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.

that’s entertainment

Is social media entertainment?

Of course it is, whatta silly question, you say. When people spend their leisure time engaged in updating their profiles, messaging each other with pokes and posts and status updates, posting and viewing photos and videos – well, that’s entertaining. The answer to the question from the user’s perspective is undeniable. But of course the fun in any analogy is to see how far you can extend it, so I’m really wondering if social media is entertainment from a business model perspective.

Think of a big-budget movie. A group of people get together around a concept, script or performers. They raise financing in excess of $100 million from traditional studio and independent interests, often pre-selling shares in future revenue stream. Many dozens, sometimes hundreds of people are employed in executing the vision into the reality of the work on screen. Distribution occurs not just in theaters, but downstream on DVD, TV, and of course the Web. A successful blockbuster returns hundreds of millions of dollars in a burst, and a continuing annuity essentially forever.

Is this so different from what we’ve seen in social media? From Tribe to Friendster to MySpace to Facebook, it’s been a hits-driven business. People assemble around a concept and produce, and it seems that there is a limited window for the concept to catch fire with the broader public. If and when it does catch fire, there is a period to maximize revenue during the peak of popularity, and then a long slow decline. Maybe the curve is a little more like a successful TV series than a blockbuster movie, but the dynamics are the same: the production of a media experience that has temporal value for audience entertainment.

This is certainly an analogy that most social media companies would resist. They prefer to think of themselves as technology companies, building a platform for media delivery, or even becoming a fundamental part of the infrastructure of communication.

It’s not easy to define a platform on the Internet. You would think the concept of infrastructure is simpler. It’s relatively easy to envision the most concrete elements of the communications infrastructure: the physical wires (be they fibers, cables or tubes), the hardware of routers and switches and terminal devices, the often unglamorous stuff that moves the bits and bytes around. Database and storage are surely infrastructure components as well.

But can a software service company become part of the infrastructure? This isn’t a question of offering infrastructure services in a cloud of computing – it’s a question of whether a service that is not about transport and storage of information can be considered essential to modern communication.

In areas where that can be considered a serious question, we have an enormous market. Search is the prime example. Without search, the way we communicate and create on the Internet would be severely hampered, in the same way it would be hampered if we didn’t have significant storage or large databases. And search is a good example of a putative infrastructure element that must be provided as a service – which means a business can be built around it. Coming up with a protocol like TCP/IP may give birth to the Internet, but it doesn’t necessarily give rise to any dominant business for its creator.

So are the companies involved in today’s creation of social media making infrastructure? Can essential services be built in social media that become a fundamental component of communication? Even if so, is the social graph going to be as enriching as TCP/IP (that is, in more of a spiritual than monetary sense)?

Or is it all “just” entertainment?