gwallet fueling Virtual Currency

As you know, gWallet recently entered the virtual currency space, and I’m extremely bullish about our entry in this industry. Just yesterday, one of our users bought $1200 worth of digital goods. Five years ago, no one would have ever predicted that someone would buy $5 worth of in-game currency.

That said, last week was a trying one for the virtual goods industry. First, Anu Shukla of Offerpal and Michael Arrington in this video mixed it up at the Virtual Goods Summit, and then Arrington published several articles exposing the sleazier side of the offer industry.

To us, this disruption is exciting. We entered this space because of its phenomenal growth potential, but we were also attracted by the relative lack of sophistication of our competition. Like all businesses, the offer marketplace revolves around supply and demand. (Supply is applications and virtual worlds that support virtual currency, and demand equals advertisers.) We excel at working with advertisers; we proved this at both ClickAgents (acquired by ValueClick in 2000 for $40 milion) and BlueLithium (acquired by Yahoo in 2007 for $300 million).

When we took a look at the offer business, however, we immediately realized that the demand side of this business is broken. No one is working directly with advertisers to help them understand and appreciate the value of this marketplace. Michael Arrington did a great thing by exposing the weaknesses associated with this model, and his words are starting to wake people up.

Last week I was on a panel at the 80/20 conference with some of my competitors, and I outlined what I think is broken in the industry and how we plan on fixing it.

Here are some of the points I made:

· In order for a marketplace to work, supply and demand need to operate in synch. In the offer business, all of my competitors are sourcing advertisers through affiliate networks. Most of these affiliate networks don’t offer any transparency to the advertiser: the advertiser often doesn’t know where its inventory is appearing, since it’s blended with traffic from other sites. It’s like adding water to soup; it may be palatable, but it’s not as nutritious as the real thing. To be successful, a company like ours needs to work directly with advertisers and agencies and implement tracking that can deliver the best ROI possible. You can’t do this by just rotating affiliate links.

· Over the last ten years, we’ve developed long-lasting relationships with major brands like GM and Anheuser-Busch. That’s why we’ve walked away from many of the shady offers our competitors are working. Over the long-term, you can’t make money by deceiving both consumers and advertisers. It’s just bad karma, and sooner or later, it will bite you in the ass. We’re introducing large advertisers and agencies into this vertical, and to our surprise, none of our competitors have even approached them. It just reminds me how unsophisticated this industry is and why we’re so excited to fix it.

· This system is not good for publishers, either. Sooner or later, when our competitors shun shady offers, there will be a huge price correction in this space. Some developers who are making upwards of $10,000 a day in revenue are in for a rude shock. The funny thing is, many of them already know this. The big players realize that they can’t go public with this kind of suspect revenue, and they are taking aggressive steps to remedy the problem. We applaud companies like Zynga that are saying no to offer scams. It will take longer for smaller players to realize that the high eCPMS to which they have become addicted are ultimately bad for business, but they will realize it soon enough.

· Bringing large brands and agencies into this space requires an extensive amount of education. You have to teach these players how to create value; you have to create specific social media offers that are different from traditional advertising or affiliate network buys. For example, for subscription-based advertisers, we’re designing offers right now in which advertisers pay $X for a new user, and if that user subscribes to their product for Month 2 or Month 3, they receive a residual bounty.

· Technology is not just talk; it is the underlying asset that enables both supply and demand to work in synch. Right now, our competitors are almost openly dismissive about the importance of technology. At the 80/20 conference, for example, the largest competitor in our space declared that “they don’t optimize; they just outperform.” Translation: “Meaning, we have no technology but we’re doing something cosmetic.” If you’re a company like Zynga, is this really the answer you want to hear? This kind of approach provides no scale, long-term sustainability, or value; it’s just a bunch of hand-waving. We’ve learned how important technology is based on my prior two ventures in the ad network space, where technology was the cornerstone to our success.

· We love developers in this space. It’s amazing how social gaming has changed the fundamental business model of a gaming company. And it’s only going to get bigger when the right monetization engine is in place for this marketplace.

I’m a strong believer that the right player with the right platform can create substantial value inside this ecosystem. I remember when I started ClickAgents. We were probably the 30^th ad network to enter the market, but just two years later, we had carved out a leadership role in the marketplace. When I started BlueLithium, we may have been the 300^th ad network, but three and a half years later, we proved that through data and analytics, a startup can create tremendous value.

In conclusion I want to apologize to Michael Arrington for Anu Shukla’s response to his question during her panel discussion at Virtual Goods Summit. When someone challenges you about a legitimate industry issue, you shouldn’t need to resort to verbal abuse or profanity; you should address them in a way that proves your model through logic and reason. Anytime someone uses vulgarity, it shows that you’d rather use noise to make your statement speak louder than your reason. So for that, I’m sorry, Michael, but thank you for waking this industry up.

Tags: advertiser, anu shukla, demand, gwallet, michael arrington, offerpal, platform, state of the industry, supply, techcrunch, virtual currency, virtual goods

This entry was posted on Tuesday, November 24th, 2009 at 5:48 pm and is filed under Industry Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.