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Virtual Goods: Entertainment, Fad, or Both?

Mob Wars logoVentureBeat has an interesting analysis of the commercial viability of virtual goods on Facebook. The area that is heating up a bit involves variations on games:

Various estimates given to me by developers themselves and other sources peg some applications as making hundreds of thousands of dollars a month -- this is money that a connected investor tells me Facebook itself isn't even fully aware of. A few apps below are notably profitable, and these are self-funded small teams, not large, venture-backed companies.
Some of the applications include:
  • A Tamagochi-like virtual pet (112,229 daily active users) as well as raising virtual plants to help "fight global warming" (745,630 daily active users -- and you thought watching your fern could be dull)
  • A game called Mob Wars in which participants play mobsters (483,824 daily active users)
  • Buying and selling your friends, which I guess would be called virtual slavery
  • Texas hold-em poker
Some of the developers are getting real investment:
Another possibly good sign here is that both companies have recently gained some big-name backers, who are presumably getting a look at company revenue that's hidden from me. SGN announced that it had brought on Amazon founder and chief executive Jeff Bezos as an investor, last week, which follows on a recent $15 million round. Meanwhile, Zynga has just raised $29 million in funding in a round led by Kleiner Perkins, with participation from existing investors Union Square Partners, Avalon Ventures, Foundry Group and Institutional Venture Partners, with IVP being the second largest investor, chief executive Mark Pincus tells me. He adds that his company has yet to tap into any of its venture money even though it has a staff of 80 people and other operating costs; it has been profitable through its previous $10 million round as well as this latest one, he says.
But let's step off the good time bandwagon for a moment. I have teenagers at home and have seen them use Facebook, and heard them talk about it. My daughter won't use the buying people application -- nor will any of her 138 Facebook friends (all of whom she knows in real life) -- because it requires comparing and ranking other people. She does use the virtual plant game, called (Lil) Green Patch, but it doesn't cost a dime (though it may be sponsored by companies that want to be associated with the topic).

In other words, active daily users can be a whole lot different from active daily paying users. Here's another view, taken from my daughter's list of active causes and some Facebook-wide statistics:

Cause Members Money Raised
Save Darfur 912,818 $25,411
Net Neutrality 14,195 $1,040
Stop Global Warming 1,935,007 $24,533
There's a big jump from having people signed up and getting them to part with their green, even if a lot of them are interested in green. This is the first problem in trying to understand a market that might or might not exist. Assuming that a few applications have found paying niches is a long way from knowing that a given venture you're considering entering or backing will have the same experience.

Another application -- which lets people become virtual pets that others can buy, using points they get for free -- shows the second problem. Among my daughter's set, the app has become passé. "No one ever uses it any more," she told me, "because it's just a fad. Every application goes through a fad [phase], except for the causes that are good for the world." The sample is anything but statistically meaningful, but her view is insightful.

Just as Tamagochis were all the rage at one point, now they're not. A company getting into this business has to stop thinking as a typical high tech entertainment business and must look more toward the volatile areas of fad and fashion.

To make money consistently, I think you'd have to find ways to create new fads. In other words, you have to operate as though you were in an industry based on fad, like couture. Now think of the infrastructure in the clothing industry: Fashion Weeks, publications devoted to driving consumer interest, and massive advertising. Consider how much effort goes into even video and computer gaming -- the advertising, the trade shows, the magazines. Even six figure monthly income among a number of companies won't be enough to sustain that level of activity.

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