By Paul Smalera
August 5, 2010

The online gaming industry sells $2 billion a year in virtual goods through micro-transactions. What if they sold newspapers?

By John Patrick Pullen, contributor

The Internet is an emporium of inequity. For example, in the massively popular social game Farmville, a little garden gnome will run you 13 Farmville Bucks, which converts, roughly, to $2.75 USD. Over on Kingdoms of Camelot, another successful game hosted on Facebook, the gauntlet of courage costs 40 gems, or four U.S. dollars. Meanwhile, at the website for the Chicago Sun-Times, every movie review that Roger Ebert has written since he started at the newspaper in 1967 is available for free. That’s right — these days, 5,000 articles and a cup of coffee will buy you the equivalent of a virtual lawn ornament.

Largely fueled by micro-transactions, subscription fees, and digital downloads, the online gaming industry has built itself from scratch in 2001 to become a $15 billion-a-year industry today. By comparison, the combined market caps for 2010’s ten largest newspapers is just under $10.5 billion. Somehow, over the last ten years, amidst all of the media’s deliberations of how to — or whether they even should — get readers to pay for online content, online gaming came along and convinced people to pay a little bit at a time for items that they didn’t even need and could, if they just kept playing the game long enough, otherwise have earned for free.

“I don’t believe anyone’s successfully implemented micro-transactions in publishing yet, but I believe it’s an absolutely viable model,” says Andrew Schneider, president and co-founder of Live Gamer, a New York-based company that powers commerce for at least 145 game titles in more than 20 countries. Though all of Live Gamer’s current clients are in the gaming industry, they have been approached by publishing industry players to power micro-transactions for online media. “I think we have a lot to offer the publishing community,” he says.

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The real question is what can the publishing industry offer readers to make them want to pay? According to Chris Carvalho, COO of Redwood City, Calif.-based Kabam (formerly Watercooler, Inc.), publisher of Facebook favorites Epic Goal and Kingdoms of Camelot, print media lacks exclusive content, a draw that compels users to pull out their credit cards for online games. With the abundance of blogs and other news websites, says Carvalho, print media struggles to maintain exclusivity because there’s always another website where readers can find information for free. “Unless you become a ‘super follower’ of some writer, which would be probably pretty niche,” says Carvalho, “there’s nothing that’s ever going to be exclusive.”

The whales of micropayments: users who pay.  Anything.

Actually, courting these super followers has been paramount to online gaming’s success. While most people play social games for free, between ten and fifteen percent pay to enhance their gaming experience. “The core user, or whales as we call them in the online game space,” says Schneider, “will be your best customer, will have the highest lifetime value, will yield significant revenue, and will probably be more valuable than 100 of your passive users, if not more.”

Live Gamer says the average revenue per paying user across all its titles is $28 per month. For perspective, the company has roughly 85 million users. By comparison, each month an average of 15.7 million people visit the New York Timeswebsite, where they have free access to content. Those who elect to subscribe to an electronic version of the daily paper pay just under $20 per month, and though figures aren’t available for the e-subscription, fewer than 1 million readers subscribe to the print daily. (Early next year The Times is set to roll out a paywall based on the metered usage model, but details are still sketchy.)

The element of competition is another reason online gamers reach for their wallet. “One of the biggest reasons that microtrans works is that there’s either some value-ad tied to it,” says Carvalho. “In gaming, specifically, there’s an aspect of competition tied to it that drives a segment of users to buy virtual goods in a game.” Publishers also need to tap into this competitive nature in order to encourage free-model readers to pay for content they find vital.

But sometimes there’s no amount of money small enough or content intriguing enough to separate an internet user with his or her credit card information — and in this way, online game developers have been very savvy. Rather than continuing to push the paywall, they give gamers other options to generate value, such as participating in a survey, or buying other products online, like signing up for Netflix (NFLX), and awarding game credits for conducting the transaction by using the game’s links.

For example, Kabam had a very successful program around Mother’s Day where they awarded game credits to players for buying flowers. “It was the most popular offer, by far, that’s been done for any event this year or any year,” says Carvalho.

It also locks players — or in the case of publishers, readers — into a proprietary virtual currency that Live Gamer says is more effective than using real world denominations. Using their own economies, online game platforms from Xbox Live to Mafia Wars have realized more pricing flexibility and better customer retention with virtual currency. “Those are the core monetization models that are highly effective and that are proven across multiple market segments and demographics,” says Schneider.

This year and next is when publishing payment models will finally become a game-changer for print media, says Schneider. Lets hope so. It only took millions of web users buying billions of dollars in virtual garden gnomes over a span of ten years for the Internet to finally become comfortable paying small, online fees. Ask any gamer — that’s a long time to be stuck on the same level.

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