Why will people spend $1 to send you a virtual beer on Facebook, but not to read a news story online?
On the surface, it defies logic. I think most people would agree that whatever economic value news and information has, it’s greater than a virtual piece of clothing, or something that gives your avatar a special power in a gaming environment, or that gives you elevated status on a social network. But in terms of consumers’ actions, the exact opposite is true.
I’ve been thinking a lot about this issue because the market for virtual goods has exploded. People are expected to spend $1.6 billion on virtual goods this year in the U.S. alone. The emergence of this market, I think, is one of the most important business trends on the web. In Silicon Valley, it’s reshaping assumptions about online business models. As the focus on ad-driven models loses favor, the virtual goods market is generating a lot of interest.
Lessons for the News Business?
Does the rise of the virtual goods economy have any lessons for the business of news and information? I think so, but I’m not sure exactly what they are. And that’s why I’m writing this post. I want to share some of my thinking about virtual goods and news. I’m throwing it out there in hopes of sparking a discussion, or catching the eye of some entrepreneurs (or future News Challenge applicants?) who might take this a step further.
The phenomenon of virtual goods confounded and fascinated me for a long time. I couldn’t get past the absurdity of spending money on such trivial things. And part of me was in denial that so many people were doing it.
My thinking began to shift when I visited the folks at Second Life last fall. It’s a company that had been written off by many, but which is in fact still growing and is profitable. Rather than rely on advertising, the “in-world” economy revolves around the buying and selling of virtual goods. This revenue stream has continued to grow and enabled Linden Lab, which created Second Life, to do just fine during the economic downturn.
Consider, also, the success of Zynga, the social gaming company that created mega-hits Farmville and Mafia Wars for the Facebook platform and other social networks. From nowhere, Zynga has grown to 750 employees in just 2.5 years, and has 300 job openings. That means it’s almost as large as Facebook, which has 1,100 employees. One of Zynga’s prime sources of revenue is virtual goods.
Or check out this interview that TechCrunch’s Michael Arrington did with the founder of Slide, Max Levchin. In this chat, Levchin explained how Slide, which makes many of the most popular widgets on Facebook, has moved from an ad-based business model to one built around virtual goods:
Levchin discusses the “shift from advertising to virtual goods” and reveals that most of Slide’s revenues now come from sales of virtual goods, whereas it was the reverse a year ago. Slide makes some of the most popular apps on Facebook and other social networks, and the fact that it is no longer focussed on advertising says a lot about the prospects for social ads.
The True Value of Virtual Goods
The person who helped me begin to get my head around this was Susan Wu, a virtual goods pioneer and former venture capitalist who has started an online gaming company called Ohai. Here’s what she understood early on about the value of virtual goods: In the real world, we have all sorts of intangible interactions, from shaking hands to smiling to offering blessings. The value of virtual goods is not about the object, but rather its ability to express an emotion or feeling in a way that has value.
“Sending someone a virtual beer is not about the beer,” Wu told me. “It’s a way to show, ‘I have an affection for you.’ It’s the same reason people have bought bouquets or other ostentatious gifts — to demonstrate a feeling.”
She pointed me to a post, “Virtual Goods: The Next Big Business Model,” she wrote for TechCrunch outlining her vision of virtual goods. That was published in 2007. It’s a good starting point if you want to dig into this topic.
Applying it to News
I’ve been trying to apply this framework to news. I think it provides an interesting, and different way, of thinking about where the true value lies: Not in the thing itself, but in something adjacent to the thing, some feeling you have about it, or something you can do with it in terms of expressing yourself.
Is there a feeling or emotion or something around consuming or sharing news that possibly has some value that can be captured and expressed?
Are there virtual goods that news organizations could create that would entice people to spend some money?
And are there models in social gaming that provide structural lessons for news organizations of all shapes and sizes that would demonstrate better and more powerful ways to harness the power of social networks?
I think the answer to all of these questions is, “Yes.” But that said, I don’t really know. It’s still a considered hunch at this point.
I do think this convinces me that, in terms of business models on the web, we are still in early days. There’s been a lot written here, and elsewhere, that the search for business models is futile. I would agree that there is no single revenue stream that will ever replace the classified, ad-based model. I think most news organizations that are sustainable will have to be built on a vast array of revenue streams.
I’m wondering if virtual goods is one of them. What do you think? Do virtual goods have anything to teach us about the economic value of news and information?
View Comments (30)
@Justin: Thanks for commenting here. Zynga is a great story, and was part of the inspiration for writing this.
That said, I want to disagree strongly about what you said: News IS emotional. Very much so. I've been in the newspaper business for 19 years, and I can say without hesitation that what we write, beyond the facts and figures, are stories (that is, when we're at out best). And those stories provoke coversations, feelings and actions.
Also, reading the printed newspaper has always been a strong experience for people. That's why so many people still pay to subscribe even though it's all free online. Part of our problem online is that we have not found a way to re-create, or create a new, experience.
Really appreciated this article. Although it resides on a secure site, is there any way I can share this article via Twitter with my community?
I am very selective about what I pay for in the virtual world. Jib Jab has been worth the subscription and I pay for one tech oriented e-zine. Otherwise I play the "social games" for free and do not buy the stuff with real money!
Not sure what the answer is. I think partnering with similar resources and a one prices gets access to all "networked" assets could work.
Your article is similar to virtual goods in this way: It makes you want something you're not actually going to get (i.e., an analysis of how virtual goods can help teach us how to make people pay for news), but you enjoy it anyway (the info about the virtual good market and advertising). =)
I think if a real world political, social, and economic simulation game is invented news stories could be used as a way to guide each player. That way news is like a necessary and valued commodity to sucessfully play the game. For example if the news says 30% of NYC will get H1N1 then 30% of the game will get H1N1, but only those who read the real world news would know to get the simulated vaccination. Other conditions, such as the stock market, weather conditions, crime, and the cost of entertainment would work too.
@Gloria This is exactly how the newspaper works in Club Penguin. And I would send a virtual beer to a favorite columnist in an online newspaper if it would elevate the status of his byline. Certainly virtual goods in response to someone's work would be better than a me-too comment on an article.
I wanted to follow these comments with some additional thoughts that have emerged in conversations with people this week via email, Twitter, and face-to-face chats.
Via Twitter, @jayrosen_nyu asked: How's 'bout selling an approved status: "you are a well informed person." Me: Yes, that's absolutely worth thinking about.
Also via Twitter today, I had series of responses from @Visionscaper. He suggested on problem was that news= text, and that text was easy to copy, whereas virtual goods were hard to copy and required a platform. He was "not optimistic about using virtual goods to express yourself related to news."
That touched on some things I'd been thinking about this past week after the original post.
First, to @Visionscaper, I'd respond that news is far more than text. It's data, multimedia, and also conversation, community, reputation, trust, and data. So I'd start my analysis of this from a broader view. I think those various pieces might contain a nugget of something that might lend itself to a virtual good.
Remember, the virtual good doesn't have to be the "news" itself, or the story. It can be something about the experience or the feeling.
But the issue of platform is also something that's come up a lot this week. My first thought was that even if we can figure out the virtual good/news relationship, the state of most news orgs Web sites is so poor that they might not be able to leverage them.
But as I talked this out more, I came back around to the example of Zynga. Zynga's success has come through another platform: Facebook. The company hasn't been booming just because it's own site is so sophisticated, or social friendly. Rather, it's leveraged someone else's platform as well.
So it seems that if news orgs want to play with this idea, they don't need to have the most advanced news site in the world. Rather, they need to move deeper in facebook or twitter or some other social media platform to create virtual goods that can be bought, sold and shared there.
None of this, necessarily answers the basic question of whether there’s a relationship between news and virtual goods. (Sorry, @Kelli!)
@Cheryl and @Gloria: Interesting thoughts. Sounds like I should check out Club Penguin, or at least get my kids to sign up and show me around.
One other stray thought: Someone in my own newsroom had an interesting suggestion. After initially dismissing this idea, he came around to wonder whether sports would be an interesting place to test this. For instance, where we live, there’s a rabid community surrounding the San Jose Sharks hockey team. Is there a way to tap into that passion and built-in community by allowing folks to create and send virtual jerseys, or hockey avatars?
Chris and commenters, thanks for the great thoughts.
Chris, the fact that you are merely asking the question reflects a fast-approaching trend every business will be dealing with - that is using such "game theory" to engage our changing expectations of experience and interaction. I see it happening now in every industry - albeit in its infancy - exploring how "gaming" can be applied to nearly everything.
At a time when the masses even having access to news was a revolution, the news was enough to expand our minds and experiences.
But today our everyday experiences are so rich, our ability to story tell across media so pervasive, and the move from consumption of information to our personal "ownership" of it have profound meaning and that must be translated into the news business.
Some of the ideas expressed here, like reputation and reward, are standard operating game theory concepts. The FB gesture or the Second Life object you are willing to purchase reflects a value well beyond the object - it is a means to an end of some sort (building reputation, alliances, or knowledge needed).
It is not that people don't value the news. That recent study of what news we share clearly shows we value things that inspire us and make us think. We pass them along not because they are free, but because they provide us with reputation, to share excitement, or to demonstrate some knowledge.
What hinders the news industry is that they are too far removed from where our culture has moved. They are stuck on the object, not on the meaning of it to the individual.
Chris and commenters, thanks for the great thoughts.
Chris, the fact that you are merely asking the question reflects a fast-approaching trend every business will be dealing with - that is using such "game theory" to engage our changing expectations of experience and interaction. I see it happening now in every industry - albeit in its infancy - exploring how "gaming" can be applied to nearly everything.
At a time when the masses even having access to news was a revolution, the news was enough to expand our minds and experiences.
But today our everyday experiences are so rich, our ability to story tell across media so pervasive, and the move from consumption of information to our personal "ownership" of it have profound meaning and that must be translated into the news business.
Some of the ideas expressed here, like reputation and reward, are standard operating game theory concepts. The FB gesture or the Second Life object you are willing to purchase reflects a value well beyond the object - it is a means to an end of some sort (building reputation, alliances, or knowledge needed).
It is not that people don't value the news. That recent study of what news we share clearly shows we value things that inspire us and make us think. We pass them along not because they are free, but because they provide us with reputation, to share excitement, or to demonstrate some knowledge.
What hinders the news industry is that they are too far removed from where our culture has moved. They are stuck on the object, not on the meaning of it to the individual.
So it seems that if news orgs want to play with this idea, they don't need to have the most advanced news site in the world. Rather, they need to move deeper in facebook or twitter or some other social media platform to create virtual goods that can be bought, sold and shared there.