Andrew Chen Archives

Eric Ries recently wrote a great blog called Three decisions to make on virtual goods, detailing the major issues IMVU had to deal with during its growth:

• User-generated content (UGC) or first-party content?
• Subscription or a la carte payments?
• Merchandising or gameplay?

The first question is particularly interesting, and Charles Hudson (formerly of Gaia, now at Serious Business) exchanged a couple emails with me on the topic.

He gave me permission to share his email below – note that this convo happened in December of 2007, so it’s a bit dated, but I think it’s still quite applicable:

from    Charles Edward Hudson
to    Andrew Chen
date    Tue, Dec 11, 2007 at 9:55 AM
subject    Re: question on virtual goods

The question you bring up is a big one and it’s really hard for me to be succinct (but I’ll try). There are a ton of advantages and disadvantages to each approach. I’ll tell you my thoughts (others at Gaia might feel differently) on why the user-generated model is riskier but potentially a bigger opportunity if you can reach scale. Below are my quick thoughts on the 3 biggest drawbacks to a UGC/DIY model as a starting point:

-You need to have users actually create stuff to make the UGC model work (DIY vs DIFM) – If you decide to go in the “do-it-yourself” model from day one (as opposed to “do-it-for-me”), you’re making a really big bet about the type of users you’ll attract. You’re going to need power users and creators who build lots of stuff to make your world or community feel vibrant. Instead of being constrained by your own ability to generate assets, you’re constrained by the creative cycles of your user base. I’m of the opinion that it’s actually better to assume the DIFM use case first and then slowly offer users DIY activities once you’ve figured out what it is that they want to customize or do within your environment.

-You need to provide users with the tools to actually create and manage those assets if you go the UGC/DIY route – You have to make a meaningful investment in tools (or at least expose the tools and systems you have) very early on if you want users to create stuff for you. And the type of tools you expose will dictate who builds. If you make really simple tools, you’ll get wide participation. Expert tools will likely narrow who produces content for you. I’d rather work on building a really great end-user experience than building great tools, but that’s just me.

-You have a lot less control over the world and economy when you don’t control the process of creation – To your point, it’s really hard to manage an economy or any system if you can’t control the inputs. It’s not so much about monopoly pricing as it is about being able to manage the economy – price controls, inflation, etc. You also don’t have to deal with all of the property rights issues and user-to-user copyright issues that emerge when you allow users to create and then resell their own goods.

I think the real challenge for someone like Second Life is finding enough people to create the world to the point where non-creators can simply join and have a great experience. I think that’s why they’re having a hard time growing. If you look at their community, they have a fairly small but really dedicated group of people. Those people are bearing a pretty serious creative burden to get the world and the experience to the point where it’s useful to and usable by a wider variety of people.

At the end of the day, I’m of the mind that the best way to become a platform is to build a great application. If you’re successful, other people will want to build on top of you and you’ll become a platform whether you want to (a la Facebook) or not (a la MySpace). Setting out to be a platform from day one (and that’s what I think Linden and others have done) is just a much harder road. But it you make it work, you avoid all of the retrofit problems that happen when applications need to rework themselves to be platforms.

So to summarize, according to Charles you face a number of issues:

• You need more creative users in your world, to author the UGC
• (Related to above, you need to lower the bar for participation in creation)
• You need to build an ecosystem of tools to help the authors
• You need to accept that it’s harder to manage the economy – pricing, inflation, etc.

Anyway, I found these points quite insightful – they should be useful for anyone looking to chose between first party and UGC virtual items.

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.