitive process that users go through at point of purchase?

Z - We try to give users twenty different colours, and 5 different styles, because users are being declarative (this is who I am) and also aspirational (this is who I want to become)

SGN - self-expression is a key component of people wanting to get items and then do unique things, like a user writing a 65-page children’s book based on FluffFriends. It’s shocking and exciting the derived fanfiction stuff they make around the game.

So for those people, they’ll buy a lot, but they need to get that moment of inspiration right at the start to get them to decide to become part of this.

RY - you can often bring them back to thinking about the realworld parallels, like everyone wants to drive a Ferrari, etc.

Q: pros/cons using real dollars as currency vs virtual currencies?

RY - analogy: when you were a kid, going to an arcade, once you change your dollars for coins, you lose track of how much you’re spending, so spending is easier. Like in Vegas the use of chips rather than money so that you lose track of total spending.

Q: why hasn’t secondary market exploded on FB the way it has in mainstream Virtual Worlds (VWs)?

[my guess: VW's have real value, FB games have practically no value by comparison]

LGP - I think it’s just early stages, it’ll happen over the next few years

Z - it makes sense that it hasn’t happened right out of the gate, because if our motivation is to generate revenues, then the user-to-user transactions doesn’t generate direct revenues so it’s not something we’re going to focus on.

It’s important, but because it adds depth to the game, and creates community.

[...except that it's generally well known now for 10+ year that the secondary market occurs independently of whether an operator tries to build it. c.f. Christopher Donahue (Live Gamer) saying earlier today that "if you don't build it, someone else will".

So, this was a pretty amazing statement from Zynga. That kind of thinking - "doesn't generate direct revenues, so it's not something we're going to focus on", is exactly the approach that mainstream MMO publishers got slated for for most of the last decade (and appear to have gradually realised was a dumb mistake and are now correcting)

I wonder if Zynga really believes this, and is happily ignoring the history of the MMO market, or if they're saying this in order to misdirect their competitors (bearing in mind the audience was probably full of wannabe-competitors)]

Q: what about retention rates, and what you do on new platforms when you move to them?

LGP - if we had to choose between keeping existing users super-engaged, or acquiring new users we’d go for keeping the existing ones.

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)

Summary

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.

Introductions

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.

Virtual Goods Summit 2008

Moderator: Margaret Wallace (Rebel Monkey)
Panellist: Brian Balfour (Viximo)
Panellist: Lee Clancy (IMVU)
Panellist: Amy Jo Kim (Shufflebrain)
Panellist: Sean Ryan (Meez)

Summary

There’s a a third type, “Branded UGC” - where users who create content start to become known-brands in their own right. This has already happened a lot in Second Life, it’s not surprising to see it happen in other content-creator-heavy, environments.

It seems the big players / winners so far are still taking a very “experimental, unplanned” approach to the fundamental worrying parts that keep newcomers awake at night: what goods should I be selling? what pricing should I offer them at?

My commentary in [square brackets]. This is not a literal transcription, I’ve elided, ommitted, and expanded things for clarity.

RM - [after getting a show of hands] About half to two-thirds the audience have or are launching a goods-based game.

RM - In general, what processes do you use to decide what to put into your inventory?

Viximo - we focus on connecting content-creators with publishers. We leave it up to the creators, and give them support tools and hints/tips to do that, prompt them around holidays to create themed content for that holiday, etc.

Tools, e.g.: mostly the info we feedback about the buying activity; what types of people are buying what tupes of goods, whats popular, whats good.

Also, Scarcity: creators decide desired high/low inventory and price. Internally we decide what inventory level when we look at that.

IMVU - 120m items in the catalogue. We take the view that anybody at some point could become a digital-goods creator if you give them enough support from community perspective AND hands-on training/tutorials.

Meez - we start with the holiday theme. Then look at what the advertisers want to see. Then we look at the upcoming features, and make sure we have compelling items there. A lot of our prod dev driven by trends/fads in the userbase - pop culture influences etc.

RM - what challenges have you found from UGC?

Shufflebrain - “quality” and “appropriateness” are the biggies. At There.com we had both branded content and UGC. We thought the branded would be much bigger, but it turned out that UGC was much more exciting among users.

Copyright, porn, hate-speech etc - you have several different ways to deal with that. Pre-moderation, user-tagging of problem content - it’s a management issue both legal and social/cultural for the product design. [basic explanation of trivial rating systems here]

When people come into the world for the first time, you want them to see great stuff, you don’t want them to see crap.

Its not “branded vs UGC” in general - it’s different for each game / prod design. Choose the right one for you.

It’s about: who are your audience, what does “status” mean to them, and how much skill do they have at content creation?

IMVU - we also see a third type, “Branded, UGC”. A lot of our users move from being CCs to being Branded CCs as they build up a significant brand purely within the IMVU world.

Meez - what is a VG? We all talk about it like they’re just clothes, but that’s just one third. Another third is world-features (can I levitate, can I glow like a lightbulb), and final third is privileges, access - “can I sit in a special seat in a public space?” etc.

In these worlds, often you’re only about 2 inches high, so to differentiate, you end up going more extreme in clothing. And then there’s not all that much you can make that varies that extremely.

[Adam: if you're making more extreme clothing, with more stuff sticking out the sides etc, specifically in order to allow differentiation, surely that leads to giving you far MORE options in terms of items to create?]

Ultimately all these items are about generating increased status.

Viximo - have to think of CCs as different from normal users - they are a different community, with different ideals and aims and activities.

IMVU - have to be very clear on your policy. We have a very clear policy on what is allowable etc.

[Adam: there are already initiatives in progress on this, from Erik's Better EULA to Raph's Metaplace policy; it would be good to see more sharing between virtual worlds, more standardised policies, so users only have to read and understand ONE of them]

RM - what tools does IMVU offer to support UGC - issues of ownership (operator or player)?

IMVU - any products that someone creates derive from a core base product originallly created by IMVU. And then we track the chain of people creating from, creating from, creating from,  … etc. We then pay everyone along the chain (every person who’s work got derived from gets paid).

[gaming this - what happens with two-person cycles?]

Shufflebrain - smilebox, which is online scrapbooking. Kind of like slide/rockyou for scrapbookers. There’s things like this that are much more connected to / derived from the real world (as opposed to pure VW worlds) and that’s part of this VG spectrum.

Meez -  if you have a community of any size and you aren’t in the VG market, then you’re missing the boat in a big way.

It shows status, it allows gifting. It’s the secondary model that combines the best bits of advertising. It’s great way of monetizing the always-on hardcore, while you’re simultaneously monetizing the masses via simple advertising.

IMVU - 90% of our revenues come from VG sales.

RM - how do you determine pricing?

Meez - pricing is easy, we look at Gaia, and copy it :).

In South Korea, it’s much more mature, so we look at that as a place to take input on pricing [???]

3%-8% of users will ever buy stuff.

We started at $6 / month for VIP package. We could have done $10/month and it would have been fine. [which begs the question: why are you voluntarily forgoing an extra 60% revenue? - one of the panellists came back and asked him this later:] we still haven’t decided exactly how much to charge, we’re still adding features to it, it’s not feature complete yet.

We’ve noticed that if something doesn’t have a status-element, it sells more poorly.

We have no secondary market, its all manually priced by us through trial and error.

The value of branded items within the system isn’t always clear.

We had one body-type originally, only “thin”. People complained that it was too thin, body dismorphia.
So, when we added more, we found that the other sizes were very popular:

17% of women choose “plus” (biggest size)
80% of men choose “buff”

Shufflebrain - people have been traditionally choosing just fantasy identities in the online games, but it’s moving towards people choosing identities that represent themselves. So, now that’s another big question you have to think about: which kind of identity will you service for your users with the kinds of goods you sell?

[Adam: IMHO this issue of "which identity are your users creating/using on your service?" is one of the few that advanced operators in all online games have been thinking about for years now, but many haven't - strangely it never comes up at conferences (I suspect that the people who know are keeping quiet about what's a clear competitive advantage to get right ;))]

Meez - why not photos? Too personal, too unchangeable. Avatars are much more flexible, changeable.

[Adam: interesting; the ease of changing/updating photos is changing already, good cameras are becoming ubiquitous (inside the DSi, for instance) and fast to upload to flickr etc ... how long before photo-avatars replace current ones?]

RM - as service provider, what effect is the financial crisis having on your clients?

V - in the VG space it’s moved from “what are VG?” to “how do I do it?”. It’s been recognized as a much better way to monetize virtual communities than most other things.

So demand among publishers is currently very high for VG economies/systems.

We’re also going after creative individuals, getting them to go direct to consumers, instead of being part of a bigger chain. Totally different dynamic to what they usually do.

I - we just added profit-based pricing: you say how much margin you want to get on the item you’ve created. This empowers the content creators [Adam: I'm not sure how that "empowers" them?]

RM - VGs are a $1.5billion global market. [Adam: this week at the Virtual Worlds Forum Europe one of the attendees mentioned a recent research report from Finland, IIRC, that pegged it at $2.1billion; we'll follow up on this later]. how do preferences for VG varying based on demographics?

SB - Only speaking from my direct expereinces…many social VG skew female, many games skew male. Ultima Online was male-skewed, There.com we had a mix - but females were leading the charge on content-creation, especially totally dominated clothing, especially especially the top creators.

Music downloads in rockband etc - this is part of VG too. That’s a good that exists in the game that opens up a new activity. I believe this has cut across gender lines (both male and female)

[Adam: Well ... the game itself is doing the cutting across gender lines, it's arguable that whether or not it's an activity is irrelevant - it's a captive audience of people who like the game]

I think this is the future - VGs that open up new activities, as opposed to merely being about status etc [this is referring back to the slide that the RedPoint Ventures guy put up at start of conference]

I - I will get hold of the breakdown between M/F content creators, but I don’t know that off the top of my head

Women are buying lots and lots of clothing items - “content consumption” skews as well as “creation”.

M - need to consider that are limits to how many items you can make use of. So think about group-purchases as well - e.g. in Puzzle Pirates when you buy a ship, you also have to buy badges for each member of your crew (other players of the game who won’t buy them themselves).

RM - how do international users influence your actions?

I - this is an English-language product, with very little internationalization, but 40% of our revenues come from international. When you build something good, people are going to want to be a part of it, wherever they are.

We’re very clear that we’re under US jurisdiction etc.

M - it’s hard to monetize non-US traffic - but it’s still EASIER with VGs than many other things.

e.g. banner ads for say Nigeria aren’t going to get better than $0.02 a click - betting they will is a losing bet, but you CAN feasibly get Nigerians buying and selling VGs at much better monetization levels.

[Adam: interesting ... places like that leapfrogging real-world consumption, straight to VG consumption?]

RM - rockband / AG numbers?

M - Kerli, an Estonian goth-pop singer, who is very popular with part of our audience. We find in general that branded goods are a great promotional vehicle.

It is not clear yet that users are willing to PAY for branded goods at a price level that’s big enough to make revenue the primary use of it. The premium branded good business in the US is still small, compared to other things.

2.5 % click-out ratio for people going out the chatroom to buy the songs on iTunes or etc.

[Adam: and some others that went past too fast for me to get down :(]

Q: I thought most of the transaction model was that you sell virtual currency. Currency vs items, challenges there?

I - we do sell credits, that are used to buy VG. There’s also promotional credits that we give every user when they get an avatar. And there’s the VIP service, which is a monthly subscription that gives a batch of credits each month as an allowance.

M - less-active users you sell advertisers. Medium users, 1 item a month purchasers. High end, you have a subs offering for the hardcore so that they can go off and differentiate themselves.

We make VIP have value more than just the credits - being a VIP is a status item in and of itself - so people subscribe AND buy extra credits.

Q: how do you decide where to draw the line on how much credits to give away?

M - look at your sinks and sources of currency, your float. Just use standard economics measures. Keep tweaking to try and keep it roughly inline to prevent inflation and deflation.

Relatively straightforward to track in and outflows on a weekly basis and keep tweaking in response.

I - a lot of biggest CCs build up so much credits from their sales that they start to act as currency traders. Provides an RMT cash-out opportunity for users / CCs, which is good.

Q: what have you done about fraud?

M - Fraud goes up as soon as you either allow cash-out, or you reach a certain size of userbase.

We have fraud but we don’t allow cash-out yet, so it’s really all about cheating in-game, and we just have to use great reporting / metrics internally to detect and trace it.

Leigh’s been a friend of F2P.biz since its inception, when she was kind enough to run several of our articles on the site she managed at the time, Worlds in Motion (a Gamasutra “sister” site). Since then, Leigh spent some time at Kotaku before rejoining the Gamasutra family as News Director of the main site, Gamasutra.com.

Leigh recently gave us some of her time at Austin GDC, doing an excellent video interview that fell victim to random audio difficulties. But because the content of that interview was too good to let die, we conducted a written interview with Leigh after the show.

Here is that interview:

You are a well known commentator on the virtual world space.  How did that happen, how did you get to where you are today?

Haha, I am? I guess that’s one of the benefits of getting in somewhat early in a space that emerged quickly and got a lot of people excited about it. I was fortunate to be chosen by Simon Carless as the first editor of Gamasutra’s sister site Worlds in Motion focusing on online worlds, and I suppose I learned a lot by covering the space and talking to the people who are pioneering it.  I also planned the inaugural Worlds in Motion Summit at GDC in February 2008, and while I didn’t have a hand in the track you saw this year in Austin, a lot of the ideas came from there.

How was the Worlds in Motion Summit this year?

It was good! Austin was sort of an interesting climate for it, because surprisingly some of the presentations I thought of as “Worlds in Motion’s Arena” were taking place across the board during the main conference. I’d hoped that some of the concepts and methodologies finding success in online social spaces would start proliferating across the game space, but I’m surprised it’s happened so quickly! Still, I think we brought some unique stuff to the table.

What were the big issues and stories in the MMO/Virtual World space in 2008?

It seems to me like 2007 was the year that a lot of people, from investors to developers to consumers, realized we had a full-fledged phenomenon on our hands. This year, I think, is the year that a lot of fledgling products will be tested. As we’re looking at what’s launching successfully and what’s not, and what’s taking off and what’s foundering, I think the biggest issue is for individual products to evaluate their substance a bit and perhaps specialize their focus a little. For a while, I think a lot of us operated under the idea that having the word “social” in your product description was enough, and now, I think a lot of these online spaces, even if they operate wholly in a “free” environment — free to play, driven by user-generated content, and free of any kind of video game linearity, are seeing that they do need some kind of backbone in structure, and for that they look back to the game industry.

We’re also seeing a quality bump start happening, I think. For example, even looking at Facebook, at first a Facebook user could get about a billion requests to add apps per day — now that the user’s maybe tried one too many “advertising in disguise” games, or one too many low-quality apps, the industry is having to adapt to a savvier user for whom all this is not so new. One of the ways in which new entries to the social gaming space can differentiate themselves is by presenting a really polished experience that’s clearly grounded in good game design.

So virtual worlds are starting to look to more game structures, and social/casual games are starting to look to more traditional quality levels, and traditional MMOs are now seeing how crucial social elements can be, adding the ability for gamers to dance and make music together. Just today, I believe, I saw an announcement that PopCap is adding a Bejeweled-style game to WoW, because sometimes even hardcore players would like that casual social experience. So there’s a lot of cross-pollination now.

What do you see as the big trends that will emerge in the MMO/Virtual World space in 2009?

I hope that the cross-pollination will continue, wisely. At first there was a lot of excitement around certain key concepts, and what I saw as a rush to implement them, and now I think the trend will favor a disciplined and appropriate implementation of things like social elements and alternative revenue streams, or asynchronous options for multi-user environments — because as Raph Koster said in a panel at AGDC, new products need to tailor their approach a bit to how people are already using the web. I think we’ll see a lot more of that.

And strictly speaking on the MMO space, with World of Warcraft in the position it’s in, and with MMOs such a high-risk and volatile space, I think that traditional online game companies making MMOs are increasingly challenged to find real staying power in the space, to hang in long enough to actually make some money and develop a user community, and they’re going to need to get more creative — I think they’re going to start looking to these emerging trends a bit more to differentiate themselves.

What are the major challenges Virtual Spaces feature before they can truly go mainstream?

The major challenge is how we define virtual spaces! As I said, I think a lot of people are excited about “virtualization” without having yet a standardized idea — or even a clear idea — of what exactly this means, and what it’d look like, and who its users will be, and where we ought to apply it and where we ought not to.

We have all the ingredients for mainstream success — browser-based interfaces that anyone can access, low barrier to entry in design that focuses, as Raph Koster said, on the everyday web user, and we even have mainstream cultural penetration. Your average consumer is already getting hands-on experience with multi-user, web-based interaction via Facebook and MySpace, which are now household names, and even something much more traditional like World of Warcraft is the stuff of evening TV. People are now wholly familiar with and comfortable with paying for things online, with having a user ID, with playing casual games. These things have penetrated our cultural fabric, and we’ve got the city all built to receive the new occupants, but I think where we’re challenged right now is finding a broad implementation that’s beneficial to others beyond those who have already adopted it. We’ll be successful at that when we implement online visual spaces, and avatar-based interaction, for example, in areas where it’s a definitive and clear enhancement on the way we already do things.

Do you think the free-to-play business model is now accepted by the North American mainstream?  In the West, its adoption has, at times, been met with suspicion and reluctance.  Are we past that and if not how do we get there?

I think the suspicion and reluctance originates primarily in the core video game community, and with designers who have come from a video game or pure MMO background. When games are free to play, they monetize in one of three ways, or a mix of the three: Through paid-for virtual items, through advertising, or through tiered subscriptions. Strictly looking at these options from a game perspective, each of them could possibly unbalance or degrade the gameplay.

For example, with microtransactions, players will likely only spend money on items that have an enhancing effect on their gameplay. So basically, the fear is that paying users will be able to have game advantages that non-paying users don’t. There’s the same suspicion of tiered subscriptions, a fear (that has been borne out in reality, somewhat) that the free players are being “ghettoized,” treated as less valuable by the game operator or simply having a much more limited game experience.

In both of these cases, yes, there is a free option, but not paying becomes a penalty in the context of a gameplay experience. From the designer’s perspective, allowing users to be able to buy game enhancements becomes really challenging, because they need to keep the game balanced in order to make it enjoyable to all, and to achieve this they’re suddenly tasked with managing a highly complex economy, something they might not have bargained for.

There’s always some core gamer resistance to advertising, as well — the vocal core of the game audience is very sensitive to integrity and will lash out against games they see as selling out to brands.

This audience, I think, will never get “past” it. They have declared quite clearly their desires and expectations from their game experience and I think that there should continue to be products that address that. But there’s a broad userbase that exists outside the hardcore gamer, believe it or not! That’s something that it’s hard to be aware of, acclimated as we are to a sort of “internet gamer community.” The people that we see the most often, and that are part of our most immediate culture, are not necessarily the largest percentage of the consumer population.

Just as concerns advertising, there’s been research done that finds that there’s a kind of consumer that would like brands in their online spaces, to enhance realism. There’s a kind of consumer that would prefer to pay in RMTs instead of subscriptions, and the current generation of kids and teens is growing up in an area where everything on the internet is free, period. They’re going to continue to expect that. So the traditional audience might be hostile to a new way of doing things, but my impression is we’re implementing some of these new concepts with the primary aim of welcoming in a new audience.

Charles Hudson has been kind enough to provide a discount code for FreeToPlay.biz readers for his upcoming Virtual Goods Summit, October 10th, 2008 in San Francisco. I attended the inaugural vgSummit in 2007 and took a ton of very useful notes.

I would highly recommend anyone even remotely interested in the virtual item sale space - or the larger free-to-play space that encompasses VIS - attend this one day conference. If it’s anything like the ‘07 version, the type of access you’ll get to the decision-makers powering the virtual item sale wave in North America (and abroad) is unlike any other event.

So if you’re interested, the FreeToPlay.biz discount code is “FREETOPLAY” (without the quotes). Enter it during checkout to save 10% off admission.

Check vgSummit’s site for more info on the fantastic lineup of speakers.

Speakers:

• Jesse Mulligan, moderator
• Robert Ferrari, Turbine
• Hilmar Veigar Petursson, CCP (Eve Online)
• Nicolay Nickelsen, Funcom
• Min Kim, Nexon

Is it possible to have one business model for a game for both sides of the Pacific?

• Min: It’s possible, but you need to tailor it for each market. You can do microtransactions in each market. But Korea has a PC cafe market which generates a lot of revenue and we don’t have that in the West, so that’s one big difference.
• Hilmar: Eve Online is centrally hosted, so our busines model needs to be adaptable within the same server. We need to build a vast array of options within game so people can choose what they are comfortable with.

What changes have you had to make to attract customers?

• Hilmar: We put in place a system of in-game codes that can be bought from us and sold player to player. Customers buy the codes with in-game money.

Is Nexon in China?

• Min: We have made some changes in terms of accounts. When we took Mabinogi from S Korea to China, we had to add more PVP for that market.
• Robert: We had to build in stuff to account for that market’s anti-addiction rules.
• Hilmar: We need to take more of a lead on this when governments start messing with our games. Governments have very narrow view of market.

F2P vs Subscriptions: is F2P going to take over? Will subs go away?

• Robert: F2P has a huge influence. But we have been based on subscriptions for years, with some games being around for 10+ years. Subscripitions hit a hardcore audience that is really embedded in those games. But as you expand your audience, they aren’t as hardcore anymore and F2P becomes more enticing as subs only wouldn’t appeal.
• Nicolay: Both models work. Hardcore gamers are comfortable with sub model and most of the games with microtransactions have been casual games. But it is possible to have more than one biz model in a game.
• Min: There is room in the market for both biz models. F2P in North America will make a large push as teenagers can’t commit to $15/month, so F2P will work well with them. Nexon saw lots of success when the market went beyond core to mass market.
• Hilmar: Consumers are changing the business model of games - consumers making decisions. You can play Eve online through our trial program as a F2P program - users are able to “game” our trial system to play it as a F2P game. It’s a challenge for companies to adopt the needs of the market rather than keeping their head in sand. People will play the game how they want.
• Min: We’re seeing in S Korea a lot of players have a subscription-based game that is their favourite, but have a secondary game that they play f2p with microtransactions.

Which model will win?

• Robert: The demographics in LOTRO etc are a lot older: 20-35, male. F2P games tend to be younger, more females, casual, less hardcore. 30 year old males are not playing a lot of F2P and have no problem paying monthly subscription. Younger people and kids are playing lots of games and want F2P for that flexibility. However, F2P microtransaction games can pull in more ARPU than subscriptions.
• Nicolay: People used to subs have not been in a microtrans environment because those games aren’t geared to them.
• Min: Demographic and psychographics drive the business model choice
• Hilmar: In China, it is illegal to have an automatic debit for sub based game - user always has to choose. For game operators, it’s important to realize that most biz models will be implemented by users. Better to implement them yourself and tune appropriately.
• Min: It’s also based on genre - not many ppl shell out $15/month to play FPS. There are some F2P FPSs now in Asia. Biz model based on genre as well.
• Hilmar to Min: Would you add subscription to your games?
• Min: We aim to have a sub without adding a sub - i.e. adding items to mimic a subscription model.

Is there a disconnect between designing for subscriptions versus F2P? Do you need simultaneous development tracks for each?

• Hilmar: All subscription-based MMOs are merit economies - those with most time, win. But the only thing you can’t buy is social merit. To be a purely subscription-based game, you should aim for social merit as it’s the only merit economy defensible against outside influences.
• Robert: There is an opportunity for subscription games to add premium services, but it is critical to look at the business model up front. You can’t just switch models halfway through. You can’t just migrate to F2P. Sometimes that up front thought doesn’t happen though as business and development teams are often separated.
• Nicolay: Going the subscription route makes it hard to go to China. So if you go subscription route, you need to be able to change later to go to China. You need to find your market and go for that.
• Hilmar: You can’t have a puritan outlook on your business model. People will use whatever business model they see fit, so design the game around that. If you are only subscription, people will use secondary markets to make your game microtransaction-based. Look at telephone services: you can choose how you pay (prepaid, subscription, etc) - we don’t have this in games as the industry is not mature enough. We need to design for that mix.

Based on your experience, is an economy based on subscriptions more or less susceptible to grey market (i.e. player to player) transactions?

• Min: It depends on the game, but in the MMO market it is all about supply and demand. Most companies keep items split - so dropped items are not same thing as bought items. Those item economies are split the same way in F2P - I don’t think a lot of ppl understand that.
• Hilmar: I’ve seen F2P games with o market challenges as well. Don’t see how it is any different in F2P vs subs. If you’re leaving a game, you sell your stuff for an 80% discount.
• Min: We introduced the Maple Trading System to Maple Story so players can sell items to other players for Nexon cash. For players that have time, they can sell the results of their time for money. Can’t get money out though.
• Hilmar: Dual currency systems are a good inhibitor to prevent people from getting money out of the system. Players trading items within the game is not a negative, provided you keep the value within the economy. As soon as you move money out, it has a negative effect on the in-game economy.

Are there any negatives around designing your economy around F2P?

• Robert: So many more people come into a F2P game so you need to ensure you can support so many more players. With subscriptions, if I am charging $15/month I need to ensure I supply content constantly. In F2P, maybe not so much content needs to be there.
• Nicolay: F2P is more of a theme park. But items need to have value in order for people to buy them.
• Min: I don’t think it is so dissimilar. In f2p, you still need to make a fun game. We aren’t just developing product to sell items, we need to make the game fun first, content needs to be updated constantly. Need to earn your money every day.

What are the challenges on the subscription model?

• Nicolay: Because players are paying on monthly basis, you need to provide service. The player anticipates certain level of support that has to continue forever. Can’t just say here is the game, have fun, don’t ask us for help. This is the biggest challenge for developers coming from retail games.
• Robert: The game is a service… now you need to keep them entertained.
• Hilmar: If your goal is to develop a subscription game, you need to think about how you develop a merit economy that can’t be turned into a microtransaction system later. I suggest designing something that accommodates both revenue models. Trying to fight against what your customers want will always be a losing war.

A number of games from China have converted from subscriptions to F2P successfully - what can you do to convert?

• Min: There is much more intense pressure in China to go to F2P. There, it is about demographics and peer set, because so many games in china are f2p, other publishers are converting to compete.
• Nicolay: It happened overnight in China… bam, it’s microtransactions. Now publishers say it’s the only way to complete. We’ve been following it, as Western devs, we need to look at that but it’s difficult from Norway to understand what’s good for the Chinese audience. It’s important if you sublicense to listen to the partner you have… a lot of Western pubs that go to the East fail.
• Min: I’ve heard that games that go to F2P have done far better than as subs. Games able to get a customer base and monetize it. Maple Story was successful in States because the players it goes after couldn’t do subscriptions. We get them in first, then monetize them.
• Hilmar: In China, people are used to a cash-based economy. There is not a lot of culture around subscriptions and there are also legal constraint as well around implementing a proper subscription model. Westward Journey 3 did it in an interesting way, similar to us.

What will happen to F2P when the first $200M budget game comes out? i.e. WoW goes F2P?

• Robert: What we’re seeing is a shift that a lot of the f2p games are so much lighter than traditional MMOs. Heavy MMOs are beautiful, but that puts a barrier to entry based on min spec - younger demographics don’t have these systems. Global expansion doesn’t support those specs either. Our games are above 5gb in size, whereas Maple Story is close to 1gb now.
• Min: What would a $200m f2p game look like? I can’t imagine spending that much… the game would be too big. Would a $200M game be a terrabyte game that wouldn’t reach a mass market consumer?

Casual users really dislike big downloads and don’t like pressing the “install” button. Does the web open that up to us? Is a web MMO as popular as WoW possible?

• Nicolay: We have it already. If you want to go into foreign markets, you need to be web-based - microtransaction or subs. A web-based game can be just as big - I think it will be even bigger than big client products.
• Min: In S Korea, people have no problem downloading big client products as the web is so fast. I often wonder if browser-based gaming is an interim step until web speeds creep up and people can return to client download.
• Hilmar: Most of the subscription games are designed for retail, even though we have no retail component. Take Conan… why not have 1 starter zone, 1 char class get it to 100mb as a download?
• Robert: Retail will always be around, but we need to design games for ease of entry - so we don’t spend 6 hours downloading. Casual players need to get into game very quickly and can’t spend their weekend figuring out how to get into the game.
• Nicolay: Need to be able to get into the game within minutes.
• Hilmar: Starting Runescape is bliss. You’re into it in 2 minutes. That’s a big part of its success.

In f2p, you have a store with microtransactions. Do you need more infrastructure than a subscription game?

• Hilmar: A store is just a market exchange that all games have.
• Robert: If you have a F2P game supported through retail cards, that’s a simple transaction - clean. In a subscription-based business, you will have credit card problems as players can dispute anything on credit cards. The way credit cards are set up, you can dispute any charge. So your CSR costs can go through the roof because of this. Prepaid cards cannot be returned.

Hilmar - do you have zero issues with point cards, Min?

• Min: We don’t see fraud issues at all, but we pay a higher margin on those sales. Credit cards are single digit surcharges.

In terms of distribution, are your costs higher if you are putting these cards out to retail?

• Min: Offering payment methods relevant to your target demographic is important. Over 20 years old, credit cards are viable. In the teen demographic, prepaid cards are still the dominant form of payment. Maybe SMS payments will come, but it is all about accessibility and convenience. In demographics such as Club Penguin’s, credit cards are a big part of their payment methods as parents are paying.
• Nicolay: I think Habbo has 140 different payment methods. The ability to pay has to be the lowest barrier to entry, otherwise you aren’t getting any money.
• Robert: SMS charges surrender so much margin to carrier, but retail cards may be more expensive just to get into channel.
• Hilmar: It’s puzzling why carriers aren’t lowering their surcharges. People would switch to it immediately, resolving credit card issues.
• Min: There is no access for our consumers to use credit cards. In 2006, we did $8.5M in the US in virtual item sales - in 2007 we did $29.3M in virtual items. Virtually all of that growth came from enabling people to pay.
• Robert: Companies like Turbine are looking at the console to expand their playerbase. Potentially we can use an xbox payment system, so we don’t need to do it ourselves. It’s about expanding access for players.

What do you see happening 5 years out?

• Hilmar: Dual currency systems. Most companies will evolve into local dual currency systems or perhaps an industry movement to have one proper currency system.
• Robert: 3-5 years out, I think we’ll see cross platform online games: pc, console, hybrid models of revenue: F2P, cards, ad-based, subscription-based - there will be lots of options offered so players can choose.
• Min: 3-5 years out, PC will make a huge comeback. Online gaming will go beyond niche & core - it’s going to be mass market. 5 years out there will be much more content out there - right now people are starved for content. Club Penguin fans will eventually need something new.

Will the balance of power shift from EA/Activision to more smaller players?

• Hilmar: We will see more Nexons, but they aren’t a small company. I don’t think core game companies are wired correctly to play in that space.. Nexon is a god example of a pure play.
• Min: You’re right - it’ s about the DNA of the company. Some companies are wired for online service - those people will make big impact on market.
• Robert: You hear about big companies all the time, but Club Penguin and Runescape were under the radar for so long, but makign tons of money. The press follows the big names but overlooks the stuff in the background making tons of money.
• Min: The scary thing to me are the diversified media companies that bring IPs, TV channels, etc. I’m not worred about the EAs.
• Robert: Viacom is running 7 or 8 virtual worlds… they are monetizing them, driving lots of revenue.
• Hilmar: I am not worried about diversified media companies. When I talk to them they are unable to understand our business and our direct relationship with consumers. We have lots of experience with that. Most diversified media companies just produce content for their retail channels.

Here we are at Austin GDC! First order of business was attending the Lane Merrifield Keynote, entitled “At Their Service: Making a Difference By Putting Players First,” where I took copious notes. I have 40 mins while our first video interview (Mike Zummo of Acclaim) downloads from our camera, so here are my notes, cleaned up a bit:

Also, here is our photofeed from today, updated when we can.

Lane’s Talk

• Lane’s plane landed at 4:30 this morning due to Ike travel complications. He jokes that if he’s slow today, it’s not because he’s Canadian. I take minor offense, being Canadian myself.
• By putting the player first, better customer support is natural follow through. But we also build better games and stronger businesses.
• Lane is a huge fan of Walt Disney and was with the company long before they acquired Club Penguin. Lane first job was manning a float in the Lion King parade at Disneyland (shows his employee pass from Disneyland, including Flock of Seagulls hair). He rode the float every day after school and also controlled a 300-pound animatronic crocodile.
• While at Disneyland, Lane observed that trash got picked up fast and drinks got replaced instantly when spilled. All the staff had a great attitude of service and took care of each other behind scenes. The environment was all about taking care of each other and service.
• The passion for serving at Disney came from Walt Disney himself. He built it for his kids. Without realizing the parallels, Lance and Lane built Club Penguin for their kids to play in. Lane strove every day to find news ways to make it safe and fun for his kids.
• Lane makes the point that “Serving must be genuine” - providing his dad’s “shirt off your back” gauge of someone’s service integrity as proof. In a snowy Canadian winter, someone who would give you their shirt is gold.
• (Big story about how he’s called Jason at his local starbucks. Point was likely about Customer Service Reps (CSRs) not taking time to know their customers.)
• Lane then reads from a note he sent to his development team after Club Penguin initially launched amid the usual dev team chaos and late nights. The letter was a story about when Lane saw parents and teachers shepherding kids across a snowy road. His analogy to the net was that some companies thought crosswalks and stoplights were the solution to keeping kids safe on net, but kids still felt isolated and unsafe and confused. Danger still existed to those trying to cross. Club Penguin believes kids need advocates - holding their hand, walking with them - and Lane hopes that as a company they always go one step further to pick up that hand and cross the street together.
• “Crush the Joy” - Lance, co-founder of Club Penguin, coined this phrase. Lance is convinced that before anyone joins the team, they need to have their ego turned down a bit. Hence, Crush the Joy. Dev team members need to work together to serve audience and let go of ego that gets in the way. Devs often wind up front and centre of what we build - we end up building for ourselves and not the player.
• Club Penguin has worked tirelessly to find people who had a passion for serving kids. Without it, they wouldn’t be hired.
• Pixar has a saying: we put people through a gauntlet to get in here, but once they are here, we treat them so well they don’t want to leave.
• Club Penguin was once fired by a staffing firm as CP consistently turned down highly qualified candidates who weren’t right for the position. CP has hired a lot of CS people from Starbucks because they know how to talk to people face to face.CP also hires people out of summer camps, boys and girls clubs, teacher’s assistants, etc to take care of player base.
• Most of the CSRs have rarely done more than email and web browsing with PC before coming in - deep tech knowledge is not as important as people skills. CP does not use automated responses… CSR team personally responds to 5-7000 emails a day.
• Programmers stand over CSRs shoulders to measure things like mouse travel to make minor changes to CSR interface to optimize work flow.
• Because real people answer player inquiries, players are more likely to relay qualitative info back to CSRs about issues like game difficulty, suggestions for “white fur” found randomly in game, etc.  CP approached this feedback in a revolutionary fashion: “we didn’t do what the kids said would be lame and did do what the kids said would be cool” - applause
• “If it doesn’t matter to a kid, it doesn’t matter” - this is the mantra CP works toward. Easy to get distracted and focused on ourselves - easy to get caught up making what we think is cool or what our friends think is cool, but need to remember what the kids think is cool. Should always be striving to serve our audience. That will create better games, work environments and a better business as a result.

Q&A Period

How do you differentiate between vocal minority and whole audience when acting on feedback?

• CP deals with a certain demographic that can barely type and read. Full time staff reads blogs and forums, play testing is done in office, etc.

Do you use any metric systems for pooling user data?

• CP does not have a lot of systems for that. We rely heavily on people… emails come in by the thousands focused around certain topics, CSRs gather that info and compile top 10 issues and send out to dev team.

Does CP have any plans to do microtransactions?

• This is a tough thing for CP to do, due to age of audience. Subscriptions are easier for parents to moderate spending. Subscription model makes it easier to focus on parental needs, versus an ad-supported model. For instance, CP just launched a timer that kicks kids off after a parent-determined aount of time.The cool thing is that there are no advertisers to get mad at CP for doing that - parents wanted it, parents got it.

Any other recommendations for fellow kids world devs, besides serving?

• Know your audience, keep them in the forefront. CP is fortunate we did not take on any VC as we didn’t think it was going to go as far as it did. We used our own credit cards to start it up and didn’t need to be accountable to anyone but parents and kids. There were no VCs in our ear talking about the latest research and focus groups, etc.

Would you like to open up new avenues for users to give feedback?

• There is never a bad way to get feedback from customers. CP also had phone support to talk directly with users. They are open to any new method for feedback.

You slated a percentage of profits to go to charity in the beginning. Was that maintained when you were acquired by Disney?

• Yes it was maintained and continues to this day. CP does not talk about it a lot as we don’t want to turn it into a marketing pitch. “Coins for Change” was our first public charity event - it allowed kids to give their coins to one of three charities. Then, CP took $1M and distributed it proportionally according to how kids put their coins between the three charities. Two billion coins were given, which is remarkable due how difficult it is to acquire coins in the game. Disney never questioned keeping the charity program.

How do you give kids what they want when, depending on the age group, kids can be bloodthirsty llittle monsters? How do you distinguish about what they say they want and what they really want?

• Kids always ask for beds for their igloos, but it leads to inappropriate stuff so CP will never do it.

What are some of the key personalities or traits you look for when hiring?

• A lot of it comes from gut If the people doing the hiring are not the type of person CP is looking for themselves, it gets a lot harder to hire the right people. Up in Canada, it’s a very relaxed environment well suited to producing those sort of people.

Does CP appeal to an older audience?

• CP actually has a wider demographic than people realize: 6-14 years old. It takes on a geeky cool thing at the older ages, like Napoleon Dynamite. Older kids spend more time on Xbox but will still hop on for snowball fight wtih friends in CP.

What percentage of your budget goes to Customer Service?

• Two thirds of our staff, 150 ppl, are dedicated to CS. We are opening offices in Brighton, Australia, Brazil, etc.

What kind of predator protection tools do you use?

• Predators are not much of a problem for CP due to our filtering tech and massive human presence on CSR. We remove several hundred words a day from system. i.e. “lollipop” takes on undertones due to pop song, so we remove it. Then we review it a few months later to see if it can be reintroduced. A lot less gets through than people realize. Reportable incidences are how these issues are measured and to date CP has not had one. Nothing is ever perfect, but in a sea full of unlocked cars, CP is low-jacked and locked up. Plenty of easier targets for predators.

With two thirds of staff being CSRs, are costs a concern? Would you ever outsource?

• CP worked hard to build a scalable model and work on efficiencies in CS. We support English alone in Australia, UK, North America, so it’s really important to have people in each country that know that region’s slang, etc. CP is so passionate about CSR system that we have never brought up outsourcing it.

How will your product evolve to accommodate a more mature userbase?

• CP has a substantially large writing staff working hard to make sure there is relevance across the board, but realistically, CP will never be able to compete with a 17 year old’s console gaming habits, etc. So at some point we need to let them go. Now with Disney we can look at developing other products for those older demographics.

I heard Penguin Times is the most widely read newspaper in the world - is that true?

• An article recently compared it to a lot of leading newspapers and it is substantially large, but CP does not keep a lot of hard metrics on it. CP did track it for a while and it was impressive - especially intimidating to the 2-3 writers who work on it full time.

How did you come up with the backstory you have?

• Story is everything in entertainment. From day 1 we had a writer who started as a support person. She built a team, but a lot of the ideas come from the kids. Lot of logical - and illogical - ideas. CP introduces characters very slowly - we don’t introduce 30 chars at once and call it a day. 90% of our internal conversations revolve around what CP can’t do re: story, but ultimately the 10% that makes it in, makes sense to audience.

How often do you get feedback concerning the flash platform?

• Lance is great at working backwards. CP was originally developed in Flash 6 and most of it would run today in that environment. We’ve always looked for the highest install base and built for that. One of the biggest issues is ports not being open on routers, so we spent a ton of time making sure it just works for everyone. New issues are constantly coming up - i.e. new browsers coming out - but our audience is quite patient as we work through issues.

What other non-English markets do you plan to launch in?

• CP has 7 or 8 translations in the works now. None are public yet, but our goal is to roll them out quickly. That is one of the reasons CP joined Disney. In the next 6 months there will be several announcements around that.

At what point did you realize you needed more than out of pocket money to move forward?

• We started CP with aggressive budget, low salaries. We worked really hard to build a scalable model, so as audience grew, CP could cover costs. There were lots of VCs out there, but CP needed infrastructure help not just money. John Lassiter and the crew at Disney were always consistent with what they said would happen and are still consistent.

How can you handle the support tools and requests from other regions and languages?

• That is one of the reasons we can’t just push a button to launch in other territories. We need to ensure the tools work for those regions. CP brings people from that country to their office for 6 weeks, then sends people from CP to the regional office for 6 weeks.

What was the biggest challenge working with Disney?

• The largest challenge CP has was the size of Disney. Every Disney division has a 50:1 ratio compared to CP’s team, so it was easy to be inundated with emails due to difference in size. Bob Eiger called Lane after acquisition and said “If you ever feel that Disney’s size is stifling you, I want to be the first to know”

What level of importance does mobile play have for your audience?

• We are trying to track demographics of our audience and how fast they are adopting mobile. We have a few things in the works for mobile now, but we want to make sure it is done purposefully and not just to check a box. Need to make sure it’s as fun or more fun than PC.

How do you deal with banning players?

• One thing we do is to purposefully keep CSRs who ban from seeing whether it is a member account or non-member account, to prevent bias from creeping in. We issue 24 hour, 72 hour and permanent bans. We’re able to see not just chat logs but also what a user was trying to say - i.e. what didn’t make it through filters.

[Editor's Note: Contributing writer Simon Newstead is CEO and Co-Founder of Frenzoo, a startup in the 3D fashion and lifestyle space and the writer of the VR Fashion blog.  He can be contacted at: simon at frenzoo dot com.]

Entranced by the success of IMVU, Club Penguin and Habbo, investors have poured millions into virtual worlds with new services blossoming out of stealth mode every week. But where is the space headed?

At last week’s Virtual Worlds Expo, several hundred insiders huddled to offer their own opinions on the future. Operators new and old alike, technology providers, and a smattering of advertisers and Hollywood players came together, and five interesting trends emerged:

1)  The War on Geekiness

Electric Sheep Company’s Sibley Verbeck summed it up well, coining the phrase “Multi-Global War on Geekiness”.

There was recognition that to hit mainstream, the industry has to leave its geeky roots behind and focus on a simple and fun user experience. Barriers to entry plaguing early entrants - difficult navigation, large downloads and complex user interfaces - have to disappear. The presented alternative to shedding our geekiness was fairly stark:  waiting years until Generation Z “Club Penguin” kids grow older. Not a new idea, but one that is really being taken seriously.

New players are paying attention – one example debuting in the US market at the show was Freggers – a game that made avatar signup and orientation a breeze. And it’s working - already Freggers has picked up a user base of over 500,000 in their home market of Germany, which interestingly includes many users in their 20s and 30s - despite a young, pixel-art style.

2) Say No To Large Client Downloads

“If uses have to download a client, you’re dead. You’re a science project only.”- Sean Ryan, Meez CEO.

One of the most lively panels was with the founders from Meez, Vivaty, Three Rings and Small Worlds and all shared the same opinion: standalone, heavy-client virtual worlds were going to fall away.

Daniel James from Three Rings, makers of popular Puzzle Pirates, believes 90-95% of visitors will not install a separate client. His new MMO, Whirled, is 2D Flash and his previous projects have both been Java.

However the panel disagreed about whether Flash was the only option for the masses, weighing up its lack of support for hardware based 3D.

Vivaty CEO Keith McCurdy argued for a light, single-click install, plugin being viable for masses. Installed in under a minute, he approximated a successful install rate of interested visitors in the 40-50% range (note- with Frenzoo we also see similar rates in our early field testing).

Google has taken the browser 3D plugin approach with its Lively service.  And Avatar chat plugin Weblin recently hit 1 million unique users.

In Korea, a bellwether market for many a trend online, 3D browser plugins have been successfully used for some time, including just recently in MiniLife from Social Network pioneer Cyworld.

3) Virtual Brands Go Terrestrial

With so many entertainment and consumer brands moving into virtual worlds, it’s easy to overlook the opposite trend starting to emerge.

A handful of successful online brands are starting to move onto store shelves through licensing and partnership agreements.

Neopets is the poster child in this space and Habbo, on the back of some early dabbling in the space, hinted at the show of a major offline brand tie-up to be announced soon

Look out for more of these crossovers to come in coming months.

4) Branded Items: Not Free For Long

So far, in many virtual worlds such as Meez, branded items have been free. But at least for some items that will soon change.

WeeWorlds head of marketing, Lauren Bigelow, explained the plans of the 25 Million strong WeeMee community: to date, all branded items had been free, but some items will soon cost money, such as premium branded items like an upcoming Paris Hilton.

Why? Charging money for branded items increases exclusivity - and therefore buzz - driving the marketing campaign’s objectives. Obviously a revenue stream is a happy side effect as well.

Used well, it sounds like a win-win. Expect experimentation on branded item pricing to happen in coming months.

5) Taking Virtual Responsibility Seriously

Kids world Dizzywood, which announced at the show it had hit 500,000 users, recently used in-game activities to promote respect and responsibility by partnering with the Arbor Foundation for Earth day to encourage kids to plant virtual trees.

Club Penguin has done a lot with WWF and Habbo also has embraced social responsibility when it comes to their users, with a policy in place now restricting the maximum that can be spent on coins each month.

Do these socially responsible activities really pay off? It’s too early to say but respecting users and building up trust surely can’t hurt.

Is there a season for conferences? If so, it feels like it’s upon us.

GDC and SXSW went well. Here are some links to coverage of my talk at GDC and my panel at SXSW.

GDC

• Kotaku
• Gamasutra
• Bret Terrill
• Coobico

SXSW

• VentureBeat
• Virtual Worlds News
• Tony Walsh’s Liveblog
• New Media Buzz

Random local press

• WestEnder magazine

Next up for me is ICE 08 in Toronto.

I’m on a panel there called “Worlds @ Play” moderated by Lucie Lalumière (VP Interactive, Earth Rangers) in discussion with Leigh Alexander (Editor, Worlds in Motion / Staff, Gamasutra.com), Matt Daly (Cofounder, Metaversatility.com) and Barbara Lippe (Art Director & VP International Relations, Avaloop). I’m only in Toronto from Wednesday afternoon to Friday afternoon, but if you want to grab coffee at the conference, let me know!

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