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.

loving and leaving linden lab

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.

F. Scott Fitzgerald, “The Crack-Up” (1936)

I love Linden Lab.  Over the past four years, I’ve poured everything I had into the company.  Leaving was a tough decision.  But at the same time, it was easy to see that it was time for me to go.

Departure missives are a tricky thing.  This is actually my third for this same departure:  I said goodbye to the company internally, I posted to the company blog, and now here’s one for my own blog.  Why so many?

I’ve studied the art of the departure memo, it’s really quite interesting.  The business world sees many comings and goings, and in certain companies, internal communications are destined to get leaked – and you can see that the authors know this.  Compare two examples from the same company, Yahoo:

  • Stewart Butterfield’s resignation was bizarre, funny, and ultimately a scathing indictment of a place that overdiversified and lost the love of innovation.
  • Sue Decker was more restrained, with a classic and classy goodbye that nevertheless could be read as a defensive listing of all the progress made under her watch.

In their own way, each goodbye note took pains to remind people of the author’s special qualities and accomplishments.  I avoided doing that in my earlier announcements.  It’s not that I’m especially modest –  I just didn’t want to muck up messages to colleagues, customers and company commentators with shameless self-promotion.  There’s a time and place for self-promotion.  Like right here, on my own damn blog.

Ah, but I’ve never been great at claiming credit.  I’m struck by the wisdom that one mentor told me earlier in my career, which I’ll paraphrase as:

Success has many fathers, and even more virgins trying to claim paternity.  No one who wasn’t there can really understand the full story, and even the ones who were there didn’t see everything.  But you’ll know what you did, and so will the people that matter.  Let the others play their guessing games.

So then here’s a game to play.  When success really does have many fathers, how do people claim any successes for their own?  I thought about what successes I’d want to highlight from my time at Linden, and I realized that any of them could have at least two opposing interpretations.

my would-be claim one idea opposing idea
key exec in managing company growth from early revenue to profitable phenomenon can spot and guide a winner just along for the ride
lead exec in many areas through company history: international markets, legal, finance, HR, developer relations, enterprise segment, business and corporate development multifunctional business executive short attention span to the point of personality disorder
led finance through early revenue, raising $15+ million equity and debt financing, accurately projecting 2+ years of revenue growth within 10% talented early-stage financier and prognosticator wild-ass guesser
early leader of international growth from 30% to 70+% of audience makes worldwide progress with limited resources strained the organization beyond its ability to grow
established basic legal and regulatory policy and strategies, with humor insightful thinker on social and governmental issues paper-pushing policy dork, with wicked streak
architected Linden Dollar as unique virtual currency and multimillion real dollar business fearless and creative new product innovator reckless and dispiriting goon
wrote, tweaked, and rewrote the Tao of Linden sensitive guardian of company culture feckless appeaser of management fads
executive sponsor of startup-within-a-startup initiative for enterprise segment constant pioneer in new markets and strategy focus-diluting disruptor
negotiated and managed acquisition and integration of several businesses accomplished M&A dealmaker heartless crusher of helpless entrepreneurs
helped recruit and integrate new management team before departure selfless assembler of talent ruthless operative in reorg-and-run

Can I claim any of these successes as wholly my own? Where does the truth lie? Would the modesty of my saying that all opposed ideas could be true be undercut by the implication that I would then be claiming a first-rate intelligence?

Ah well, that’s about the best I can do for self-promotion.