From Virtual Goods to Virtual Brands?

I must confess, for a long time, I had failed to appreciate the commercial potential of virtual goods, and the virtual currency to buy them. That changed recently, when I found myself involved in a transaction whose raison d'etre was to merge social networks with the revenue-enhancing potential of trade in virtual goods. Sure I had heard about Zynga and the wild success of its Farmville game. But only when the transaction forced me to learn more about the role of virtual goods in the social network space, did I gain insights into why, according to one report ("There's Real Money in Virtual Goods", by Gurbakash Chahal, TechCrunch, June 23rd here), "[w]ith more than 230 million unique users per month, games by Farmville publisher Zynga alone are played by half of the world's Facebook users each month."

As cogently explained to me, for gamers, the amounts expended on virtual goods have to be compared with an alternative expenditure for other forms of entertainment. Compare the $20-dollars or more (choose your exact price, local currency and exchange rate) paid for a two-hour movie with the cumulative engagement of a game such as Farmville, where each single outlay for a virtual item is a mere fraction of the cost of the movie. At the end of the day, there is no real difference between paying for two hours of pleasure via the celluloid screen and the untold hours tending to one's virtual farm and ensuring that you have the necessary implements to do so. Both are popular forms of entertainment based on the enjoyment of a vicarious reality.

One aspect of this gaming experience was tantalizingly described in the TechCrunch article mentioned above, namely, the role of trade marks and brands as a part of the effort to monetize virtual goods. Permit me to quote Chahal on this point as follows:

"Brands are already a prominent part of the social Web. Facebook users post branded gifts on each other’s walls—paid for with real money—and become fans of those brands’ pages. And why wouldn’t they? The essence of social networking is the expression and projection of one’s identity, and brand affinity is a central theme of nearly every modern consumer’s persona. Why buy a Gucci dress when you can get the same look from DKNY or even J Crew? Because it helps you express something different, and feel better doing it. Virtual goods are no different, except they are don’t cost as much. Already, branded virtual goods are clicked ten times more often than non-branded equivalents. In this light, it isn’t hard to visualize the virtual marketplace of the near future. (Emphasis added).

As more real-world brands in more categories extend into the virtual marketplace, branding will increasingly seem like the norm, pushing unbranded virtual items down in status to the level of store brands and generics. For some consumers, this provides the opportunity to replicate their existing brand relationships; for others, virtual items can help satisfy the desire for their unaffordable real equivalents. (Emphasis added). The hottest brands will command the highest prices, even if practically indistinguishable from lesser labels and knockoffs—just as in the real world."

Find the Virtual Superbrand

The thrust of these comments seems to be that the most successful brands in the virtual goods world will be derived from their three-dimensional countparts in the tactile world. Moreover, unlike the tactile world, the financial likelihood of success in the virtual world for marks that are anything less than these superbrands is slim. Assuming that I have understood Chahal point(s) here, permit me to make the following observations:

1. Superbrands are characertized by careful nurturing and monitoring of their owners. It is not clear to me how this "tender loving brand care" is supposed to be transformed in the social networks/virtual goods world. Instead of an utopian outcome, I could plausibly foresee the opposite. Thus, uncontrolled use of valuable brands in undesirable virtual settings could have a deleterious, if not worse, affect on the value of the brand, especially given the huge number of players engaged in and exposed to these brands.

2. Instead of an uncontrolled and possibly destructive nexus between brand use in the tactile and virtual worlds, might it not be the case that brands will develop solely in connection with virtual goods. That is to say, might not some enterprising entrepenuers see their ultimate product offering in the virtual world not as an array of farm implements, or virtual replications of three-dimensional luxury brands, but rather the development of brands whose sole context is the social network world. Just as with a strong fanciful mark that is successfully used in connection with a widget, so too might the day not be too far away where a strong fanciful mark is developed in connection with a virtual widget. Aldous Huxley--here we come.

More on Farmville here.
More on Aldous Huxley here.

Technology and IP: Is There a Next Big Thing?

An issue that has occupied (some say "preoccupied") me for some time is whether we are entering into a period of technological stagnation. The concern has been expressed, as I recall, by no less an icon than Andrew Grove. While cast in various forms, the claim can be distilled to the following: the growth of the hardware/software revolution from roughly the 1950s to the begin of this decade was accompanied by the rise of new industries worthy of their name--e.g. Intel, Microsoft, IBM and HP. These companies can all be characterized by their success in monetizing technology and the IP rights therein, whereby IP protection is a basic component of commercial success.

By comparison, this decade can be best characterized by Web 2.0, networking, and online social communities. Whether My Space, Facebook, Wikipedia, or You Tube, their success in accumulating the eyeballs of their tens, if not hundreds of millions of user, has not been translated into the kind of monetization that we witnessed in the earlier period. Even the flagship company of this decade--Google-- is still more notable for its stock price than the absolute size of the gross revenue that it is generating. As soon as one leaves Google, the profitability of even the most notable Web 2.0 companies remains clouded. Moreover, from the IP perspective, Web 2.0 is not IP driven-- witness the internal struggle within You Tube, where the increasing adoption of professional contents (protected by copyright) will likely enhance You Tube's profitability, but may well diminish the social (and largely non-IP) experience of its users.

But can it be monetized like a Pentium chip?

Interestingly, when I raised these issues with a prominent Silicon Valley colleague who recently visited our offices, his eyebrows furrowed, and a certain unease was observed in his defense of the technological and commercial future of the Valley. Indeed, a week later my colleague sent me a thoughtful email in which he particularly pointed to biotech as the next new development that will push forward technological development in Silicon Valley and beyond. Maybe yes, maybe no--but even if "yes", somehow I don't see how this industry, with its long R&D and regulatory gestation, and the centrality, almost too much so, of patent protection, as taking the place of the computer and telecon industries, with its dynamic mix of copyright, trade secrets, and patents, as the new beacon of technology.

By "almost too much so, of patent protection", I mean that it appears that biotech, more than other tech industries, tends to rely on patent protection as a sine qua non of competitive advantage. Patent protection is exclusionary by nature, so it is not difficult to imagine a scenario where, if there is notable biotech profitability, and the public comes to view the industry as earning "excessive" profits, there could be a backlash against IP protection, in general, and patents, in particular. If that comes to pass, then the industry and the patent protection on which is relies might well find itself between the proverbial "rock and hard place". The more successful the industry, the greater the pressure to weaken patent protection; the weaker patent protection becomes, the less robust the industry will become.

Pushing the thought a bit further, let's assume nevertheless that the technological future will be a bi-polar world of biotech and Web. 2.0, alongside the commodification of more and more hardware and the increasing reliance on "software as a service" in place of fully integrated software products. How will IP fit into this new world? In my view, one possible answer is that IP will do so in an inverse way. That is to say, industries with a greater reliance on IP protection will likely enjoy greater profits than those industries for which IP is secondary, or the drift of opinion is in favor of weakened IP protection. There will be industries in both camps. If so, the next generation of technological development will be much more patchy from the point of view of commercial success and the level of IP protection.

However, I am not certain that issue has yet become a front and center agenda item. Fareed Zakaria is a leading fashioner of ideas, editor of the International Edition of Newsweek, prominent television commentator, and author of a world-wide best seller, "The Post American World". He was recently interviewed on Bloomberg radio, and a phrase at the end of the interview grabbed my attention. In conclusion, Zakaria expressed the belief that a renewed America will continue to maintain its technological leadership and generate a new era of world-beating developments such as "Google and the iPod."

Don't get me wrong. No one is a bigger fan of the information revolution spawned by Google than I am. As well, the iPod that my family gave me as a birthday present has literally changed my knowledge base, as I obsessively download and listen to podcasts on various topics on a daily basis (including the Zakaria interview itself). So what is it in Zakaria's comment that bothered me? Ironically, it is precisely his choice of examples. Somehow I don't see Google and the iPod as the future functional equivalents to Microsoft and Intel. Indeed, I don't recall any discussion in his interview about biotech and the like or intellectual property (in "The Post American World") more generally. Zakaria is not alone. We still seem far from that day.