Wednesday AM keynote session

Virtual Worlds and Video Games Team

And now, a word from our sponsors...

Mixer tonight after reception, tickets at booth #61.

Pillsbury VWs and video games team (legal), chairs legal committee on Association of Virtual Worlds, founded SL bar association

Most of legal cases fall back on TOS and EULAs. Successful cases are because the company has a good TOS. Data privacy and COPPA (Childrens Online Privacy Protection Act).

Taxes...China announced a tax on the sale of virtual goods. Helping companies with money laundering issues.

Visit booth to get free copies of virtual book on VW law.

Boku product and marketing guy

Mobile payments...allow people check out online and pay using mobile phone. No PII required...just telephone number. A text is sent to user, user replies "y" and then bill shows up on mobile phone bill. Live in 50+ countries. Over 1000 social and free to play gaming.

Keynote speakers: Jeremy Liew (Lightspeed Partners VC)

Korea and other Asian markets started virtual good sales. Only just starting to take off in US. Reasons: software piracy in Asia made it difficult to sell packaged software. Started moving towards server-based model...even if you got client for free, you still needed to interact with the server. Start with pay-for-free so you can tell if you are going to like it before you have to spend a dime. Makes marketing more compelling.

Took off in Asia first b/c different use case for gaming...mostly takes place in internet cafes. How do you get someone's money who wants to pay you? In a cybercafe, it is simple...handled at the counter of the cafe. This is nice b/c it can be done for cash and not credit cards (good for kids). In US, different use case...people are playing games at home. So if you have cash to put into game, you can't do it since there is no counter to give that money to. It took a while for the payment mechanisms to be put into place.

Drivers: mobile payments (also common in Korea). Prepaid cards at retail. Author providers. Has happened over last 12-18 months.

People buy digital goods for the same reasons they do in the RW: to do more, build relationships, and establish identity (in Wall Street op ed).

Use cases for virtual goods:

(1) increased functionality. Allows you to do more in game than you otherwise would be able to do. Direct item or currency sales. Usually associated with games, but not always.

(2) convenience and saving time. If you want to buy a v good, you can grind and level or you can short cut it by buying the good with some cash conversion. The ability to level up faster. Ex: Manager Zone (soccer management game), get texted scouting reports from opponents.

(3) attention. Ex: digital gifts. When you get 40 wall posts versus one virtual gift, the gift is what stands out in your mind because someone actually spent money. Consider the online dating environment...gifts signal a higher level of interest. Good job done by Foobar (world's biggest online happy hour). Can host a happy hour on your profile page. If you are building for attention, you have to have a very clear way of people seeing how much attention they are getting. This happens with variations in pricing too, unlike FB. Both recipient and sender must understand the protocol: "I like you X dollars." This communication must be clear...a wide variety of v goods with a wide variety if price points looses the ability to understand the protocol.

(4) self expression. Convey to other people the things that are important to you. Requires a more closed platform since it is hard to charge a premium for these things on MySpace. If you are building for self expression, you want to have a very wide catalog of v goods.

Rise in popularity of social games impacting proliferation and acceptance of v goods:

Attitude of gamers towards v goods:
Very accepted in Asia. People do not self-identify as gamers in US...many people identify this as cheating. Gets people who are not hard core gamers to play games. Places that have no cheating/not convention are much more accepting. Mindset of casual gamers is that they only have so much time and would like to enjoy it as much as possible...maximize time having fun versus time spent.

A lot of game companies look at social games as not being very serious games. Social games are expanding market and production values are increasing. Game publishers are starting to shift a lot of development towards this, especially iPhone. Probably will become like xbox.

Broader, untapped applications for consumer services that might marry well:
"If I knew, I would not be a venture capitalist and would be an entrepreneur."
MySpace is much more open from a profile perspective than FB. It is much harder to charge for a premium skin on FB. The whole point of spending money so others can see you spent money is lost on more closed systems like FB.

Future of social networks (closed environment) versus destinations on the open web:
It depends on what you mean by the open web. On a site-by-site basis, there has to be developer control to sell v goods. Social games could spread on the open web, largely drive by FB. Client-based games have spread much faster in Asia than here. Probably will happen in US as well.

VC industry and conversations with entrepreneurs, interesting developments in microtransactions:
Growth of companies is remarkable...going from zero to $10-100M overnight. Important aspect is to bring non-gamers to the market. This will drive sustainability. Now that infrastructure pieces are in place, this will bring new players to this market.

Closing thoughts on v goods and social media:
All the action and most growth is in games right now, particularly in-browser games. But other categories are exciting too...client-based games. Challenges with distribution. They have not shown the same viral growth. QQ has driven its revenue growth with v goods, but not true yet in the west.

One corporate opportunity: training.

Branded v goods: if intent is so that people go into rw and buy the v good, then you need a lot of people associated with these goods. Think about it more like advertising rather than v goods. Make it free so people don't have the friction of payment to get the thing. Don't regard it like a revenue stream in this case.

Tweens and kids most negatively impacted with v goods sales since they usually require a credit card. Mobile may not be an option depending on the age of the child. Need payment cards through retail. However, this is largely happening with branded cards and not cross-game cards. Do you have a VW with enough users to drive foot traffic through the retail stores so the store wants to sell your card?

If you do not control the secondary market (i.e. people reselling v goods), then you are opening yourself up to the Russian mafia doing so. This stuff will happen and you have to figure out how you are going to deal with it.

Next speaker: Trip Hawkins (Digital Chocolate)

Started career at Apple, founded EA, 3DL, Digital Chocolate. News to define upcoming news.

DC started on the mobile side...100M web game sessions, 40M iPhone downloads (6 different titles, 1M customer reviews, no marketing done). Couldn't force mobile to be interesting on the web, so went beyond mobile. Then to FB. Took off virally. (I think people are using this word too much without knowing what it means.)

Everyone gets a new phone approximately every 1-2 years. What is the next phone?

Omni Media Revolution:
5-6 years ago, most people did not identify themselves as a hardcore gamer, only about 100M people in this category. Most of public was phobic about computers, games, phones, etc. It was not a digital mass phenomenon. Now it is > 1B and phone is a mobile social computer. Affects everyone including hard core gamers. Gamers have purposefully dumb down hard core experience to allow more friends to try it (ex: PS1 and PS2 and then buy Wii and Guitar Hero). These gamers are now equally happy to spend their money on v goods than their games. This is being driven by social media and the social value of the thing.

Disruptive Products:
Dumb down the quality of something for simplicity and convenience (ex: Flash...not great graphics but allows in-browser gaming. One-touch interfaces.) Consumers are seeking the social experience and how to create a new village. We could go to movies, but we don't b/c it is not the most social experience.

Virtual Items are not New:
Strat-O-Matic fans
EA sports data discs...you didn't have to keep buying the new game, just the new players. But the move away from floppies to CDs (read/write versus not) made this come back.
Trading card games ($2B/yr)...kids who grew up playing Pokemon now have jobs and incomes. People would spend thousands on CCGs and a small stack of paper and be very happy with it!
Investment thesis...allow the mind and wallet to follow where the heart is.

New Strategic Factors:
Avatar marriages resulting in RW marriages. "People are clearly starved socially." "People are looking for love in the hard-core role playing game, AND THEY ARE FINDING IT!" There are a whole lot of reasons why it is hard for people to get social value in real life, so why shouldn't they turn to a VW to find it? Do not be skeptical about what people are going to be prepared to spend. $1000 to be the king of the world is worth it! People will pay 10x more for social value than normal entertainment.

V goods are about $2B/year

Digital distribution...anyone can reach the public through online distribution. Y

We don't have to build a VW trying to knock of WoW or Penguin, but we can guild a social network to reach out to the socially starved.

Now there is more WiFi, WiMax, 3G...mobile web. Big shift here. If you are socially motivated, you want to be connected 24/7. Your social life cannot live just on the PC. The mobile side will be much more fragmented. You won't need to filter things through a social network.

Offer networks...new ways of monetizing, games as a service. When people are playing a free game, they don't want to provide PII. But if they can get a coupon to play, then they are more likely.

One-touch billing...Android is not monetizing, iPhone is. Apple: your phone will be dumb until you give us a billing arrangement. Need to provide a mechanism for impulse purchases. Hook things up to carrier billing. Apple leveraged 100M iTunes accts. Faster start on monetizing content. Carriers already have this too, but must leverage it.

Issues with virtual items:
People churn in and out of a game really fast. If people only play a game for a few weeks, those v goods are not worth much. Hard to get emotionally attached to a lifeless object like kids did with Pikkachu. Why not start up with a CCG principle? These were designed to be played face-to-face...this does not translate to online play. Cannot design an online experience this way.

NanoStars:
Virtual characters, not objects. Ex: Batman. Suppose you buy a packet of NanoStars and you get a Batman. Then you own that personality. This then unlocks an exclusive ringtown, screen saver, Batmobile outside of v home, etc. You go into a game (perhaps with a Batman theme) where you have to bring in your best characters. Batman has different functionality in different games...cross-platform. Emotionally-charged character. Unlock special features. Can trade Batman. Customers will come to this because they are playing a free game. But the free version will not let them do all of the stuff paying customers will have. Customers will want to spread this virally since they can get their friends into it too (unlike the problems some CCG people have).

Game uses standard 52 card deck. Start with 4 cards. Via draws and discards, try and get the best 4 card hand. NanoStars are power-ups/modifiers. They go into a deck of their own that you draw every turn. They affect your hand or the hand of your friend. For the advanced player, they can spend money and get more of the rare ones. Pokemon for grown ups.

Casual games not as expensive as hardcore games. Social games not as expensive as VWs. Design for viral spread, social engagement, v items. Create big funnel for trial. Cross platform.