Kindle Review – Kindle 2 Review, Books

What’s going on with Virtual Goods?

People are paying for stuff that doesn’t really exist

There are more and more signs that people are putting down hard cash for virtual goods -

1. Facebook just went cash flow positive based off of self-serve ads and virtual gifts. 
2. Zynga, a facebook game app maker, claims $100 million+ revenue a year based off of purchase of virtual in-game items. 
3. Virtual World Entropia Universe operates a Virtual World and had a 2007 turnover of $400 million. It’s actually integrating real world banking systems and sold 5 two year banking licenses for a total of $404,000. 
4. The Second Life economy is on track to be worth $500 million+ in 2009. User to user transactions increased 94% in Q2, 2009 from a year ago.
5. Perhaps most impressive of all is China’s TenCent social network -
   

   Q4 Earnings 2008 for TenCent:
   Total Revenues: Over $1 billion.
   Virtual Goods on the Web: $719 million.
   Virtual Mobile Goods: $204 million.
   Ad Revenue: $120 million.

   Virtual Goods sales increased 95.5% year over year.

Basically, people are paying hard cash for stuff that doesn’t really exist -

1. $1 for virtual teddy bears. 
2. $10 for weapon upgrades and game cards.
3. $10,000 for a virtual island. 
4. $90,000 for a banking license (and that seems smart compared to the other purchases). 

Every advertiser would think it’s crazy – However, if Facebook stopped focusing on ads and started focusing on selling virtual goods, Facebook Real Estate, and taking a cut off of Facebook app revenues (currently they don’t) they’d almost certainly make more money.

Virtual Goods work for a few reasons

If you think about it, it does make sense that people would pay for things that enrich their experience and help them get more pleasure (from what they came to a site to do in the first place). There are a few reasons Virtual Goods work -

1. They tie-in with what the user is interested in.
2. They enrich and enhance the user experience.  
3. You can’t get the same experience anywhere else.  
4. It’s very well policed i.e. none of the openness nonsense (which is supposedly necessary to profit).
5. They also get the user more invested i.e. the more you spend the higher your committment.

Look at all the companies profiting from Virtual Goods – none of them are ‘open’ and all of them have very strict rules.

Perhaps the most important element is catering to what the user is already doing (interested in).

If you came to Facebook to spend some free time or to find your next date -

1. Paying $5 for enjoying your free time more. Or 
2. Paying $5 to be able to quickly find the most ‘dateable’ people.

Makes sense.

What companies are doing with virtual goods is very, very important for traditional content providers.

The same Internet that thinks music should be free and ebooks should be $2-$5 is paying for things that don’t even exist.

Before, looking into how content providers can learn from the success of virtual goods, let’s kick advertising out of our heads.

Advertising is not the solution

The whole ‘advertising supported business’ concept is a mirage. This is what happens as users get more and more aware -

1. The most naive users confuse ads with text and click on it.  
2. Basic users click on ads as they can’t find what they’re looking for.  
3. More advanced users learn to ‘tune out’ ads.
4. Very advanced users use ad-blocking software that prevents ads from even being displayed.

Jakob Nielsen talks about this and also about the fact that the more like actual content ads seem, the more likely users are to click on them.

This behavior is consistent across platforms – In particular, iPhone users click on ads even less than desktop users.

The greatest trick Internet users and middlemen ever pulled off was convincing content and product manufacturers to give away their product for free.

Giving away things free only helps companies that collate the content and end users i.e.

1. Users get to see videos for free. 
2. YouTube gets sold for $1.65 billion. 
3. Google monetizes YouTube (not very successfully).
4. Video creators make next to nothing.

Google has messed up a lot of people’s perceptions because people wrongly think Google does ads.

Google makes a ton of money not off of advertising but off of shortcuts i.e. directing people to the places that are most likely to have what users are searching for.

Stop thinking of Google Advertising and think of it as shortcuts disguised as text ads. They are taking customers to what customers are already looking for – the exact opposite of what ads do.  

What option are content providers left with?

It’s pretty simple – give people what they want, charge for what they want, sell value-add services.

1. This might seem like the craziest concept in the world i.e. sell people what they want. However, isn’t this the basis of all commerce?
2. It’s a sign of how throughly the Internet has fooled companies that they are scared to sell their core content.
3. The success of virtual goods shows that people will pay for things they want – even when those things are made up. 

Which means that, if the perception is managed well, people will pay for actual content.

The success of the Kindle proves this.

There are more Kindle editions of the latest Dan Brown novel selling than hardcovers from Amazon. This is despite the fact that there’s a pirated ePub version circulating (since 15 minutes after official release).

The success of iPhone Apps proves this too.

The mind-set of people and companies who think ’selling’ your core product is bad

One thing that content creators don’t really understand fully is that it’s in the best interest of users and middle-men to get content creators to give away their product.

Why wouldn’t content middle-men and content consumers want free content?

It suits them much more than having to pay for it. People don’t think long-term even about their own self-interest (see credit cards and home mortgages) – Do we really expect them to think long-term of the consequences of not paying for content?

Let’s take the example of a piece of investigate reporting that takes 2 weeks and a few trips and that costs $1,000 to create. In the current model –  

1. Users on the Internet get it for free. 
2. Bloggers get to copy it for free (bloggers would say ‘in return for links’). 
3. Search Engines get to use it to populate their natural search rankings.

It suits every other element in the news eco-system to convince content providers that virtual things like ‘links’ and ‘promise of advertising revenue’ are enough in return for content.

Content is valuable in itself

All sorts of content, data, and analysis is valuable. You just have to figure out to who, and how much.

The whole myth that’s perpetuated is -

1. Anyone can create news. People will just blog it or twitter it.
   

   Quite frankly, this is nonsense. No blogger is flying to Korea or spending weeks investigating a story.

   More importantly, how do you know who you can trust?

2. Without links and search engines people will stop visiting content sites.
   

   Actually they won’t. People are NOT going to stop looking for quality content and dependable news.
   They’ll just go to the source that provides it constantly.

   News aggregators get traffic because they aggregate news – no one goes there for anything other than news.

At TechMeme (my news aggregator of choice) 41.5% of presence in the news is from the top 20 news sources.

Millions of blogs and news sources and the top 20 news sources still account for 41.5% of news that gets featured.

Closing Thoughts – Two Questions Content Creators should ask

It’s really interesting that almost everyone online benefits from the fact that most content is free.

Basically, no one on the Internet has any incentive to ever let content creators know that their content has value.

Thankfully, in stark contrast to the misinformation above,

1. Amazon and Apple are creating new channels that are honest with content creators. 
2. Virtual Goods are putting paid to the notion that people online won’t pay for things.

Here’s the first question content creators need to ask themselves -

If a company can sell a virtual teddy bear, why can’t I sell my quality content?

And the second question, one that needs to be asked about all the companies and bloggers that claim content creators need ‘links’ and ‘traffic’ -

How is it that so many of these companies are producing little to no content and still making millions or billions of dollars?