VentureBeat has a story on virtual goods business models being used to good effect by casual gaming companies.  Given the uncertainty swirling around social network advertising, I have to imagine that almost every casual game developer is thinking along these lines. Even for brands who are looking to use casual games and virtual spaces to bolster marketing and real-world sales, virtual goods can be an effective way to turn a marketing cost center into a profitable effort.
Of course, for both virtual goods and advertising models, you have to invest in building the traffic before you can really start to monetize.

Still, the casual game space has been doing well enough that Zynga “has yet to tap into any of its venture money even though it has a staff of 80 people and other operating costs; it has been profitable through its previous $10 million round as well as this latest one, he [Mark Pincus] says.”

Ravi Mehta of Viximo has some more interesting thoughts on the topic at Virtual Goods Insider.

We were thrilled to finally announce WebFlock last Thursday.  We had some nice coverage alongside the release and I thought I would highlight a few with side commentary:

TechCrunch and Hollywood Reporter broke the news followed up by an in-depth piece from Virtual Worlds News and coverage at Worlds in Motion. Joey Seiler, with Virtual Worlds News, picked up on an important point when he wrote, “WebFlock is not–not–a virtual world. It’s a tool for developing virtual environments. While other worlds develop content relationships with brands, The Sheep are only interested in taking WebFlock to the brands themselves.” Raph Koster also, not surprisingly, got this distinction.

WebFlock is not a consumer virtual world.  Each implementation is entirely private-labeled, thus registration, art and user experience is controlled by the owner, not ESC.  I’ll write a little bit more about that tomorrow.  A key thing to note is that each space is separate, just like Amazon.com and NBA.com, and you navigate from one WebFlock-powered implementation to another just like you do from one website to another — by going to a new URL.

Right now, I personally don’t think of the Metaverse as a separate layer on top of the Internet that is navigated entirely in 3D; rather virtual spaces will be integrated and embedded right into the Web.  Virtual experiences don’t have to be part of large, sprawling worlds, but rather like websites, can be small, targeted, purposeful, and engaging. They enrich a webpage rather than replacing it.

Tony Walsh also picked up the story over at Clickable Culture and I added a comment there about some of the 3D tools: avatars and environments are built using standard 3D tools like Maya and 3DStudioMax. I also noted the lack of a fully user-controllable camera, which I think is a good thing for mainstream usage right now.  We call the environment “Perspective 3D”, since it has many of the immersive qualities of 3D without the usability complexities or hardware/software requirements.

ESC is not exclusively doing WebFlock work by any means, but the application provides an important option for the market that was missing, and we are excited about where this technology will go.

The Academy of Television Arts & Sciences put out their press release and 2008 Primetime Emmy award nominations, and included in the release was a list of finalists (finalists are not considered “nominees”) for the Interactive Media Programming Juried Area, Fiction:

We’re proud of our partners at Showtime and thrilled to have been involved.  It makes today, with our announcement of The L Word implementation of our new WebFlock product, even better.

The NYTimes [link] had an article today, echoing similar recent reports, that Microsoft is embracing virtual world elements for the Xbox.  It is another example of gaming and social activity meeting in the middle to appeal to the mainstream.

Here is an excerpt from the article and a quote from David Hufford, Microsoft’s director for Xbox product management:

“And what really is appealing to that mainstream consumer is that social experience, in the living room or online,” he said. “Whether it’s the older consumer or the Facebook generation, they see games not as a solitary experience but as something you do with friends and family, and that’s what we want to deliver this fall.”

At the core of Microsoft’s initiative is a new interface for the Xbox 360 that incorporates humanlike “avatars” representing players. Users will be able to customize their avatars and socialize with other players, even outside a particular game. Nintendo has successfully used a similar approach with its Wii, in which each person creates a more cartoony figure called a Mii. Sony is also working on such a system with a new service for its PlayStation 3 called Home.

In Microsoft’s system, users will be able to share photographs with one another across the Xbox Live network and also watch movies together in real time, even if they are thousands of miles apart.

During my lunch blog-browse, I ran across two posts that hit on different sides of the same issue: are social media marketing projects falling short because they take a build-and-ship approach?  Today projects need to focus on near-term ROI, which ostensibly is a good thing, but this is leading to risk averse behavior from CMOs. One point of consensus at the Advertising 2.0 conference was that the short average tenure for CMO’s is leading to short term thinking, not unlike public companies hamstrung by the pressures of quarterly numbers.

Over at Hyperempowered, Marc Schiller asks whether brand “build and ship it” thinking can ever compete with startup “alway in beta” thinking, where services and experiences are constantly updated and improved in an iterative fashion.

At Experience Matters, David Armano writes, “one of the biggest challenges agencies face is that marketing initiatives are often focused on short term gain vs. fostering long term relationships. This results in a churn and burn which can become difficult for us to sustain.” This points to the reality that a relationship and “conversation” is not built overnight, but also highlights the need for longer-term, iterative thinking.

The software industry learned the hard way that “build it, ship it” was a pretty awful approach, and thus agile development was born.  A key step was the ability to move away from shipping physical media.  The Web makes it easy to update software whether desktop apps or, even easier, purely online applications.

When one is creating a TV spot or a radio ad, one faces the same issue: one must create and ship because once it is out there, it is out there and cannot be changed — you have to start again with a new campaign piece.  Now that agencies and their clients are moving online, they need to learn the same lesson that the software industry learned: iterative is the way to be.

Don’t spend all your budget guessing user behavior, but rather put your best foot forward with a first release, monitor closely, and save some budget for constant improvement.

There have been a number of articles recently about the challenges big social networking sites have faced in monetizing their audiences. I think that there are two issues going on here:

1. the type of ad interaction needs to improve, and

2. advertisers and their agencies need to come up to speed and get comfortable with these new mediums.

The latter is requiring some real change to businesses as organizational structures and titles that fit the processes of old school media buying struggle with the dynamics and complexities of online.

The New York Times has an extensive article today on this topic [link here]. As the author writes, “In the last few months, the bloom has come off social networking’s rose” and “the balloon of unrealistic prospects is losing air.”

I happen to believe that the social networking sites will figure this out, but they will have to evolve just as the advertisers. The article states, “there are concerns that social network users do not view ads, no matter how carefully the ads are placed.” So much of advertising success depends on the method. Simple case in point: in virtual worlds, we have seen very effective engagement levels (see Pepsi and vMTV’s example), but not by sticking the 3D equivalent of a billboard on the wall.

I very much agree with this statement from eMarketer, quoted in the NYT article: “‘The challenge is that all these new forms of advertising are more difficult to plan, measure and quantify than advertisers are used to, and that has impacted spending growth,’ Debra Aho Williamson, an eMarketer analyst, wrote in April.”

I have not yet had time to write up my notes from the Advertising 2.0 conference the other week, but it was clear that agencies are struggling with the variety, complexity, and newness of social media advertising. It is considerably easier to stick to traditional media buying. We are in a transitional period where advertisers are not happy with the cost/benefit equation from traditional media buying, but still need to get comfortable with these new methods and metrics.

Neither business nor culture changes overnight, and Chris DeWolfe is right to ask everyone (including the media) to take a deep breath.

Sadly, I was too busy to attend the Social Gaming Summit, but hope to make it through some of the blog coverage.  I’m storing up my links to browse through below:

• Jeremy Liew, one of the key organizers, has a good roundup here
• Joey Seiler of Virtual Worlds News, and a moderator on one of the panels, blogged
• Monetization and Business Models
• User Generated Games in Social Networks
• Worlds in Motion’s Simon Carliss covered Joey’s panel on Casual MMOs and Immersive Worlds
• Inside Social Games covers Asynchronous Games on Social Networks
• Mashable’s coverage
• Andrew Chen’s thoughts

On my way to the office today, I passed Lord & Taylor and was blown away when I looked at the windows. They held a series of paintings from the Spanish artist Juan Genoves (click here for larger version of image above). My brain immediately took its own path, thinking how this painting holds a wonderful place in a visual representation of some trends we have seen.

We can start with Lucian Freud (that is a portrait of his mother) as the icon for the start of the Web, which saw experiments in community that were a little ahead of the mainstream’s readiness to adopt. Early Web was thus mostly solitary, focused on consumption of content and goods. Like Freud, who has wrestled with the portrait his entire life, the early Web was about the “I” and the “YOU”.

Genova’s work also made me think of Wayne Theibaud with that pop aesthetic. Theibaud’s highly stylized hillscapes (click for larger image) could be the next step in this visual journey, representing the obsession about “PLACE” which we saw so often in the early days of Second Life as fascination swirled around virtual architecture and representation of the real.

Genova’s paintings (see image at top) symbolize the journey to focus in on a core strength of virtual worlds, which is social interaction and communication. Genova strips out location, architecture, infrastructure and hones in on the simple essence of the crowd, of social energy, and the concept of “WE”.

If you are in New York, swing by Lord and Taylor at 38th and 5th Avenue and check out these fabulous paintings.

Sequoia VC Mark Kvamme recently exhorted advertising agencies to build their technology capabilities, saying at a recent conference: “You have to have world-class creative, but you have to have world-class tech folks who can translate that into conversations.” (hat tip to Nic for link)

However, what really stood out for me was this message:

While the ad world has focused on the reach and frequency of messages, Kvamme believes digital media overload is placing a premium on interactions. In the near future, advertisers will go from valuing whether their messages show up in front of people to enticing some sort of engagement, he said.

“You’ve got to create a two-way communication with consumers,” he said. Sequoia companies like virtual world Stardoll bring brand into their environment as virtual goods: Users can choose to wear Donna Karan fashions, for example. With a premium on engagement, more advertising will follow this model, rather than its typical relegation to the sidelines of a page, he said.

This is obviously an important message for the virtual worlds industry, because engagement is one of its key selling points. For example, VirtualMTV has an average time per visit of 28 minutes and beyond just the time spent, brands like Pepsi have seen important early results that stem from the inherently greater consumer emotional engagement.

I think that two way communication is important, but not necessarily in a literal way. As I’ve written before, big brands inherantly have a scalability problem, not unlike the “fame” issue that Clay Shirky discusses in his excellent new book Here Comes Everybody (see chapter 4). Brands do need to have more two-way communication, but they won’t be able to directly keep up with the volume of “conversation”. They need to encourage indirect conversation and participation. They can help their customers and communities (and customers and community are two different things) interact with each other in meaningful or fun ways.

This is where virtual world capabilities come into play, but not necessarily in the form commonly understood, where virtual worlds equals a giant MMO or Second Life-like place. No, these capabilities need to come to where the consumer is, i.e. on the Web, and need to be simple and specific enough to be useful and fun rather than overwhelming.

Much to figure out, but much promise.

A few people took note when the U.S. Internal Revenue Service ruled earlier this month that a former contractor whom we had worked with as part of our Second Life “greeters” program should be classified as an employee rather than an independent contractor. We were puzzled by the ruling, and promptly began a dual path of preparing the necessary paperwork based on the ruling and also seeking the advice of our counsel on the matter. Our counsel decided that given all the facts, we were correct in our original classification of these contractors.

We have always tried to treat our contractors well, doing our best to pay reasonable market rates, take care of the appropriate 1099 filings, and remain a friendly and professional company to work with. We shall see where this particular issue leads, but since this had become a public matter we thought that we would share our assessment of the situation:

It is the Company’s position that all “greeters” are independent contractors and are not employees of the Company. Greeters are free to (1) accept or reject assignments; (2) utilize substitutes; and (3) work for other companies, including competitors of the Company. Greeters use their own equipment and receive a Form 1099 from the Company.