In social games, and now in some MMOs, the game owners make money from selling virtual goods, but what exactly are they?

When internet based games were run in the western world there was often a subscription fee to pay – for games like Everquest or the popular World of Warcraft it was/is usually in the region of $15/month. This covered the cost of running the servers and updating the game with bugfix patches etc and gave the company a recurring amount of revenue. Expansion packs and the initial game software were sold as either digital downloads or boxed software in stores alongside other games.

In the east, particularly China a different model sprung up where the game was free to play, but you used real world money to buy advantages in game. This might take the form of an awesome sword, or an item which lets you level up faster – essentially it was an item which gave you an advantage over other players who hadn’t bought the item. These sort of goods often trade real world money for time where the player can do more in a limited time at the cost of real world cash which they presumably earn in the time they aren’t playing the game.

But – there are other types of virtual goods. Generally virtual goods can be loosely categorised as 3 types:

1. Goods which give the player extra functionality

2. Goods which allow the player to customise their appearance

3. Goods which grant the player social status (This includes the ability to gift other players items)

Essentially these boil down to – do more stuff, make you feel good about yourself and make others feel good about you.

When you buy that tractor in Farmville you are buying into type 1, and when you put down decorative items to customise your farm you are either buying types 2 or 3 (depending on whether you are doing it for yourself or to show off your awesome farm to friends).

Gifting in particular can be very tricky in a social sense for a player. When someone gifts you an item in game, you feel obliged to return the favour. This is where the social nature of social games can be leveraged to maximise profit (for good or bad!)

Back when I used to play Star Wars Galaxies I was fascinated by how MMO economies worked. At the time, being a player, I never really considered what went on behind the scenes, I always looked at the public, front end side and how to get the most out of things in order to maximise my in game profit. Then I saw a post by game designer Raph Koster on how the SWG economy was monitored on the back end which blew my mind. A copy of the original article is available here.

Not long after this a game called Eve online was released and I noted with interest that they hired a full time economist to manage and report on their in-game economy. This wasn’t the only incidence of economists looking at how MMO economies worked – Edward Castranova has been looking at virtual economies from an academic point of view since 2001 when he suggested that Everquest had a GNP around equivalent of Russia or Bulgaria and the currency had more value than the Yen or Lira.

Virtual Economies are often setup as a ‘faucet drain’ system so a certain amount of cash flows into the economy, and there are various sinks which remove the cash from the economy. The balance between these two determines the inflation of the economy. It is therefore critical that the game developers are tracking the inflow and outflow of money or else the economy will either a) run dry, or b) (more likely) inflate too fast. If this happens items become too expensive for new players to purchase from other players and the game essentially dies as new players drop out from being unable to participate effectively in the economy.

As if that wasn’t complex enough for a new, small company to manage, social games also complicate things because they offer some goods for in game cash, and some goods for real world cash. They essentially have two separate but overlapping economies to manage and balance. This balance is critically important in converting free to paid users. If the game is too easy without purchasing using real money, then no one would convert to paying customers, conversely if the game is too hard without using real money then players will drop out of the game because they feel like they are forced to buy goods with real cash to progress.

Oh yeah…and this is all on top of usual game design theory.

Right now, I do have a good motive for blogging, so it’s time to start anew and kick things up a gear.

When I started at Palringo I was tasked with coming up with a consumer revenue strategy. The problem they had was that mobile advertising doesn’t exactly pay well. While the advertising could have been optimised in order to increase revenue it would need a significant change in order to generate enough revenues for it to be worthwhile – and if the changes were going to be significant anyway, would there be other, potentially better avenues to go down than the advertising route.

I spent a significant amount of time working out whether a virtual economy supported by micro-transactions would be a better  solution long term. This research involved looking at how to run a virtual economy, and what’s the best way to go about starting a virtual economy from scratch. From this I realised there was a space in the market, an underserved need regarding how to actually run a virtual economy when you don’t have the knowledge or resources in house as to how to do so. Zynga, Playfish, Crowdstar, Wooga and the recently acquired Popcap all have people working fulltime to maximise the revenue generating capabilities of their games/networks. Was it possible that other smaller, newer players could be helped?