Saturday, November 07, 2009

Virtual News

Sometimes the New York Times has excellent coverage of the Internet and gaming, especially if it has work written by new media journalist Clive Thompson. Sometimes it has terrible coverage. Not all the stories about online gaming in the newspaper were ill-informed today. In "Chinese Agencies Struggle Over Video Game" not only describes an interesting dispute between the authoritarian government's Ministry of Culture and the more culturally conservative Administration of Press and Publication over regulation of the game World of Warcraft. It also pointed out that U.S. massive games tend to have a much smaller part of the total market share than games developed in China. For more coverage of the controversy, check out "Clarification from the Ministry of Culture" from Web2Asia.

But "Virtual Goods Start Bringing Real Paydays" makes a number of missteps, even though it talks to real gamers about their virtual purchases and identifies sources from big players in the market of social games like Zynga, Playfish, and Playdom. The big mistake that it makes is relying on the opinions of venture capitalists, who tend to have poor understanding of reputation economies or the subversive potentials of online social networks.

Analysts estimate that virtual goods could bring in a billion dollars in the United States and around $5 billion worldwide this year — all for things that, aside from perhaps a few hours of work by an artist and a programmer, cost nothing to produce.

“It’s a fantastic business,” said Jeremy Liew of Lightspeed Venture Partners, a venture capital firm that has invested $10 million in several virtual goods companies. “Because it’s digital, the marginal cost for every one you sell is zero, so you have 100 percent margins.”

First of all, anyone who collects virtual goods will tell you that not all digital items are created equal and that "few hours of work by an artist" has to be done by someone who can create a compelling image using only a few pixels wisely. Games that are successful, like Farmville, which is one of their examples, rely on having a range of crop and animal animations that are visually engaging at a number of scales. To have the cuteness quotient of what the Japanese call "kawaii" characteristics requires a particular attention to the aesthetics of the screen.

Second, the idea that players are merely passive consumers eager to purchase meaningless tokens underestimates the likelihood of player revolts, particularly since -- as the article itself admits -- most players play for free. For example, last year's PackRat revolt, which I am writing about in the upcoming collection Facebook and Philosophy shows how participatory culture punishes what it perceives as systems of greed.

Finally, there is a tone of amusement at this mysterious behavior, despite all the explanations that the article offers, that seems ironic, given that something like the greeting card industry doesn't get similar amazement for having customers. Buy your friend a greeting card and it may well cost you over five dollars, including stamp, gas, and time for selection. And then who can see it? How does it give your friend any continuing pleasure once it is opened? Virtual goods are profoundly about the social and the public dimension of online interactions, a quality that the NYT doesn't always seem to get.

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Blogger Jardinero1 said...

I think what you say is true because it is also true in the brick and mortar world. In the brick and mortar world, the marginal cost of producing each additional unit is not the main driver for profit.

When you buy a bottle of coke for $1.25, the marginal cost of that unit, including the bottle, is probably less than a penny. But it is a reasonble guess that each participant along the chain to the final consumer made no more than an eight or ten percent profit for their individual part.

Most of the mundane items we buy in the brick and mortar world have an extremely low marginal cost but produce very little profit to the end seller or any seller along the supply chain. For most brick and mortar companies; the costs which matter most and must be recovered are R&D, overhead, marketing and or commission. Marketing and commission usually make up the plurality of costs.

7:36 AM  
Anonymous aion kinah said...

Social games is booming and it's time for the investor to take advantage - less investment compared to any fully bloomed MMORPG like Aion Online and the age target is not only to young adults it cover all age bracket.

9:07 PM  

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