Primer: Publisher’s Business Models

Revenues of virtual world publishers range from the negative, for hobbyist worlds, to the hundreds of millions of USD per annum. For example Korea’s Nexon reported  2005 revenues of $230 million (primarily generated from micro-transactions). This section of tVPN’s Virtual World Primer gives an overview of the various business model approaches publishers use.

The trend for virtual world publishers, especially the larger ones, is to utilise multiple business models and a broad range of payment methods – Sulake, publishers of Habbo Hotel, quote well over 100 payment methods globally and employ a number of models in addition to their core micro-transaction (see below) based model.

Subscription

One of the most common business models, especially for Western game worlds, is the subscription fee model. Here, users of the virtual world pay a subscription on a monthly basis (or for longer periods which attract modest discounts). Subscriptions are typically around the $10 – $15 (World of Warcraft, Lord of the Rings Online) level for virtual worlds targeted at adults and $2- 47 (Habbo Hotel, Club Penguin) for those targeted at children. Subscriptions are generally taken by credit card; hence, publishers hold payment and other details on file.

An alternative form of subscription model is the game card. This is similar the mobile phone industry’s pay as you go model. Like the subscription model it is effectively paying for time, but unlike the subscription model it requires a lower level of commitment and can be used by people who do not have access to credit cards.

Free-to-use

The other most common base business model is “free-to-use” i.e. payment is indirect. Typically this model is mixed with one that requires payment to access some form of higher-value content – either through subscription-based membership (Habbo Hotel) or the purchase of virtual artefacts through micro-payments (Habbo Hotel, Seafight). Alternatively, the publisher may generate revenue via advertising (Anarchy Online); by being brand based (MTV Online), or at the hobby level might run a virtual world simply because they find it rewarding.

Box / Expansion-Pack Sales

Graphically rich virtual worlds tend to be based on client/server technology. The client software is often sold as a retail product or a paid-for software download. These can cost between $20 and around $40. This revenue stream generally complements a subscription model, though in a few cases such as NCSoft’s Guild Wars, there is no subscription. The box sale model is commonly extended in two ways – first through ‘expansion packs’ which extend the virtual world in some way, second through special edition retail product which generally includes other merchandising.

Merchandising, brand extension & licensing

More popular virtual worlds have started to extend their product rages outside the virtual and beyond retail software. One example of brand extension and licensing is Blizzard’s World of Warcraft which has a range of licensed branded products such as books on how to play the game, t-shirts, stickers, card games etc. In addition they have done co-promotion with Coke in China and Toyota in the US.
Another model is that exemplified by Ganz’s Webkinz, a virtual world where children look after virtual pets. Webkinz model is based on people owning both physical ‘plush’  (around £10) and online versions of their ‘pet’. Webkinz also has a range of trading cards.

Mobile

Mobile is being used both as a payment mechanism by virtual worlds, and increasingly being looked at as a platform extension or a platform in its own right. Sulake have recently released Mini Friday as a test / cut-down version of their online world Habbo Hotel; and open source developers working with Linden Lab’s Second Life source code have created a number of mobile views. The rise of browser-based worlds is likely to herald an increase in the use of mobile as a platform and it is probable that value-added extensions to virtual worlds such as who’s online, statistics, etc. will become the norm.

Item & currency sales – micro payment model

Many virtual worlds, especially those targeted at children, appeal to the fashion aspect of user activity and generate revenue through the sale of digital artefacts with which people decorate their avatar or virtual spaces. These artefacts are sold at a low price – often less than $1. Virtual world creators maintain a constant supply of items and create unique items such as limited-edition Christmas trees and Halloween hats, thus maintaining on-going revenues.

The publishers typically offer a wide variety of payment options such as paypal, mobile phone, premium phone lines etc. In part, this allows access to the non-credit card holding market i.e. children. While individual payments might be small, the size of the user base and the frequency of purchases make this a successful and expanding business model. While this model is highly successful in Asia, there is some resistance to its application to game-worlds in the West where purchasing game items can be seen as a way of buying success, in social and kids worlds though the practice is now standard.

Character / item services

Many game worlds split their users into a number of separate, but largely identical servers (known as shards or realms). Typically, users cannot move a character from one server to another on their own and may find themselves separated from their friends or guild. As building up a character can take a great deal of effort, players are often willing to pay a fee (World of Warcraft charges $25) to transfer it to a new server.

Modifying characters in other ways, such as levelling, character ownership transfer and item brokering are unusual services for game world publishers to provide, but Sony Online Entertainment (SOE) is one of the few big publishers moving into this area with their Station Exchange brokering service. These kinds of services are usually offered only by third parties in contradiction to the terms of service for the game.

Events

In-world events are a mainstay of virtual world social activity. These range from parties through to weddings and funerals. A number of virtual world providers have event teams who support and / or stage such events. Examples of this include SOE’s Star Wars Galaxies who would create Rebel or Imperial wedding events including things such as Storm Trooper honour guards – although this type of event formed part of the overall fabric of the virtual world and was not a revenue-generating stream in and of itself. Whereas Makena Technologies, the company that runs There.com, stages regular events for clients such as CosmoGIRL! within the There.com world (this is in addition to the work done within specific branded worlds (see below)).

World building business models – Virtual space / land / serious games

Some virtual worlds employ a range of models based on the principle of selling virtual space and / or ‘white label’ versions of their virtual world platform.
One of Linden Lab’s (Second Life) primary sources of revenue is ‘land sales’. That is, areas of Second Life are sold to businesses or individuals. Currently an ‘island’ costs US$1,675 up-front and US$295 per month for ‘maintenance’. Makena Technologies (There.com) also sells virtual space. However, in their case this is a separate virtual world based on the There.com platform. The main example of this would be those spaces created for MTV .

Sulake did a similar deal with Disney in the creation of Virtual Magic Kingdom.
There is also an expanding market in the use of virtual world technologies for training, as exemplified by companies such as Forterra Systems, a spin-off from the original There.com company. Forterra have focused on catering for military, medical and other simulation-based training environments.

Keep in mind that these business models are only one way real-world money is flowing through virtual worlds. The other sections of this Primer take a look at the business models virtual worlds users are exploring.

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