What does a bad economy means for virtual goods?

This post may be a day late with yesterday’s market rebound, however it still doesn’t fully repair the sting from last weeks massive drop. There was certainly questions and buzz at last weeks Virtual Goods Summit on what effect the economy will have on the virtual goods industry. To take a good look at this I broke down what I think the effect will be among the various constituents in the virtual goods economy.

Users and Consumers

The most important group out of the economy is of course the ones that are actually plopping down cash for virtual items, the end user. If the economy caused end users to stop buying virtual goods, we would all be screwed whether you are a publisher, content creator, or third party service provider like Viximo. But luckily I don’t think that’s going to be the case. There are two aspects of virtual goods that keep it recession resistant: Entertainment and Micro transactions. In many respects virtual goods are tied to entertainment in games, virtual worlds, social networks, etc. Past recessions have proven that entertainment weathers a storm fairly well, and there is even an argument that if people spend less time going out on the town to save money, they will spend more time online. Free to play b-models with micro transactions are a much easier pill to swallow then paying $60 up front for a console video game. And as Bret Terrill points out the desire to consume does not disappear among consumers just because they have less money in their wallet. “That desire to buy real items, such as clothes, shoes, and accessories is easily transferred to vanity virtual goods.” I especially bet this is the case among females which Viximo has seen as the highest virtual goods purchasing demographic.

Effect of economy on Users and Consumers = Slight Positive

Publishers

A few months ago I spoke on a panel at the TieCon East conference on the state of the tech industry, and whether or not we were in a bubble. At that time I stated that there is a cycle we have seen before, and are going through again, where innovation in consumer oriented destinations outpace the business models that monetize them. A few months ago we were approaching approaching the top of that curve, and now we are clearly going down it. The result is that companies and entrepreneurs are forced to re-shift their focus from how to get users, to how to generate revenue. And guess what, the answer is not advertising.

Virtual Goods is a model that has proven to generate serious revenues at levels greater then advertising on social products. Now that monetization has become a much higher priority, I think publishers will look to implement and test virtual goods models much quicker and sooner then before. A publishers mode around virtual goods is likely to change from exploration to implementation/execution. The challenge for publishers will be dealing with things they aren’t use to. What is the right virtual goods model, micro transactions, ecommerce, merchandising, etcs. Enter shameless promo: Viximo can help get you up and running quickly with virtual goods (and revenue!!) with out you spending valuable resources on the parts that would be reinventing the wheel.

At the end of the day, the more publishers that add a virtual goods model, the more users will become familiar with micro transaction models. A rising tide raises all boats.

Effect of economy on Publishers = Positive

Brands

Branded digital goods is and will continue to become a very important part of a successful virtual goods model. Consumers are demanding branded virtual goods and they add a substantial supplemental revenue stream to consumer purchased virtual goods. There are two different branded virtual goods models that have emerged. Licensing, where a brand will license their name for purposes of selling their branded virtual goods, and sponsorship, where brands pay the publisher to distribute their branded digital goods for free for purposes of engagement and promotion.In the short term I think the dominant model will be licensing. Brands view the licensing model as a potential additional revenue stream with not much to lose, and the sponsorship model as an experimental expense. In an economic downturn where companies are tightening their belts which one do you think they will choose? Sponsored virtual goods is still in companies experimental portion of their budgets. These budgets were one of the first things to go as the market started to fall. Brands will stick with methods of promotion they are familiar with and know work.

I don’t think the licensing model will be the dominant long term model, but I’ll save that for another blog post. In the mean time, publishers of virtual goods will need to provide standard metrics and repeated case examples that prove that branded digital campaigns are more enganging than traditional online advertising. These metrics ultimately need to prove that a branded digital good campaign lead to selling more of the brands physical product or service. Without easy sponsorship money to rely on, publishers will be forced to focus on how to increase purchases and engagement of virtual goods among their users. In the long term this focus on engagement as a base, will benefit brand sponsorship models when the money comes back around. Brands are more likely to receive positive results from their branded digital goods campaigns if the publisher has initially focused on pure user engagement, which means a brand is likely to do repeated campaigns.

Effect of economy on Brands = Near Term Negative, Long Term Positive

Content Creators

Content creators are one of the less considered constutents in the virtual goods economy, but they are still very important. Ultimately this group will play a vital role in helping enhancing and innovating what a virtual good can be. Enhancing virtual goods will help spur more spending by consumers. I don’t think that the economy will have a direct positive or negative effect on content creators. Creatives are always looking for new methods to distribute their work and brand. Virtual goods remain a great low barrier method to do this. As the virtual goods industry grows, the opportunity for creatives will grow as well.

Effect of economy on Content Creators = Neutral

Overall

Combined I think that virtual goods is fairly recession proof, and that a lot of signs point to a temporary bad economy having a long term positive effect on virtual goods as a business model.