Changes in Store for Kids’ Virtual Worlds

NEW YORK The kids virtual worlds space is due for a major shakeout in 2009 as advertisers are expected to pull back on spending in the once red-hot sector, while venture capital funding has almost completely dried up.

That’s according to Barry Gilbert, vp, research director, Strategy Analytics, who presented a sobering look at the virtual worlds market during a session yesterday at the Engage Expo! conference in New York. While 2008 saw “an explosion of kids worlds,” according to Gilbert, this year he predicts contraction and consolidation in the market as many of the dozens of kids/young-adult virtual worlds that launched in the past year may either merge or fold. “We don’t see it as a sustainable market,” he said.

And it’s not a market where advertising will flourish, at least in the near term. According to Gilbert, in 2008 virtual worlds collectively pulled in $1.2 billion in revenue globally, with roughly 10 percent of those dollars — $125 million or so — coming from advertising (Gilbert’s data focuses exclusively on social worlds, excluding massive multiplayer games like World of Warcraft). He predicts that in ’09 ad spending will decline to around $100 million and won’t bounce back until 2011.

The reason for the predicted decline is the current ad recession, which doesn’t necessarily lend itself to experimentation by brands. “Advertisers are pulling back budgets, and they don’t want to go with anything that isn’t proven,” he said.

Besides a softening ad business, user churn and the lack of an established business model are likely to contribute to the expected shakeout, said Gilbert. Many of the segment’s top sites — which include Habbo, Disney’s Club Penguin, Gaia Online and Zwinky — employ a variety of revenue models, including advertising, subscriptions, prepaid usage cards, virtual goods and microtransactions. While virtual goods and microtransactions (such as buying accessories for one’s avatar) account for 68 percent of spending in the category, “nobody’s got it down pat,” said Gilbert.

Plus, there is a wide gap between the number of users who have tried virtual worlds and the number of users who are considered “active” — logging on at least once a Web session. According to Strategy Analytics’ research, the cumulative number of unique registered users for virtual worlds will exceed 180 million globally in 2009, an increase of roughly 50 million. However, just 23 million of those users are considered active. Another presenter at the conference, Michael Cai, vp, research at Interpret, estimated there were close to 8 million active virtual worlds users in the U.S.

And loyalty is an issue, as the average user has visited three and four different worlds. “This is a transient market,” he said. “Many users [register for sites] and never come back.”

However, Gilbert still sees long-term potential for the space. He predicts that several barriers to entry may be eliminated. More virtual worlds are expected to drop download and/or plug-ins requirements and go completely browser based. Plus, there is a movement afoot to enable interoperability between worlds, so users won’t have to register multiple times and might even be able to use the same avatar across worlds. “We believe these are fundamentals for growth,” he said. But overall, virtual worlds have “a healthy sense of traction…and significant headroom for growth.”

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