Earlier this week industry analyst and Benchmark Capital investor Bill Gurley wrote a thought-provoking piece that explored the traditional problem of monetizing social networks through virtual goods sales from an interesting new angle. While most social networks are currently adopting models where virtual goods are income streams that supplement advertising revenue, Gurley instead considered the revenue-generating potential of virtual goods as the primary revenue stream for a social network.
This is not a possibility currently being considered widely by virtual goods industry analysts or major figures in the gaming industry, but there is some strong financial evidence to suggest it can work. Gurley's model for virtual goods success is the revenue model used by Chinese company TenCent in its QQ IM program, where the lion's share of revenue per user is generated by sales of virtual goods, casual gaming packages, and other digital upgrades.
It may seem disingenuous to compare an IM program to Western social networks, but QQ fills an analogous cultural niche and offers its members many of the same basic services. TenCent was founded in 1998 and serves 355 million users through its QQ program.
It generates the US equivalent of $1.2 billion in annual revenue, only 12% of which is generated by traditional Web advertising. The rest - about $1 billion dollars annually - is generated by sales of virtual goods, casual games packages, and other digital items. In terms of revenue per user, this amounts to QQ generating (adjusted for cost of living differences between China and the West) $2 per user through advertising and then $17 from that same user through virtual goods, games, and other digital sales.
It would be easy to dismiss QQ's rampant success as simply the result of cultural differences between China and the West, but a comparison of QQ, Facebook, Myspace, and a smattering of Japanese companies reinforces the appearance of a trend. The Japanese services DENA and Gree monetize along QQ's model, focusing on selling virtual goods and causal gaming content to users of their service. The Japanese service Mixi monetizes more like the current Facebook and MySpace, getting most of its revenue through advertising. Mixi's revenue per user is comparable to Facebook and MySpace's as it stands, while DENA and Gree are operating in QQ's much higher revenue per user bracket.
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