Acquisition, Retention, Monetization: Final Report

Today’s HIIT Gamification of Services Seminar in Helsinki also doubles as the final seminar of a research project called ARMS: Acquisition, Retention and Monetization in Virtual and Social Spaces, in which I’ve had the pleasure of working during the past couple of years. We are publishing the final report of the project here on VERN. Enjoy!

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ARMS: Project Final Report – Introduction

The ARMS research project – short for Acquisition, Retention and Monetization of Virtual and Social Spaces – started in fall 2009 as a part of Tekes’s (The Finnish Funding Agency for Technology and Innovation) Spaces and Places research program.

The mission of ARMS was two-folded. First, Tekes’s program called for projects that would study the cross-section of three sorts of spaces: the virtual space, the physical space and the social space. ARMS did exactly this. The scope of our project ranged from virtual hangouts, to social networking services and to media companies. On a conceptual level, it even spanned brick and mortar businesses. The second mission was an internal one, set by ARMS’s project proposal in summer 2009: to investigate how strategies drawn from the virtual space could be used to enhance customer acquisition, retention and monetization in other contexts. In hindsight, this goal setting was timely: the term gamification became popular in the latter half of 2010, resulting in a surge of interest in the topics that ARMS was already studying.

The project was implemented in three phases. In the first phase, we began with an exploratory investigation of virtual design patterns used in virtual worlds, social networking services and games. The second phase consisted of identifying theories behind these patterns from social sciences, economics and marketing. In the third phase, these patterns were investigated in case studies of multiple services.

In terms of publications, the project produced nine articles in scientific journals and 11 conference and workshop papers, in addition to some that are still in review. Comprehensive internal technical reports were also created to serve as tools for subsequent research and as brainstorming documents for the project’s company partners. The cooperation with the industry partners was very positive and insightful throughout the entire project and the feedback we have received leads us to believe that the cooperation was likewise regarded as valuable by the companies.

This document summarizes the project’s results through 12 short essays, each describing one research area that resulted in one or more publications. The essays introduce the problem area, summarize some of the key results and highlight implications for business and design. At the end of each summary essay, there are links to relevant publications and presentations that interested readers can use to delve deeper into the subjects.

The ARMS project had a strong international dimension. Vili Lehdonvirta worked as a visiting scientist at the University of Tokyo’s Interfaculty Initiative in Information Studies, and Kai Huotari worked as a visiting scholar at the University of California Berkeley School of Information. We forged important new links, collaborating closely with the Virtual Worlds Observatory, a consortium of U.S. social scientists led by professor Dmitri Williams at University of Southern California. We also collaborated closely with our long-standing partners at Waseda University, Japan, lead by professor Tatsuo Nakajima, as well as with the project’s Iceland-based partner CCP Games and Sulake’s California office. These international exchanges continued our tradition of working with top research institutes in Japan and in the United States, and allowed HIIT to further strengthen its position as one of the global leaders in virtual economy research.

We would like to thank Tekes as well as our industry partners CCP Games, Frosmo, Ironstar Helsinki, Maxisat, Nokia, Palmu and Sulake for their financial support and for their curiosity. We would also like to thank the University of Turku, our co-research partner in this project, for seamless and insightful cooperation. And last but not least let us thank our brilliant colleagues who have worked with us on this project: Veikko Eranti, Juho Hamari, Matti Nelimarkka, Matti Näsi, adj. prof. Olli Pitkänen, professor Pekka Räsänen, Outi Sarpila, Juha Tolvanen, and professor Marko Turpeinen.

Kai Huotari                                                     Vili Lehdonvirta

Project manager                                               Report editor

Helsinki Institute for Information Technology HIIT
Aalto University / Univerity of Helsinki, Finland

Read the complete report here

Seminar on gamification and virtual economy

Participate: http://goo.gl/Yff2W
Date & time: April 25th | 10:00 – 17:00
Place: Arkadiankatu 28 – Class 4 – 3rd floor – Aalto School of Economics

Helsinki Institute for Information Technology HIIT with cooperation with Aalto Service Factory ASF is organizing a seminar on “Gamification” of services on 25th of April at the premises of Aalto School of Economics.

The seminar approaches the phenomena of Gamification from different inter-related perspectives: playfulness, game design, virtual economics and service marketing. The sessions will seek answers to questions such as how Gamification can be understood in the context of service marketing and what can explain its effectiveness as well as give in-depth insights into designing persuasive game mechanics for both Facebook games and more utilitarian services. We will also take a look into virtual economies, goods and currencies.

The seminar has a limited number of seats.

Morning session (10-12)

• Kai Huotari (HIIT/Berkeley/Hanken School of Economics): “Gamification from The Perspective of Service Marketing”
• Juho Hamari (HIIT/Aalto School of Economics) – “Gamification and Behavioral Economics”
• Konrad Markus (HIIT) – “Saving is Fun! – EnergyLife, a Conservation Game in Households”

12:00 Lunch

Industry insights (13-15)

• Aki Järvinen (Digital Chocolate): “Game design in Facebook games”
• Marjoriikka Ylisiurua (Sulake): “TBA”
• Juho Makkonen – (Avoin interactive Ltd / Kassi) – “Badges in peer-to-peer trading service”

Evening session (15-17)

• Kai Kuikkaniemi (HIIT/Aalto School of Arts, Design and Architecture) – “Playification”
• Pekka Räsänen / Matti Näsi (University of Turku): “User acquisition and positive user experiences. What implications can be drawn from population surveys?”
• Vili Lehdonvirta (HIIT/London School of Economics): “Designing virtual currency for serious and playful purposes”

Designing Virtual Currency by Breaking (Almost) Every Rule in the Economics Textbook

I’ve neglected to post my Game Developers Conference presentation slides here. The talk was about designing virtual currency. Not how to design sources, sinks or markets, but how to design the actual objects that are used as money in a virtual economy, and how users interact with those objects. There is much room for innovation in that area, as a couple of historical examples show.

The slides themselves are mostly pictures. To get the full story, click through to SlideShare and check out the Notes tab, which contains an almost full transcript of the talk.

Designing Virtual Currency by Breaking (Almost) Every Rule in the Economics Textbook

Abstract: Many games today feature virtual money of some sort, whether a “hard currency” sold for real money or a “soft currency” earned through play. The question that this lecture answers is, how do you design money? Not how do players obtain money, nor how do they spend it – but how do you design the money itself. Economists have identified around a dozen attributes of a good money – the kind of money that makes an economy efficient. These attributes make a great guideline for designing serious digital currencies. But in game design, we don’t always want things to be efficient – we might want them to be challenging and fun instead. In this lecture, we therefore turn the economists’ advice on its head and come up with a guideline for designing “bad money”! Both historical and virtual examples are included.

Linden Lab no longer releasing economic metrics

In recent news, Linden Lab has announced that they will no longer provide their customary annual or quarterly economic reports.  Blogger Tateru Nino reports that Peter Gray, a spokesperson for Linden Lab, has stated that, “We don’t plan to publish a Q4 2011 economic summary. We are discontinuing regular reporting of aggregate economy-level data, because landowners and merchants have told us that the information is of limited value to them. Moving forward, we will instead focus on improved reporting tools that help individuals better manage their businesses in SL.”

Since their inception, the quarterly reports have been gradually limited, with certain statistics and measures eliminated over time.   However, even after a number of revisions that have reduced the available economic data, not releasing economic reports at all still removed a fair amount of information from circulation.   Recent reports, for instance, included general information such as daily completed registrations, average monthly users, user hours, and world size.  On the economic side, they also offered details around average monthly economic participants, average exchange rate, Linden supply, Lindex volume, and web merchandise sale volume.  These reports were analysed on well-known and well-read blogs such as Dwell On It, Gwyn’s Home, New World Notes, and The Alphaville Herald.  They were also recoded in databases like the Economic Metrics Repository to ensure easy accessibility and analysis.  In short, they were widely read and used by everyone from Second Life business owners through to interested residents.

The complete eradication of these reports has some Second Life insiders worried.  New World Notes has termed the revelation a “bad sign” and speculated that Second Life’s health may not be as robust as Linden Lab would like residents to believe.  Similarly, Tateru Nino notes that Linden Lab has removed figures for metrics that appeared to be in decline.  Given that Linden Lab has been largely silent apart from announcing the end of their reports, the reasons for this change and what it could indicate regarding the future of Second Life are still very much up in the air.  While a recent interview with Linden Lab CEO Rod Humble suggests a more positive picture – one that is focused on improving the world and expanding Linden Lab’s offerings into new areas – many residents are skeptical, especially given the loss of economic measures with which to conduct their own analysis of the state of the virtual world.

 

Loss Aversion in Facebook Games

5-year-old VERN moves to a new platform, links broken

The Virtual Economy Research Network website was launched in September 2006, so this autumn we had our fifth birthday! During the years VERN has published hundreds of posts and guest articles by some of the leading scholars and practitioners, had its texts cited in academic publications and popular media, and witnessed the meteoric rise of the social and mobile games industries that depend on virtual goods and currencies. A big thank you to all our readers and collaborators!

Unfortunately the technology behind the site was starting to show its age. Commenting was difficult and VERN integrated poorly to social media. Spam filters were not able to keep up with the new microwork-based human-generated spam. Complex backend interface discouraged writers. For this reason, we have spent the autumn moving VERN to a new platform, namely WordPress.com. This will cause some inconvenience to readers while we adjust to the new home. The biggest inconvenience is that the old URL addresses could unfortunately not be preserved. If you came here following a broken link, please use the search box to find the content that you were looking for. Each and every article continues to be available, simply under a different address. Our sincere apologies for this inconvenience.

A big thanks to Matti Nelimarkka for his massive help in the migration process!

As always, please feel free to send feedback via comments or email.

Here’s to another successful five years!

Dr Vili Lehdonvirta, Founder & Co-editor

Gold and guardian cubs: tradable pets and RMT in world of warcraft

With the opening of an online pet store in 2009, Blizzard Entertainment started allowing players to spend offline money for virtual goods in the game World of Warcraft. Now, a new pet option that can be sold to other players has potential implications for the in-game economy and real-money trading.

In November 2009, Blizzard opened an online “pet store”, selling virtual items for real money. In order to not affect player abilities, available items are limited to $10 vanity pets and $25 mounts. Buyers are given a code that they link to their game account, or that can be give to another player. Codes can only be used by a single account. Once used, items are automatically bound to the account to which the code was applied and are not tradeable within the game.

In a new option for virtual good purchases, Blizzard has now announced a pet that functions differently. The Guardian Cub companion is not automatically tied to the account that uses the code, meaning that it can be given or traded to another player either directly in world or through the game’s auction house system. The economic implications of this development are interesting. In addition to serving as a gift, this pet makes possible a form of real-money trading (RMT), and has the potential to affect the in-game economy.

Blizzard has positioned the pet as a gift. The company points out that, “The Guardian Cub is also the Pet Store’s first tradable pet, meaning it can be swapped between characters in-game or given as a gift to guildmates, friends, family, or that special someone”. Along with gifts, Blizzard also acknowledges the possibility of residents selling the pets to other players for in-game currency, potentially allowing players who do not want to spend real money on a virtual pet a way to obtain one. In the release, Blizzard notes that, “Since the introduction of the Pet Store, many players have been asking for ways to get the companions we offer there without having to spend real-world cash. By making the Guardian Cub tradable… players interested in the new pet will have fun, alternative in-game ways to get one.”

Although the earlier pets and mounts available through the store could also be given as gifts, this is the first time pets purchased with real money have been tradable directly within the game world. These new tradeable pets appear to be at least partially motivated by an attempt to reduce real-money trading (RMT) through third parties, which can be unsecure and present issues for players. Although RMT has been banned by Blizzard, players still buy gold from sellers to facilitate their game experience. Because the pet can be traded or sold within the game, the Guardian Cub can take the place of some RMT transactions and doesn’t require a third party or any interaction between players outside of the game world. By buying a $10 pet, sellers have the opportunity to trade that pet for in-game gold for relatively little effort, essentially indirectly buying up game currency for real money.

The question now is whether there will be enough in-game demand for these pets to be profitable. If there is a large supply, or not enough interest from people who will not buy the pets directly from the pet store, selling pets may not be a viable option for obtaining game currency. These conditions will drive the in-world cost of the pets, and will determine how expensive or inexpensive they are. Consequently, they will also affect the conversion rate of real money to in-world currency.

In addition, this process requires that players who want to sell the Guardian Cubs bear some risk. If a potential seller buys the pet, there is no guarantee that it will sell, a fact that Blizzard mentions as a warning. What they do not explicitly mention is that if the demand is not enough, or the supply is too great, the $10 cost of the pet may not be worth the return in gold. Although the option to use a pet as a form of RMT may be far safer than relying on third-party gold sellers, if the return on investment is not high enough, players will be less likely to use this option.

Knowledge Map of the Virtual Economy: presentation slides

I gave a presentation yesterday at the InfoDev virtual economy workshop introducing the Knowledge Map of the Virtual Economy report. Here are the slides. Also, The Economist published a nice summary of some of the main findings.

Knowledge Map of the Virtual Economy: an Introduction

World Bank Virtual Economy report: secondary markets worth $3 billion

Last year, the World Bank’s InfoDev programme asked me to write a report on the “development potential of the virtual economy”. The report, titled Knowledge Map of the Virtual Economy, is published today. It contains a number of new facts and ways of thinking about the virtual economy, and I’m excited to see what the reaction is.

In this report, we understand the virtual economy more widely than as mere online game economies, although online game economies are big part of it. Other sectors of the virtual economy are markets for such things as Facebook likes, Twitter followers, and digital microtasks. All of these are valuable yet scarce digital assets that have emerged as the so-called “digital economy” of online services has grown (see Figure 1).

The development potential here refers to the potential to provide income opportunities to poor and undereducated people in developing countries, and to support the development of local ICT infrastructure. It is well known that gold farming provides income to many people in developing countries. In this report we estimate that it may employ as many as 100,000 full-time equivalent game laborers. For the first time, we also examine the full value chain through which gold farmers’ services are brought to Western players: everything from advertising to account hacking. We call all of these functions together the “third-party gaming services industry”, of which actual gold farming is only a small part. The total revenues of the industry are estimated at 3.0 billion USD.

But the future development potential of the third-party gaming services industry does not look good. It is threatened by game publishers’ decision to start selling virtual goods to players directly. Moreover, its services often bring harm to other players and game publishers, meaning that their net social value may often be negative.

In contrast, another sector of the virtual economy represents an unequivocally positive contribution to society: the market for microwork, or small tasks such as tagging an image or trascribing a snippet of hand-written text. E-commerce sites and other companies need such work. With suitable technology, this demand translates to income opportunities for digitally connected individuals in developing countries. In the report, we examine the value chain of this industry and assess its development potential.

One important point to make is that microwork is distinct from the related concept of crowdsourcing. Crowdsourcing refers to the outsourcing of all kinds of tasks to a crowd via an open call. Microwork refers to tiny, digitally distributed tasks, whether these are sourced via an open call or, as is also common, through closed networks (see Table 8).

In authoring the report, I enlisted the help of my friend and colleague at the University of Tokyo, Dr Mirko Ernkvist. He is an economic historian specializing in entrepreneurship, innovation and development, and has studied the Chinese online games market.

See also:

• Lehdonvirta, V. and Ernkvist, M. (2011) Knowledge Map of the Virtual Economy. Washington DC: World Bank.
• Presentation slides
• The Economist article
• Washington Post article
• Press release (below)

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In Washington, D.C.:
Name: Nadine Ghannam
Phone: (202) 473-3011
E-mail: nsghannam@ifc.org

$3 Billion Virtual Economy Provides Jobs in Developing Countries, Finds IFC/World Bank Study

Washington D.C., April 7, 2011 A new study by the World Bank Group’s infoDev program shows that virtual online currencies and digital work now provide real income opportunities to poor and unskilled workers in developing countries.

infoDev is a global technology and innovation-led development finance program of the World Bank and IFC. The new study, Knowledge Map of the Virtual Economy, finds that more than 100,000 people in countries such as China and India earn a living through online games and websites disseminating micro-tasks.

Jobs in the virtual economy include micro-tasks like categorizing products in online shops, moderating content posted to social media sites, or even playing online games on behalf of wealthier players who are too busy to tend to their characters themselves. The study estimates that the market for such gaming-for-hire services was worth $3 billion in 2009, and it suggests that with suitable mobile technologies even the least-developed countries could benefit from this emerging virtual economy.

“Developing countries’ roles in the digital world have been mostly limited to users and consumers, not producers. But today, a growing mesh of digital services is giving rise to a new layer of entrepreneurial opportunities with very low entry barriers,” said Valerie D’Costa, Program Manager of infoDev.

Tim Kelly, infoDev’s Lead ICT Policy Specialist, said, “Some of the poorest people in the world are already connected to digital networks through their mobile phones. The study shows that there are real earning opportunities in the virtual economy that will become accessible as mobile technology develops. This could significantly boost local economies and support further development of digital infrastructure in regions such as Africa and southeast Asia.”

While the virtual economy unlocks a plethora of business opportunities, it should be noted that not all these activities are viewed positively. According to the infoDev study, certain business ventures and services offered may actually detract from the experience of other Internet users. For example, harvesting and selling online gaming currencies or mass clicking “Like” on corporate Facebook pages can create an unfair environment where legitimate game play and user opinion loses value and is represented inaccurately.

“Entrepreneurs should focus on digital micro-work that benefits society. Examples include transcribing books, translating documents, and improving search-engine results,” said Dr. Vili Lehdonvirta, a researcher at Helsinki Institute for Information Technology and the main author of the study.

The study, funded by the United Kingdom’s Department for International Development, is available on infoDev’s website and in print. For more information, visit http://www.infodev.org.

About the World Bank Group
The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which together form the World Bank; the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world. For more information, please visit http://www.worldbank.org, http://www.miga.org, and http://www.ifc.org.

The Financial Life (and Death) of an East European Gold Farm

Last year I was given access to the financial balance sheet of an East European gold farm, selling on WoW, which allows an insight into income, expenditure and profitability – as well as sales channels.

I’ve posted the details at: http://ict4dblog.wordpress.com/2011/03/30/the-financial-life-and-death-of-an-east-european-gold-farm/

However, the postscript is that the continuing devaluation of WoW gold has led to at least a temporary shut-down of the operation. There is also a hint that only through botting can gold farming be viable.