Loki Partners

Virtual Goods Payment Method Breakdown - Mobile/Cards Rising

This was originally posted at my personal blog Sharkjumping

I was asked this past week by a few people to elaborate on the comments I made at the Engage conference 2 weeks ago outlining how I see most payment methods occurring across the various companies I work with.  So with the caveat that this is more relevant for US-centric companies with at least a portion of teenage audiences, the breakdown generally is:

50%: Credit Card & PayPal 

• The US is a credit card-centric country, and PayPal started here, so it's generally the highest contributor.
• Advantages:  low transaction fees (usually less than 5%) and ability to do recurring payments
• Disadvantages: new credit card law makes it even harder for under 21 crowd to have cards, and the higher "friendly fraud" issues in interactive entertainment cause issues for payment providers, leading to publishers being cut off by their processor
• Suppliers - many on the credit card side, plus PayPal in general

20%:  Offers & Surveys

• This rapidly growing category started on Facebook, and has now spread to all virtual goods based sites.  In this case, users can either fill out an appropriate actual market research survey and receive currency for it, or they can sign up for direct-response style offers (e.g sign up for Netflix), and receive currency for it.
• The offer/survey provider receives a fee from the supplier, as high as $50+ for a credit card application or as low as $3 for a survey, takes a 10-20% fee, and remits the rest to the site
• Advantages:  user doesn't directly pay, so it opens up audience to less banked people or those who have more money than time
• Disadvantages: users quickly find ways to game the system, some users sign up for offers solely for the cash, not because they have any interest in the advertiser, plus a subset of the offers are quite misleading.   Surveys often don't have enough supply for all of the publishers
• Survey Suppliers - Peanut Labs and new OfferPal service
• Offer Suppliers - many, including Super Rewards, OfferPal, Gambit, CPA Storm, Ad Parlor, etc.

10-15%: Mobile/Premium SMS 

• More popular in Europe, but now growing in the US, payment by mobile phone through premium SMS is a convenient way for less banked users to use their phone to pay for offline goods, especially now that most providers have wide US coverage and now that the kinks have been worked out across carriers
• Advantages:  convenient since a phone is always with you, great for younger users with no credit cards, and recurring transaction capability is arriving
• Disadvantages:  50% transaction fees in the US, plus still have some friendly fraud issues when parents see the bill.
• Suppliers - Zong, Boku, Allopass

10-15%: Retail PrePaid Cards 

• Seems like an old school approach (why buy virtual things at physical retailers?), the rapid growth of the prepaid card market in the US continues as more retailer distribution takes place and as users and publishers start to get used to the method.
• Advantages: available at tens of thousands of stores through good old fashion cash, is great for gifting from from friends and relatives (holiday season is soon), and has less friendly fraud issues since it's a set amount of currency
• Disadvantages:  high transaction costs (25-55%), too many cards for limited shelf space, inability to do recurring transactions, can get kicked off shelf due to slow sales, and hard to roll out retailer by retailer
• Suppliers - Incomm, GMG (Meez's partner)

2-5%:  Other:  Cash in Mail, Bill to Home Phone, Rixty, etc

• There are numerous other methods, including the humorous "Cash in Mail" method which make up a small percentage of remaining revenue, all with their own strengths and weaknesses

Again, this breakdown is different, depending on a site's demographic.  A European-focused site like Sulake's Habbo Hotel will get the majority of its revenue from Mobile, while a tween-girl game like Nexon's Maple Story drives revenue primarily from prepaid cards, and a savvy social media publisher like Zynga may have much higher Offer revenue.

What's key here is that the overall virtual goods market is surging in the US, that we're all collectively addressing the payment method issue through a variety of new approaches & products, but that there are still a number of new methods coming to accelerate the market even farther. 

Best of all, it keeps changing, keeping consultants like me employed since last year's methods are not as effective as current ones

Only Virtual Goods Will Pay for Community Features

After having the same conversation multiple times this week at Casual Connect Europe (see post here), as well as with numerous other big social communities, the easiest way I can express the value of virtual goods to non-gaming and non-virtual world sites is that Only Virtual Goods Will Pay for Community Features.

What do I mean by that?  If you have a general consumer-oriented site that has community features (forums, chat, profiles, IM) as a big part of its traffic, then you have no way to currently pay for it, even if it has tons of traffic.  There is very little commerce taking place in general community sites, few profitable advertisers want to be any where near this type of user-generated content, and almost no users will pay a separate subscription fee for it.   Yet community features are driving the bulk of a site's traffic, producing tremendous time-on-site stats, and page views per visit - all at less than $.05 CPM (and declining), especially if you have a decent portion of non-US traffic.

Where virtual commerce enters the equation is that it is the ONLY proven method where active users in a community will pay tens of cents per month per user to:

• personalize their experience
• differentiate themselves from friends
• thank people for doing something
• show off for others
• flirt with some users
• simply waste time with friends
• in general, pay to be noticed

Those tens of cents per month quickly add up to tens of thousands of dollars per month in total revenue for smaller sites, and hundreds of thousands of dollars per month for bigger sites.   For a huge site like Facebook, even its relatively primitive gifting program generates millions of dollars per month, and that's by barely trying.  For a site with non-US traffic, it's even more important to drive this business since few countries outside western Europe and the US can support a robust advertising solution, yet those countries have hundreds of millions of Internet users.

Some folks I speak with seem to believe this will only work for hard core gamers or for teenagers.  The data from Meez and other similar sites actually shows that women aged 25-54 will pay the most for virtual commerce, and they do it in a wide variety of sites, not just in gaming ones.  

If you have a site with a big set of community features, and you're not offering a rich virtual commerce program, you're just leaving money on the table, which is a tough thing to do in this environment.

Hi5 Finds Virtual Goods Religion

This blog post was originally posted at Sharkjumping

VentureBeat today profiled (here) large international social media network Hi5's increasing efforts to differentiate and monetize its service through a virtual goods approach versus an advertising one practiced by MySpace and Facebook.  As I have blogged about in the past (here), this is a powerful move by Hi5, as it should be for any big community site (blog, social media, forum, IM service, etc.) which needs to monetize its site beyond the declining advertising market, especially for any audience outside the United States.

A virtual gifting program, a la Facebook, is the obvious first step for any site, but Hi5 isn't stopping there, with plans to introduce avatars, games, and an eventual virtual world, all integrated into Hi5's massive social media network.  This is truly the next generation of social media, as Meez (where I am a board member) has shown with its growing avatar, gaming and virtual world efforts.   With an integrated virtual goods system through out the site, the value of the site's currency and the resulting status becomes much higher versus just banging out a gifting site and then calling it a day, as some companies seem to be doing.

At TwoFish (where I am a board member), the company provides a full back-end financial solution for community sites or application developers which wish to offer a virtual goods-based set of services to their users.  For a site like Hi5, with a larger 3rd party developer network, the bold move would be to create a Hi5 wallet, which would give Hi5 users a single place to fund a wallet, but which would then give 3rd parties the ability to tap that wallet to power their applications.   Hi5 gets yet another source of revenue, and the 3rd party developers don't have to sign up every new customer for a yet another set of payments - it's a win/win situation.

In general, these trends are accelerating as the advertising climate shifts downward, but every site should have a plan to integrate virtual item-based services anyway because it offers a premium revenue stream perfectly matched to the tons of incredibly loyal users for big community sites - these users are lousy advertising targets since they repeat so much that they hit quickly frequency caps on most ads.  

Our experience and research at Loki Partners (www.lokipartners.com) shows that general community sites should be able to generate $.10/month/repeat user within a few months of launch, and that should move to $.25/month/repeat user within a few additional months as new features are launched, with $1/month being the number seen by some virtual worlds - in this case, we define repeat users as those who repeat a visit within the same month.  That revenue bump is a HUGE win in today's rough economy, and it's good to see Hi5 blazing a trail in that direction.

The Social Network Service Quest for Premium Revenue = Virtual Items

Originally posted at www.sharkjumping.com

What's become clear in the past 24 months is that the rise of social network services (SNS) is changing the face of the consumer Internet through a massive user base combined with enormous engagement metrics.  What is obvious is that advertising alone isn't going to pay the freight for these services, at least not at the rate their owners would prefer.   An article in the NYT today about MySpace's quest for advertising revenue (see here) points out the same dilemma, but without providing any solutions, outside of better targeted advertising.

The fact is that most successful media models offer 2 revenue streams - premium/subscription and advertising - Newspapers, magazines, XM/Sirius, and cable television come to mind.  It doesn't mean you can't create value with only advertising, as broadcast radio and broadcast television have done, but the holy grail is an additional revenue stream, and preferably one which doesn't reduce the overall audience count through a "subscription wall".

As you might expect from me at Meez, we believe that the required secondary revenue model should be a virtual item-based one.  Why?  Because at a SNS, roughly 10% of your unique users provide roughly 50% of your overall engagement (no one calls them page views any more).  This means that your best customers are actually your worst advertising targets since they are on your site so much that they "frequency cap" on advertising since they have seen every single ad you can possibly show.  Yet they are your most loyal users, so they are usually most willing to pay if you give them a good enough reason (and a convenient method, but that's another upcoming post).

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status?  It's so basic, and is sometimes overlooked.  It's not about getting loyal users to pay for premium services like Music since those are generally solitary services which don't take advantage of a social network filled with people checking each other out. It can be as basic as a virtual gifting system, and as sophisticated as a fully built-out virtual item marketplace.  The "online bar" FUBAR is probably the most developed in the US, with a relentless focus on getting users to pay to impress members of the opposite gender, or to somehow benefit the group through happy hour sponsorship, but there are numerous other examples emerging.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases.  That compares to $3-5/year in advertising from a unique user.  If a SNS can't technically implement this system, there are now virtual item platform providers like TwoFish (where I sit on the board) which can accelerate a site's development of this revenue model.

This doesn't mean I believe only in virtual item models, as you see with the now popular "Free to Play" MMO model in gaming.  It's the combination of the two revenue models which is so powerful since it matches harder core users with a great way to monetize them, while still leaving completely open all of the advertising opportunities that come with large audiences.  So if you're an SNS, you MUST consider implementing a virtual item/gifting program as a way to generate additional revenue which uniquely fits the social aspects of an SNS vs just subscribing to premium service.

What's become clear in the past 24 months is that the rise of social network services (SNS) is changing the face of the consumer Internet through a massive user base combined with enormous engagement metrics.  What is obvious is that advertising alone isn't going to pay the freight for these services, at least not at the rate their owners would prefer.   An article in the NYT today about MySpace's quest for advertising revenue (see here) points out the same dilemma, but without providing any solutions, outside of better targeted advertising.

The fact is that most successful media models offer 2 revenue streams - premium/subscription and advertising - Newspapers, magazines, XM/Sirius, and cable television come to mind.  It doesn't mean you can't create value with only advertising, as broadcast radio and broadcast television have done, but the holy grail is an additional revenue stream, and preferably one which doesn't reduce the overall audience count through a "subscription wall".

As you might expect from me at Meez, we believe that the required secondary revenue model should be a virtual item-based one.  Why?  Because at a SNS, roughly 10% of your unique users provide roughly 50% of your overall engagement (no one calls them page views any more).  This means that your best customers are actually your worst advertising targets since they are on your site so much that they "frequency cap" on advertising since they have seen every single ad you can possibly show.  Yet they are your most loyal users, so they are usually most willing to pay if you give them a good enough reason (and a convenient method, but that's another upcoming post).

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status?  It's so basic, and is sometimes overlooked.  It's not about getting loyal users to pay for premium services like Music since those are generally solitary services which don't take advantage of a social network filled with people checking each other out. It can be as basic as a virtual gifting system, and as sophisticated as a fully built-out virtual item marketplace.  The "online bar" FUBAR is probably the most developed in the US, with a relentless focus on getting users to pay to impress members of the opposite gender, or to somehow benefit the group through happy hour sponsorship, but there are numerous other examples emerging.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases.  That compares to $3-5/year in advertising from a unique user.  If a SNS can't technically implement this system, there are now virtual item platform providers like TwoFish (where I sit on the board) which can accelerate a site's development of this revenue model.

This doesn't mean I believe only in virtual item models, as you see with the now popular "Free to Play" MMO model in gaming.  It's the combination of the two revenue models which is so powerful since it matches harder core users with a great way to monetize them, while still leaving completely open all of the advertising opportunities that come with large audiences.  So if you're an SNS, you MUST consider implementing a virtual item/gifting program as a way to generate additional revenue which uniquely fits the social aspects of an SNS vs just subscribing to premium service.

The Importance of PrePaid Cards to Virtual Worlds & MMO's

Originally posted at www.sharkjumping.com

Our partner GMG Entertainment today announced the roll out of Meez prepaid digital entertainment cards (and others) at top US retailer Best Buy (NYSE: BBY).  This is a key move for the growth of virtual commerce at MeezNation and we're excited that Best Buy is launching dedicated card kiosks in their video game sections since it shows a strong level of commitment from a forward-thinking retailer.

So why should anyone care about old-line retail stores and physical goods when we're all selling cutting edge virtual goods?  Isn't it all going to be virtual?   The reason is that retail still matters a great deal, especially when addressing a somewhat unbanked audience like teenagers.  We all know teens acquire an estimated $60B each year, whether it's from allowances or part-time jobs - however, they don't have an easy way to send it to their favorite virtual world or Massively Multiplayer Online (MMO) game company since they don't have credit cards, are not happy borrowing them from parents, and aren't as comfortable with PayPal, even though it can be linked to a checking account.   Plus, teenagers still go shopping a lot, and that retail foot traffic is incredibly important since it provides another way to reach that audience when they're not online.  Finally, parents or friends are more comfortable giving gift cards these days so it's easier for a teenager to ask grandpa for a $10 Meez card for graduation vs asking for cash - it's a big Win/Win for the category.  The downsides are that there are a limited number of slots available, and the retailer/partner margin takes a significant part of the overall revenue, but since we're selling virtual goods with high margins, we believe the increase in revenue is worth the transactional cost.

On the retailer side, cards are perfect merchandise since they deliver relatively high value to floor space ratios, offer margins somewhat close to other physical products, and since there is little shrinkage/theft since the card is not worth anything unless activated at the register.  Given the decline of recorded music sales and the flattening of DVD sales, this can be a nice win for retailers who really focus on the digital entertainment category - some of them will soon start to actually integrate their brands and links into these worlds so that users can move back and forth between virtual and physical spaces.   Best Buy was a key driver of Rhapsody's success when I was running it 5 years ago, and the company is always looking at next wave of retail trends to make sure it stays relevant in an increasingly digital world.

This plan doesn't mean just throwing the cards next to the Macy's and TGI Friday's gift cards, as I have seen at other stores since they will get lost in the increasing blizzard of cards, many of which are aimed at different demographics than entertainment cards.  That's why we're excited about GMG's efforts to work with Best Buy to launch a specialized area of the video game section in Best Buy stores, and to provide an array of entertainment cards, from hard core MMO's to broader virtual world offerings like Meez.  When I asked about the cards this weekend at the Columbia, Maryland store, the employee knew exactly where it was, and took me directly to it.  You can see if Meez cards at your local BB store here. 

There will come a time when all transactions are done by cell phone or some other equally high tech method, but for the foreseeable future, retail placement and the resulting revenue will be a key driver for successful digital entertainment brands, and leading retailers will benefit by offering these options to their customers.

Alternative Payment Systems Power Social Monetization Growth

Originally posted at www.Sharkjumping.com

I've previously blogged about the rise of virtual goods and overall premium services in virtual worlds, social media and gaming, but one key component of this growth in revenue has been the rise of what are generally called alternative/aggregated payment services such as OfferPal, SuperRewards, PeanutLabs, PayByCash, Sometrics, etc.

This occurs because there are 3 components to a successful virtual good-oriented revenue model:

1. Influx of Users with High Repeat Usage and Time on Site - this is true for many community-oriented sites, whether it's forums, social media sites, or MMO's - if a site doesn't have strong engagement, then it will never sell premium services and should stick with advertising
2. Creation of Premium Items and Services - this is where all the site focus generally takes place since it's fun to come up with cool virtual items, although I've blogged before about how it's more important to worry about STATUS, not GOODS- in any case, the site owners must focus heavily on creating services which users will pay for - social gaming service Zynga has some great examples of ways to monetize users.
3. Offer a Wide Range of Payment Options - this is the most underlooked part of the equation, but is crucial for community sites which appeal to US teenagers or anyone outside the US who is not credit card-centric - this is where aggregated payment services enter the equation.

Because the big social media sites can not seem to come up with a shared electronic wallet solution (like logically using one from TwoFish where I'm on the BoD), it means that every application provider or individual site must come up with their own way to collect money from users for premium solutions.  Since many of the users don't have credit cards, or aren't comfortable putting them down, all big sites need to provide a wide array of payment options to maximize potential revenue.

Most important payment options are:

• Credit Card - bulk of users, esp in US
• PayPal - bigger in US than overseas, but generally #2 after credit cards
• PrePaid Cards at Retail - can be really large, like for Maple Story MMO, but is low margin
• Premium SMS/Mobile - is often the largest non-US solution, but very expensive
• Cash In Mail - Gaia Online has 3 people opening envelopes of cash - is often overlooked
• Fill out Surveys - a newish offering which lets users provide information in return for currency
• CPA - e.g sign up for ringtones, and get virtual currency
• 50+ other solutions, especially outside the US - includes bank transfers, additional cards, etc.

At Meez, we offer the first 5 solutions, and each one beyond credit cards has driven up revenue by 5-10%, but it becomes a management nightmare to continue to coordinate with each provider, as well as implement each additional API solution.  That's where aggregated payment solutions come in.  With any of the providers I first mentioned above, a social community site can quickly offer a wide range of payment options with a much smaller amount of work, and by paying only a 5-10% additional fee beyond the core fees for each type of service.  This move generally drives up revenue by 25%+, and opens up the site to a much wider range of users who may be frustrated at their inability to pay for premium services.

At a later time, the site can choose to do individual deals with especially important providers, depending on how a sites' users tend to choose. e.g. if a large percentage of users choose mobile payments, then a site may want to cut a direct deal with a big SMS provider like Zong, MobileCash, etc. to feature them and to cut out the middle man

With alternative payment systems now proliferating along with the monetization opportunities, some of these companies are doing tens of millions of dollars in revenue after being in existence for just a couple of years.  The competition is growing quickly, but so is the emphasis on premium offerings, so it's one of the few growth areas in the sector.  Where is PayPal or VISA in this opportunity?  The short answer is nowhere after multiple failed efforts, but my guess is they will end up purchasing the leaders in the space once it gets large enough, just as PayPal recently did with Bill Me Later.  

Again, if you have a popular social community site and you're not aggressively monetizing it through premium services, you're leaving tons of money on the table, and probably won't be with us in 2010 at the current trend line, so definitely look at the payment services as a way to quickly scale up your offerings.