A Parks Associates White Paper October 2008
Attribution Authored by Yuanzhe (Michael) Cai, Director, Digital Media and Gaming Published by Parks Associates October 2008 Parks Associates Dallas, Texas 75230 All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America Disclaimer Parks Associates has made every reasonable effort to ensure that all information in this report is correct. We assume no responsibility for any inadvertent errors. Attribution and Disclaimer i
Table of Contents 1.0 Defining Virtual World... 1 2.0 Success Factors of 2D KT&T Virtual Worlds... 2 3.0 Key Trends in the 3D Virtual World Industry... 6 4.0 Virtual World Business Models... 9 5.0 Consumers, Virtual Worlds, and Social Media... 11 6.0 Summary and Recommendations... 15 List of Figures Figure 1 Key Attributes of Virtual Worlds... 1 Figure 2 Virtual Worlds: Registered Users... 2 Figure 3 The Virtual Worlds Pyramid... 4 Figure 4 Virtual World Value Chain... 6 Figure 5 The Continuum of Business Models... 9 Figure 6 2X2: Virtual Worlds Compared to Other Online Communications Tools... 11 Figure 7 The U.K.: Adoption of Virtual Worlds vs. Social Networks (Q3/08)... 12 Figure 8 The U.K.: Gender of Monthly Users of Social Networks vs. Virtual Worlds (Q3/08)... 12 Figure 9 Active Virtual World Users Are Early Technology Adopters... 14 Figure 10 Reasons for Visiting Virtual Worlds... 14 Table of Contents and List of Figures ii
1.0 Defining Virtual World Virtual world is a computer simulated, persistent virtual environment where individuals can interact with each other and the environment through their avatars, which are visual representations of themselves. Other common characteristics of a virtual world include scalable support for multiple users, open ended or scripted content, and support of both synchronous and asynchronous communications (Figure 1). As the marketplace evolves, the categories of virtual worlds are quickly expanding, now including the following: 2D, 2.5D, and 3D virtual worlds based on graphics and technology; Web based or software client based virtual worlds based on access methods; Enterprise worlds, social worlds, entertainment worlds, and gaming worlds based on content and applications; and Kids/tweens/teens worlds (known as KT&T) and adult worlds based on target demographics. Figure 1 Key Attributes of Virtual Worlds Definition of Virtual World Page 1
2.0 Success Factors of 2D KT&T Virtual Worlds 2D virtual worlds focusing on the KT&T segment have been much more successful than 3D, adultoriented worlds. The following graph, courtesy of Nic Mitham at Kzero, shows that except for Second Life, all the virtual worlds that have more than 10 million registered users are 2D KT&T worlds. Some of the largest worlds based on total registered user accounts include Habbo Hotel, Neopets, Club Penguin, Stardoll, Poptropica, Barbie Girls, and Gaia Online (Figure 2). Figure 2 Virtual Worlds: Registered Users Consumer data confirm the popularity of virtual worlds among teens. Electronic Gaming in the Digital Home II, a Parks Associates survey conducted in March 2008 of more than 2,000 Internet gamers, shows that approximately 9% of respondents ages 13 17 play in a virtual world on a weekly basis. A Success Factors of 2D KT&T Virtual Worlds Page 2
recent Pew Research telephony survey of more than 1,000 American teens (12 17) also shows that 10% of them play in a virtual world. Further, the study reveals that there are no gender, racial, or ethnic differences in who visits virtual worlds. However, younger teens are more likely to have visited virtual worlds than older teens, with 13% of 12 to 14 year olds visiting these sites compared to just 8% of teens ages 15 17. 1 One of the reasons that 2D KT&T worlds have become huge hits is because many tweens and teens rely on Internet tools and cell phones to keep up with their friends after school. Virtual worlds provide a good environment for them to socialize with existing friends and make new friends while concurrently engaging in entertaining activities like gaming and listening to music. Several other key factors contribute to the success of youth oriented virtual worlds. They are easy to access and use. Most of these 2D/2.5D worlds are Flash or Java based; they are browser accessible and can run on computers without the latest processors and graphics cards. New visitors do not encounter a time consuming learning curve upon entering the worlds, as most worlds provide great orientation and support for newbies. In addition, because they are browser embeddable, they are very easy to market through Web advertisements and viral marketing. They provide a variety of interesting activities and content in a structured and controlled environment. Most of the 2D worlds maintain a healthy balance between user generated and professionally produced content. Visitors quickly find a sense of purpose. These worlds are a means to an end; in other words, they enhance the user experience through content and interaction with other people through avatars and virtual environments. Most of these worlds are themed, not open worlds. These themes attract repeat visits. The most popular themes are playing games, nurturing pets, enjoying music, and dressing up avatars. Our research shows that among virtual world participants ages 13 17, 46% primarily use virtual worlds to play games. In some of the popular 2D virtual worlds such as Webkinz and Neopets, more than 50 percent of their users visit mainly to play games. In contrast, visitors to 1 Teens, Video Games, and Civics, Pew Internet Research, September 16 2008. Fielding period: November. 2007 to February 2008. Success Factors of 2D KT&T Virtual Worlds Page 3
3D virtual worlds such as Second Life cite escaping real life and being someone else as their top two reasons for participation. These reasons provide less sustainable motivations than playing games, interacting with entertainment content, and socializing with other members. 2D KT&T worlds have clearly defined target audiences. They do not try to be all things to all people; they develop business models and content based on the needs of their core demographic groups. In addition, they build emotional ties with their audiences through familiar and branded characters, real world toys, and virtual objects. The Virtual Worlds Pyramid Enterprise Worlds Audience Base 3D Social Worlds: Client-Based 3D Social Worlds: Web-Based 3D Chat Rooms ARPU Potential, Age Groups Kids Virtual Worlds Figure 3 The Virtual Worlds Pyramid KT&T virtual worlds will remain the bright spots of the virtual world industry in the near term. The sheer audience size more than compensates for the low monthly ARPU (Figure 3). Large media companies, toy companies, and other brands targeting kids are investing serious money and efforts into the space. Media companies are especially active; Viacom purchased Neopets in 2005 for $160 million, and Disney acquired Club Penguin for $700 million last year. Other popular worlds, including Gaia Online, Habbo Hotel, and Stardoll, are the subject of frequent acquisition rumors. The interest is justified. Not only are virtual worlds attracting eyeball hours and dollars from many kids and teens, they also increase the level of engagement with brands and content. For instance, in May 2008, Success Factors of 2D KT&T Virtual Worlds Page 4
Nickelodeon announced that, thanks to Neopets, its cluster of family and child oriented sites achieve an astonishing 80 minutes of time spent per visitor per month. This announcement received much attention from many other media companies. A key question and challenge 2D worlds pose to the industry is, How will these kids change the Internet landscape when they grow up and graduate from kids worlds? Accustomed to avatars, virtual environments, and virtual items having real world value, they will certainly have a different set of expectations, needs, and requirements for various Internet applications, including communication tools, social networks, online games, and e commerce. Will these adults, accustomed to 2D worlds as children, want to graduate into more advanced 3D virtual worlds? Will they demand that social networking sites become virtual environments? Will they drive the adoption of 3D virtual worlds for enterprise applications? No one has the answers now, and they will not have these answers until more research is available. One thing is certain companies that best address this migration will reap huge benefit. Success Factors of 2D KT&T Virtual Worlds Page 5
3.0 Key Trends in the 3D Virtual World Industry Figure 4 Virtual World Value Chain Formation of an ecosystem: In a few short years, the virtual world industry has formed a fairly comprehensive value chain and ecosystem (Figure 4). Many virtual world operators are morphing into platform companies; in addition to operating their own worlds, they provide technology solutions to other companies interested in building virtual worlds. Marketing agencies that used to focus solely on advertising and marketing in virtual worlds, such as Millions of Us and Electric Sheep, are developing new capabilities and becoming full service agencies that can provide consulting, design, support services, and even full fledged virtual world technology platforms. A variety of enabling solution providers, application developers, and content studios has emerged to enrich the worlds with attractive content and activities. Four key categories of virtual world customers are becoming clearly defined: consumers, media companies, enterprises/educational institutions, and brands. In addition, several large global companies including Google, Sun Microsystems, Nortel, and Sony (PlayStation Home) have entered the space with their own virtual world products. Standards for the Sake of Standards Page 6
Movement towards interoperability, identity and asset portability, and open platform: 3D virtualworld companies realize that to achieve the vision of building 3D Internet or Web3D, there have to be certain levels of interoperability among different worlds. The Internet did not take off until leading companies broke down the Walled Gardens. New virtual world companies such as Multiverse, HiPiHi, and Vivaty have all taken an open platform approach, allowing all the worlds operating on their platforms to interoperate with each other. Areae is taking yet one step further by building a Webbased platform that allows everyone to build an interoperable virtual world. Second Life has lent its support to OpenSIM, which allows third party companies to use its virtual world browser to connect to open source servers and thus render an experience similar to Second Life. OpenSIM has fostered a lively developer community. Recently Second Life and IBM achieved a rudimentary form of interoperability between worlds by demonstrating the teleportation of an avatar between Second Life and OpenSIM. Despite these efforts, it will require time and continuous learning before the industry achieves a full interoperability that includes transferable avatars and identity, security rich transactions of virtual assets among worlds, and open standards. Many challenges exist, such as conflicting business interests and differences in business models and virtual economic systems. Increasing focus on simplicity and accessibility: Many 3D virtual worlds are learning from the successes in 2D KT&T worlds and are working hard to improve the accessibility and usability of their worlds. Many different approaches exist: Vivaty, Metaplace, and Google Lively enable thin client based virtual worlds that can be embedded in a Web browser; There.com and Second Life, both of which require downloads of a relatively large client software, have created messenger clients through which users can connect with in world friends and events; Multiverse provides both a 2D Flash based browser and a 3D downloadable client for accessing its worlds; and Exit Reality and 3DXPlorer provide easy to use technology tools for building 3D Webpages. In addition, virtual world companies in general have designed better user interfaces to improve the orientation processes for their new users. Standards for the Sake of Standards Page 7
Broadened use cases and growth of themed worlds : So far, general purpose open worlds, social worlds, and gaming worlds have been the dominant forms of virtual worlds. Second Life, There.com, and Entropia Universe are good examples of these types of worlds. In the past two years, however, many themed worlds have emerged, with content and communities that appeal to different types of consumers and interest groups. These include fan worlds (Virtual Laguna Beach, Virtual Hills, Buffy the Vampire Slayer world), travel themed worlds (Amazing Worlds and Journeys), music and entertainment worlds (vside, vles, and Next Island), and enterprise worlds (Forterra and Nortel). Established virtual worlds settle on one or two key business models: Second Life is focusing on its hosting business model while maintaining a social world for consumers; Entropia Universe has relied predominantly on a Virtual Asset Depreciation model but seeks to expand its appeal and business models through its partners such as CRD and Creative Kingdom; and There.com generates money mainly from marketing/sponsorships, virtual currency, and item sales. All of the other worlds are adopting a combination of these business models. Standards for the Sake of Standards Page 8
4.0 Virtual World Business Models Because of unique characteristics such as an immersive environment, avatar based real time communication, and support of multimedia content, a virtual world provides a platform that can accommodate a variety of business models simultaneously. These models include, but are not limited to, subscriptions, sales of virtual items, advertising/marketing/sponsorships, and e commerce. Virtual Worlds: the Internet of Avatars, a new report from Parks Associates, provides detailed analysis of these business models. The Continuum of Business Models 140 Registered Users Monthly Actives ARPU (Among monthly actives) 25 120 20 Registered Users (Millions) 100 80 60 40 20 15 10 5 Monthly ARPU 0 Facebook Myspace Habbo hotel F2P games Second Life World of Warcraft Entropia Universe Ad-centric models Diversified revenue streams Sub. Niche Models 0 Source: Virtual Worlds: the Internet of Avatars 2008 Parks Associates Figure 5 The Continuum of Business Models In its current incarnation, virtual world is uniquely positioned on the business model continuum between social networks and communities on one hand and MMORPGs and niche gaming worlds on the other (Figure 5). Most of the social networks scaled up their user bases quickly but rely heavily on advertising revenue. That revenue has experienced much slower growth than user numbers. MySpace, thanks to its partnership with Google, currently generates more revenue and ARPU than Facebook, its strongest competitor, but the monthly ARPU per active user for both social networks is lower than $1. On the other end of the spectrum, subscription based MMORPGs like World of Warcraft and gaming Virtual World Business Models Page 9
centric virtual worlds like Entropia Universe have much higher monthly ARPU per active user, but their business models are less scalable. World of Warcraft is the most successful MMORPG to date, but it took the game five years to sign up 11 million subscribers and its subscriber growth has slowed significantly in the last 12 months. Entropia Universe s VAD model generates the highest monthly ARPU among actives but only appeals to a small group of gamers, a reality reflected by its number of registered and active users. In the middle of the business model continuum, virtual worlds and games that adopt a combination of freemium and advertising based business models have interesting growth potential. They can ramp their user bases fairly quickly due to low entry barriers (it s free to play) and social/community elements while concurrently increasing ARPU through a combination of business models. For instance, a virtual world can start with a free to play, microtransaction based model and then, as its user base increases, introduce advertising, digital content distribution, and VIP club memberships (a subscription based model). The flexibility of business models is an important success factor for virtual worlds. In the long run, as the 2D Internet evolves toward Web3D, virtual worlds have the potential to become the new user interface for various Internet applications, opening up even more business opportunities. Virtual World Business Models Page 10
5.0 Consumers, Virtual Worlds, and Social Media Compared to other online communications and social media platforms, virtual world has several technical advantages, including an immersive environment, presence, synchronous communications, high engagement, and rich interactive features (Figure 6). However, both the adoption and active usage of virtual worlds lag behind other online applications. For instance, only 13% of adult broadband users in the U.K. have ever tried a virtual world, compared to 54% for social networks. In addition, only 23% of virtual world visitors visit on a weekly basis, compared to 59% for social networks (Figure 7). These metrics show that virtual world has yet to find the best intersection between entertainment, socialization, and community features. A lack of content that appeals to mass market consumers, suboptimal user interface and technologies, and the unbalanced gender ratio compared to social networks (Figure 8) have all contributed to the low adoption rate and low activity ratio. Figure 6 2X2: Virtual Worlds Compared to Other Online Communications Tools Consumers, Virtual Worlds, and Social Media Page 11
UK: Adoption of Virtual Worlds vs. Social Networks (Q3/08) (Among Broadband Heads of Households in the UK, n=1,062; +/ 3%) Virtual Worlds 8% 2%2% 1% Less Than Once a Month 1 3 Times A Month 1 3 TimesA Week Daily/Almost Daily Social Network 12% 9% 10% 23% 0% 10% 20% 30% 40% 50% 60% Source: Virtual Worlds: the Internet of Avatars 2008 Parks Associates Percentage of Internet Gamers Figure 7 The U.K.: Adoption of Virtual Worlds vs. Social Networks (Q3/08) UK: Gender of Monthly Users of Social Networks vs. Virtual Worlds (Q3/08) Male Female Virtual World Monthly Users (n=56*) 63% 38% Social Network Monthly Users (n=449) 47% 53% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of Respondents Source: Virtual Worlds: the Internet of Avatars 2008 Parks Associates Figure 8 The U.K.: Gender of Monthly Users of Social Networks vs. Virtual Worlds (Q3/08) Consumers, Virtual Worlds, and Social Media Page 12
I don t want to go as far as Sibley Verbeck (CEO of the Electric Sheep Company) did at Virtual Worlds Expo 2008, when he called for a Multiglobal War on Geekiness, although I agree with him at the concept level: current virtual world users are likely to be early adopters of technologies, judged by their technographics (Figure 9). To move beyond the geeks, virtual worlds need to enhance their value propositions and give consumers a reason to visit and stay! In surveying virtual world visitors, we discovered that the top reason that users visit a virtual world is to play games. If they don t find the games or other entertainment content engaging at first visit, they are less likely to return. The next four reasons cited by survey respondents are not sustainable. These reasons include escaping real life, satisfying curiosity, creating and managing avatars, and being someone else. Once the novelty factor associated with these reasons wears off, most of these users will not find a good reason to stay in the world. Second Life is more susceptible for such exits as its users rate escaping real life and being someone else as top reasons for their visits. Further, although Second Life and Entropia Universe both market purchasing virtual property, creating content, and making money as major attractions of their worlds, only a small percentage of users visit virtual worlds for these reasons. The majority of people visiting virtual worlds just want to consume content and be entertained. Going forward, virtual world operators need to enrich their worlds with interesting content such as games, music, events, and activities, and also encourage community formation around such activities. Community is known to be important in these applications as shown by its role in the success of MMORPGs. Consumers, Virtual Worlds, and Social Media Page 13
Active Virtual World Users Are Early Technology Adopters Monthly users of virtual worlds (n=56*) Non users (n=1,006) I like to purchase CE devices as soon as they are released 6% 14% I like using CE devices and services 29% 36% Price is the single most important factor for CE purchase 21% 26% I like to personalize my CE devices CE devices help me stay connected CE devices help me live the lifestyle I want 18% 21% 32% 31% 34% 34% 0% 5% 10% 15% 20% 25% 30% 35% 40% Percentage of Respondents Strongly Agree with a Statement ("6 7" on a 7 point scale) Source: Virtual Worlds: the Internet of Avatars 2008 Parks Associates Figure 9 Active Virtual World Users Are Early Technology Adopters Reasons for Visiting Virtual Worlds (Among Internet Gamers who have participated in Virtual Worlds, n=517; ±4.31%) To play games To escape real life To satisfy my curiosity To create and manage my avatar To be someone else To play and interact with other members Don't know To make new friends To create virtual estate/property and items To keep in touch with my friends To get freebies Other reasons To enable me to fulfill the fantasies I can't fulfill in real life To buy virtual estate/property and items To participate in different in world events To make money To search for information that helps me in my real life To buy/evaluate products that help me in my real life 15% 14% 14% 11% 11% 10% 9% 8% 6% 5% 5% 4% 23% 21% 20% 19% 29% 36% 0% 5% 10% 15% 20% 25% 30% 35% 40% Percentage of Virtual Worlds Visitor Who Participate... Source: Electronic Gaming in the Digital Home II, a survey of 1,985 Internet gamers Figure 10 Reasons for Visiting Virtual Worlds Consumers, Virtual Worlds, and Social Media Page 14
6.0 Summary and Recommendations In summary, despite the recent positive trends in the 3D virtual world industry, 3D virtual worlds remain a niche media. Companies targeting adults will have to enhance the appeal of this medium by lowering entry barriers and enriching their worlds with entertainment content and organized activities. We offer the following recommendations: Make virtual world technologies more accessible and easier to use; Integrate with 2D Internet tools such as messenger and social networks for viral marketing and distribution; Provide friendly orientation and ongoing customer support; Create themed worlds that appeal to targeted demographics with the right content and activities, instead of a hodgepodge that s everything for everyone; Do not try to market your virtual worlds with esoteric examples; mass market consumers aren t interested in becoming a millionaire in a virtual world they are there for entertainment; Engage with established media companies, 3D artists, and virtual world studios to create content with mass market appeal, instead of relying mainly on user generated content; Support offline content creation and allow content creators use off the shelf 3D software and reuse existing 3D objects; Tie the virtual world to real world content and activities; Balance the ratio between male and female users; Establish a dialogue with the gaming industry and borrow game design elements to make the worlds more engaging; Research kids, teens, and tweens and learn what kinds of social networks and virtual worlds into which they would like to graduate; and Expedite interoperability and standardization efforts. Summary and Recommendations Page 15
About the industry report Virtual Worlds: the Internet of Avatars 3D virtual world does not just offer an innovative way for people to interact, communicate, creates, and entertain, it promises many new Internet business models for multiplayer gaming, e commerce, online marketing, and content distribution. Virtual Worlds: the Internet of Avatars defines the 3D virtual world industry domain and value chain, profiles leading virtual worlds operators and technology companies and their business models and strategies, examines industry trends and dynamics, analyzes global consumer perspectives, forecasts market growth, and offers practical recommendations to large media companies, technology companies, consumer brands, marketers, and Internet companies. Visit www.parksassociates.com for more information or to purchase this report. About the Author Yuanzhe (Michael) Cai studies developments in the digital media, gaming, and broadband industries. Specifically, his gaming expertise spans console and PC gaming, online gaming, digital distribution, game advertising, mobile gaming, MMORPG, and virtual worlds. He leads a research team that covers digital media topics including Internet video, social media, and advertising. His broadband coverage included broadband services, broadband technologies such as FTTx and WiMAX, mobile broadband and Internet, Fixed Mobile Convergence, and value added services. Michael has written numerous reports on these topics and presented his research in various industry events including GDC, E3, Virtual Worlds Conference and Expo, CES, Supercomm, NXTComm, Broadband World Forum, the Cable Show, and CONNECTIONS. INDUSTRY EXPERTISE: Internet Video, Online Gaming, Console Gaming, Mobile Gaming, Virtual Worlds, Broadband Services, Broadband Wireless Technologies/WiMAX, Bundled Services, Content Delivery Networks, Mobile Broadband, and Mobile Platforms. Parks Associates is an internationally recognized market research and consulting company specializing in emerging consumer technology products and services. Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start ups through market reports, primary studies, consumer research, custom research, workshops, executive conferences, and annual service subscriptions. The company's expertise includes new media, digital entertainment and gaming, home networks, Internet and television services, digital health, mobile applications and services, consumer electronics, and home control systems and security. Each year, Parks Associates co hosts executive thought leadership conferences CONNECTIONS, with support from the Consumer Electronics Association (CEA ), and CONNECTIONS Europe. In addition, Parks Associates produces the online publication Industry Insights in conjunction with the CONNECTIONS Conference series. http://www.parksassociates.com http://www.connectionsconference.com http://www.connectionseurope.com http://www.connectionsindustryinsights.com Summary and Recommendations Page 16