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The Real Value of Virtual Currency

Posted in: Blog, Loyalty, Monetization, Virtual Currency on November 21, 2009

There has been a lot of talk recently about virtual currency, and rightly so.  Points based systems took off in Asia years ago, and as is often the case the U.S. is just now catching up.  It is our thesis that rewards (points, virtual currency, coins – whatever you want to call them) lie at the heart of a shift that is going to substantially alter the online entertainment industry.

The Challenge

There is a well documented macro trend under-way in U.S. consumer behavior as it relates to how we entertain ourselves.  People are shifting their time from more traditional media (Newspapers, magazines, CDs, television and theaters) to the online world.  Whether part of the cause, or in reaction to this move – the online world has built an amazing entertainment infrastructure within just the last few years.  We’ve invested countless millions into in systems and content in order to make sure that users can be connected, entertained and can even personally express themselves in this exciting new world.  We’ve improved the experience and are making the online world a truly great place for massive consumer entertainment.  The problem is we are still using offline models for monetization.  Until recently, in-content ads (that nobody wants to click on if they are in “entertainment mode”) and subscription models were the only two significant monetization methods employed by online entertainment related properties.  But a new model is coming, and if we are going to make the online world a sustainable and healthy ecosystem for consumer entertainment, we have to embrace and evolve our methods of monetization to match these new experiences.

Direct User Monetization

I make it a priority to regularly speak with entertainment focused online publishers and I consistently hear them talk much more about traffic and user engagement than they do monetization.  This can be a great thing, but it is also the sign of an immature industry – one that has yet to figure out how to generate appropriate profits from the millions they are entertaining.  When I drill in on the topic of monetization they tend to be resigned to sub-par ECPM rates from advertising or a 2% or less subscription model.  Some, however, invoke the Holy Grail – the myth of direct user monetization – but after a brief flash of life in their eyes they quickly remember that making money directly from users lies somewhere between the Tooth-Fairy and Santa Claus on the reality scale.  After all, our industry tried micro-payments years ago and they clearly haven’t taken off.  This memory tends to kill the discussion around direct user monetization and dash any hopes that we in the online consumer entertainment business will every actually find a model that gives us per-user economics anywhere close to Google, or for that matter even network television.

I know publishers who have built content destination sites that attract millions of regular monthly users, engage them and entertain them – and are content generating less than $.50 per user per month.  This is absurd, and we as an industry can and must do a better job if we are going to be able to reinvest the capital needed to continue to entertain the masses who are pouring through our gates.

Snickers vs. Almond Joy and the Power of Abstraction

The answer to this problem lies in something that psychologists refer to as psychological myopia – meaning the tendency for a decision maker to focus on information immediately related to their choice with a significant disregard for the long-term value of that choice.

Several years ago a group of researchers from the University of Chicago Graduate School of Business conducted a fascinating experiment about the value of a medium, i.e. points.  They took 174 students from a southern U.S. university, put them in a dining hall, split them into four groups and presented each group with two options:

Group 1:

Take a 20 minute survey and get 1 pound of Snickers bars.

Or

Take a 25 minute survey and get your choice of 1 pound of Snickers or 1 pound of Almond Joy bars.

Group 2:

Take a 20 minute survey and 60 points which can be used to get 1 pound of Snickers bars.

Or

Take a 25 minute survey and get 61 points which can be used to get your choice of 1 pound of Snickers or 1 pound of Almond Joy bars.

Group 3:

Take a 20 minute survey and get a brown ticket which can be used to get 1 pound of Snickers bars.

Or

Take a 25 minute survey and get a blue ticket which can be used to get your choice of 1 pound of Snickers or 1 pound of Almond Joy bars.

Group 4:

Take a 20 minute survey and 60 points which can be used to get 1 pound of Snickers bars.

Or

Take a 25 minute survey and get 100 points which can be used to get your choice of 1 pound of Snickers or 1 pound of Almond Joy bars.

The researchers found that 71% of the students preferred Snickers bars, so logic would tell you that the results should be pretty straight-forward and that only roughly 30% of students should opt for the longer survey.  This was in fact the case with groups 1 through 3; roughly 30% of students opted for the long survey and the rest predictably took the shorter survey since their reward of Snickers was what they desired anyway.  But group four, the group that was given the option of receiving 2/3^rds more points for taking the longer survey (mind you, it was made clear that these points had no additional value beyond the stated rewards and they were not transferrable) – this group had over 75% of respondents opt to take the longer survey.  More than twice as many people than the other groups chose something they wouldn’t normally simply because more points were offered.

There are a number of similar studies that have shown similar results, and the psychological myopia that is present in almost all of us when presented with an attractive medium that offers a layer of abstraction simply can’t be ignored.  An abstracted medium like virtual currency has such a strong psychological effect that it can be used to build a Loyalty Economy that engages and attracts users, as well as holds the key to direct user monetization.  Maybe the Tooth Fairy really does exist.

Zynga – The Ultimate Case Study In Myopia

Much has been written about Zynga, but at the core of their success is a deep understanding of psychological myopia and the power of a medium.  They have done a masterful job of using virtual currencies to elicit engagement and to directly monetize their audiences.  They certainly didn’t invent the virtual currency, but they are the first consumer facing U.S. online entertainment company to scale it and to introduce creative monetization methods around virtual currency.  In doing so they have introduced a new model to the online world that will likely be as disruptive and as powerful as the paid search model that Overture introduced over a decade ago.

Sure Zynga has taken a bit of a beating lately in the press, but they will figure out their mis-steps and will continue to grow.  The model they have introduced will continue to be improved upon and will make the leap from social media platforms to the rest of the online world.

Where To From Here?

As online entertainment publishers we need to ask ourselves how the power of a medium can and should affect our business.  Those are the questions we are asking ourselves here at BigDoor, and we are hard at work trying to answer them.

Once we understand the power of a medium like virtual currency, we can then begin to evolve effective ways to monetize that currency.  There has been some initial innovation along these lines, but we think that this industry shift is still in the early stages and we are working hard to develop an innovative and easy to use platform that will help publishers take advantage of this massive opportunity by creating their own Loyalty Economy.  Please stay tuned to announcements from BigDoor on this subject.