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Experience in Asia suggests virtual goods is the biz model for social media

This post by Bill Gurley of Benchmark in the US gives a great comparative analyis of how social media sites are monetising in Asia and the US.

The headline is that the leading western socnets Myspace and Facebook are generating reasonable revenues (Bill estimates current run rate is $650m and $450m respectively), but that if their Asian equivalents are anything to go by they could be generating much more by bringing virtual goods and casual games more firmly into the mix.

TenCent is the leading example – it is a Chinese IM business that has 355m users, $1.2bn in annual revenues and a market cap of $11.2bn.  When adjusted for the cost of living in China TenCent makes as much per user in advertising as Facebook and Myspace AND then makes a further 8x that from other revenue streams, primarily virtual goods and casual games.

There are similar stories at DENA and GREE in Japan, although these companies are smaller.

Read Bill’s post for the full analysis.

Bill thinks that western socnets haven’t capitalised on the virtual goods opportunity as much as they should have in large part because the execs over here don’t really believe deep down in virtual goods and the value they have for consumers.

This last point certainly rings true with me.  Discussions of virtual goods business models are all too often met with a rolling of the eyes over here, and pointers to the success of Asian virtual goods businesses are met with looks of incomprehension and questions about whether things are simply different ‘over there’.

As Bill points out the fact that here in the west we are happy to embrace real world brands to establish our identity, often at vast expense, suggests that we ought to be able to translate that to the virtual world.

However, as Bill points out, there is a right way and a wrong way to do virtual goods, and simply launching them as an offering is unlikely to succeed.  As with everything else bringing in execs who have relevant experience will help and constant iteration and evolution of the product will probably be required before you hit upon the magic formula.

  • http://www.broadstuff.com alan p

    I agree with you, Nick, I've been arguing for a while that this will work in Europe and the OECD – after all, Habbo uses it – see here for eg:

    http://www.broadstuff.com/archives/1014-The-rea

  • http://www.cognitivematch.com Glen Conybeare

    While Execs with experience are certainly needed I think technology has an obvious role to play here to help determine which virtual goods work, for whom and when.

    A simple, “It's valentines – we should offer hearts and flowers”, approach probably won’t cut it. Technology that quickly learns what a specific user is more likely to respond too and measures the success or otherwise of what is presented is likely needed. This is especially important in 'spiky' markets and I suspect virtual goods have a certain viral element to them in that what was popular yesterday isn't necessarily going to be popular tomorrow.

    Cognitive Match (http://www.cognitivematch.com) is an early stage company that aims to help site owners solve this problem by using smart mathematics to match users with content/goods in real time.

  • MatthewWarneford

    I think its interesting how we're happy to spend significantly more on our own identity (with 'Chanel' sunglasses) than we are on gifts for other people! And without any hard evidence to back this up, it seems to me that digital gifting drives less revenue than digital identity, paralleling the real world.

    When I first read your post I was thinking that maybe there is a hierarchy here, going from 'practical utility' to 'identity value'. But then your post about flirtomatic made me think that perhaps its more about aligning the 'virtual value' to the purpose of the site.

    Big Point in Germany are doing some interesting things with 'practical utility'; in their case weapons. Having a better weapon, or more ammo, improves my chance of winning, and being a competitive man my identity is closely tied to winning!

    So, perhaps its more about combining sources of value? In the case of digital weapons I'm buying utility that hopefully helps me win and effects my identity.

    But then, to really tap into my identity its got to be a little deeper than just a status symbol. Somehow my mac says a little something about me, some how it stands for something that I want as part of my identity.

    So if its not just a status symbol then its definitely not about making some digital goods more expensive and assuming demand follows price (although that might be the case with some wines!).

    I think, perhaps, its more about examining what characteristics that make up the identity of the sites audience. If its a competitive gaming site then help me win because my self esteem is tied to my success. Or maybe I'm on IMVU and I'm an emotional and sensitive guy so let me dress as a goth. Or Im on Flirtomatic and I want to show I'm caring and a little racy, let me send you a risque gift! But ultimately, I'm prepared to spend the most money when its about me!

    It seems my budget for entertainment its far more limited than my budget for defining who I am.

    All round its a fascinating topic!

  • http://www.theequitykicker.com brisbourne

    Great comment Matt

  • MatthewWarneford

    I think its interesting how we're happy to spend significantly more on our own identity (with 'Chanel' sunglasses) than we are on gifts for other people! And without any hard evidence to back this up, it seems to me that digital gifting drives less revenue than digital identity, paralleling the real world.

    When I first read your post I was thinking that maybe there is a hierarchy here, going from 'practical utility' to 'identity value'. But then your post about flirtomatic made me think that perhaps its more about aligning the 'virtual value' to the purpose of the site.

    Big Point in Germany are doing some interesting things with 'practical utility'; in their case weapons. Having a better weapon, or more ammo, improves my chance of winning, and being a competitive man my identity is closely tied to winning!

    So, perhaps its more about combining sources of value? In the case of digital weapons I'm buying utility that hopefully helps me win and effects my identity.

    But then, to really tap into my identity its got to be a little deeper than just a status symbol. Somehow my mac says a little something about me, some how it stands for something that I want as part of my identity.

    So if its not just a status symbol then its definitely not about making some digital goods more expensive and assuming demand follows price (although that might be the case with some wines!).

    I think, perhaps, its more about examining what characteristics that make up the identity of the sites audience. If its a competitive gaming site then help me win because my self esteem is tied to my success. Or maybe I'm on IMVU and I'm an emotional and sensitive guy so let me dress as a goth. Or Im on Flirtomatic and I want to show I'm caring and a little racy, let me send you a risque gift! But ultimately, I'm prepared to spend the most money when its about me!

    It seems my budget for entertainment its far more limited than my budget for defining who I am.

    All round its a fascinating topic!

  • http://www.theequitykicker.com brisbourne

    Great comment Matt