virtually great currency
The acquisition of SuperRewards by Adknowledge is a notable milestone in the evolution of virtual currency business models. This is the first time an independent virtual currency platform has been acquired by a company outside of the virtual goods category, and so the first time that a virtual currency has achieved monetization for someone other than its creators and users. We’ve moved into the peak of the third phase of business models for virtual currency.
The first phase was a sort of prehistory where virtual currency was a gameplay feature of massively multiplayer online games – points that players could gain through the completion of tasks, and use to acquire in-game items that were valuable for further progress in the game. Although points have been a feature of most videogames since the inception of the medium, the relevant new thing about MMOGs was the operation of a “persistent” online economic environment. That meant that even when particular players weren’t online, the service constantly maintained an environment where items of value could be acquired and traded. Much of the trading of items for value was “off-service” – often against the game rules – but this was the first step in virtual currencies breaking free of gameplay rules.
The second phase started when online services that were not solely game-oriented used virtual currencies to encourage trading of service assets – this time trading currency for service items wasn’t against the rules, but specifically designed to encourage sales within the service. Korea’s Cyworld was a pioneer in this use, with “Cyholics” using “acorns” as a medium of exchange for digital presents that users could buy for themselves and each other. Chinese Internet portal Tencent built QQ coins into a $900 million economy, while in the U.S., Second Life users are heading towards $450 million (in U.S. Dollars) of Linden Dollar transactions. The authorized use of virtual currency within these services led naturally to implicitly or explicitly authorized use of their virtual currencies outside of the traditional boundaries of the service, demonstrated by Chinese users buying real-world items for QQ coins and Second Life users setting up 3rd-party currency exchanges and virtual goods stores. (As an illustration of the differences in culture, it’s interesting to note that the Chinese government eventually banned the use of virtual currency for “real” items, and that Linden Lab rebuilt or acquired the third party services.)
In the third phase, we have businesses that were natively built as a platform for virtual currency to be used on other services (rather than a feature of an economy within a more comprehensive service). Some have stayed closer to virtual currency’s MMOG roots, like PlaySpan and LiveGamer, while others have tried to ride the wave of social media apps platforms, like TwoFish and SocialGold. SuperRewards and OfferPal brought a new twist by using marketing offers as the underlying value to the virtual currency.
This part takes a little bit of explaining. For any currency to gain favor with a user base, there must be some underlying value to the medium of exchange – from a consumer point of view, this is sometimes expressed as a demand that the currency be “backed” by something of value. In ye olden days, governmental currency was backed by precious metal; in theory you could turn in your dollars to the government in return for equivalent value in gold. Most governmental currencies came off the gold standard decades ago, and are now backed by the declaration of the government that the currency is legal tender. The meaning of this declaration is a little murky both in theory and in practice.
Suffice to say that there are virtual currencies that emulate most of the historical models of real governmental currencies. e-Gold tried the gold-backed model, to disastrous result. Some virtual currencies are run as essentially stored value systems for governmental currency, so ultimately they are backed by the same declaration of the government. QQ coins to some extent, and Linden Dollars to a greater extent, are free-floating media of exchange that are backed by the commercial viability of their operators – a private rather than governmental declaration of value (this is not as revolutionary as it may seem, since in many ways it’s similar to airline miles and other customer loyalty programs).
By using marketing offers as the underlying value, virtual currency operators can sidestep some of the difficulties involved in demonstrating that a currency is sufficiently “backed” to satisfy customer demand for stable value. This technique introduces significant complexity and cost by introducing many additional parties to the value chain, but now SuperRewards has demonstrated (to its investors if not yet a skeptical public) that this kind of backing does create a valuable virtual currency. OfferPal is not far behind, and of course is now far ahead in terms of its ability to maintain an independent business.
So what’s coming for the fourth phase of virtual currency business models? That’ll have to be the subject of another post. But for now the developments to watch are the competition between Facebook and MySpace in their own virtual currencies, app developer currencies from companies like Zynga, and the continued progress of OfferPal.
somebody’s watching
There’s a certain techno-futurist vision of personalized advertising where constant surveillance leads to complete erosion of privacy, all in the service of targeting advertising to your behavior and tastes. The most popular picture of this future was in the movie Minority Report, where talking ads creepily enveloped the hero in a wash of ad patter while he ran for his life.
Despite this dystopian vision, I think the current level of public concern about the privacy invasion of targeted advertising could be described as significantly beneath swine flu and slightly above Lyme-disease bearing ticks.
But this year, the largest online advertisers and ISPs have really begun to show their power over consumer behavioral data. The New York Times has been utterly obsessed with this topic, to the point where it’s somehow news when a company decides not to use a targeted ad system. (I wonder if it there could really be such a thing as behavioral tracking so creepy that even advertisers won’t use it. The cynic in me says that the system probably just didn’t work well enough to justify the cost.)
Consumers who are asked about privacy generally want greater control over their marketing data, but don’t know how they can achieve it. In sympathy to this consumer demand, the industry’s leading ad networks have banded together to establish best practices for use of consumer data. (This sympathy was perhaps supplemented by the interested attention of the FTC.)
Industry self-regulation is a time-honored method of appeasing and forestalling government regulation. There are areas where this works just fine (in terms of industry commercial interest, if not art) – comics, movies and video games – this tends to involve public morality. And there are areas where greed and the public interest seem destined to cycles of boom and bust and bust – some industries just don’t seem capable of operating without eventual crisis in a deregulated environment.
So will the ad industry’s attempt self-regulation turn out more like the entertainment industry’s successes with the morality police, or the financial industry’s pathological self-destructiveness?
On the one hand, the dynamics of targeted advertising share some characteristics with complex financial instruments: advanced algorithms, proprietary trading systems, a leveraged financial return from a slight mathematical edge. On the other hand, consumers are not in bed with advertisers in the way that they were with their bankers and brokers and realtors. A little willful blindness made everyone happy for a while in finance, but that same blindness in advertising only covers growing consumer unease.
There are startups that tried to give greater consumer control over marketing data, but none really got a lot of traction. The problem may have been that the problem wasn’t big enough yet. Until everyone’s singing like Rockwell, it could still be too early.
