I Have My Virtual Allowance?
May 23, 2008
Sometimes the most
amazing things happen right under our noses and we miss
them because we're not in fourth grade.
Take a stroll down the aisles at your local Target,
Wal-Mart, Walgreens or Rite-Aid and you'll notice an
interesting phenomenon -- pre-paid gift cards for as
many as 26 virtual worlds. Let me try to explain what
this means (if you have a fourth grader, feel free to
skip the next couple paragraphs).
There are roughly 100 million people in virtual worlds
at the moment and the vast majority of them are kids and
teens. These worlds, which in general are rather simple
looking, allow kids to hang out together on the web.
Jeff Yang of Redpoint Ventures, a prominent investor in
a variety of these worlds (he was also the sole venture
capitalist behind Myspace), likes to call these worlds
the "new mall." Collectively, the kids in this "mall"
are spending over $1.5 billion on avatars, clothing,
pets and the like. That's real money on virtual stuff.
Now here's where the cards come in. While these kids
have a seemingly endless appetite for virtual goods,
they don't have credit cards. Even if they did, the
stuff they're buying costs between 20 cents and $5 --
creating a problem when the cost of clearing the
transaction is greater than the value of the item. The
cards solve this by allowing a parent to buy their child
$10 or $25 worth of virtual currency. The card company
takes a fee off the top, generally somewhere in the
neighborhood of 20% (nice business model, huh?) and the
rest goes to the kid to spend at the virtual mall.
Now I'm guessing a few of you are wondering why on earth
anyone would spend real money on virtual stuff. Let me
try to explain this in truly simple terms, because I
think it's a really fundamental concept, no different
than what goes on when we buy stuff in the real world.
First of all (and this is beyond fascinating), teenagers
view their avatars, or characters in virtual worlds,
very differently than adults. While you or I might refer
to the avatar as "my avatar," a teenage just calls it
"myself" or "me." Perhaps an equivalent for us older
folks is that we'd never ask someone if they received an
e-mail from our "e-mail account," we'd simply say, "Did
you read what I wrote you?" So these teens see their
avatars as themselves, which makes sense when you're
spending over an hour a day communicating through that
character. And when that's the case, how your avatar
looks is critical to the way in which one's social
status is perceived. So virtual goods become the markers
of social hierarchy -- we are social creatures after all
(even non-fourth graders) and that stuff really matters.
If you're still thinking that this is beyond bizarre,
let me leave you with a little thought experiment. How
much does your average pair of jeans cost? The truth is
that if you bought jeans based simply on utility (in
other words, discounting social perception to zero), you
would spend $10. This means that the difference between
what you really spend on jeans and $10 is the value you
place on what other people think. In my case, it's
embarrassingly high -- more than $100.
Guess those fourth graders spending $2 on virtual bling
aren't so crazy after all.
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