I would like now to move on to the second part of my talk, the one connecting online and offline behaviors.
Just like many of you, I was surprised when I heard about, or witnessed, some extreme behaviors:
- Flaming wars in forums
- Guys dying in Internet cafes
- Parents neglecting their “offline” baby in favor of some online thing
- People protesting online
- Bots mistaken for people and people mistaken for bots
- Even Chatroulette was interesting – though at that time it was not a surprise to me anymore. At least the creativity of people such as the piano guy, remains encouraging to witness, and stays alive as long as the environment does not reach a too high toxicity.

So what did I find in social psychology and social dynamics? I picked a few key things:

- People’s behavior is largely shaped by their environment. The simplest example is the “broken window theory”.

- People behave differently according to the likelihood of getting caught, or interacting again. There are examples from Zimbardo’s “Stanford Prison Experiment” to the abuses of Abu Ghraib, or simply “would you cheat a stranger if you knew you will never meet him again”. The depressing answer to this is: many people would. You can study Stanley Milgram’s “Obedience to Authority” experiment to see the reality of it.

- There are mechanisms to socialization and even seduction. I studied the research done by various social coaches, and looked into ways to engage and interact with total strangers. I even advised a startup who was developing an iPhone app just for that purpose.

Unfortunately, I don’t have time to go into details about those mechanisms but in short, they mean that as a service operator or “virtual world” builder, or a “resident”, there are ways to improve dramatically socialization and behaviors within digital environments.

Which leads me to the conclusion of my talk: what about the future of digital socialization, and the business around it?

There is enough research and proven cases out there showing what people are happy to pay for, so the business aspects I am not worried about. It is more about the pace: things like the semantic cells around “virtual” and “game”, payment systems are hurdles to overcome to help the market grow. It is getting better, but is still slow.

More interestingly, I actually think digital environments are one of the solutions to a real social problem. With neighborhoods disappearing and the prevalence of the “car” or “commuter” culture, we, as social beings, are very isolated, constantly in contact with vast numbers of strangers. The beauty of online environments – and they can be text-based, 2D, 3D, Stereoscopic and what not – is that those spaces – and I call them spaces in an architectural sense – can help us create new neighborhoods.

Some of you might be familiar with the concept of “third place” – the collection of places aside your home and workplace. Those are often essential to us to be social, creative and enjoy our life. A city with lots of them is very enjoyable to live in. What I am looking for – and working on with the company Cmune as an early iteration of that – is the creation of those “digital third places”. Second Life has been a great inspiration and raised awareness to a very high level, but is limited on many aspects: the business model, the clunkiness, the client install and more generally the poor social design and lack of “fun”. I am looking forward to seeing the next generation of services tackle those challenges and enrich our lives with old and new experiences in digital places.

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+8* | Plus Eight Star believes in a better future online, as proven by Asia. Follow us at @plus8star or @benjaminjoffe for more.

I would like to start by thanking the organizers and all participants to this event. After all the hype virtual worlds and Second Life went through, I see this as a sign that we might be past the “disillusionment” and are ready to move forward. Whether SL will be the platform for that in the future is yet to see, and I hope to learn from you what you think about it.

Though I explored a bit before, this is the first time I do a talk in SL and quite frankly I feel like a hack. I possibly have the least hours spent in SL of you all. In addition, I am in the “East” track when first, I am not Asian and second, I am today in San Francisco on a business trip. If you look at my avatar, it was graciously provided by the organizers because I had no time to prep one that would not betray my identity and errands in SL ;-)

So what could I have to say?

Well, the fact is that I did spend quite a bit of time with virtual things, digital goods and Asia, where I have been based for the past 10 years. Also, though I like technology, I am most interested by the social aspects of technology.

What Clay Shirky says “When a technology becomes boring, that’s when the social effects become interesting” resonates strongly with me. It is true also at micro-levels. Many of what has been observed in SL has been around in graphic or even text-based VW since the 80′s. I was visiting Howard Rheingold in Mill Valley last week-end and the man has been researching this field for about 25 years.

So to understand why people were acting in certain ways online, I researched offline behavior, social psychology and social dynamics. I came to understand a lot better why people behave the way they do in various social environments. I can even tell you this came at a price when experimenting with offline social dynamics.

Since I have 30 minutes what I would like to talk about is three things:
1- What I learned from researching Virtual Worlds, Social Networks and Online Games in Asia
2- What I learned by researching social psychology and social dynamics
3. I’ll then share some ideas on the good things the future might hold for us, and how we can shape it.

Digital goods

First, you might have come across some numbers about virtual goods: the market would have been around $1B in US and $7B in Asia in 2009. I have some confidence in the second estimate because I actually did it myself based on our research and estimates of the various free-to-play online gaming markets in Asia.

The reality today is that there are two shifts happening. On is a business model shift, another is a mindset shift.

The business shift is the transition, or rather diversification, of the video gaming industry to free-to-play. The West and Japan have been lagging due to their huge package software legacy, while Korea then China and now most developing economies are embracing the model, generating huge profits by cutting many costs and middle-men out of the value chain.

The mindset shift is more fundamental. It is about what Aldous Huxley called in his last series of lectures “Semantic Prisons”.

I quote here “There are plenty of semantic prisons which do not permit us to think straight”.

I think this is very true. The closest everyday expression would be “assume make an ass of you and me”. We have tons of assumptions and many of our words and thoughts are locked within semantic cells. I witnessed that countless times when discussing culture or business in Asia to foreigners, or foreign things to Asians. In the specific case of virtual worlds and the business opportunities associated, I identified two major ones:

“VIRTUAL”

For many, “virtual” sounds odd because it sounds like it does not exist, has no value. Anyone paying for something virtual would surely be slightly stupid. The fact is that “virtual” is a legacy word, and so vague it is actually hurtful to the development of the industry. The opposite of “real” is not “virtual”, it is “imaginary”. And things happening online are not “imaginary”, they are “digital”.

To make an offline parallel, when you go to a concert, you don’t get anything physical either. When you buy a CD and put it into MP3, you just got yourself a sequence of 0s and 1s. It is digital too. What you have paid for is an experience, not the plastic. Brands are very good at selling physical objects charged with symbolic value, but how many are yet able to sell non-physical objects? If the margins are better, they should!

About a month ago I did a talk for 700 P&G employees, including the CEO, about digital innovation. P&G’s products might be great, but they are commodities. For them, the symbolic value is where the margin is. What if they could add a digital component and an experience to it?

The other term that is a very damaging semantic cell is:

“GAME”

Why is “game” a problem? Because we are too serious. Games are for children; games are a waste of time; games are a waste of money.

Well, there are a few things to know about games:

- First, games are a great way to learn anything. Much better than a manual or a tech demo. Just try it, have fun and there you go – you know how to use it. New technologies have a much higher chance to spread when introduced from a gaming angle. The other possibility is adult content, but I won’t cover that here.

- Second, games are already the biggest contributor to digital goods sales – if you exclude music, movies and books. In Asia, it is about 3/4 of those $7B I mentioned earlier. So it’s already working! Many people are ok to spend to have fun, despite the mental barrier of “it’s not real”.

- Third, we are already all gamers, but we don’t want to be called gamers. My aunt, a woman in her 50’s who lives in Mountain View, California plays almost every day a puzzle game on Facebook. She also likes Sudoku. I told her she was a gamer because she played more than me. She was certainly surprised to realize that. When you go bowling, play poker you can call it sport or whatever, the reality is that you are playing a game. In the case of bowling you are even renting physical items to do it.

Not long ago, the game designer, professor, thinker and writer Jesse Schell gave a talk at DICE and Long Now Foundation about the “gamification” of everything. He was mentioning a toothpaste service could measure how long you brush and give you points for each minute. 3 minutes in a day and you get, say, 100 points, 7 days in a row and you get a bonus. You could even compare scores with friends. It could be used of course to sell more products, or simply to help you embrace positive behaviors by giving you feedback, social proof and a gaming aspect.

So my conclusions here are that:

First, “virtual” is a terrible term and we should say “digital”, or not say anything.
Second, “game” should be renamed “entertainment”.

As Cary Rosenzweig, CEO of IMVU, former P&G exec and client of ours – said “Virtual goods are consumer goods”.

I would say also “video games” should be renamed “digital entertainment”, putting them alongside movies and music. It would then become apparent that movies are simply non-interactive narratives, while music is “auditory entertainment”. Nothing wrong with that, it just shows they are more alike than we usually think.

What else is there to learn from Asia?

- That online games make a killing, are extremely profitable.

- The mobile also makes huge amounts of money. In Japan, a *mobile* social network named GREE using Flash games with digital goods and avatars made over 400 million USD last year with only 20 million users.
The profit margin is 60%. Facebook made double the amount, with much less profit and over 20 times the user base.

- Tencent, who operates QQ, the #1 IM service in China, and is also a game and SNS operator, made over $1.3B IN THE FIRST HALF OF THIS YEAR! Net profit margin is 42%. The company is now the world’s third largest Internet market cap after Google and Amazon, with $35B, and still growing fast.

- Other developing markets – including, for instance, Russia, Vietnam and Thailand – are following the same path.

(to be continued)

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+8* | Plus Eight Star thinks that it is not because you follow us at @benjaminjoffe that you are virtual and that learning from Asia can help us bridge the gap.

I chose to address a few topics around the business, the sociology and the future of virtual economies and socialization.

The challenges identified were:

“Who would pay for something that doesn’t exist?”
“Asians are not like us”
“Online relationships are not real”

And my plan:

1. What I learned from researching Virtual Worlds, Social Networks and Online Games in Asia – from the business of digital goods to the discovery of semantic prisons.
2. What I learned by researching social psychology and social dynamics: how spaces and social design shape interactions both offline and online.
3. Some ideas on the good things the future might hold for us, and how we can shape it.

I will be posting a script of the talk in coming posts. In the meantime, please enjoy the slideshow:

As well as an in-world video. My avatar, graciously provided by the organizers, has a “clubber” style (don’t ask me why!). The first part is embedded below, the other parts (7 parts, total of ~40 minutes) can be found here.

1. What are your top three trend predictions for the virtual goods sector in 2010?

• Virtual goods expand beyond online games, social games and virtual worlds to be used in various online media properties. Virtual currencies being a combination of “prepaid credit” and “mileage”, it is actually old practices in new media.
• More people wake up to the fact that selling 100% replicable pixels for dollars is more profitable than selling black sugar water.
• Global virtual goods market over USD 10 billion: the US market was about $1B in 2009 and our estimated for Asia was a conservative $7B. Factor in growth in US (maybe $2B next year) + Asia ($9B?) + rest of the world and we’re there easily.
• Virtual goods go mobile too. Thanks to its 95% penetration of 3G and widespread data plans, Japan already has 2 mobile SNS making hundreds of millions with virtual goods (GREE and Mobile Game Town) and even another with an open mobile platform (Mixi). There is no reason why other countries can’t replicate this success, especially with Flash spreading on mobile.

2. What challenges do you expect 2010 to bring for the virtual goods industry?

• Many people still don’t “get” the fact that virtual goods are consumer goods.
• Maybe starting to regulate legal issues with virtual goods, from convertibility to consumer protection.

5. Who are the one or two companies or individuals you think are most likely to have the greatest impact on the virtual goods sector in 2010 and why?

• Tencent in China should make close to 2 bln USD, most of it via virtual goods, in 2009. They could make 3 billion USD in 2010 and are entering cautiously Western markets with LOTS of experience.
• Regulation on virtual goods could start getting in the way.

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In last month’s column, I mentioned our estimate of 7 billion USD for 2009 of the Asian virtual goods market, which includes most online games, social networks and virtual worlds in China, Japan and South Korea. The US market was barely 1 billion USD and my point was to explain how the video game industry is transitioning. This month’s column will not deal with numbers and markets. Rather, it is my attempt to explain, by way of comparisons, the fundamental human drives behind the consumption of digital goods.

If you consider virtual goods (their basic form are “avatars” and game power-ups) a mystery, the purpose of this column is to take you out of this predicament that could simply kill your company if you head, say, a gaming company or a social network, for missing out on an important concept of our times.

We have three mysteries to solve:

1. Is “virtual” real?
2. Can we “own” something virtual?
3. What are we really paying for?

Please make a quick note of what you think of people paying for avatars and game power-ups. We will use it later on.

Is “virtual” real?

I have read countless variations on “only idiots would pay real money for a new hairstyle of an online avatar”. When I first encountered this phenomenon in South Korea in the early 2000, I thought: “that sounds crazy, but it looks like millions are doing it, so there must be something to understand”. Years of research on numerous social networks and virtual worlds later, my understanding improved.

First, I realized the terms we use to describe this frame our thinking. Today, “virtual” is commonly used as an opposite for “real”. This is more important than you might think as the correct opposite of “real” is “imaginary”. I’ll try and explain how virtual goods are not only very real but also that you have been buying them for years. Let the journey begin!

Would you call music on iTunes virtual?
We can probably agree on “digital” as it is clearly not “imaginary”.

Would you call a blog, a picture on Flickr or a YouTube video “virtual”?
You probably get the idea.

I believe the proper term to use would be “digital” rather than “virtual”, as it helps avoid the confusion due to the vagueness of “virtual” and keeps the latter in the drawer with all those terms that one thinks he knows but cannot explain.

The difference between buying a two-dimensional or three-dimensional digital object is not a whole lot different from buying a song on iTunes. Those objects might be digital but they exist as much as an iTunes song. Hence, virtual does not mean “that don’t exist” despite having no physical embodiment.
If we have established that “virtual” is “real”, we still have to solve two problems that are quite difficult to grasp: what is it we “own” when paying for digital goods and why many accept to pay for them.

Can we own digital objects?

One common point raised is that people pay real money to buy digital things that they don’t “own”. I heard claims that when we buy a CD or a DVD, we own it, while we cannot own a new avatar hairstyle or a weapon in a video game in the same sense. This sense ownership of cultural products – physical or digital – is largely an illusion.

If, like me, you don’t read the disclaimers when playing a DVD, you might think you “own” it in the sense you can do as you please with it. The reality is that you can’t. While you own the physical object, you don’t have 360 degrees rights to its content: in most cases, you are not allowed to share it publicly or copy it. Considering the cost of sharing and copying in digital form is zero, this is an understandable restriction from the seller’s point of view but is also a very strong restriction of your ownership.

What is the difference then between buying a CD or DVD limited to personal use and paying for background music on your personal webpage, like Cyworld has been offering for years in Korea and Tencent offers in China on its QZone service?

What about pay-per-view video?

The main difference is that you don’t have a token object – which might have its own artistic qualities – to make you feel comfortable with the fact that you paid for the same content. When looking at homo sapiens from a zoologist point of view, it is actually not surprising that humans feel more comfortable with objects. I think this explains the popularity of touch interfaces too – they are simply more “natural”. If all this sounds very logical, now let’s now look into our contradictions.

My virtual holidays

If you go skiing for a day and don’t have your own equipment, would you rent cheap or expensive equipment? After you are done skiing, what will you own? You won’t own the equipment, the snow or the resort. You might “own” some bruises or a broken leg (I hope not). You will “own” memories that you might store under a physical or digital form (photos, videos), while the ones in your head will gradually be altered over time. In short, you have paid for something that you don’t “own” in a physical sense.

From holiday to sport to study to watching a movie in a cinema, any “experience” fall into the “virtual” (non-physical) category, and many are not free.

You might pay with your time, your money or both. In such cases you might like a physical object to symbolize or act as a reminder of the time or money invested, but it will be “worth” very little in terms of bill of materials compared to the value of the experience itself. More, it sounds perfectly reasonable to pay for having a good time and pay more for a better time thanks to better equipment. Better golf clubs, better running shoes, better resort by the beach.

Is it unreasonable to pay to have fun in a video game? Video games used to be arcade machines in which you had to put a quarter of a dollar to play. Is it unreasonable to pay more to get better “digital equipment”? I saw recently the movie “Avatar” (an interesting name in this context) and the novelty of 3D lead me to pay more for the experience.

In a similar way, you might buy nice-looking clothes or sports gear. They don’t improve your performance but make you feel better by looking better. Why would it be different online where the only visual cues are your name, an icon and sometimes a 2D or 3D avatar? If I had a way to make you look 50% more professional or 50% more attractive when you use email, wouldn’t you buy it?

Now we might be getting somewhere: people already pay for experiences, i.e. non physical things, for fun, for work, for looking better. It seems like what people pay for online is also for fun, for work (though not much yet) or looking better. Calling again the zoologist, he might argue that our specie is especially interested in fun, food and reproduction, in which case we could think of work and looking better as means towards those ends.

Real money vs. Virtual currencies

Since we’re dealing with this topic, I might as well cover virtual currencies and “real” money.
There are two main types of virtual currencies used online so far: “points” that you get with activity and “cash” that you pay for. Depending on the service, they can be used to pay for separate things or combined in various ways.

Generally, “points” reward activity and engagement into the service. They are comparable to loyalty points. “Cash” is the way how the company behind the service makes money and are comparable to prepaid credit for your mobile, your Skype account or transportation card.

So virtual currencies are new names for old concepts used in a variety of consumer goods and services. This is why we hear now increasingly that virtual goods are consumer goods.

Several governments worry about virtual currencies. So far the main concern is about the use of a service’s currency outside the service (convertibility to “real” money). For instance: paying for a massage with QQ points (I heard this was possible in some places in Shenzhen). This is a problem for several reasons among which are money laundering (money transfers are hard to trace in virtual currencies and without real names) and disguised gambling (illegal). I believe the most important reason is that each company operating a virtual currency is actually printing money.

If you consider that money is “anything that is generally accepted within a community to pay for goods or services” then a “virtual currency” that is widely used online might start to get accepted also offline just as well, provided it can be spent in enough ways to make it attractive. The fact that it is “digital” is almost secondary as most of our money already moves in digital form to pay for salaries, rent, loans, utilities and many large and small purchases (the fact we use a plastic card for those payments does not change the money’s digital form).

So virtual currencies can become like real ones but are real ones more “real”? It’s up to your assessment. My opinion is that governments print money when they need it pretty much the same way Tencent prints QQ money. There is moderation in doing so, as printing money should be somewhat related to the increase in value created in a country to prevent inflation, but some governments seem to be fairly liberal with that too.

While I don’t think alternate currencies will overtake “official” currencies (though I heard of some large companies in Africa whose vouchers were more “official” and accepted than the local money) and as far-fetched as it might sound, there is surely a lot to learn about currency management from well-run digital economies!

By now, it is likely you have a better idea of the motivations behind virtual goods in social settings such as virtual worlds and social networks, as well as in games for fun and looks. Do you remember the note you wrote down earlier? What do you think now?

Your ideas are welcome at benjamin@plus8star.com. Our presentation on “Virtual Goods in Asia” is available on www.slideshare.net/plus8star.

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+8* | Asia’s web and mobile users are more than US + Europe together! Plus Eight Star finds the best ideas among all they do online.
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