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					Branded Virtual Goods Market Report
Opportunities and Strategies for Aligning Brands with Virtual Goods

August 2010

	
  




                             Image Courtesy WeeWorld & Big Tent Entertainment




By Ravi Mehta, Zeenat Rasheed and Brett Orlanski

http://viximo.com // info@viximo.com
http://virtualgreats.com // contact@virtualgreats.com
Release Date: August 2, 2010

	
  


	
  
                                                                                                                                                                                                                                                                                                                                         BRANDED VIRTUAL GOODS MARKET REPORT [JULY 2010]

	
                                                                                                                                     	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  




Table of Contents	
  

Introduction ................................................................................................................................................ 3


What are Branded Virtual Goods?............................................................................................................ 4


Branded Virtual Goods Case Study: Snoop Dogg .................................................................................. 5


The Business Opportunity for Branded Virtual Goods ........................................................................... 7


                  Brands ..................................................................................................................................................... 7


                  Social Networks....................................................................................................................................... 8


                  Game and Virtual World Developers ....................................................................................................... 9	
  


Branded Virtual Goods in Action ............................................................................................................ 10


                  Partnership Strategy: How to Pair Brands with Content ....................................................................... 10


                  Product Strategy: How to Design Great Branded Virtual Goods .......................................................... 11


                  Distribution Strategy: How to Make Branded Virtual Goods Profitable ................................................ 12	
  


The Future of Branded Virtual Goods .................................................................................................... 14


                  Market Size & Forecast.......................................................................................................................... 14


                  Future Trends in Branded Virtual Goods ............................................................................................... 15	
  


Conclusion................................................................................................................................................ 16


About the Authors.................................................................................................................................... 17


	
  

	
  


	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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Introduction

Over the past several years, virtual goods have played a key role in the explosive growth of social
networking, virtual worlds, and free-to-play gaming sites. Successfully selling virtual goods is very similar
to selling tangible goods – careful attention to pricing, product mix, proper context (the right product in
the right environment), and merchandising is essential to maximizing revenue. And just as in the real
world, brands have the power to transform a mundane item into a highly recognized and sought-after
product.


This Branded Virtual Goods Market Report describes the increasingly prevalent role that brands are
playing in the fast growing virtual goods market. We describe the business opportunity for selling
Branded Virtual Goods (BVGs) from the perspective of each player in the value chain: the brand, the
game or virtual world developer, and the social network or publisher. We go on to discuss how to launch
a successful BVG campaign. In the final section, we discuss the overall market for BVGs and identify key
trends that will shape the role that brands play in the virtual goods industry.




	
  



	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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What are Branded Virtual Goods?	
  

Virtual goods are non-physical objects that are purchased with real money for use in online
communities, virtual worlds, or games and fulfill a functional or decorative purpose in an online
environment. Virtual goods are typically priced from $1 to $3, but can be sold for much higher prices
depending on scarcity, functionality, and design. Virtual goods include weapons or tools that help
players progress in a game, decorative items like avatar gear or profile themes that allow users to
express their individuality, and virtual gifts that enhance communication between friends and family.
Perhaps most importantly, virtual goods also act as social badges that, depending on the social context,
can convey a level of status, achievement or acceptance similar to that associated with ownership of
real status symbols.	
  


Branded Virtual Goods (BVGs) are virtual goods that – in addition to offering some functional or
decorative value – display an insignia, copyright protected mark, logo or derivative image of a known
brand, and by virtue of being “branded”, command a higher social and monetary value among end
users. This premium positioning is analogous to the difference between generic and branded products in
the real world where branded items typically sell more units and fetch higher prices than their generic
counterparts. A plain white t-shirt can be transformed from a cheap commodity to a sought-after
product by incorporating the mark of a well-known company or celebrity. Brands have a similar impact
on virtual goods. In this report, we define brands broadly, i.e. they include not only popular consumer
brands, but also images of and associations with celebrities, famous athletes, sports teams, colleges,
movies, musicians and televisions shows. In short, a brand creates a point of differentiation in the user’s
mind, and this differentiation represents an opportunity for monetization that is not found in generic
goods.


                                                                                                         	
  




                                                                                                                                       Figure 1: University of Alabama Branded Items
                                                                                                                                         Image Courtesy Zwinky/Mindspark & CLC
                                                                                                                                                                                                                                                            	
  




	
                                                                                                                                                                                               	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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Branded Virtual Goods Case Study: Snoop Dogg

Celebrity rapper Snoop Dogg is a multi-platinum recording artist who has turned his persona into a
globally recognized brand, with endorsements that range from cognac and sportswear, to a youth
football league and GPS navigation voice skins. Snoop Dogg works with Virtual Greats to extend his
name and likeness into the online world by selling Branded Virtual Goods. His portfolio of BVGs includes
everything from avatar clothing, to pets, to virtual gifts, and is offered on social networks and virtual
worlds that cater to young teens, including WeeWorld, Gaia Online, Zwinky, and Viximo’s network of
social networking partners. These items have been, and continue to be, very successful.




          “My virtual items are off tha chain jacc! It's a world and
          a movement that I have been down with since day 1 and
          we are gonna continue to hit u with hot products and
          virtual items until tha wheels fall off. Be on da lookout
          for more items in an internet hood near u - ya dig?!?”

                                                                                                                                                                                                                               -Snoop Dogg                                                                                                              Figure 2: Snoop Dogg Branded Items
                                                                                                                                                                                                                                                                                                                                                      Image Courtesy WeeWorld & Snoop Dogg




According to WeeWorld, a social game and virtual world with a global audience of more than 36 million
registered “WeeMee” avatars, unit sales of Snoop Dogg branded items are 2.5 times higher than the
highest selling non-branded, comparably priced item. In addition, sales of Snoop Double Doggs (which
fall into the category of branded pets called “Cweetures”) are 5 times higher than the highest selling
non-branded pet (see right). Since all WeeMee avatars are created equal and do not feature special
functionality (i.e. they are vanity-only items) it is clear that Snoop Dogg’s own brand equity is the driving
factor behind the increased desirability for these virtual goods that draw from his likeness.


On Gaia Online, Snoop Dogg’s Branded Virtual Goods inventory includes a branded sweatshirt and a
boom box that can be purchased and used by a player’s online avatar. In November 2008, these items
were sold directly to players at a “list price” slightly higher than the items’ generic counterparts. The
items sold well, but the true value became apparent in Gaia Online’s secondary marketplace.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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This secondary market is an eBay-like bazaar where players can buy and sell virtual goods via player-to-
player auctions. Here, the Celebrity Snare Snoop Dogg’s Hoodie item traded for over 10,000 Gaia Gold
(the site’s reward currency), which was a 345% premium over a similarly styled, generic Soft Ivory
Hoodie. In addition, the Celebrity Snare Snoop Dogg’s Retro Boombox was valued at over 9,000 Gaia
Gold, which was an 1800%+ premium over the generic Red Mini Boombox (see below).




                                                                                                                                       Figure 3: Snoop Dogg Items on Gaia Online’s Secondary Marketplace


This data illustrates the price premium dynamics that drive the Branded Virtual Goods opportunity – Gaia
users valued the Snoop Dogg branded items more highly than their generic counterparts and this led to
significant inflation in their selling price on the secondary market.


To date, Snoop Dogg Branded Virtual Goods have generated over $200,000 in sales, and virtual goods
have become a rapidly growing part of the artist’s merchandising and endorsement mix.


	
  



	
                                                                                                                                                                                                          	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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The Business Opportunity for Branded Virtual Goods	
  

Branded Virtual Goods represent a lucrative revenue and user engagement opportunity for three key
parties: Brands, Social Networks and Game/Virtual World Developers.


I.                         Brands


Brands are constantly seeking new ways to interact with their customers in a deep and meaningful way,
and almost any brand with strong consumer positioning can benefit from Branded Virtual Goods. Social
media, virtual worlds, and online social games provide an unprecedented opportunity for brands to
engage their customers via a rich, one-to-one channel. How? Given the opportunity, brand loyal
customers are eager to flaunt their favorite brands to their online friends and rivals. Branded Virtual
                                                                                                                                       Goods, designed and sanctioned by the Intellectual Property holder, enable
                                                                                                                                       this kind of self-identifying behavior, and deepen the relationship between
                                                                                                                                       brand and customer within a hip and relevant media environment.
                                                                                                                                       Additionally, when users buy and integrate a branded item into their online
                                                                                                                                       persona, it leads to greater engagement and a perception of authenticity
                                                                                                                                       that translates into a more effective and valuable impression for the brand.


                                                                                                                                        Brands also benefit from an additional source of revenue. The virtual
            Figure 4: Domo Branded Items
             Image Courtesy WeeWorld &                                                                                                  goods business model works in their favor since development costs are
                Big Tent Entertainment
                                                                                                                                        low – a Branded Virtual Good can cost as little as $50 to create – and
decrease to zero after designing the first unit of any virtual item. In fact, with the user effectively paying
the brand for interacting with it, the overall CPM cost to the brand is negligible, if not negative – a
compelling economic argument for brands that are used to paying $3 or higher CPMs for other forms of
online marketing activity. Also, while costs decrease, sales – driven by viral behavior across the social
graph – increase. This buzz-inspired growth, when combined with essentially infinite online shelf space
(i.e. server capacity) and no real inventory management issues or costs, plus the benefits of new users
coming into these communities continuously, creates a powerful and profitable scenario for real world
brands. Finally, while virtual goods’ gross margins of over 90% may seem like a good enough return on
investment, the ability of virtual items to drive real world product sales is growing and may potentially be
the greatest prize of all.




	
                                                                                                                                                                                                    	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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II. Social Networks


Virtual goods have transformed the way that social networks monetize their audiences. For years, social
networks struggled with low returns on their ad inventory despite reaching highly relevant and valuable
audiences. Today, virtual goods allow social networks to not only directly monetize their users, but also
to increase engagement and loyalty through customization, gifting, and gaming behaviors. Branded
Virtual Goods extend these benefits further: social networks can connect with users in an even more
meaningful way because familiar products and logos bridge the real and virtual world and make the
online user experience richer and more realistic. Social networks can also use their branded wares to
differentiate themselves from competitors, and give users a reason to keep coming back to engage with
their favorite brands.


For social networks that target a particular niche, such as Viximo partner
BlackPlanet.com (the largest social network for African-American users),
BVGs offer an additional benefit. Those sites can increase their relevance and
credibility from the halo effect of their association with premium brands. For
example, by selling virtual gifts based on Rocawear, rapper Jay-Z’s clothing
line, BlackPlanet.com benefits by providing unique, targeted and highly
                                                                                                                                                                                                                                                                                                                                                                                                                                        Figure 5: Rocawear Branded Item
valued content to their members.                                                                                                                                                                                                                                                                                                                                                                                                       Image Courtesy Meez & Rocawear



Finally, BVGs offer a way to increase both the revenue and profit margins of a social network’s virtual
goods business. Since BVGs are priced at a premium to generic virtual goods, they enable sites to
achieve higher returns by selling more valuable, higher priced inventory through their virtual goods
storefronts and marketplaces.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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III. Game and Virtual World Developers


Branded Virtual Goods provide virtual world and game developers with a unique tool to enhance their
products’ realism, credibility, and familiarity. The best candidates for BVGs are virtual worlds and games
that appeal to users who have strong relationships with target brands and are set in realistic
environments that benefit from the presence of popular brands.


Branded Virtual Goods offer better monetization opportunities to developers than their unbranded
counterparts. Users are likely to feel more comfortable spending real dollars on virtual goods they
recognize and brands they are loyal to in the real world. Also, not only does the associated premium
pricing generate more revenue, but developers can also give BVGs multiple roles within a product –
functional, decorative or consumable – and earn even more revenue by creatively deploying different
types of items sponsored by the same brand. Zynga recently partnered with Cascadian Farm to offer
Farmville’s first branded organic vegetables and Three Melons (recently acquired by Playdom) executed
a particularly elegant brand integration in its Bola soccer game where users can sign a virtual
sponsorship deal with brands like Fox and National Geographic and receive Bollars, the in-game virtual
currency, in exchange for the brand’s ability to get promotional placement inside the player’s virtual
soccer stadium.


In an increasingly cluttered and competitive industry, virtual worlds and games that offer Branded Virtual
Goods are able to differentiate themselves and increase their own credibility. On average, 95% of users
in social gaming or virtual environments never buy anything; they play for free. BVGs have the ability to
get that huge majority off the sidelines and drive revenue. Additionally, when players make brand-related
purchases, they share this information with their social graph and attract other brand loyalists, thereby
amplifying the revenue potential for BVGs. So, although partnering with brands means additional profit
sharing, the buzz created by integrating with known brands compensates for the loss by bringing in
significantly more players and converting non-buyers to buyers.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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Branded Virtual Goods in Action

Partnership Strategy: How to Pair Brands with Content


Virtual goods offer a unique marketing opportunity, but they appeal to a certain type of audience. The
most successful Branded Virtual Goods are based on brands that inherently appeal to that audience.
Brands, Social Networks and Developers should assess fit based on the following criteria:


 Focus on Customer Interaction. BVGs are most suitable for brands seeking high frequency,
                           monetizable, one-on-one user interactions. Brands that aim to increase overall awareness through
                           broad reach tactics are more likely to achieve their objectives in the virtual realm through mass
                           exposure integrations, such as sponsoring an event or real estate in a highly trafficked virtual world.


 Strong Visual Brand Equity. For the online user, the main condition for making a BVG purchase is
                           immediately recognizing the brand and the values for which it stands, despite seeing it only as a
                           small icon on a computer screen. Brands with well-known, prominent visual signatures will be best
                           equipped to create a BVG that conveys authenticity and value on a small screen.


 Have Enthusiastic Followers. Brands that have a powerful, self-identifying fan-
                           base, such as the Boston Celtics, are likely to benefit more from Branded Virtual
                           Goods than mass brands, such as Wal-Mart, that are positioned to appeal to the
                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Figure 6:
                           broadest of audiences. Customers who consider themselves devoted                                                                                                                                                                                                                                                                                                                                                                   Celtics Sweatshirt
                                                                                                                                                                                                                                                                                                                                                                                                                                                          Image Courtesy Meez & NBA
                           loyalists and have deeply personal relationships with iconic brands will
                           continue their offline endorsement of the brand by spending money on them in an online
                           environment. Celebrities with a compelling personal brand, such as Lady Gaga or Snoop Dogg, have
                           also found success with Branded Virtual Goods because of the strength of their fan following.


 Strong Real World Relevance. Brands that can emotionally connect with users through popular
                           memes are seen as culturally relevant and exciting. Successful movie franchises, such as Harry
                           Potter or the Twilight saga, have unique narratives that provide excellent source material for BVGs.
                           Additionally, brands that leverage real world activity and events such as sports games, concert
                           tours, new fashion styles, or back to school product lines, offer a sense of immediacy that translates
                           well into sales. Without this strong attachment to real life, brands will be challenged to find the
                           relevance that is the backbone of a                                                                                                                                                                                                                                                                                                        successful Branded Virtual Good.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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    Product Strategy: How to Design Great Branded Virtual Goods


    Once a brand has been matched with the appropriate game or application, the fun part begins. Design is
    even more important for virtual goods than it is for tangible products because virtual goods often do not
    offer utility in the same way that real products do. However, they are not constrained by real product
    realities either, allowing for whimsical or exciting interpretations of the brand, such as branded sneakers
    that enable the wearer to fly. As a result, virtual goods rely much more heavily on their brand story and
    visual appeal to drive demand. Successful BVG’s exhibit these qualities:


 Contextual Relevance. This is a key factor in determining the success of a Branded Virtual Good. Every
    brand should consider how its existing equity can be leveraged to create a compelling virtual good and
    what kind of behavior it wants to enable in its target user – winning, self-expression or status – based on
    the users’ preferred online activities. BVGs should fit seamlessly into the context of the online
    environment and add value to online activity in order to be viewed positively.


                                                                                                          Timeliness. BVGs should convey an interesting narrative, but that story should be
                                                                                                                                    current from a timing perspective. Brands should try to tie into relevant seasons and
                                                                                                                                  real-world events to give their virtual goods a sense of immediacy. Heart-shaped

    Figure 7: Elvis
                                                                                                                                   items sell quickly on Valentine’s Day, and sales of Los Angeles Lakers and Boston
       Cupcake                                                                                                                     Celtics virtual items recently soared when both teams advanced to the 2010 NBA
   Image Courtesy
     Elvis Presley                                                                                                                 finals. Also, while virtual goods that tap into current memes connect emotionally with
     Enterprises
                                                                                                                                   users, brands like Elvis Presley also have timeless appeal that can be leveraged well
                                                                                                                                   through virtual goods.


     Exclusivity. As with real goods, virtual goods that are perceived as scarce are considered more
                               desirable. BVGs should be constantly refreshed, but sold in limited supply at premium prices. This
                               way they can be turned into exclusive collectibles, and generate high demand among fans who want
                               to own the complete series. It may seem counter-intuitive to limit supply of a product with almost
                               zero marginal cost and unlimited shelf space, but the perceived scarcity actually allows brands to
                               maximize impressions.


     High Quality. Users are drawn to visually stunning and engaging imagery. BVGs should be vibrant,
                               rich, interactive and engaging. These elements protect the brand’s visual equity, but also make the
                               virtual goods distinctive and able                                                                                                                                                                                                                                                                                                                  to stand out from unbranded items.




    	
                                                                                                                                                                                                       	
  
    	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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Distribution Strategy: How to Make Branded Virtual Goods Profitable


After the portfolio of virtual goods has been designed, it is essential to craft a distribution strategy that
optimizes the reach and profitability of the BVG inventory. The following factors should be considered
when creating this strategy:


 Channel Mix. Choosing where to sell BVGs can be the single biggest factor in the success of a BVG
                           campaign. The most important consideration here is assessing the expected demand of any
                           distribution channel. While brands may be tempted to only distribute via the largest social
                           networking sites because of their access to millions of users, it is important to consider smaller sites
                           that reinforce the values of the brand or are particularly relevant from a timeliness or pop culture
                           perspective. In general, more immersive channels, such as MMOs, convert better than less
                           immersive channels such as social networks. This is due to the fact that the rich environments,
                           structured game rules, and moveable avatars of virtual worlds and MMOs provide a more
                           compelling buying experience than the static profile pages of social networks. As a
                           result, the same product can generate more revenue on a moderately sized virtual
                           world than on a massive social network. For example, Virtual Greats observed that a
                           Los Angeles Lakers jersey sold 10 times better in a popular virtual world than it                                                                                                                                                                                                                                                                                                                                                  Figure 8:
                                                                                                                                                                                                                                                                                                                                                                                                                                                          LA Lakers Jersey
                           did on a popular social network. Also, by simultaneously deploying BVGs on                                                                                                                                                                                                                                                                                                                                                      Image Courtesy
                                                                                                                                                                                                                                                                                                                                                                                                                                                          WeeWorld & NBA
                           numerous platforms, brands can account for the effects of varying buy rates, price
                           elasticity and active user rates, and ensure they meet revenue and promotional goals.


 Merchandising. For each distribution channel, it’s important to understand how users will find and
                           buy Branded Virtual Goods. Some publishers provide a single storefront while other publishers have
                           multiple stores located throughout the virtual world or online game. Single storefronts provide a
                           highly trafficked area to sell virtual goods, but may not offer enough differentiation or visibility to
                           BVGs, while purpose-built storefronts provide a highly structured and merchandised buying
                           experience, although they may not get as much traffic. Some publishers provide a secondary market
                           that allows users to buy from and sell to other users on the site. While user-to-user transactions are
                           less controlled than primary market transactions (and may not provide a direct revenue stream),
                           secondary markets can be indispensable to understanding how a community values a brand’s virtual
                           goods, as seen in the case study on Snoop Dogg.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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 Number of SKUs & Lifetime Value. Virtual goods in general, and BVGs in particular, are a volume-
                           driven business. Although each original item (SKU) requires a small fixed cost investment to
                           produce, variety increases the likelihood that users will find items they want to buy. Dipping a toe
                           into the water is generally not the best strategy to maximize revenue as a small set of assets limits
                           the upside. When a collection of BVGs is carefully designed, each SKU can sell hundreds of units
                           without cannibalizing the other SKUs, and this allows brands to offer a large selection of items while
                           maintaining negligible fixed costs. Branded Virtual Goods for a virtual world can cost as little as $50
                           to create, and, on average, the Lifetime Value of a single SKU is upwards of $3,000 (it can be
                           significantly higher depending on the popularity of the brand and the channels in which it is sold).
                           Given these metrics, a BVG campaign can achieve very healthy margins.


 Pricing & Promotion. Due to differences in payment methods and usage behavior, pricing and
                           promotional strategy needs to be determined individually for each distribution channel. Below are
                           some of the factors that need to be considered when setting this strategy:


                           Pricing                                                                                                                                                                                                                                                    Promotion


                           o                          On average, how much does the target                                                                                                                                                                                            o                          What is the ideal timing for offering the
                                                      audience pay for a virtual item?                                                                                                                                                                                                                           branded virtual good?
                           o                          What kind of pricing will reflect fair                                                                                                                                                                                          o                          Is there a relevant real world event (such as
                                                      value but also premium positioning?                                                                                                                                                                                                                        a sporting championship, film release, or
                           o                          Should items be priced differently to                                                                                                                                                                                                                      concert tour) to tie the virtual good into?
                                                      reflect different levels of status?                                                                                                                                                                                             o                          What                                                 is                           the                                     strategy       for   increasing
                           o                          Does the price encourage users to                                                                                                                                                                                                                          exclusivity through limited availability?
                                                      utilize the currency packages they have                                                                                                                                                                                         o                          Can the item/brand be tied into relevant
                                                      purchased?                                                                                                                                                                                                                                                 promotions or seasonal campaigns?
                           o                          Is there a secondary marketplace and                                                                                                                                                                                            o                          How can you harness each environment’s
                                                      what impact does it have on price?                                                                                                                                                                                                                         native viral channels for maximum buzz and
                           o                          How should scarcity and bundling be                                                                                                                                                                                                                        effect?
                                                      managed to maximize revenue?




	
  
	
  
	
  

	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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The Future of Branded Virtual Goods

Market Size & Forecast


When assessing market size for Branded Virtual Goods, it is important to keep a global perspective
since today’s leading brands have a global presence and customer base, and online environments like
social networks, online games and virtual worlds exercise a reach that crosses geographic boundaries.


The global virtual goods industry is estimated to be a $3.1 billion market (Source: Piper Jaffray) and
analysts agree that this market is poised to grow exponentially within the next three to five years.
According to Piper Jaffray estimates, the global virtual goods market will grow 25% over the next three
years and generate over $6 billion in revenues by 2013. Further analysis suggests that by 2015, the
industry will be growing at a 21% CAGR and be a $7.9 billion market.


Currently, Branded Virtual Goods currently make up less than 1% of this market, with global revenue
estimates for sales of BVGs at around $15 million. However, as virtual goods become more ubiquitous
and brands come to recognize virtual goods as a valuable engagement and revenue opportunity, we
expect that the growth of Branded Virtual Goods will outpace the industry’s overall growth.


We predict that global BVG revenues will grow at 113% CAGR over three years to $150 million by 2013
(2.5% share) and at 83% CAGR over five years to $318 million by 2015 (4% share).




	
  
	
  
	
  
	
  
	
  

	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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Future Trends in Branded Virtual Goods


The growth towards this predicted market size will be driven by a number of trends influencing the
supply and demand of Branded Virtual Goods. We have already begun to see activity in these areas as
the virtual goods industry continues to grow, both in terms of market size and usability.


 Entry of a Super Brand Into the BVG Market. Media mogul Disney already has a significant
                           position in the space through its acquisition of Club Penguin, a virtual world for children aged 6 to
                           14, and Nike has offered a small set of virtual goods in Gaia Online in the past. As these platinum
                           brands try out Branded Virtual Goods, we expect that other “super” brands, such as M&M’S, will
                           enter the market with the goal of monetizing their brand, not just for branding or marketing value.


 Increased Interest from Media & Entertainment Verticals. The largest
                           and fastest growing segment of clients for Virtual Greats are media and
                           entertainment clients, such as movie brands, sports franchises, and
                           musicians. These clients have highly connected audiences that are the
                           core demographic for many social media sites, virtual worlds, and online
                           games. BVGs provide media and entertainment brands with a low cost
                           method to grow revenue and diversify their marketing mix, and we expect
                                                                                                                                                                                                                                                                                                                                                                                                                                                          Figure 9: Lady Gaga Bubble Dress
                           that growth in the industry will be driven in large part by interest from                                                                                                                                                                                                                                                                                                                                                          Image Courtesy Viximo &
                                                                                                                                                                                                                                                                                                                                                                                                                                                               Interscope Geffen A&M
                           these industries.


 Evolution from Vanity to Functional Virtual Goods. BVGs benefit from seller-friendly price
                           dynamics: they are typically priced higher than their generic counterparts, and often buck traditional
                           economic theory in that the best selling items are usually the most expensive. As the industry
                           matures and average prices begin to increase, BVGs will need to live up to their premium pricing and
                           perceived value by going beyond decorative avatar items or gifts to incorporating functionalities that
                           cohere with the brand and also enable the user to engage in preferred behavior, such as moving
                           ahead faster in a game. For example, Nike partnered with Gaia Online and offered Nike-branded
                           sneakers that not only acted as a status symbol or avatar enhancer, but also enabled the wearer to
                           run faster than other players in the virtual world. As Branded Virtual Goods become popular, brands
                           will incorporate such functionality into their virtual goods so that they are more relevant, and thus
                           more desirable, to the user.




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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 The Marriage of Real and Virtual Worlds. Recently, various brands have partnered with Zynga to
                           create real, in-store promotions for virtual goods and currency. Green Giant gave away Farmville
                           cash with purchase of branded vegetables, and 7-11 branded its physical products with codes that
                           helped buyers unlock limited edition virtual goods in various Zynga games. Zynga’s popularity and
                           scale has allowed it to be the forerunner in such promotional campaigns, but we expect that as more
                           hit social games emerge, there will be a greater number of real-plus-virtual promotions. We expect
                           the model will flip around too, where 7-11, or any other retailer, will sell Branded Virtual Goods inside
                           social games that translate into a physical purchase in real life, i.e. when you buy a virtual Slurpee,
                           you receive a coupon for a free or discounted real Slurpee. We expect that such innovations will
                           occur in the very near future, likely within the 2010 calendar year.


 Entry into Mobile/GPS Applications. The popularity of GPS-based mobile “check-in” apps such as
                           MyTown, Foursquare, Gowalla and Loopt has created a new platform for selling virtual goods.
                           Earning the badge (a virtual good) has become more popular than the using the application for its
                           intended purpose, and the gameplay of these apps have evolved to more prominently feature
                           badges. At this time, badges are earned and not paid for, but many large brands, including the NBA,
                           the History Channel and Starbucks, have partnered with mobile app developers to offer their IP as
                           badges. As mobile penetration increases and such apps become the norm, we expect that Branded
                           Virtual Good integrations on the mobile platform will be incredibly popular and offer a significant
                           revenue stream for brands and developers.




Conclusion

The social gaming industry and mainstream media have already embraced virtual goods as a legitimate
revenue stream. The injection of branded content into this dynamic space is the next logical area of
growth for virtual goods. Branded Virtual Goods offer incremental revenue to brands that are just
beginning to explore the potential of this new product category, and also offer a compelling new
revenue-generating product line to social networks, virtual worlds, and game developers. The market is
growing rapidly and pioneering brands have made significant returns by selling virtual goods with almost
zero marginal costs, while achieving significant promotional goals. Branded Virtual Goods represent a
burgeoning opportunity for brands, social networks, virtual worlds, and game developers, and will be
critical                                                   component                                                                   of   the   future                                                                                                                                                                                       growth of the virtual goods industry.




	
                                                                                                                                                                                                            	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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ABOUT THE AUTHORS


Viximo is the largest virtual goods platform that connects social app and game developers with
numerous social networks across the web. With Viximo’s platform, Developers get access to over 60
million users across multiple social networks with a single easy implementation. Additionally, Social
Networks are able to quickly set up a robust virtual currency, enable third parties to easily develop to
their site, and instantly offer the highest quality social apps and games. For more information visit
http://viximo.com or http://blog.viximo.com.


Virtual Greats connects celebrities and artists, intellectual property owners and brands with a new
generation of fans, unlocking value through digital representations of real world content in online
communities. Virtual Greats' unique team of specialists is based in Los Angeles and San Francisco,
helping partners develop new revenues from the complex relationship between content, technology, and
virtual goods while reaching out and connecting with young audiences in social networks, casual
gaming, virtual worlds and mobile applications. For more information, visit www.virtualgreats.com.




CONTRIBUTORS


Ravi Mehta                                                                                                                                             Zeenat Rasheed                                                                                                                                                                                                                                                Brett Orlanski
VP Product Management                                                                                                                                  Marketing Manager                                                                                                                                                                                                                                             Director of Platform
Viximo                                                                                                                                                 Viximo                                                                                                                                                                                                                                                        Management
Twitter: @ravi_mehta                                                                                                                                   Twitter: @zeenatrasheed                                                                                                                                                                                                                                       Virtual Greats
                                                                                                                                                                                                                                                                                                                                                                                                                     Twitter: @brettorlanski




CONTACT


Ravi Mehta                                                                                                                                                                                                                                                                                                                                  Brett Orlanski
VP Product Management                                                                                                                                                                                                                                                                                                                       Director of Platform Management
Viximo                                                                                                                                                                                                                                                                                                                                      Virtual Greats
(617) 583-5671                                                                                                                                                                                                                                                                                                                              (415) 786-1125
info@viximo.com                                                                                                                                                                                                                                                                                                                             contact@virtualgreats.com




	
                                                                                                                                                                                              	
  
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
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