December 9th, 2008
Via The Wall Street Journal, an interesting look at the sale of virtual goods in virtual worlds:
“…Want to walk a mile in Elvis Presley’s blue suede shoes? It’ll cost you 50 cents.
In a down economy, that might be an affordable luxury to a teenager or twentysomething hanging out in a virtual world like Gaia Online, which this week will start selling a range of digital accessories depicting the rock legend’s style, including blue suede shoes, a white-rhinestone jumpsuit ($4) and a pompadour ($1.50).
Younger people unfamiliar with Elvis might prefer to shell out $2 for Justin Timberlake’s signature fedora or $3 for a pair of Snoop Dogg Dobermans to raise the cool quotient of their characters, known as avatars.
That is the premise behind Virtual Greats, a start-up in Huntington Beach, Calif., that represents celebrities and brands in the burgeoning American virtual goods business. The one-year-old company acts as a broker between Hollywood and the technologists who run youth-oriented virtual worlds like Gaia, Whyville and WeeWorld.
So far, the deepening recession has not slowed sales of virtual goods, which executives attribute to people spending more time at home. Gaia Online, a youth world with seven million monthly visitors, sells more than $1 million a month of virtual goods and expects a record month in December, said its chief executive, Craig Sherman. One rival, IMVU, has also had a 15 to 20 percent increase in sales since September.
Facebook, the leading social network, allows members to spend real money to send virtual gifts, and it has worked with corporations like Ben & Jerry’s Homemade, which gave away 500,000 virtual ice cream cones in April as part of a Free Cone Day promotion in stores.
Consumers are tightening their belts, but they still want to socialize with peers and express themselves, industry executives say. Virtual goods like Paris Hilton’s pet Chihuahua or Mr. Timberlake’s puffy jacket can offer a cheap way to stand out.
“People are thinking that they’re sacrificing in other areas so I’ll indulge here with a dollar,†said Charlene Li, a social media analyst formerly with Forrester Research. “Is it worth it? It depends on them.â€
By most estimates, customers spend about $1.5 billion a year on virtual goods worldwide. Tencent Holdings, a publicly traded Internet media company based in China, is the leader, with hundreds of millions in annual revenue from virtual goods in online games and other applications. Internet companies in the United States are behind the curve.
For celebrities, licensing virtual products is a new way to make a buck and stay hip with a young crowd. Snoop Dogg’s manager, Constance Schwartz, said she did not have a clue about virtual worlds when Virtual Greats approached her this year, so she and her team spent a week exploring Gaia Online.
After seeing that many teenagers were spending their time and allowances there, Ms. Schwartz explained the concept to Snoop Dogg. She said it was an easy sell, given that Snoop Dogg had been one of the first rap musicians to license works for ring tones and voice tones. His only requirement was that all of the goods be “true to himself,†down to the hair braids, house slippers and plates of Roscoe’s chicken and waffles he regularly eats in Los Angeles.
At Elvis Presley Enterprises, virtual worlds are just another drop in the bucket — 250 licensees worldwide sell 5,000 Elvis products and promotions, including talking dolls, Pez dispensers and a Facebook page. “Elvis is everywhere,†said Kevin Kern, a spokesman for the company, which controls the name, image and likeness of the rock star. “Why not the virtual worlds?â€
Virtual Greats appeals to partners like Snoop Dogg and Elvis Presley Enterprises because it does the legwork that neither party — rights holder or virtual-world operator — has the desire or time to do. On one end, it courts celebrities and brands, negotiates licenses and aggregates talent; on the other end, it coalesces an otherwise fragmented market of virtual worlds starved for added sources of revenue.
Dan Jansen, former head of the Boston Consulting Group’s global media and entertainment practice, started Virtual Greats in partnership with Millions of Us, a marketing agency in Sausalito, Calif., that builds virtual worlds. The two companies shared the idea that virtual worlds lacked diverse revenue sources and had no presence when it came to celebrity or branded goods. The Omnicom Group, a marketing and advertising firm, and Allen & Company, an investment bank, invested an undisclosed sum in Virtual Greats.
Virtual goods have profit margins of 70 percent to 90 percent because they do not cost much to store, reproduce or distribute. Still, making a profit requires high volume. Next year, Virtual Greats hopes to represent 30 worlds and more than 50 artists.
It is talking with movie studios about licensing rights to characters like Ferris Bueller and with sports leagues for the rights to jerseys. It is also courting luxury brands like Gucci, Prada and Chanel for the rights to represent their goods online.
One challenge for Virtual Greats and its partners is to create legitimacy for the online brands while ensuring that there is not too much supply.
Mr. Sherman says Gaia uses “forced forms of rarity,†or limited editions of items. Over time, those items can command a premium in the secondary market, where members trade their goods for virtual currency. For example, a Gaia golden halo now out of production sold for $6,000 on eBay, he said.
Similarly, Virtual Greats has learned that it underpriced some items, like the Hulk Impact Crater, which originally sold for 50 cents, then went up sixfold in the Gaia aftermarket. In its several months of testing, Virtual Greats has found that people prefer more expensive items with a brand name over cheaper, generic items. And larger items that are easier to see are more popular than small ones.
Licensed virtual goods probably will not be more than a tiny niche business. Generic items are a huge portion of the virtual-goods market, and company-sponsored promotions like the Ben & Jerry’s cones on Facebook will probably grow in importance as marketers try to extend their brands onto social networks…”
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