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M a R K E T O V E R V Ie W March 23, 2007 The Real Business Of Virtual Worlds by Paul Jackson MARKET OVERVIEW Making Leaders Successful Every Day MARKET OVERVIEW March 23, 2007 The Real Business Of Virtual Worlds Firms Creating New Virtual Worlds Must Balance Real Revenues With High Risks by Paul Jackson with Michelle de Lussanet and Lizet Menke EXECUTIVE SUMMARY Second Life has brought discussions about virtual worlds out of the geeks’ basement and into the harsh light of business life. Revenues from successful virtual world services can be substantial, but success can be fleeting and significant risks are involved. Strategy professionals should investigate virtual worlds as a new channel for reaching the most influential segments of consumer markets. Make sure you’re “learning by doing” and are prepared to handle the emergence of business-critical, high-revenue virtual worlds. TABLE OF CONTENTS NOTES & RESOURCES 2 Virtual Worlds: A Primer We found the following documents helpful in 4 The Business Of Virtual Worlds our research. Influential Consumers And New Opportunities Related Research Documents Drive Business Interest In Virtual Worlds “North American Video Gaming: Surviving Virtual Worlds Promise A Direct Revenue A Midlife Slowdown” Business Opportunity . February 21, 2006, Trends . But The Costs And Risks Associated With “Social Computing” Virtual Worlds Are Substantial February 13, 2006, Forrester Big Idea RECOMMENDATIONS 9 Engage, Experiment, And Explore . But Don’t Get Carried Away Just Yet WHAT IT MEANS 10 The More Inclusive Future Of Virtual Worlds © 2007, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email [email protected]. 2 Market Overview | The Real Business Of Virtual Worlds TARGET AUDIENCE Strategy professional VIRTUAL WORLDS: A PRIMER In recent months, virtual worlds in general and Second Life and World of Warcraft in particular have featured heavily in the mainstream media.1 But although they’ve only been in the news for the past five to six months, the concepts behind and early iterations of virtual worlds have been around for more than a decade (see Figure 1). Here is a whistle-stop tour of virtual worlds to date for strategy professionals in firms that are investigating advertising or establishing an experimental presence in such worlds or even creating their own. Aside from the technical platforms, virtual worlds are: · Computer-generated worlds where people participate using avatars. In these worlds, people interact with virtual objects (e.g., transportation devices, games, information sources) as well as other avatars (see Figure 2).2 The first practical consumer online virtual world was AlphaWorld, build on the Active Worlds platform; it debuted in 1995. A related discipline is virtual reality, the creation of a virtual environment into which an individual can “step” via technology like 3D goggles, tactile feedback gloves, and motion-tracking suits. Figure 1 A Timeline Of Virtual World Development Proto-virtual worlds arrive: • WorldsAway (1995) Up for launch in 2007: • thePalace.com (1996) • Spore Final Fantasy XI • Home (Playstation 3) • MUDs (1978- ) Ultima Online launch launch (1997) • Lord of the Rings (Playstation 2 & PC) Online The Matrix (2002) in cinemas World of Warcraft (1999) AlphaWorld launch (2004) launch (1995) <1995 1995 1998 2001 2004 2007 Virtual world concepts explored • Phantasy Star • Lineage User base: in science fiction: Online launch peaks at • World of Warcraft 8.5 • Tron (1982) (Sega Dreamcast) 3.2 million million • Neal Stephenson’s Snow (2000) users (2003) • Second Life 4.8 Crash (1992) • Habbo Hotel • Second Life million* • William Gibson’s Neuromancer (1984) launch launch • Philip K Dick’s The Three Stigmata of (2000) (2003) Palmer Eldritch (1965) *Registered to use service 40701 Source: Forrester Research, Inc. March 23, 2007 © 2007, Forrester Research, Inc. Reproduction Prohibited Market Overview | The Real Business Of Virtual Worlds 3 Figure 2 What Makes A Virtual World Virtual world characteristics 3-D “world” Realistic or recognizable representation of objects, perspective, etc. Consumer-driven avatar Viewpoint typically third person (i.e., outside body) Many synchronous users Persistent world May simulate real-world phenomena: • Gravity • Day/night cycles • Travel distances Copyright 2007, Linden Research, Inc. All Rights Reserved. • Picking up objects, wearing clothes, etc. Communication mechanisms: • Voice • Text assembly via menus • Free-text entry 40701 Source: Forrester Research, Inc. · An outgrowth of online gaming. The second age of virtual worlds arrived with massively multiplayer online role playing games (MMORPGs) — these emerged as a popular platform in 1998 with Ultima Online from Origin Systems, but really gained in popularity with the release of Lineage by NCsoft. Lineage became popular in South Korea in 1999 and had a peak subscriber base of 3.2 million consumers in 2003/2004. MMORPGs typically have fantasy “sword and sorcery” or science-fiction settings with specific “quests” for participants. These games were the forerunners of today’s popular games like EverQuest (Sony), World of Warcraft (Blizzard Entertainment), and City of Heroes/Villains (NCsoft). · Evolving into rich ecosystems of online communities. The increase in PC power and the growth of broadband connectivity — around 41% of households in North America and 33% of consumers in Western Europe now have broadband — has driven the number of consumers taking part in MMORPGs and other virtual worlds up to around 19 million consumers globally.3 Key games include: EverQuest 1 and 2, Lineage 2, Star Wars Galaxies (LucasArts), Final Fantasy XI (SQUARE ENIX), and World of Warcraft. In addition to these games, other virtual worlds that emphasize chat, creativity, and community have begun to emerge, like Second Life, Toontown, Habbo Hotel, and There.com © 2007, Forrester Research, Inc. Reproduction Prohibited March 23, 2007 4 Market Overview | The Real Business Of Virtual Worlds The two key differentiators between current virtual world offerings are how much time and dedication they require from the consumer and whether they are recognizably a “game” in the traditional sense — i.e., with goals, endpoints, and a “winner” (see Figure 3). Figure 3 Mapping The Landscape Of Virtual Worlds Traditional MMORPG worlds Free-form virtual worlds High time spend/ Second constant visits to EVE Online virtual worlds Lineage Life World of Final Fantasy There.com Warcraft Spore* EverQuest The Sims Playstation Home* Star Wars Galaxies City of Guild Wars Heroes Toontown Habbo Hotel Cyworld Low time spend/ occasional visits to virtual worlds Online game worlds Social network worlds Online game Virtual world *Not released yet 40701 Source: Forrester Research, Inc. THE BUSINESS OF VIRTUAL WORLDS In recent months, Forrester has received dozens of queries from clients on the topic of virtual worlds. Strategy professionals are keen to understand why mainstream consumer-facing companies from all areas of business — IBM, Toyota, Nokia, and Reuters — are so keen to get involved in this space. Why are high-profile artists like Duran Duran and U2 and organizations with political agendas like Davos or Jean-Marie Le Pen’s far-right Front National party taking their messages into Second Life? Additionally, why are more development and media companies trying to bring their own virtual worlds to market? How do they make money and what costs are involved? Influential Consumers And New Opportunities Drive Business Interest In Virtual Worlds While virtual worlds still only attract a niche group of consumers today, strategy professionals at media, financial services, IT infrastructure, and consumer packaged goods (CPG) companies should take them seriously. Why? Virtual worlds are: March 23, 2007 © 2007, Forrester Research, Inc. Reproduction Prohibited Market Overview | The Real Business Of Virtual Worlds 5 · A niche consumer activity — but what a niche! Forrester has been exploring the potential for companies to tap into the vein of user-generated content for some time and has developed a categorization of the pecking order of those consumers pushing the boundaries of Social Computing. At the very top of the pile is a small group of “creators” who generate much of the valuable content, have undue influence in peer groups, and experiment with new bleeding-edge technologies. Guess what? Virtual worlds today are almost totally populated by creators: Getting access to them — even if there are only tens of thousands of them globally — is probably worth the investment.4 · Still a wide-open market waiting for a winner to emerge. Unlike other emerging Social Computing technologies where clear global brands have already emerged — YouTube for user-generated content (UGC) video, MySpace and LinkedIn for social networking — no clear winner has yet emerged in virtual worlds. Sure, Blizzard has cornered the MMORPG market for now and Linden Lab has a headstart with PR-friendly Second Life, but the growth from today’s
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