The Green Sheet Online Edition
September 22, 2008 • Issue 08:09:02
Virtual money, tangible profits
With the passage of the Unlawful Internet Gambling Enforcement Act in 2006, it is illegal for U.S. ISOs and merchant level salespeople (MLSs) to share in the revenues of online gambling transactions. But sales reps can make money from other games people play.
The games are called massively multiplayer online role playing games, or MMOs for short. Games like Blizzard Entertainment's World of Warcraft (WoW) are exploding in popularity.
Every month, millions of residents of the meta universe (a term coined by sci-fi author Neal Stephenson in Snow Crash) exchange what we commonly call "real money" for virtual money, which they then spend on in-game time and virtual goods and services to enhance their virtual experiences.
Players in these worlds build avatars, or characters, to represent themselves. Most avatars are beautiful or buff 20-somethings, but you can have a fox-head on a serpent's body or wings if you so choose. Through avatars, individuals buy virtual cars, property, buildings, clothing, jewelry, even household appliances. For MMO gamers, virtual money buys better armor, more deadly weapons and increased magical powers.
Two revenue models dominate MMO games: play-as-you-pay and free-to-play. Play-as-you-pay, such as in WoW, involves a monthly subscription fee - typically $15 a month - which gives gamers unlimited access to game content.
On the other hand, the free-to-play model, Gala-Net Inc.'s Flyff and Upshift StrikeRacer, for instance, offers no subscription service; gamers log onto the Web site, register and play for free. Gala-Net generates revenue through in-game advertising and the selling of enhancements to gamers' online alter egos.
Play-as-you pay, therefore, represents a guaranteed revenue stream. As long as Blizzard can keep gamers returning to WoW and other games, that monthly revenue continues. Free-to-play, in contrast, is a more open-ended income model; gamers play for free but may decide to pay to enhance their online gaming experiences.
Both models are proving widely successful. Blizzard reported 2007 revenues of $1.2 billion for WoW; in January 2008, it said WoW subscribers had surpassed the 10 million mark worldwide. In May 2008, Gala-Net said it had 3.4 million registered users.
First Data Corp.-owned inComm Inc. is a major player in the manufacture and distribution of game cards. After purchasing game cards, users log on to gaming Web sites and enter PIN codes on the cards for playing time or purchases of items within the gaming environment.
According to Michael Frasier, Business Development Manager at inComm, the Atlanta-based company has forged relationships with corporate clients that have large footprints in the gaming marketplace, including Sony Online Entertainment LLC, Microsoft Corp. and The Walt Disney Co.
InComm leverages its POS terminal applications in big box stores for the activation of game cards once they are purchased. Frasier called it POSA (point of sale activation) technology, where InComm's technology is linked directly to game companies' billing systems.
In industry parlance, purchases in the gaming world are known as microtransactions. A South Korean company called Nexon Corp. pioneered the microtransactions business model back in the 1990s. According to Frasier, Nexon acted in response to video game piracy rampant in the Far East.
Instead of Nexon having its software games ripped off by copycat bootleggers, the company devised a way to control its revenue by going online with its games. The game itself is free; Nexon makes money by users paying for things within the game. The microtransactions model, therefore, goes hand-in-hand with the free-to-play revenue model.
"The future of gaming is probably microtransactions," Frasier said. "You build a base and then you start to sell items in-world."
With that model, Nexon said its online game MapleStory has over 40 million registered users worldwide, with 2 million of those playing the North American version.
MapleStory is an MMO adventure game aimed at teenaged and younger gamers. Users take on avatars like magicians, thieves and archers to battle monsters, complete quests and make friends. Once in-game, players can choose from thousands of items, which can be purchased using credit cards or PayPal accounts.
Items can also be bought with prepaid game cards. Reportedly, Nexon America rakes in $1.6 million a month on microtransactions. Its game cards in Target Corp. stores are said to be behind only Apple Inc.'s iTunes cards in popularity.
With Nexon game cards, players can purchase items like Demonfyre, a pink-colored ring of fire that surrounds avatars, or a self-explanatory VIP Teleport Rock. The items sell for 2,800 Nexon Cash and 900 Nexon Cash respectively. A Nexon game card purchased at 7-Eleven for $25 is worth 25,000 in Nexon Cash.
But 25,000 Nexon Cash is not a lot of virtual money. "You've just bought a $25 card from 7-Eleven," Frazier said. "You go in-world. Boom. You can spend that $25 in two seconds. Once you do, you're going back to 7-Eleven to buy more cards. In a month, you could spend $200 at 7-Eleven on microtransactions."
Another popular form of virtual currency is gPotatoes for Gala-Net games. GPotato game cards run $15 or $30 at Target stores and are used to purchase in-world items that add power and abilities to online gaming identities. For instance, gamers playing Flyff can use the cards to enhance their online characters with a Scroll of Acquisition or a Madrigal Guardian Red Helmet.
Brian Haynes, Category Manager for Prepaid Services at 7-Eleven Inc., puts the consumer split at 65 percent to 35 percent male to female who buy game cards from the 7,500 7-Eleven stores in North America. Globally, the company franchises or licenses approximately 34,200 stores in 14 countries.
Because of game card popularity, Haynes said the cards are prominently displayed at the front of the stores. The cards act as a lure to attract new business, as well as an impulse buy for teen consumers already in the stores.
"We are very positive about the future of selling game cards at 7-Eleven," Haynes said. "It appeals to many of our customers, and we can offer the products conveniently. We do plan to expand our assortment and provide offers in bundles and some exclusive items."
World of War-crack
Appealing might not be the right word to describe MMO games; addictive might be more accurate. And it's not surprising that big box and convenience store retailers are enthusiastic about selling game cards. The interactive, immersive, reality-escaping nature of online games is what keeps revenue from game cards pouring in.
Vampkat, an avid online gamer of WoW and City of Heroes, explained the addiction simply. "They're kind of like what people use movies for," she said. "They can escape reality and be someone else for awhile."
But MMO games go beyond films seen in movie theaters; in many respects, gamers are able to make their own movies.
"If you're playing an in-world game, it's a movie that goes on, and you just pop in and out of it," Frazier said. "It's your movie, and you can buy items to enhance your movie experience. You're able to control your camera angles, you're interactions. It takes the first person shooter [games] to the next level. You know, some people go a little crazy on it."
MMO addiction recovery forums have popped up on the Internet for gamers who have gone a little crazy on MMO games. Everyday lives can be disrupted by these games. Marriages can be broken up.
MMO or WoW widow or widower is terminology used to describe women and men whose significant others have become so engaged in virtual worlds that they feel like their partners have died.
"I have a friend who joined Warcraft and took on a character just to be with her husband," Vampkat said.
But gamers are far from antisocial within virtual worlds. Vampkat said gamers can get very competitive, not only in winning the actual games, but also in comparing their avatars to their friends' avatars.
"It's that velvet rope philosophy," Frasier said. "Someone has a pair of Jimmy Choos. 'Well, man, I need to go get a pair myself.' You know, even though they are $450 in the real world, it may cost you only $5 in virtual worlds. There's always the potential you're going to run into somebody who has something that you want, so you're going to want to go buy that."
It is the combination of MMO games' addictiveness with the acquisitive nature of its players that has retailers and processors seeing dollar signs.
But how can ISOs and MLSs cash in on this growing phenomenon?
Through general propose reloadable prepaid (GPRP) cards, said Victor Newsom, Senior Vice President of Operations at prepaid processor eCommLink Inc. "The purchase of prepaid cards for U.S. dollars and registering them as a bill payment device for online game time is actually an emerging and increasingly popular tool," he said.
A major consumer sector for prepaid cards is millennials - teenagers without access to debit and credit cards; instead, they rely on cash. Since prepaid cards are simply cash loaded onto cards, they give teens access to online shopping and other services. A preponderance of teens are online gamers. The convergence of prepaid and gaming seems, therefore, inevitable.
"The fact that they can come into your store and purchase a prepaid card and then use that as their monthly hit for their game services - that is something that appeals to the 13- to 18-year-old market," Newsom said.
Big box discount retailers like Target and Best Buy Co. Inc. already sell closed loop prepaid cards designed specifically for games like WoW and Flyff.
"I think the bigger commercial plays are going to be spoken for by the megastores," Newsom said. "It's going to be tough for mid- and lower-tier merchants to connect in there."
But Newsom does see a market opportunity for the smaller merchants: selling open loop GPRP cards that teenagers can employ to satisfy their gaming needs. "Retailers have a real good chance for very little investment to have an entirely new revenue stream, increase foot traffic, all the things that retailers want," he said.
Frasier agreed that, for ISOs and MLSs who service level three and four merchants, the more general-play GPRP cards may be easier to sell than the specific closed loop game cards inComm provides game developers.
"The market is exploding, and people are really starting to take a hard look at this," he said. "But is it for a mom and pop? Is it for a one-off store that can take advantage of selling game cards? Typically, no."
From a game developer's perspective, the economies of scale may prohibit game-specific cards from being sold by very small merchants. But ISOs who support mid-sized merchants with perhaps 25 or more store branches may want to pursue closed loop game cards, Frazier said. "There are middlemen in the market," he conceded. "If you look, there are some aggregators out there - PayByCash, for instance, which is working with inComm. So there's room in this market for those types. There is the opportunity."
Internet Payment Solutions Inc., doing business as PayByCash, leverages inComm's POSA system to offer the Ultimate Game Card to 7-Eleven stores. The prepaid cards can be purchased in more than 12,000 retail locations and come in $10 denominations. With these cards, users can choose to play one of more than 150 virtual games online.
If GPRP cards are the obvious play, enterprising ISOs and MLSs, recognizing that innovative money-making opportunities have arisen as a direct result of the MMO explosion, may want to keep an eye on this dynamic, evolving sphere.
It is possible for players to sell items such as gold or gems they have acquired within WoW. However, WoW does not sell the items; it awards them to players who earn them. And it forbids players from purchasing them.
But that hasn't stopped a black market economy known as gold farming from growing up around WoW. It is estimated that 100,000 to 500,000 gamers known as gold farmers - most of them from developing nations like China - play WoW to amass as many items of value within the game as possible. Then they sell those items to other WoW players. Reportedly, gold farm brokerages have also sprung up.
"It's an interesting phenomenon," Frazier said. "At the end of the day, you're not buying anything tangible, except for inside that particular world. You're buying pixels in essence."
But these pixels have real-world monetary value, which is being exploited. Another increasing activity is MMO players selling their avatars online.
On the classified Web site run by craigslist inc., hundreds, if not thousands, of WoW gamers are selling their characters, from Blood Elf paladins to Orc shamans. For example, you can buy three coveted characters - a shadow priest, protection warrior and frost mage (a character that casts spells) - for $600.
Gamers who would purchase these avatars do so to play WoW at higher levels than they had earned themselves. It's a practice that violates WoW's gaming rules.
But WoW and other gaming companies could set up their own auction Web sites where gamers would sell their characters, and the companies would reap a portion of the profits, rather than lose the profits to third parties. ISOs could set up those companies for card processing and enjoy the subsequent residuals. (One prominent game developer contacted for this story had no comment on this potential market opportunity.)
Another possibility involves gaming startups. At gaming conventions such as KublaCon, which takes place annually in the San Francisco Bay Area, new game developers might be interested in talking to ISOs and MLSs who have merchant portfolios chock full of businesses that may want to stock game cards for exciting new MMO games positioned to rise to the cusp of gaming stardom.
Boston-based consultancy Mercator Advisory Group has researched the rapid expansion of the prepaid game card market. Combining game cards and ring tone downloads into one category, Mercator predicts that sector will grow from a $4.47 billion load volume in 2008 to over $8 billion by 2010.
"Everyone is hopping onto the bandwagon right now," Frazier said. "The market's not saturated at this point."
As more consumers join the virtual gaming world, the size of the market will only increase. And as new games are introduced and perhaps new revenue models spring up as well, new selling opportunities for ISOs and MLSs will present themselves. Could the next generation of virtual worlds usher in the next generation of payments? Like virtual worlds themselves, the possibilities are virtually endless.
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