Kate Pietrelli, Author at TriplePoints of Interest

Talking Virtual Goods and Emerging Revenue Recognition Models with Mick Bobroff of Ernst & Young LLP

As part of the TriplePoint speaker series, we hosted a private luncheon with Mick Bobroff, Audit Partner at Ernst & Young LLP, in which he presented general observations and principals on the accounting policies applied by companies using free-to-play/virtual goods-based business models. Additionally, Bobroff provided an overview on the different models that have recently emerged for recognizing revenue on the sale of virtual goods.

Bobroff brings to the table over 13 years of experience specifically focused in software and internet media industries, including social networking. Over the past several years, as the social gaming industry has rapidly expanded, Bobroff formed Ernst & Young’s positioning on how revenue should be recognized on the sale of virtual goods. Additionally, they recently released a white paper that gives an in-depth overview of the firm’s views on revenue recognition, and the presentation that Bobroff gave during our luncheon provides a summary of this white paper.

Here are some of the key findings from the presentation:

Currently, three models exist for recognizing revenue on the sale of virtual goods – Game-based, User-based, and Item-based revenue models – and publishers can determine which model is most appropriate for their business based on the extent of user behavior data that is available for each of their specific games
The sale of virtual currency itself does not initiate the earnings process for game publishers – it isn’t until the currency is redeemed for items such as virtual goods that the revenue must then be recognized
Revenue is recognized when all of the following criteria are met: evidence of an arrangement between the seller and purchaser, the fee for the virtual item is fixed or determinable, collection of the virtual item is reasonably assured and delivery has been met; it’s also important to note that publishers are obligated to continue displaying the purchased virtual goods over certain periods of time based on the characteristics of those virtual goods

For more information, visit the Ernst & Young website to download the full white paper: http://www.ey.com/Publication/vwLUAssets/Hot_topic_-_Revenue_recognition/$FILE/Hot_Topic_Sale_of_virtual_goods.pdf.

TriplePoint Rolls the D.I.C.E. Summit This Year

Out in the vast desert of Las Vegas, the Academy of Interactive Arts and Sciences® (AIAS) hosted the 2010 D.I.C.E. (Design, Innovate, Communicate, Entertain) Summit and the 13th annual Interactive Achievement Awards ceremony, and the TriplePoint team was in attendence. Julia Roether, Joe Ziemer and I joined in the event to learn from video game industry leaders, connect with likeminded individuals…..and enjoy that dry, ultra dehydrating weather that only Las Vegas can provide. Overall, we found that the D.I.C.E. Summit is a can’t miss event with informative and thought-provoking discussions from seasoned industry professionals, and we’ve included some of our key findings from the summit below.

One of the most interesting portions of the summit were a series of “Hot Topics” presented by Electronic Entertainment Design and Research (EEDAR). Adam Sessler, Host of “X-Play” and Editor-in-Chief for G4tv.com, led debates on a few different themes, including a discussion on casual games with David Jaffe of Eat Sleep Play and David Crane of AppStar Games. Crane weighed in on the casual market saying that it will likely collapse on itself because development studios have to compete not only with the large scale publishers of the world like EA, but also the average teenager who is creating games in their basements without financial risk. Sessler also spoke with Dan Connors of Telltale Games and Richard Garriott of Portalarium about the importance of storytelling. Garriott expressed that most games with storylines have failed to integrate this properly. Additionally, Sessler spoke with Chris Taylor from Gas Powered Games and Mike Capps of Epic Games about the challenges of being an independent studio, and Taylor joked that his kids probably wouldn’t go to college because of the financial risks he’s had to take in order to finance the studio’s games.

You can also view brief video clips from the Hot Topics session here:

Game Reviews – E3 2010

The D.I.C.E. Summit also featured a series of informative presentations from industry leaders, including Jesse Schell, a professor of game design at Carnegie Mellon University and head of Schell Games, who clearly gave the favorited talk at D.I.C.E. this year. Schell spoke about the impact of social games on Facebook platform over the last year, as well as the future of games beyond the online platform. He talked about the convergence of game-like interactions happening offline, and being incorporated into everything else that we do. He also projected that in the future, censors will detect everything in your life and will be used to engage people in gameplay. You can view Schell’s full presentation here:

Xbox 360 Games – E3 2010 – Guitar Hero 5

The 13th annual Interactive Achievement Awards ceremony took place on the final evening of the summit to pay tribute and recognize the individuals and products that have contributed to the growth of the video game industry. It was truly a pleasure to watch Jay Mohr host the event as he jabbed at well-known industry executives with his sharp, totally uncensored comedy. In the end, we found the D.I.C.E. Summit to be a must-attend event for video game industry professionals both for its engaging and insightful content, and its focus on fostering relationships and growth in the industry.

Virtual Goods Generate 1.6 Billion – New Payments Solutions Make It Even Easier to Purchase Goods

Inside Network recently released a report that the virtual goods market is expected to drive $1.6 billion in revenue in the U.S. in 2010. The market is driven in large part by virtual items sold in social games, which account for $835 million of the total sales projected. While publishers such as Zynga, Playfish, Playdom and Serious Business are hard at work creating the content and engagement mechanisms to drive sales, payments solutions such as Social Gold (online), Zong (mobile), Open Network Entertainment, Inc. (prepaid cards) and the newly launched Kwedit (cash) are striving to help customers purchase those virtual goods seamlessly.

Today, Kwedit launched their new payments services (Kwedit Direct and Kwedit Promise) in partnership with Social Gold. Thousands of online games and virtual worlds currently using the Social Gold virtual economy platform now provide access to the Kwedit service. The service enables players to purchase digital goods online, and then print a receipt with a bar code (or save it to their mobile phone) and pay for the goods at a retail store in cash (or mail in cash via a postage paid envelope). For the millions of tweens and teens in the US without debit or credit cards, also referred to as “the unbanked masses,” paying for virtual currency and goods with cash is the only option, and this new solution will make it easier for publishers to monetize this growing market.

What’s also particularly unique about the Kwedit payments service is that customers are on the honor system when it comes to actually paying for their virtual goods. Customers are asked to pinky swear that they will pay eventually, and if they don’t, then their virtual Kwedit score will decrease (much like a real FICO score) and it will be much more difficult to obtain Kwedit to buy more virtual goods. Does this teach kids about financial responsibility? Possibly.

The Kwedit service is a very unique alternative to direct purchases via a credit card, PayPal, or even a prepaid card. TechCrunch’s Michael Arrington gave the new payment service a glowing review, calling it brilliant. It will be interesting to see how the service performs in the competitive payments market, and whether cash-paying consumers will quickly adopt the model.

Meanwhile, while I play Mafia Wars and, inevitably, buy reward points to boost my experience level and sharpen my attack and defense skills for big boss fights, I’ll be thinking about how these payments solutions are making it faster and easier for me to make those impulse purchases. When I’m just a few simple clicks away from receiving that instant gratification, the term “buyer’s remorse” doesn’t even cross my mind. As the market appears to be on track to exceed last year’s sales of virtual goods by over 40%, I suppose we have the obsessively engaging content and also the increasingly frictionless purchasing experience to thank for this!

Google’s Nexus One – Changing the Mobile Gaming Market?

While the iPhone has taken the lead in attracting development for the mobile gaming genre, and development for the Android has been trailing behind, many folks are currently wondering if the Nexus One will be the device that truly changes the mobile game development market around in favor of the Android open source mobile operating system.

The Nexus One is Google’s latest smartphone to hit the market – releasing just a few days ago during CES on January 5, 2010. The phone runs on the newly released Android 2.1 operating system, which features a number of significant enhancements such as Live Wallpapers that are animated in the background and react to different user inputs, an Application Drawer that can be pressed to access the list of applications installed on the phone, and a Media Gallery that provides several new features allowing users to browse, edit, and share photos and videos on the phone with just the swipe of a finger.

Aside from these dazzling enhancements, the Nexus One features some real meaty upgrades such as a 1GHz Snapdragon processor, on-chip graphical capabilities and a 480×800 resolution screen (ideal for gaming) that truly set this device apart from the iPhone. And the kicker…..Adobe has confirmed that Flash Player 10.1 will be coming soon to the Nexus One, and they promise that it will provide a consistent, cross-platform runtime across desktop and mobile devices.

This news is particularly significant because Flash-based game development is so widespread in the gaming industry, yet the iPhone doesn’t support Flash. Highly-trafficked and popular entertainment genres including social games (via Facebook, MySpace, etc.) and virtual worlds monetizing through the sale of virtual goods and microtransactions are primarily Flash-based. The opportunity to additionally monetize from the Nexus One platform is significant news for mobile game developers as well as the many Flash game developers who have held off from developing for the iPhone SDK due to these limitations.

As it stands now, the Android Market has about 18,000 apps available while the iTunes App Store features upwards of 100,000 apps. It is yet to be seen whether Google’s Nexus One will be a game changer for the mobile gaming space, but considering how fast this market has moved in the last year, it won’t be long before we find out.

iPhone App Business Models 101: Paid Downloads, Advertising and In-app Purchases

We here at TriplePoint are frequently asked by developers, “What is the best way to monetize my iPhone app?” I thought it would be helpful to create a high level overview of some of the different business models that developers are utilizing to make money from their iPhone or iPod Touch applications and games. Below you’ll find an overview of several of the most popular business models, including paid downloads, mobile advertising and in-app purchases (otherwise known as microtransactions). Additionally, I’ve included an overview of the correlation between units sold and ranking in the App Store – essentially, a brief synopsis of what it takes to be in the Top 100 Paid Apps list on the App Store.

Option 1: Paid Downloads

The most popular way to monetize your iPhone application is through selling paid downloads of it at retail in the App Store. While Apple reported that the most common price point for iPhone apps is $0.99, according to an October 2009 report from analytics firm Distimo, the current average price of an application in the App Store is $3.42. In this free report, Distimo also provides a list of the top 15 highest ranked paid applications and their price points, which ranged from $0.99 up to $2.99. Although choosing a price point based on popularity and what appears to be working for the top 15 paid apps is certainly common, developers are also taking into consideration the value that their app provides and what it is potentially worth to customers. This perceived value may be based on uniqueness of functionality, depth of gameplay, quality of graphics, and other criteria.

Many developers are also testing their app’s price point post launch and finding that offering discounts or special offers can provide a boost in sales numbers. Additionally, some developers are offering “light” versions of their iPhone game for free and leveraging the user base to drive sales of the paid full version of the game. The flexibility to alter the price point is certainly helpful as developers test the waters with their first application.

Option 2: Mobile Advertising

As mentioned above, $0.99 is the most common price point and FREE is reportedly the second most popular price point. Currently, there are over 100,000 apps available in the App Store and thousands of them are free. Developers that offer their iPhone game or application for free may consider monetizing through mobile advertising. Leading mobile advertising networks include AdFonic, AdMob (recently acquired by Google), InMobi, Millennial Media and Quattro Wireless. Mobile ad networks make it simple for developers to begin serving advertisements directly within their iPhone application in order to start generating revenue, and advertisers are eager to reach the iPhone and iPod Touch using population, so the market is growing. Magna projects that mobile advertising revenues will grow 36% in 2009, in part, due to growth fueled by iPhones.

While some developers rely solely on generating revenue from free applications through mobile advertisements, others are testing multiple business models through their iPhone games and applications and seeing success. Backflip Studios recently reported that revenue generated by advertising sales on free applications has supplemented their income from paid downloads, and is currently driving 50% of their overall monthly revenues. As demonstrated in this instance, advertising revenue can be more than just incremental income, and can be a real substantial revenue stream for developers.

Option 3: In-app Purchases

For iPhone games or applications that lend themselves well to selling virtual goods and downloadable content (such as additional levels and expansion packs), the microtransaction-based business model is a good fit. Ever since Apple launched the iPhone OS 3.0 in June 2009, which offers the microtransaction system, developers have been exploring ways to leverage this platform for in-app purchases. Although, since this is a relatively new business model for consumers to adopt, some developers are erring on the side of caution about adding micro payments to their apps while others like Bolt Creative are embracing it. In October, Bolt Creative launched Episode 26: Good Will Haunting from their hit iPhone title Pocket God and included in-app purchases via downloadable content. The company reported positive revenue results as well as positive feedback from the community, and plans to continue including in-app purchases plans to continue including in-app purchases as a part of their applications going forward.

Additionally, iPhone applications that sell real-world goods are also a natural fit for the microtransaction-based business model as demonstrated by JamBase, an iPhone and iPod touch application that enables consumers to purchase local concert tickets on the go from their mobile phone.

As paying for incremental content and virtual goods, or even making mobile purchases of real-world items via microtransactions become more familiar with consumers, it becomes a more viable business model for developers to adopt.

What does the Top 100 Paid Apps list mean?

Constantly a moving target, the iPhone apps featured in the Top 100 Paid Apps list correlates to the total number of unit sales per day. At this time, to break into the top 100, an iPhone application is typically selling over 400 per day, and apps at the top of the charts are estimably selling over 10,000 units per day.

Earlier this year, Bolt Creative released a chart that shows Pocket God’s weekly ranking in the App Store along with its daily units sold. As illustrated in the graph, the game entered the top 100 list when the game broke about 500 units sold per day, and reached the number one rank in the list while selling over 10,000 units per day.

Final Thoughts

In addition to the abovementioned business models to monetize iPhone games and applications, developers can also monetize through other means such as lead generation, subscriptions, data sales, and more. The possibilities are practically limitless. While there are many different ways to monetize mobile games or applications and they’ve demonstrated success for many developers, in the end, it’s important to select a business model that integrates naturally with the functionality of the game or application and that suits the target audience.

GDC China 2009: Adventures in Shanghai

After a brief hiatus in 2008, GDC China returned in 2009 with a three-day conference held in Shanghai, and TriplePoint was there to soak it all in. We were bowled over by Shanghai’s incredibly dynamic spirit and international influences, not to mention some of the best food we’ve ever consumed (seriously). There is so much to learn, and the trends below represent the tip of the iceberg; we can’t wait to return next year and continue our education about the world’s largest gaming market.

Here are a few key takeaways from our experience:

The Chinese market presents massive opportunities

The opportunities for Chinese developers and publishers within China are vast, and many are choosing to focus on this market rather than looking Westward. With over 330 million Internet users and an audience passionate about online games, the challenges of localization, culturalization and operating in the US don’t need to be solved right now. The US market has almost 200 million Internet users, and a developer must capture at least 2% of the online gaming audience to become profitable, whereas developers in China must capture only 0.2% – 0.8% of the online gaming market to become financially successful. And the market is growing rapidly, with a projected size is $900 million by the end of 2009, up over 39% from last year. That’s not to say that our market doesn’t matter: Some say that the Chinese online gaming space could be saturated in two years, prompting movement into the US and Europe, and the leading companies are exploring opportunities now.

Government politics play a large part in the games industry

The political situation surrounding World of Warcraft in China was a hot topic while we were at GDC, and remains so, with operator NetEase caught in the middle of a battle for control between the Ministry of Culture and the General Administration of Press and Publications (GAPP). The outcome remains to be seen, and will impact any games operated in China. For the latest, we recommend this article: http://www.google.com/hostednews/ap/article/ALeqM5hU1YNKGtJmAZA0DGIvMUXrAyurlwD9BOPRIO0

Avoiding risky business by playing it safe

In the Western world, original IP is king. We associate creativity, value and integrity with original IP and unique gameplay. In Milan, Italy at the second annual Italian Game Developers Conference in early October, we witnessed the value and importance associated with creating and owning original IP. In the Chinese gaming market, it’s quite different and according to several sources, developers struggle to secure investment funding for their original IP. Instead, proposing to develop a product similar to an existing successful game demonstrates less risk to potential investors and results in a higher chance of receiving funding. Additionally, from a marketing perspective, it’s generally believed that a game in line with existing trends will garner success in the market.

Roots run deep and come to life in games

Chinese history and culture are common themes in online games, as reflected by such titles as Fantasy Westward Journey, Sangokushi Online, Zhengtu and Sho Online. During conversations with developers and publishers, we heard many times that games with references to Chinese history or culture will not resonate with Western audiences, and therefore have little relevance for other parts of the world. Korea-based publisher, Joymax, has experienced success attracting international audiences with their free-to-play MMORPG, Silkroad Online, which draws in players from 180 countries from around the world. It appears that there is a potential opportunity for Chinese developers to explore publishing historically-based games in other markets.

New platform developments on the forefront

Around the time of the conference, Unicom announced the launch date for the iPhone in the Chinese market, opening the door to this mobile platform for game developers in China. While iPhone game development wasn’t a focus at the conference, it’s certainly a new market opportunity and it will be fascinating to see how the platform fares. Additionally, we spoke with several developers creating social games, primarily for Facebook, even though the site is blocked in China. Chinese developers are testing out social games by launching them on U.S.-focused social networks, which they then monetize, and leverage the results for building social games for the Chinese social networks. A big difference between social networks in China and the U.S. is that the Chinese social networks require that you submit your social game application for review before it is published on the site, so testing and fine tuning applications in the open publishing platform of Facebook is highly valuable.

What’s next? And the big opportunities

It was apparent at this year’s GDC China that there are numerous opportunities for both Chinese and U.S. game developers in each market and that both sides may be looking to expand in the near future. The general feel from the conference was that China is looking forward to the opportunities presented within the games market, such as new platforms and new distribution channels. The attitude can be summed up by a response to our appreciation for the Shanghai skyline: “It’s impressive now, but just wait until 2010!”

Written by Kate Pietrelli and Eddiemae Jukes

Entry way to Shanghai International Convention Center for GDC China 2009. — Entrance to Shanghai International Convention Center for GDC China 2009.

With badge and lanyard in place, TriplePoint's Kate Pietrelli is ready to attend GDC China 2009.

TriplePoint's Eddiemae Jukes and Kate Pietrelli visit the Yuyuan Pagoda in Shanghai.

YPulse Youth Marketing Mashup

YPulse Events Last week, we joined YPulse’s Youth Marketing Mashup 2-day conference in San Francisco. A wealth of market research, success stories, intriguing discussions and even heated debates, the conference was highly informative and entertaining.

The conference kicked off with a vibrant keynote speech by self-proclaimed “Advice Slinger” Josh Shipp (HeyJosh.com). Shipp shared insight into his experience as a motivational speaker for youth audiences – an extremely challenging and also deeply rewarding profession. He advised the audience of marketers, brand managers and advertisers on tactics that enable him to connect with the teen audience. Shipp emphasized the importance of telling stories through campaigns and remembering to ask yourself while developing the campaign “Does your brand have a story worth telling?” If the story is worth telling, teens will tell your story to their friends and family, and the story (i.e. your marketing campaign) will grow virally.

Doug Sweeney, Vice President Levi’s Brand America’s for Levi Strauss, presented a case study on the success of their “Foster Levi’s Love” campaign, which was executed through a series of viral videos. Levi’s launched 10 films in 6 months, each video lasted 10-15 minutes, and was produced for under $75,000 per film. Originally, the films launched on YouTube without Levi’s branding, and eventually branding was incorporated and the films were edited into short TV commercial spots. Out of the 10 films launched on YouTube, about 3 or 4 were wildly successful in driving viral growth, and were subsequently edited into shorter versions for advertising spots on TV. The films that were successful had the following characteristics: authentic, truthful, and relevant, and carried Levi’s brand values of empathy and respect. From the video clips Sweeney shared at the conference, it was evident that they were also funny and entertaining, which likely also contributed to their viral growth. See one of the videos here: http://www.youtube.com/watch?v=pShf2VuAu_Q

Likewise, the folks at Disney Online have increased their usage of video to engage youth audiences. Jason Davis, Vice President of Disney.com, Kelly Hugunin, Executive Director of Marketing for Walk Disney Records, and Paul Yanover, Executive Vice President and Managing Director of Disney Online, shared their experiences driving the “U Rock” marketing campaign based on user-generated content. The team at Disney discussed how they were able to design a program that enabled kids to create and share their own videos while also ensuring that parents were involved in the safety of their children. During the panel, the Disney team announced the next edition of the campaign called “U Rock 2” and you can learn more about the campaign here: http://urock.disney.go.com/?int_cmp=dcom_UR2_home_tower_0601__Intl

In addition to case studies presented by leading brands, several researchers provided insight into the habits, trends and mindsets of youth audiences. Bill Carter, Partner at Fuse, shared some interesting statistics about youth’s response to different types of advertising. 75% of teens prefer TV ads and think it’s appropriate to market to them through this medium. 10% of teens approve of advertising via text ads, so most teens generally don’t want to be solicited on their mobile phones. Traditional print magazine advertising was ranked by teens as the second most effective medium to reach them. Paul Metz, Senior Vice President of C&R Research, stated that 95% of teens are interested in social causes based on youth issues such as child abuse, education and school violence. Donna Fenn, Author and Contributing Editor for Inc. Magazine, discussed how this generation has been affected by the recession. Two-thirds of teens graduate from college with significant personal debt in addition to student loans; however, they are optimistic, they don’t have any fears of saving money and utilize their parents as a financial safety net.

One of the best ways to learn about teens is to hear directly from teens, so the conference also featured two youth panels. The panels were very interesting and revealed a great amount about the interests and passions of what Don Tapscott, Author and Chairman of nGenera Insight, calls the “Net Generation.” Tapscott characterized this group as the echo of the baby boomers. There are 80 million people included in this echo, and ranging in age from 13-31. He also calls this group “digital natives” and stated that it’s the first generation to be an authority on something over the previous generation (ex. internet technology).

On the first youth panel, the panelists ranging in age from 15-20 years old shared their hobbies and interests. Popular interests included: being involved in causes, listening to music, reading books and magazines, and gaming. Each panelist was heavily involved in a different type of cause including support for the environment and organic products, breast cancer awareness, youth activism, and music programs for youth. During the session, the panelists were asked to compare different advertising campaigns in a battle of the brands (Coca Cola vs. Pepsi and Mac vs. PC) and weigh in on the advertisements that resonated with them. While the panelists were very critical and often sarcastic in their commentary about most of the ads, they provided some insight into the types of ads that would be interesting to them and recommended that the ads be real and authentic, funny and entertaining, imaginative and inspiring.

In the final session, teens took the center stage once more for a panel about young entrepreneurs. Guy Kawasaki, Managing Director of Garage Technology Ventures, led the discussion with challenging questions for the panelists about how they started their business – touching on topics from inspiration for their ideas to scaling and fundraising. The common theme among all the young entrepreneurs was their eagerness and fearlessness to build companies that realized their dreams. And, the panelists were quick to advise the audience on how to realize their own dreams by dismissing inhibitions, and simply getting out there and building it.

Overall, the YPulse conference was a big hit with marketers and brand managers. If youth audiences are a core target for your business, spend some time checking out the YPulse online publication for insights into engaging this demographic. Also, stay tuned for more information about additional upcoming Ypulse events on their website.

For those interested in checking out presentations from this event, YPulse posted many of them here: http://mashup.ypulse.com/2009-ypulse-youth-marketing-mashup-presos/

Robert Scoble Interviews SmallWorlds for Fast Company TV

SmallWorlds, a new generation of 3D virtual world that integrates seamlessly with the rest of the web, recently launched out of beta in December 2008. Robert Scoble takes a closer look inside SmallWorlds with co-founder Mitch Olson and VP of Business Development Ted Tagami. With his trusty video camera and monopod, Robert (aka “Scobleizer”) captures the interview on-camera in the TriplePoint San Francisco office. The video interview can also be seen on FastCompany.TV.

TriplePoint at ESA’s Nite to Unite

Last night, TriplePoint joined industry colleagues at the Entertainment Software Association’s eigth annual charity dinner ‘A Nite to Unite – for Kids’ held in San Francisco. The annual dinner event hosted by the ESA and supported by members of the ESA and the interactive entertainment industry raises funds each year for the ESA Foundation. To date, the annual event has raised over $6.7 million benefiting various organizations.

In addition to supporting the community, the event celebrated the industry’s continuing growth and success this year with an award presentation for Nintendo designer Shigeru Miyamoto. Miyamoto was presented with the Champion Award at the event.

Rich Kain, Julia Roether, Rannie Yoo and Kate Pietrelli at Nite to Unite

Eddiemae Jukes, Lisa Kennedy, and Julia Roether at Nite to Unite

Author: Kate Pietrelli