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The Reality of Virtual Opportunities

By Isaac Kato, Principal, General Catalyst Partners

People escape to virtual worlds because they provide a forum to express alter egos. Whatever flaws you may have in the real world are erased when you enter the virtual world. As these virtual worlds have become more compelling places to be, people have started essentially living in them. Users have even started to make a living in the virtual worlds, and this provides real opportunities for a host of players.

As a youth, I was a flute-toting band dork. (Actually, I played the violin, which is probably even worse.) One of the ways that my dorkiness manifested itself was through my deep passion for Dungeons and Dragons. My fellow nerdlings and I would spend hours immersed in a fantasy world where we slaughtered orcs, hunted dragons, and wooed imaginary princesses (hey, everyone needs to be loved). I was also sucker for Zork, a text based computer adventure game; and when Wizardry, the first graphical fantasy computer game was published for the Apple II, I was consumed for hours at a stretch hacking and slashing my way through the game's fantasy world.

The games were early precursors to the more interactive online "virtual worlds", which are proliferating today at frightening clip. These virtual worlds include the massively multiplayer online role playing games (MMORPGs or MMOs), such as World of Warcraft and Everquest, more general online communities like Second Life, teen oriented worlds such as HabboHotel, and in the broadest sense of the term, the social networks such as MySpace and Hi5.

The fundamental motivations, which drive people to participate in these virtual worlds, are hardly new. On a simple level, they provide escapism. More interestingly, though, they provide a forum for us to express our alter egos. You may be unsatisfied and unable to improve the circumstances of your real life perhaps you're in a 9-to-5-punch-the-clock-to-pay-the-bills job, or perhaps your personal relationships are unfulfilling and painful. In the virtual world, however, you can be master of your own domain and ultimately be whoever you want to be. Whatever flaws you may have in the real world are erased when you enter the virtual world.

Interestingly, as these virtual worlds have become more compelling places to be, people have, for all intents and purposes, started living in them. Short of eating, sleeping, and performing other basic physical functions, there is progressively less that you can do in the real world that you can't do in the virtual world. People have even started to make a living in the virtual worlds.

With large number of consumers engaging in these new worlds, often for startlingly long periods of time dedicated users will often spend 20-30 hours a week in their virtual worlds entrepreneurs, entertainment providers and consumer goods companies are lining up to figure out how to monetize these virtual worlds through everything from selling "virtual" goods such as a $100,000 space station to selling services in the world (such as designing a custom 3D virtual castle) to coordinating real-world product placements (such as record labels having their acts stop by a virtual community and share a Coke with you) to holding corporate-sponsored virtual bass fishing tournaments. There are very liquid and frictionless flows of real money into, and now out of, these virtual worlds.

A $1.5 Billion Market
While virtual goods and services first achieved prominence in the MMOs like EverQuest-where players sell special items on eBay or pay proxies for "skilling" and building up their abilities, the opportunity exists now to reach an even broader audience of teens and tweens, who have already embraced online communities such as MySpace (more than 81 million members worldwide) as well as "hangouts" like HabboHotel, a virtual community in 17 countries that combines the concept of a chat room and the skills of navigating an online game.

And, these virtual worlds are commanding real dollars. IGE Ltd., an independent online gaming services firm, estimates that players spent about $1 billion last year on virtual goods and services and predicts, that could rise to $1.5 billion this year. In some of the teen sites, users will pay several dollars a month to purchase digital clothing and accessories for their avatars and their virtual homes. (An avatar is the virtual representation of you it is the Sanskrit word for "incarnation.") . To be clear, these teens are paying real money to buy digital, pixilated images of a shirt or a sofa. It's all part of the expression of our alter ego if we can't be cool or achieve status in the real world, we can do it in the virtual world. Also, as you might imagine, for the companies and in-world entrepreneurs selling these virtual items, the margins are quite high.

In one highly publicized incident, a player in the online game Project Entropia paid $100,000 in real money for a virtual space station. The investment is already paying off for him, as, according to Reuters, "he now makes more than $12,000 per month renting virtual apartments and retail space and plans to open a nightclub as well."

A Brief History of the Online Virtual World
Online virtual worlds have been around for quite some time. Their first incarnation emerged in the late seventies, in the form of text-based MUDs (multi user dimensions or multi user dungeons), where groups of hackers would play a non-graphical form of computer Dungeons and Dragons. Science fiction books, notably William Gibson's Neuromancer (in which the term "cyberspace" was coined) and Neil Stephenson's Snowcrash, helped to set a broader vision for an immersive and highly nteractive online virtual world. The evolution of 2D and 3D graphical user interfaces and huge advances in computing power and broadband networking (which allow many people to interact simultaneously online) permitted the creation of deeply engaging, pervasive, virtual worlds and the communities that live in them.

There were a few stillborn attempts to launch 3D virtual worlds in 1995 using VRML (virtual reality markup language), but the real breakthrough of the genre came with the launch of Ultima Online, a fantasy-based MMORPG. Shortly after Ultima Online launched in the U.S., Jake Song launched Nexus: The Kingdom of the Winds and then Lineage in South Korea, which eventually formed the basis of a multi-billion dollar market.

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