The Virtual Goods Economy: Challenges of UGC

This article dives into the challenges of creating a virtual goods economy, particularly focusing on the user-generated content (UGC) model. It utilizes insights shared by Charles Hudson, formerly of Gaia and currently at Serious Business, in an email exchange with Andrew Chen.

The article highlights three key decisions to be made when designing a virtual goods economy:

User-generated content (UGC) or first-party content?

Subscription or a la carte payments?

Merchandising or gameplay?

The article focuses on the first decision, exploring the advantages and disadvantages of UGC.

Challenges of the UGC Model

Charles Hudson emphasizes the potential risks of adopting a UGC model, particularly for startups like IMVU.

Attracting Creators: The UGC model heavily relies on the active participation of users creating content. This requires attracting power users and creators who are willing to invest significant time and effort in building the virtual world.

Providing Tools for Creators: A UGC model needs to offer comprehensive tools for creators to design and manage their assets. These tools must be easy to use and intuitive to encourage widespread participation.

Managing the Virtual Economy: With UGC, control over the virtual economy is significantly reduced. It becomes challenging to manage pricing, inflation, and other economic aspects when creators are free to determine the value of their goods. This can lead to unexpected market fluctuations and instability.

The "Do-It-For-Me" Approach

Charles Hudson suggests starting with a "do-it-for-me" (DIFM) approach, where the platform controls the creation of virtual goods. This allows the platform to establish a foundation for the virtual world and its economy before introducing UGC.

Control Over the Environment: This approach allows the platform to create a consistent and controlled environment, ensuring quality and stability. It also provides greater control over the virtual economy, preventing potential issues like inflation.

Creating a Base for Expansion: By building a solid foundation with DIFM content, the platform can gradually introduce UGC, allowing creators to contribute to an already established virtual world.

The Platform vs. Application Dilemma

Charles Hudson argues that building a successful application first is the best way to become a platform. By focusing on creating a high-quality application, the platform can naturally attract third-party developers and creators who want to build on top of it. This approach is exemplified by Facebook, which evolved into a platform organically rather than being explicitly designed as one from the start.

Lessons from Second Life

Charles Hudson uses Second Life as an example to illustrate the challenges of relying solely on UGC. Second Life struggled to grow its user base because the burden of creating content fell heavily on a relatively small group of dedicated users. This created a barrier for newcomers, who found it difficult to find engaging content and experiences.

Economic Management in Virtual Worlds

Charles Hudson's insights highlight the crucial role of economic management in virtual worlds. The success of a virtual economy depends on a balance between platform control and user-generated content. While a UGC model offers potential for creativity and innovation, it also presents challenges in managing pricing, inflation, and the overall stability of the virtual economy.

The Future of Virtual Goods

The challenges of building a successful virtual goods economy are complex and evolving. Understanding the trade-offs between UGC and platform control is crucial for creating a sustainable virtual world. Platforms like IMVU and Gaia, along with the insights of Charles Hudson, offer valuable lessons for developers and creators looking to navigate the exciting world of virtual goods.