The Business of Virtual Worlds
StumbleUponActually making money from a virtual world offers a number of possibilities, with most businesses opting for one of five business models. A second report from the Virtual Worlds Forum.
How you earn money will be a result of the nature of your product and the nature of your audience. Basically, there are five models: subscription, retail purchase, microtransactions, advertising and branding.
| Model | Examples | Notes |
| Monthly Fee | World of Warcraft, Eve Online | Large revenue possibilities - definitely the most profitable model currently. Global market for games is worth $2bn, with virtual worlds accounting for 15-25% of this. Also large startup costs, though. Interplay, for example, has said that the cost of its Fallout VW will cost $75mn and take 3-4 years. Risk factor is high, since many online games have failed to create a following. |
| Retail Sale | Guild Wars, Neverwinter Nights | One of the least popular models but with some noteable successes. Players buy a boxed product for a normal game price, but then play online for free. Little ongoing revenue except for expansions, so needs careful planning. It can be very rewarding, though. The WoW expansion The Burning Crusade sold 2.4mn units at $39.99 on its first day in the US and Europe. Neverwinter Nights is interesting in this regard as servers are run and paid for by the community. |
| Microtransactions | Habbo Hotel, Stardoll, CyWorld, Second Life (partly) | Large revenues again. At present, these are mainly geared towards younger and more casual audiences, spending small amounts of money (but multiplied by their millions of members) each month on accessories for their avatars and their spaces. CyWorld users spend $300K per day on these, which goes directly to the owner; Second Life transactions amount to $1.5mn per day, but the owners only take a commission on currency exchanges between L$ and US$. Most of these worlds are free to enter and the proportion of free versus paying members appears to be around 5:1 in most cases. |
| Advertising & Marketing | Second Life (partly), There.com | Brands and companies enter Second Life for various reasons: for PR purposes, to conduct research, for internal meetings and to prototype products, for example. Reach is low, but Second Life residents are viewed as influentials. Revenues and budget figures are difficult to come by but are estimated to be at the ‘tens of millions’ mark. Early adopting companies spent up to $200K on their virtual world presence, with ongoing costs around staffing and maintenance. There.com developed as a sanitised alternative for additional brand security, but with even lower reach at present. |
| Media Franchise | Playstation Home, ToonTown, BBC Adventure Rock | Brands developing their own virtual worlds is a new area and is not currently a noteable source of revenue. Likely to develop to become vehicles to sell music and games, for example. Educational institutions like the BBC and work from universities would also fall into this category. |
Recent developments have been the increase in hybrid models for revenue generation. The online world of Battlefield 2142, for example, is only accessible through a retail, boxed package, but the owners also sell in-game billboard space to brands. Virtual worlds agency IGA Worldwide has developed a network of billboard spots in more than 100 games to give brands reach in virtual worlds that they wouldn’t get working with just one world. However, this reduces the opportunity for relevant, seamless spots within particular worlds. This may or may not be a bad thing. Research has shown that seamless marketing is very well accepted by players, but also is likely to lead to low retention or attention rates. Second Life earns its income from a combination of commissions on financial transactions between real-world dollars and virtual Linden dollars, plus land rental.
The opportunities in virtual worlds are fourfold: they are currently niche, but represent some of the most interesting and influential individuals in the world as their users; there is still no clear winner, especially in the casual/social space; most online citizens aren’t part of a virtual world - finding the mainstream audience grabber - the Facebook of Second Lives - is still very much open to competition; and lastly, getting into virtual worlds is becoming cheaper: companies like BigWorld Technology, Sun Microsystems and Multiverse are offering world engines at increasingly competitive rates, and even for free (Sun).
The risks of getting involved in virtual worlds are also worth noting:
High Costs: Virtual worlds allow for a piracy-free and cheap distribution methods, but these benefits are offset by very high development and maintenance costs.
Unpopularity: Well-loved franchises, such as The Matrix and The Sims, have tried and - in some respects - failed to create online virtual worlds that match their overall profile. Few consumers will use more than one virtual world at a time, since they tend to command a significant demand on those individuals’ time. Hence, another WoW is likely to fail.
Regulation: The legal position and the jurisdiction regarding virtual worlds remains unclear. However, governments are understandably keen to tax the proceeds of virtual activities. At the same time, hacking exploits are common and the links with crimes around money laundering and terrorism are starting to be recognised.
Churn: Virtual worlds are always in competition with the next best thing. Any subscription-based or free-to-use service faces churn as an enemy. Developers need to be sure they are able to recoup costs before their users flip to a newer and brighter space.
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