As we develop into an increasingly virtual world, our lives are definitely moving into a “virtual reality” that is complementary to our physical life. (In philosophy, in fact, would be not so clear which of our existences is the complement, but this is not our topic now).

Virtual goods made 2.1 billion US $ compared to 16.9 billion revenues in advertising in 2007. In other words, virtual goods are worth watching closely since any digital player may get a share of this market in a coming future incorporating new revenue streams.  If online games managed to create virtual objects that are worth real money for their audience, it may be the case that we, online media, may find a similar response. In fact, if I am typing this letters right now is because I am sure that media can create virtual goods within their communities of influence.

Virtual goods (summarized from Lehdonvirta’s excellent work: Virtual item sales as a revenue model: identifying attributes that drive purchase decisions.) are not information goods (a mp3 file) but “simulations” of material objects that sometimes do not have a material counterpart with 3 key characteristics: mutually excluding (their usage by one person excludes the use of a different person), persistency (it has to exist for some length of time) and interconnection (must not exist in isolation).

Virtual purchase drivers are:
1. Functionality: goods that improve performance, new functions or gameplay options.
2. Hedonism: aesthetic attributes
3. Social drivers: like facebook gifts that sometimes got artificial scarcity

“Virtual goods are more suited to creating and maintaining social distinctions and bonds because of their built-in rivalry and scarcity.”

Therefore, virtual goods are, at the end of the day, not that different to “real” goods. As we buy a Gucci bag, or a BMW, we are not just buying the physical object (its functionality) but the social, hedonistic part… how this object differentiate us from the others by its brand, design, etc. We are defining ourselves in society by acquiring some goods are not others.  Physical goods have a great “virtual” load in their attributes.

World of Warcraft, Habbo Hotel or Second Life may appear that have nothing to see with online media, but, there may be rules of their business model we should be watching because they are making money.  Online media will probably be soon a major supplier of “virtual goods”.

CC image by ntr23

On PowerPoint, a business plan that monetizes content generated by users can provide us with a wonderful business model of potentially unlimited scalability and a cost structure sustainable from the beginning.

It seems something like this was the idea behind JPG which we now read in GigaOm (through Journalism.co.uk) wanted to print a magazine with content generated and selected online by a community of users. Either it was too early for this project (but, honestly, are we going to print anything in a couple of years?), other say it is early because advertisers still do not want to invest in user generated sites, or it may just be not so easy to sustain businesses based in content generated by users.

I did work in an user generated content business (eBay, and yes, I still remember when I had to face all Spanish powersellers and their problems with the last update of Turbolister) and I know it’s not easy, and it is already recognized that social networks will be soon in trouble if they do not find cash. We also know that youtube (ugc) is performing in terms of finance much worse than hulu (professional content).

The truth is that it is still uncertain to assure that user generated content will be a gold mine while professional content is death. In fact, the demonstration that the long tail did not arrive yet they way they told us also supports the great difficulty to build up sustainable models based in user generated content.

In fact, the distinction between user generated and professional content is quite unfair very often, Shakespeare or Cervantes were not “users”? Why do we need to draw such a line? That line that separates UGC from professional content is more a concept invented to convince investors than a reality. When we talk about UGC we mainly mean contents done for free than I can exploit, no matter they were created by a Nobel prize or by my grandmother. Why am I talking about this?

Because behind the euphemism UGC many projects and business plans have been based (and I accuse myself in the first part becuase I have also produced and defended business ideas heavily based on UGC). Trying to build top-down a business place thinking that it will encourage a community to emerge is like, we say in spain: building the house from the roof. Communities, by definition, have at least a partially bottom-up growth, if not, more than a community they are a kind of army.

Well, I have to say I have seen how tuenti was created top-down and now it is a complete success (apparently).

It may be possible to build on communities but really difficult to create them from scratch. I would invest -honestly- little in user generated content, because it is difficult to control and always out of your hands.

Even if we feel very sorry for the closed company and its workers and investors, we have, as a society, to try learning on the experiences the others are  having to not repeat the same mistake. Having said that, I have to admit 8 y 10 new ventures right now are probably making this mistake. My guess is that we are going to see many UGC based business closing during the coming years and a couple of winners. I know it sounds crazy, but I even imagine youtube with a similar luck or with a radical model transformation.

Let’s leave this post online and see what happens!

(by the way, if you want to invest in a not completely user generated content business plan in Spain, let me know )

From an analysis by Deloitte analyst Paul Lee we read in Daily Telegraph :

1. they may need some additional revenue streams

2. information storage costs are increasing

3. “Average revenue per user for some of the largest new media sites is measured in just pennies per month, not pounds.”

4. Concretely twitter and facebook did not make nearly any revenues yet.

5. More concentrated in growth, facebook cancelled a plan to allow employees selling shares

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Social networking, for the moment, did not find a way to be sustainable. They are, for sure, working on building revenue streams to continue providing their service, and, if they do not find it soon, they will be  in trouble.

Pic by M. Keefe

A personal view on the future of social networks:

Social networks are not tools we use to communicate online with other people, but people connected around nodes. Then, facebook, tuenti, or linkedin are not social networks themselves but social networks enablers.

These enablers face big challenges:

1. When they are born, they need to open up in order to acquire new users and contents and to lower entry barriers to newbies.
2. Once they are big, they have the threat of being to opened. Users are the owners of their information and they may leave the platform or sindicate the content from another platform. Then, it would be necessary to lock-in users by closing the platform
3. opensocial and openid would convert platform into commodities that, in fact, do not add value further from hosting contents

Social networking platforms, in my opinion, are over-valued and their future sustainability is of a great difficulty and wild competition with lowering entry barriers to social sindication.

At the end of the day, they are also content business (although user-generated) and they face the challenges any other online media faces. Their content may be moved out and their network economies may not be enough to stop the development of neutral and external applications. The B plan would be closing their platforms, but that would get into a kind of autarchy of proprietary software in a growing opened software world.
Content aggregation tools (tools, no the social networks themselves) have, in my view, a clear path to become commodities and to face much more legal problems than business opportunities. There will be (probably) many business based on social networking, but, it may be the case that this business is not made by platforms themselves, or, at least, not by their platform development business unit if they had any.