By selling an array of virtual products from avatar clothes to e-furniture, Asia’s social networking sites appear to have solved the conundrum of how to leverage big profits from their extensive user bases.
According to them, it’s simple: the money might be virtual but the profits are all too real. Chinese university student Tan Shengrong spends about US$2.90 per month purchasing outfits for her pet penguin avatar or playing games at QQ, an instant message portal on Qzone, China’s most popular social networking site.
It may not seem like a hefty sum, but every cent is money in the bank for Tencent Holdings, which owns Qzone and saw an 85 percent increase in its second quarter net profit this year compared to 2008, remarkable numbers in light of the economic downturn.
“They keep growing even though the economy’s bad because they keep making millions from cents from millions and millions of people,” said Benjamin Joffe, head of Internet consulting firm Plus Eight Star.
DIGGING DEEP
From virtual clothes to e-pets, Asians spend an estimated US$5 billion a year on virtual purchases via Web sites such as Qzone, Cyworld in South Korea and mobile-phone based network Gree in Japan, according to Plus Eight Star. That’s about 80 percent of the global market for virtual products, the company says.
“Social networking is just a way to get people together, but if you want revenue you have to sell them something. What they found was that people were happy to pay for content related to emotion, status and entertainment,” said Joffe.
About 80 percent of virtual sales in Asia come from items such as equipment for online games, a fitting example being rods for Gree’s fishing game Tsuri Star 2. The rest comes from purchases for avatars on social networking sites.
The success of virtual sales on Asia’s most popular social networking sites is so impressive that MySpace and Facebook are starting to reexamine the potential that virtual money possesses to generate cold hard cash.
Qzone’s Tencent Holdings made over US$1 billion last year with just 13 percent coming from advertising revenue. In contrast, Facebook and MySpace depend on advertising for the bulk of their revenue.
The evolution of virtual money on social networking sites in Asia is partly due to a less developed online advertising market, the state of which has driven Asian Web businesses to seek new ways to profit.
Cultural issues are at play too. Gaming is popular among adults in Asia, whereas in the West the activity tends to be perceived as a children’s pastime.
East Asian societies are also very status conscious. Players are loath to be the only avatars without the latest gear and Asians are perhaps more willing than their Western counterparts to buy virtual products to update their avatars or social space.
Furthermore, while Asia’s social networking sites tend to be country specific, they have very active user bases.
Qzone had 228 million active user accounts during the second quarter of this year, although it won’t give out monthly visitor figures. Meanwhile, Cyworld, which says that 90 percent of South Korea’s 20-somethings are members, had 23 million unique visitors per month at the end of the first quarter of 2009.
Like their Western counterparts, Asian social networking sites allow their users to chat, play games and share photos.
There is also some advertising, but the sites earn most of their revenues from their users. Members are represented by avatars and can acquire virtual currency from the sites to buy digital goods, game packages or upgrades.
Though this model has taken off abroad, the West still has a long way to go before it catches up with Asia.
Habbo, a social networking site for teenagers owned by Finland’s Sulake Corporation, sells virtual clothes and furniture. Meanwhile, games along the lines of Pet Society, which is available on Facebook and allows users to raise virtual pets, sell goods such as virtual pet accessories and e-food.
Playfish, creator of Pet Society and other social games, says it has 47 million active users per month playing its games.
With seven million or so inhabitants, the virtual world Second Life offers a range of e-wares for sale in Linden dollars. Some are mundane and others are controversial, examples being guns and virtual phalluses with price tags based on size.
Asia is also a playground for a diverse spectrum of virtual business models, as exemplified by the evolving rentals market. For example, Cyworld rents background skins of popular South Korean baseball players for limited periods of time. Such rentals drive repeat sales and tap into trends.
LOST IN TRANSLATION
The success of these East Asian sites contrasts sharply with the frustrations of the social media market across the Pacific, where, despite immense popularity, Facebook and MySpace have yet to fully harness the profit potential of their massive user bases.
Facebook, the world’s biggest social networking site with close to 300 million visitors per month, is on track to earn more than US$500 million in revenue this year, mostly from advertising, though its focus remains on expanding its user base rather than making money.
Nevertheless, a recent New York Times article pointed to signs of a mass exodus from Facebook, as disillusioned users leave due to privacy concerns or complaints of rampant commercialism.
Rupert Murdoch’s MySpace stands out among the major social networks in its ability to generate profits through advertising sales. However, the site is currently undergoing a major overhaul in the face of problematic user metrics, and has ousted its CEO and fired hundreds of staff.
Meanwhile, both Facebook and MySpace are eyeing the benefits of virtual money. Facebook, which sells virtual goods mainly in the form of Facebook gifts through a credit system, said in March that it was considering offering a common virtual currency to third-party application developers.
At the Web 2.0 Summit late last year, MySpace’s recently-departed chief operating officer Amit Kapur mentioned that the firm was also interested in developing a payments and virtual goods system.
Meanwhile, Internet entrepreneurs are coming to Asia to study innovative Web business models.
In June, 32 venture capitalists and Internet entrepreneurs visited Japan and China under the banner “GeeksOnAPlane” to learn about local success stories such as DeNA, video hosting Web site Tudou and gaming Web site PopCap.
“They were all blown away even though some of them already knew about what was going on here,” said George Godula, founder of Shanghai-based consultancy group Web2Asia. “They [Asian social networking sites] are quite nimble at finding out business models or ways of how to make money,” he said.
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