Photo by “solcookie”

According to this psychological study, people get more satisfaction from buying an experience than buying a possession.

Excerpt:

The study demonstrates that experiential purchases, such as a meal out or theater tickets, result in increased well-being because they satisfy higher order needs, specifically the need for social connectedness and vitality — a feeling of being alive.

“These findings support an extension of basic need theory, where purchases that increase psychological need satisfaction will produce the greatest well-being,” said Ryan Howell, assistant professor of psychology at San Francisco State University.

This makes perfect sense to me, and seems like a good reason why video games and movies usually do well during recessions. People are willing to spend their money to have a good time.

There is an excellent (but loooong) documentary by the BBC called The Century of The Self, that looks at the history of public relations. The documentary sheds light on the effectiveness of using advertising to appeal to people’s basic needs (to feel sexy, strong, etc.) and to connect a purchase to the satisfaction of such needs. Which everyone knows, doesn’t really work. No matter how many _____ you buy, you still won’t be or feel like a happier person.

Buy yourself a trip to an exotic country (or a Casa Bonita) and you’ll have a memorable experience that might just change you as a person.

Buy a video game (or a subscription to a virtual world) and you’ve got something to do while you wait for the economy to recover.

So where do virtual goods fit in? Are they experiences or possessions?

I think it depends on the item. If it’s another hat to stick in your inventory, then maybe it’s just a possession. If it’s a level 60 Brutality Blade with +9 Strength and Agility, then what you’ve really bought is a gameplay feature… an experience.

Virtual Worlds, from Club Penguin to World of Warcraft, are packed with great content. In some cases, there is so much content that it can be overwhelming and difficult to find what you want! This content includes games, locations, friends, friends of friends, events, and more. Social networks have the same problem! Packed with that same rich set of content, it was once very hard to find things on those networks. Enter the social networking newsfeed. In 2006 Facebook decided to turn on their “Newsfeed” feature for all of their users. Immediately Facebook users were able to see what their other friends were up to, including who they friended, when they changed their relationship status, what applications they were playing with, which groups they joined and almost any other significant activity happening on the site. Facebook turned the world onto the notion that it is easier to find content you like by looking at the content your friends like. It’s a small world after all! Did you know that guy from high school is also on Facebook? Of course you do, because one of your friends, friended them. Did you know your good friends from college are also playing WOW? Not with the help of WOW’s social tools. Did you know Gaia introduced a great new game? Maybe not, but a good friend has been playing for days! Did you see that great new sim or hot new musical act in Second Life? Not unless you found out via Twitter.

Virtual worlds both social and game focused need newsfeeds! They help you find content and they make the world more social. My favorite part about playing MMO’s is playing with friends, yet they are hard to find and its difficult to track their behavior. I look forward to newsfeeds coming to virtual worlds and I believe they are just around the corner! I can’t wait to see what great content my friends are finding in the virtual worlds I share with them.

The economy is on everyone’s mind right now.

We design virtual economies here at ESC, so I’ve been thinking about economics as a game. The RIDEMAKERZ Virtual Experience is in an early enough stage (it’s in closed beta right now) that we are still establishing the economy, and learning about how it will play out.

So what makes an economy fun? Gambling is the first “game” that comes to mind. But let’s ignore that one for now.

Entrepreneurship is a sort of game. Second Life has shown that a thriving entrepreneur class can keep a virtual world alive indefinitely. Any opportunity to trade goods or currency between players if done right, should increase player engagement, if only by adding another “game” to the mix. Player-to-player interactions are always a good thing, but in a kid’s world where we manage and limit the types of communication available, this becomes tricky.

Most kid’s virtual worlds have a shopping experience that has little impact on the game itself. Play games, earn coins, use those coins to decorate your avatar or your home. But that’s basically it. This sort of economy is not only 1-dimensional, but it’s a heck of a lot of work to maintain, since it relies on the continued addition of more stuff to buy.

Most MMORPGs have at least one added dimension to the economy since the items you buy not only affect what you look like, but they affect the player’s gameplay experience. In Ridemakerz, the virtual parts players can buy not only affect how their car looks, but how it handles in the game.

In the real world, the products we buy don’t last forever. Sometimes due to planned obsolescence, and sometimes because things just wear out. If we want virtual items to wear out, we have to add it in… we get to call it a feature.  There are a few ways to do this that we’ve been discussing lately:

• Consumable items that can be purchased and used, but must be replaced
• Item degradation, which is tricky because that’s generally an un-fun part of the real world, so making it justifiable and fun in a game is a challenge

The place where I think it gets interesting is in finding ways to make an experience based on a real-world system that is not necessarily fun for most people, and turn it into something that will not only be fun, but will make a player want to keep playing. This is where good justification comes in.

If I buy a poster and hang it on my wall, it doesn’t make much sense if I have to replace it, since posters don’t generally wear out. But if I buy a neon sign that lights up, it makes more sense that it slowly gets dim over time. But there’s nothing fun about watching a lightbulb go out.

I think a good real-world example of a fun consumable is fireworks. When I was a kid, I would get very excited every summer because I loved lighting fireworks. But fireworks weren’t very easy to come by. They are illegal for kids to have, and illegal to sell and use in NYC. So the act of getting some bottle-rockets in itself was a sort of game that I put a lot of effort into. Then once I finally made the buy, I hid them in my closet until July 4th. When that night finally came, I used them all and had a great time. Each one literally burned and destroyed never to be used again.

What a fun way to watch my money and effort go up in smoke.

Photo by Sharyn Morrow

Who am I? Who are you? Who’s that guy?

Questions we are answering at all times throughout our lives. Whether we intend to or not. Each action we take, however mundane, results in a display of who we are. Sane people take measures to manage their identity in the world through the choices they make when in public view. Celebrities may be known to us through the media created in their wake, but our perception of the identity behind the headline may have little to do with that person’s perception of self. Likewise, as the number of observers increases, the power of each individual action increases as an identity is defined in the minds of the observer and in the resulting activity log.

Or that’s how it seems to me so far.

I believe we are in a sort of “honeymoon phase” with social networking. Novelty has inspired generations to present themselves publicly to hundreds of observers at a time. Facebook and Facebook Connect present an interesting set of potential futures, some of which are explored in this slide show.

I’ve recently had an experience where I was suddenly friended on Facebook by a new group. People I have not “seen” since we were children in elementary school, more than 20 years ago. I did actually get together with one such friend, but most of them have only been faces on my screen, and voices on my newsfeed.

What defines the public view?

If a celebrity who has lost control of her identity becomes one thing in the public eye and record, yet that same person maintains a completely separate identity among her close-knit friends and family… then which identity is “real?”

All my connections, from professional to family are now able to view my news feed. By default, anyone can tag a photo of me, and even tag photos that aren’t me. If I stop actively managing my identity on Facebook, my account may end up with a life of its own through photo tagging alone. These settings can be turned off, and managed differently for different groups of friends, but by default everyone can see everything. The more friends I have on my list, the more I will be drawn to managing my identity.

Identity is something people spend their whole lives managing. Issues of privacy also arise, but seem on the surface to be less ambiguous. Identity Management has traditionally been the concern of a small number of public faces. Most “ordinary” people through history (I’m no historian, I’m just speculating) have had a small number of identity observers, close friends, co-workers, neighbors and other groups. Online social networking seems different than what we are, as a society, used to dealing with. People from otherwise unrelated groups may now encounter each other on your newsfeed, and see the results of asynchronous interactions between you and members of other groups.

When I walk down the street in my neighborhood to get a cup of coffee, there is no chance that I will bump into my mother on the way. But now that she’s on my friend’s list, she can see me if someone else takes a photo of me on my morning coffee run, and tags it on Facebook. (Ok, that’s a bit of a strange example. How many people are being photographed on their way to get a cup of coffee?)

In virtual worlds, I think the issue of identity is slightly more clear due to the obvious separation between the virtual identity as represented by an avatar, and the “real” identity of the person behind it. In a virtual world, people feel a freedom to create an identity that expresses parts of their personality (or fantasies) that may not be possible or even desirable to express in the real world. For most virtual world users, though, there is a clear delineation between the virtual and real personas. On a social networking site, the dividing line is less clear. The representation of self that comes through the Facebook news feed isn’t any more or less “real” than a person’s avatar in a virtual world, yet the use of photos and real-world connections makes it seem more real. This presents both opportunities and challenges.

This widening of the range of identity observers on Facebook can be a great thing if managed wisely. I am grateful to be in touch with my old friends from grade school. I’m glad my mother and I can keep informed of what the other is up to (ok, so she doesn’t update her status, but I know she’s there.) The potential to have a wider impact in the world through an expanded network of social connections presents excellent opportunities.

The uncertainty of navigating this new territory of identity management, is probably the reason I avoided Facebook at first. Although I couldn’t say specifically, “I don’t want to spend extra time managing my identity,” or “Sounds like a new platform for spammers and phishers.” I had some sense that social networking would be different than what I am used to, and different than what we as a people are used to.

What’s next?

Here are some questions that I’ll be thinking about and watching for…

• Will identity management become a new time drain in people’s lives?
• Will identity management become a professional service?
• Courtcases revolving around Social Network slander?
• Identity impersonation cases? (different from outright theft)
• Blackmail via Facebook
• Social network celebrities and success stories

The many forms of Eric Rice from Lively, all doomed.

As you probably already know, Google is shutting down it’s virtual world, Lively (very succinct notice here).

This is tragic and disappointing.  Despite my negative review of Lively in it’s initial form, I am baffled.  After spending at least two years in largely secret development (making 16,000 options for hair!) it was given only 4.5 months between announcement of launch and announcement of shut-down.  Sure, it hasn’t taken off like a rocket yet, but it’s in beta, with some of the most important features yet to roll out.  In my view, this is about more than just its performance to date; someone at Google either doesn’t believe in virtual worlds in the near term or perhaps more likely, didn’t believe that this particular product has a path to success.

If Google thinks that everything it rolls out has to set the world on fire in its first version and within 4.5 months, it won’t be succeeding with too many new products.

Nevertheless, I think we can learn some lessons from this so rapidly aborted world.

As I wrote when it announced in greater detail, Lively lacked a rigorous plan for success, at least that we could see from the outside.  Here’s a summary.

- It didn’t allow / wasn’t designed for kids under 13, which are the bulk of virtual world users today

-  After kids, the most experimentation with virtual worlds today is in enterprise use, and Lively was also not appropriate for those applications

- Large publishers didn’t want to use it because they didn’t want to scede control of their users to Google (Google log-ins, Google hosting, maybe future Google advertising)

- Advertisers need a huge audeince, which Lively hadn’t yet built

- Web communities that could use virtual environments, even very sticky ones, have a hard time getting users to download plug-ins

- New non-gamer users have trouble navigating 3D, especially with camera controls separate from avatar movement, as just one interface barrier of many

- If you can’t sell virtual goods, you don’t provide the most common incentive for people or companies to build and publish great content

All those rule out most great plans that could have made sense for Lively.  But what was the plan?  From what I can tell, it was to incite user generated content (rooms) that would then get used virally on MySpace.  In terms of content that motivates people to use the product, this looks like:

Google User/Content Plan

This is similar to Second Life in its focus on UGC (user generated content), betting that being on the Web, perhaps tied into social networking platforms and with Google’s existing users, Lively could take off more quickly.

The fundamental flaw was not with this plan, but that the execution of the product was not rigorously designed to make this plan work.  Seed content by professional 3rd parties (step 2a) was very weak - no really catchy games, constant stream of major events, interactive social applications, etc.  The tools for users were not yet well developed, and Google had no advance plan for dealing with the dark side of the UGC coin - porn.  So the virtuous UGC cycle never got going, and users therefore never caused viral adoption.

Beyond the specifics of Google’s example, the lesson is that if you want to launch a successful virtual world today, you MUST pick one of the four following ways to do it.

1.  Follow success, with a competitive advantage.  Today, that means kids’ worlds, since that is the one huge success of virtual worlds (counting MMOs separately).  Take the highly successful model of kids’ worlds, and add a twist - more compelling game play, a few MMO features, tie-ins to interactive toys, better AI characters, plots that follow your TV show, good old fashioned huge amounts of marketing $, or whatever.

2.  Translate success to a new market.  One could take the simple success model of kids’ worlds today and apply them to a new demographic, making the necessary design adjustments.  I think the opportunity is huge today for more success with teens and adults with very simple social virtual worlds around casual gaming and/or social networking - just up what works with kids’ to be demographically appropriate.

3.  Forget virtual worlds, and get there by accident.  This is how kids’ worlds started.  Not from the cadre of virtual world dreamers, but just from creating an app (fun games for kids) and adding a few features to it that just so happen to be features that in total, make the Web site look strikingly like a virtual world.  Who knew?  This is not semantics, it’s a whole different design point of view - creating a property with a user-focused vision that may or may not turn out to be a virtual world in the end.

4.  Strike out in a new direction, with a GREAT plan.  There is the most success to be made in this fashion, but it is difficult to be sufficiently rigorous with the plan and analysis.  It’s not a blind search process, however.

a) Expand the very simple type of diagram above to cover the exact motivation of the user at each key step in the process to success

b) Determine the technical and business requirements for making that motivation extremely high at every single step

This is what Lively needed to do and did not.  It is also what the Virtual Worlds Roadmap effort hopes to help people do (hopefully with some first content up next week).

The lesson is - stop creating half-baked platforms and products that don’t fulfill a complete cycle of user motivation and value!

Just over a week ago, Sibley posted his take on the economy and its impact on virtual worlds.  That day, I also spoke to Joey Seiler at Virtual Worlds News, and for those who didn’t see the piece, this was my primary message:

“We suspect that the best virtual worlds will remain relatively counter-cyclical, as they provide a cheap form of entertainment. However, business models that relied on advertising and sponsorships will be under pressure, while those who chose subscription models or micro-transaction models will stand stronger.  Advertising spend is going to shrink and concentrate, and it is going to focus on highly measurable areas.  We also expect enterprise experimentation budgets to shrink, as businesses cut back on non-core IT projects.  We still see solid interest in building large-scale youth worlds. This will not be start-ups, but rather companies that have a strong real-world property that they can leverage and who know that virtual worlds are a necessary competitive, and potentially very profitable investment in their future.”

I was interested to see Geoff Ramsey, CEO of eMarketer, come out yesterday with an article on ad spend projections.  While eMarketer has inevitably cut their projections, Ramsey believes that growth will remain strong:

“[T]here is still a consensus among many analysts that spending growth for online advertising will continue to show double-digit gains in both 2008 and 2009. eMarketer agrees.”

Ramsey also refers to several surveys, including a McKinsey study of marketing execs which said that 55% are “cutting expenditures on traditional media, precisely in order to increase funding for online efforts.”  Key drivers behind this will not surprise readers of this blog: the Internet provides greater levels of targeting, measurement, engagement, greater insights from conversations and participatory marketing, etc.

You can read the full article here.

This is not to say that online advertising can completely resist a recession, but that folks like Ramsey are bullish that the floor will not drop out.  Ad Age has an article today on the softening in the ad sales hiring market. Still, there is a recurring tone of cautious confidence, as the author wrote:

Aside from the burst of another asset bubble, there are few similarities between the internet bust of 2000 and the slowdown occurring today. First, most believe we’re looking at a few years of single-digit growth, not negative growth, as occurred between 2000 and 2002. In 2000, online advertising was still experimental for most marketers; today it’s part of the mainstream. Indeed, unlike in 2000, agencies are unlikely to cut any online staff and likely will use the downturn to fill or upgrade positions.

My personal belief remains that virtual worlds, as a relatively new and thus still experimental form of online advertising, will struggle to gain share of interactive ad spend.

It is as clear as it can be that a major recession is upon our economy. What is the likely effect on the virtual worlds’ industry? It’s impossible to say, but here are my predictions, perhaps in increasingly speculative order. I’d love to hear any other commentary.

(Picture by Extra Ketchup.)

1. Elimination of at least 80% of Virtual World advertising, marketing, and sponsorship efforts.

Other than a short-lived craze to get into Second Life in 2007, this hasn’t yet been a huge category, with most efforts by brands to market within virtual worlds still considered highly experimental. But the steady increase in campaigns within growing worlds like Gaia is likely to decrease and even more experimental dollars into newer or less Web-based worlds is likely to dry up altogether.

This is the most predictable effect of the downturn - the Wall Street Journal has already issued this prediction in an article this week by Emily Steel. (Since the Journal isn’t freely available, here’s a link to a reporting of the article by Jeremy Liew on the Lightspeed Ventures blog.)

I continue to believe that without a doubt, virtual worlds will become the most effective advertising medium that has ever existed. But innovation in advertising is cyclical, relying on the extra $ thrown around on poorly-understood experiments in good times. So the likely economy of the next two years will postpone the rapid development of this inevitably huge advertising category.

2. Enterprise use of Virtual Worlds will Stagnate.

This may be more controversial as a prediction, but I feel that the vast majority of the current efforts in enterprise use of virtual environments is still well in the experimental R&D phase. In tighter times, corporate budgets will focus on proven value.

But what about virtual worlds saving on corporate travel costs? The problem is that, just as with the effectiveness of virtual world advertising, this is a prediction for the future, not a sufficiently proven reality of the present. I don’t think that current virtual world tools are sufficiently feature-rich to be effective in widely deployed corporate use cases. They point the way but are not there yet. So who is going to pay for the couple million dollars of feature development and customization that is needed for most use cases when the success is uncertain? Very few if any in this financial environment.

$50k experimental projects will mostly disappear with the experimental IT budgets that pay for them, and no one will get to the $2M wide deployment stage.

Remember, the bar is not even that a virtual meeting is useful, but that it’s so much more useful than WebEx or a conference call to justify the learning curve on very new software and the expense of setup and operation.

3. Kids’ Worlds will Continue to Grow at a Healthy Rate.

It’s not all doom and gloom in virtual worls!

Virtual Worlds aimed at tweens and younger kids are the first truly successful consumer application of graphical virtual worlds (beyond straight-up MMOs), and they’ve achieved success in time to be in a growth position during the recession. This is not to say that they won’t be affected - the lower risk tolerance of the downturn will lessen some of the bubble characteristics of this genre.

I predict that rather than having 100 copy cat kids’ worlds constructed for $1M a piece over the next 18 months we’ll see more ho-hum kids’ worlds fail and the best continue to grow. We’ll still see many new kids’ worlds come out with production values of $2.5M to $6M through launch. These will rapidly increase the graphical fidelity, depth of game play, and richness of features as compared to the most successful kids’ worlds today and as a result see better financial metrics (e.g. more subscribers, lower churn).

The fuel behind this continued investment will continue to be a combination of subscriptions and microtransactions, with the US market still tilting more toward the former and some other markets tilting toward the latter. Sure, some consumers will think twice about signing up for a six month subscription on-line for their kid or purchasing another pack of trading / virtual currency cards on every trip to the store. But many other consumers will see the many hours their kids’ play with these properties as inexpensive entertainment compared to options they may have indulged in previously.

In one way the economic downturn will be good for this category: limiting participation to major brands and the best capitalized independent efforts will avoid some of the hype boom and bust that was being set up by all of the “me too” efforts to publish kids’ worlds that were not going to be successful anyway. Instead, we’ll see some new big hits, steady growth in the category, and perhaps in 3-4 years some longer-term category leaders emerge as the WoW or MySpace of kids’ worlds. I could even see new teen worlds taking off during this period, but this is less likely primarily because the capital to create them will be harder to come by.

4. Many Startups Will Fail

It’s just an unfortunately reality that investment capital will be harder to come by at least to some degree over the next two years, M&A will be slower, and fewer business models will produce much revenue. It seems inevitable therefore, that many virtual worlds startups that might have succeeded in better times will simply run out of capital.

5. Virtual Conferences?

This is one of the few new uses of virtual worlds that I could see conceivably taking off over the next two years. I’d put the odds against it, but

a) Conferences suffer greatly in times like this, which might make the companies that run them more likely to take what is seen as a financial risk in allowing less expensive virtual participation.

b) I think that the technology exists today to set up virtual attendance of real-world conferences in a way that has some economic value more cheaply than one can for internal enterprise meetings or training.

6. A new Virtual World Winter?

I’ve written before about how virtual worlds have had periods over the last 20 years of huge amounts of investment and then nearly complete bust. Are we going to hit another bust?

I actually don’t think so. I think we may see a number of platform companies fail as unfortunate startup victims of the times. But the kids’ world success and the broader if still niche adoption of some worlds like Second Life that can sustain themselves financially has I think gotten the industry just barely far enough that it won’t nearly disappear again.

If I’m wrong about #3 above, though, then we could see another several year gap in virtual world innovation.

What do you think? Disagree with any of the above or have any other predictions? Any virtual world applications come to mind that you think will grow rapidly over the next two years?

Now, if I could just sell these virtual credit default swaps I’ve been holding on to…

For those attending the upcoming Virtual Worlds London conference, put on by Chris Sherman and the team at Virtual Worlds News, I wanted to note that ESC CEO Sibley Verbeck will be presenting on Monday afternoon, October 20th, with folks from Intel, Samsung, ngi, and Digital Space.  While in LA, the group presented the concept of the new roadmap effort, this time they will be presenting some great content from the work done over the last several months.

October 20th, 1600 / 4pm GMT

Afternoon Keynote - Virtual Worlds Roadmap Keynote
A cross industry team will present a framework and effort to publish virtual world case studies and descriptions of the technical and business barriers to future mass market adoption of specific virtual world applications. The session will invite the audience to contribute to virtual world industry predictions, analysis, and ideas for lowering barriers to innovation.

- Victoria Coleman, Vice President, Samsung Electronics
- Bruce Damer, Digital Space and Executive Director, Contact Consortium - Virtual Worlds Roadmap SIG
- John Hengeveld, Senior Business Strategist, Intel
- Jeffrey Pope, Executive Vice President, ngi Group Ventures / 3Di
- Sibley Verbeck, CEO, The Electric Sheep Company

If you haven’t registered yet, and would like to do so, you can use the code GIFFVIP for a 20% discount on the full show pass.  If you want an expo-only pass, you can register online for a free one using the code gif66, but there is only a limited number of those free passes.

I miss working with the Ill Clan gang of Frank, Paul, Kerria and Tom, and was thrilled to see their release of the short film Tiny Nation, a concept I enjoyed hearing about long ago and which I wondered would come to fruition.  It is funny and wonderfully produced.  Go check it out!

And if you are in the market for machinima services, I cannot think of a more talented team.

The ILL Clan has just released their latest machinima project. Looks like a lot of work went into this, and it really shows off their talent. They continue to innovate with great looking machinima. Check it out.

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• Recently Written

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The Electric Sheep Company creates Web-enabled social and virtual world experiences. This blog is written by many members of our team, and contains a mixture of corporate messages and individual opinion pieces. To learn more about ESC, please visit our website.