How do virtual worlds make money, how big is the market, and how much do they make?

We like to think of virtual worlds as interactive cartoons; a cartoon where the player is the hero and can change the ending. But, unlike cartoons, virtual worlds do not depend on advertising, in fact, many of the most popular and profitable worlds have no advertising at all.

Virtual worlds are described as ‘freemium’ businesses; its free to play with subscription for premium services. These premium services might include access to a wider range of clothes for their avatar, a private customizable chat room, VIP areas, or new games.

Subscriptions are great because their simple; a single monthly fee gives access to all the features. However, converting a free player into a subscriber must first go through the parent; the child must convince their parent to put a recurring bill onto their credit card. We all know how easy it is to leave recurring bills on our credit card, and so we have a conscious resistance to signing up in the first place.

World subscriptions typically run between $4-$10 per month. Compared with the cinema, DVD, or magazine virtual worlds are great value entertainment. The young players will derive many, many hours of entertainment from $5 every month. Where a magazine might last 4 hours, a DVD watch twice, and the cinema for an afternoon.

Micropayments

As a reaction to the challenges of the subscription model we’re seeing virtual worlds embrace micropayments. These are small fees, often sub £1, spent buying digital clothes for their avatar, virtual furniture, or maybe some kind of power-up for a game.

Buying virtual clothes sounds like a strange idea! But, I’d argue we all buy virtual good, and have been doing for years. Indeed, every product contains both tangible and intangible sources of value; its this intangible value that is in fact virtual, and everything you buy has at least some “virtual” component. By recognizing these components, we can make better sense of what’s going on in the online virtual goods market, and craft strategies that leverage people’s pre-existing experience with virtual goods.

The micropayment model has been used successfully in Asian countries for several years. Indeed, its not unusual to see players spending over $50 per month on digital items for their avatar.

Subscriptions are the predominant revenue generator for many worlds, but the industry expects to see micropayments take the lead over the next two years.

Today, our credit card infrastructure is not suited to small sub £1 payments – the processing costs are too high. There are two popular alternatives, take payments through mobile phones, or buy intermediary credits for £5+.

Habbo Hotel successfully uses mobiles phones payments for its predominantly teen audience to buy digital clothes and virtual furniture. They now generate over $100M in revenue per annum. Whereas, XBox live use an intermediary currency so players from around the world can buy a chunk of gamer points for £10. These points can be spent buying games, expansion packs, or even movies.

We’re seeing small start-ups and large telecoms working to make processing micropayments quicker and simpler and providing more ways for players to engage with the premium content.

Indeed, our own Dubit Research division found that young people in the UK have over £50 per month entertainment spend. By limiting to subscriptions on parents credit cards your world is missing an opportunity; not only do parents resist subscriptions, but our research indicates few subscribe to multiple worlds.

Although we expect parents to become more accepting of virtual world subscriptions, access to the greater entertainment and identity spend comes through micropayments.

Average Revenue Per Unique User (ARPU)

Virtual worlds can generate many millions of dollars revenue every year, depending on the combination of subscriptions, micropayments, and the user base we can see average revenues per paying user from a few dollars to over 50 dollars.

We normalize the revenues between worlds by looking at the average revenue per unique user (ARPU). This is the total revenue divided by the total unique users. When we do this we find that a well performing world can expect between $1 and $2 per unique user per month.

I’ve outlined three different examples of well performing worlds with revenues that normalize to the $1-$2 range.

Club Penguin
Club Penguin generate the vast majority of its revenues from subscriptions, with only small supplements from the sale of physical toys and merchandise. The subscription unlocks premium features so that players can spend the free points they earn through playing games. Club Penguin attracts 8 to 12 year old boys and girls.

When Club Penguin was bought by Disney in August 2007, it was reported to have 12m registered users and 700k paying users. As the monthly charge for paying subscribers is $6, this suggests monthly revenues of around $4.2m. Compete reported 2.6m UU to Club Penguin in that month. Dividing these two numbers we get around $1.62/active user (where an active user is defined as a unique user in that month).

Habbo Hotel
Habbo Hotel does not have a subscription model, instead it uses micropayments, both mobile phones and intermediary currencies, through which players buy clothes for their avatar and furniture for the private room.

At AGDC in September of 2007, Habbo Hotel’s lead designer, Sulka Haro gave some statistics on Habbo Hotel’s usage:

Habbo Hotel has approximately 7.5m unique players per month globally — nipping at the heels of World of Warcraft. In the seven years since the game launched, 80 million accounts have been created. Globally, the game typically has 100,000 concurrent users playing at one time.

Furthermore, Habbo was estimated to do $77m in revenue in 2006. In the middle of 2006, Habbo had around 53m accounts. Assuming a similar ratio of monthly players to total accounts in mid 2006 to what Habbo has today, that suggests that there were around 5m unique players per month at that time. Dividing $77m by 12 months by 5m unique players suggests about $1.30 in revenue per active users.

Puzzle Pirates
Puzzle Pirates runs a dual currency model. Players buy a gold currency through subscription or micropayments, and earn a less valuable silver currency through playing the game.

Items in the world might require both silver and gold, or just gold currency. However, its possible for free players to ‘buy’ gold from the paying players in exchange for silver. The players set their own exchange rate.

Puzzle Pirates sees approximately $50 in micropayments each month from each paying user (ARPPU) for a total of $230,000 a month. Approximately 5,000 gamers are generating the $230,000 in revenue.

In February, 2005, they launched a free-to-play version of Puzzle Pirates alongside the original subscription model (which contributes an additional $70,000 each month from subscription fees).

Their CEO has reported that their average revenue per user is between $1 and $2.

Market Size

Globally, there are over 200M children with internet access aged 5-19. Thats a huge potential market, and it can be tempting to think its possible to build a world that appeals to a broad swathe of those children.

However, the activities that 5 year old boys like to engage in are hugely different to 12 year old boys, and completely different to 12 year old girls. While some of the early virtual worlds were able to appeal to a wide span of ages, in todays market there is more competition, and little hope of appealing to both ends of the spectrum.

Attempting to attract a wide spread of ages thins the concept down to the lowest common denominator. Consequently there is simply not enough to attract, engage, and retain users. Its better to build a product that will delight a smaller group of people: not only is it easier, requires less features, and will ship sooner, but most importantly, it sets the stage for word of mouth to happen. By making a world that delights, your players will talk about it.

With over 200M children to target focusing on a smaller 3 to 5 year age range does not mean a small target market. Virtual worlds are global, and from day one your world will draw users from all over the globe. Indeed, launching in England does not mean your players will only come from England.

We’ve gathered data for the top four native English speaking countries (UK, USA, Canada, and Australia), Europe, Latin America, and Asia. Those regions have a combined 136M children aged 5-14 with internet access. The graph below splits out the regions.

 

Conclusion

I’ve summarized the post into three short conclusions:

  1. Virtual worlds are best monetized through subscriptions and micropayments; advertising is not only small in comparison, but can turn off those parents who you’d like to subscribe.
  2. The potential market is massive, but is limited by the dependancy on subscriptions through parental credit cards. Micropayments, possibly through mobiles, are the key to unlocking the far larger entertainment spend.
  3. By keeping build, hosting, and running costs low, the market is more than big enough to support many different players. So don’t try to target a broad demographic, focus on a 3 to 5 year age range and delight them; you’ll still have tens of millions of players to reach, you can always expand into new demographics later.

We’ve developed the Dubit Platform to give creative teams control over their virtual world. We have the core features your world needs, so you can save time and money by focusing only on those killer features that make your world unique.

If you’d like to find out more get in touch with matthew@dubitlimited.com

Sources

The ARPU from the following sources:

Market size date from US Census Bureau International Data Base (IDB)

 

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