The Funeral of WoW Gold

Look for advertisers to pull back while venture funding dries up

March 11, 2009

NEW YORK The kids virtual worlds space is due for a major shakeout in 2009 as advertisers are expected to pull back on spending in the once red-hot sector, while venture capital funding has almost completely dried up.

That’s according to Barry Gilbert, vp, research director, Strategy Analytics, who presented a sobering look at the virtual worlds market during a session yesterday at the Engage Expo! conference in New York. While 2008 saw “an explosion of kids worlds,” according to Gilbert, this year he predicts contraction and consolidation in the market as many of the dozens of kids/young-adult virtual worlds that launched in the past year may either merge or fold. “We don’t see it as a sustainable market,” he said.

And it’s not a market where advertising will flourish, at least in the near term. According to Gilbert, in 2008 virtual worlds collectively pulled in $1.2 billion in revenue globally, with roughly 10 percent of those dollars — $125 million or so — coming from advertising (Gilbert’s data focuses exclusively on social worlds, excluding massive multiplayer games like World of Warcraft). He predicts that in ‘09 ad spending will decline to around $100 million and won’t bounce back until 2011.

The reason for the predicted decline is the current ad recession, which doesn’t necessarily lend itself to experimentation by brands. “Advertisers are pulling back budgets, and they don’t want to go with anything that isn’t proven,” he said.

Besides a softening ad business, user churn and the lack of an established business model are likely to contribute to the expected shakeout, said Gilbert. Many of the segment’s top sites — which include Habbo, Disney’s Club Penguin, Gaia Online and Zwinky — employ a variety of revenue models, including advertising, subscriptions, prepaid usage cards, virtual goods and microtransactions. While virtual goods and microtransactions (such as buying accessories for one’s avatar) account for 68 percent of spending in the category, “nobody’s got it down pat,” said Gilbert.

Plus, there is a wide gap between the number of users who have tried virtual worlds and the number of users who are considered “active” — logging on at least once a Web session. According to Strategy Analytics’ research, the cumulative number of unique registered users for virtual worlds will exceed 180 million globally in 2009, an increase of roughly 50 million. However, just 23 million of those users are considered active. Another presenter at the conference, Michael Cai, vp, research at Interpret, estimated there were close to 8 million active virtual worlds users in the U.S.

And loyalty is an issue, as the average user has visited three and four different worlds. “This is a transient market,” he said. “Many users [register for sites] and never come back.”

However, Gilbert still sees long-term potential for the space. He predicts that several barriers to entry may be eliminated. More virtual worlds are expected to drop download and/or plug-ins requirements and go completely browser based. Plus, there is a movement afoot to enable interoperability between worlds, so users won’t have to register multiple times and might even be able to use the same avatar across worlds. “We believe these are fundamentals for growth,” he said. But overall, virtual worlds have “a healthy sense of traction…and significant headroom for growth.”

San Francisco - SuperSecret, a start-up developing online social games for kids, announced on Wednesday that it has secured $10 million in its first round of funding, led by Opus Capital.

San Francisco-based SuperSecret, which plans to launch its flagship site in the spring, bills its offering as an “online social game for tweens who are ready to move on from Club Penguin or Webkinz, but are too young for “World of Warcraft” or Facebook.”

The company added that it “actively involves tweens in product design.”

The company’s founders, Ted Barnett and Tony Espinoza, previously founded Web calendar service When.com, which they sold to AOL. Barnett also helped develop Dogz, a virtual life PC game.

SuperSecret will use the funds for ongoing product development, and to build a distribution network for its products.

Research indicates the potential benefits of online gaming, Jason Hill reports.

Participants of massively multiplayer online role-playing games (MMORPGs) such as World of Warcraft report high levels of stress and social anxiety, a psychologist has found.

Online games attract millions of players around the world, with World of Warcraft alone now enjoying more than 10million subscribers. But psychologists know little about why people spend so much time in these virtual worlds, despite fears that the games have been linked to anti-social behaviour, health problems and even suicide.

The lack of research prompted Megan Christie, 28, an American studying in
Australia, to devote her masters in psychology to studying MMORPGs. Her research had two main objectives: to examine what motivates people to play MMORPGs, and investigate whether psychological factors are related to why they play.

Ms Christie says focus-group testing found people play MMORPGS for many reasons, including “to socialise, to achieve, to regulate their emotions, and for entertainment”.

Other studies have indicated that people who spend a lot of time online in activities such as web surfing, email and chat rooms are often motivated by loneliness, depression and anxiety, but Ms Christie did not find these to be significant psychological factors for online gamers.

But “analysis of the online surveys completed by MMORPG players indicate that higher levels of social anxiety, higher levels of stress, and greater awareness and ability to manage emotions were associated with a statistically significant increase in reasons to play MMORPGs,” she says.

“At some level there is truth to many stereotypes. The negative media hype associated with MMORPGs is substantiated by empirical research that argues this genre of gaming has negatively impacted individuals’ physical health, relationships, and quality of life. However, such cases are arguably the minority.”

Ms Christie says evidence also indicates that online gaming “may be beneficial to a number of individuals and enhance their quality-of-life”.

“People regularly engage in activities with entertainment qualities, such as watching movies and reading novels, and MMORPGs may merely be an alternative and modern form of these more traditional activities.”

Ms Christie says she is keen to continue her research, including whether social anxiety is caused by MMORPGS or provides a less threatening environment for anxious people.

“MMORPGs may provide socially anxious players with opportunities to be anonymously in control of the impression their online character makes on other players, thus reducing the likelihood of experiencing social anxiety. Alternatively, greater involvement within MMORPGs may cause individuals to feel less confident and less skilled in real-world social situations.”

When Activision Blizzard CEO (ATVI) Bobby Kotick said yesterday his company needed to work on penetrating the Chinese market, he wasn’t kidding. The company’s World of Warcraft: Wrath of the Lich King, a blockbuster hit in the West, has been banned from sale in
China by Chinese government censors.

China-based JLM Pacific Epoch

: The government has rejected two applications by the second expansion for The9’s (Nasdaq:NCTY) licensed MMORPG World of Warcraft, “Wrath of the Lich King,” since China’s Spring Festival (January 25 - February 1), reports Sohu quoting unnamed sources. The applications were rejected due to content that didn’t meet requirements, including a city raid and skeleton characters; the submitted version did not contain WLK’s Death Knight first hero class, said the insider.

WoW game developer Blizzard Entertainment recently deleted a link on the game’s North American site to the site’s simplified Chinese version, said the report.

Where to go from here? Activision is recruiting firms to mange its brand in China, and maybe help handle the Chinese government too.

The Wrath of the Lich King is not being felt in
China, where censors have deemed the game unfit for release twice.

“The applications were rejected due to content that didn’t meet requirements, including a city raid and skeleton characters,” reports business research news site JLM Pacific Epoch.  The Chinese version of the game had already been submitted without the expansion’s highly anticipated Death Knight hero character.  Further, Blizzard recently deleted a link to the game’s simplified Chinese website, likely in recognition that things were not going as planned for the Lich King’s foray into mainland China.

World of Warcraft’s subjugation to Chinese censors is nothing new.  MMO news site Massively notes that existing editions of the game has received a number of deletions, “namely removing skeletons altogether,” to receive clearance for the Chinese market.

As the world’s biggest game, Warcraft eclipsed 11.5 million subscribers last December.  Roughly half of those are believed to be in Asian markets, which makes Lich King a critical release for Blizzard.  The expansion has already sold 4 million copies in Western territories.