Despite Neopets‘ inauspicious beginnings as a virtual pet site created by college students Adam Powell and Donna Williams, it’s turned into a youth culture force. About 80 percent of the site’s users are under 18, and as of November 2007, there are over 150 million registered accounts. But Neopets isn’t just about showing kids a good time. According to Neopets’ Senior Vice President and General Manager, Kyra Reppen, children age 6-14 have access to $60 billion of their parents’ money, so there is certainly much to gain. Banner ads and sponsorship have been their “primary business model,” and business has been very good, to the tune of a $160 million buyout.

But the site wasn’t always the juggernaut it’s become. In the beginning, Powell and Williams promised to never use banner ads and didn’t charge for special features on the site. Instead, they relied on “immersive advertising,” a term they trademarked, which meant their ad revenue depended on companies sponsoring minigames and items rather than direct advertising. Other sources included branded destinations within the site’s virtual world. Players could sign up for offers or surveys for “Neopoints,” the in-game currency, as well. Never once did a player have to stare at a basic ad.

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However, in 2004, things changed. Powell and Williams launched a premium subscription service, which granted players several bonuses, along with a sponsored downloadable toolbar. At the same time, they introduced banner ads. (People who paid for the premium subscription didn’t have to look at the ads.) The community rebelled at the broken promise, but the designers claimed the ads were necessary to keep the site free and promised to ensure they were appropriate for the user base’s consumption.

Since then, the site has grown even more commercial. In 2005, Viacom, owner of MTV Networks (MTVN), purchased Neopets for approximately $160 million. Viacom has been actively making headway into the gaming market over the past several years. Today, they own Xfire, GameTrailers.com, music game developer Harmonix, AddictingGames.com and Shockwave.com, among other related brands. Neopets, along with various Nickelodeon properties, is at the heart of MTVN’s Kids and Family Group.

Reppen, who spoke at the Virtual Goods Summit in June, said the company has refocused its model into “four key emotional drivers” since joining MTVN: having fun, fulfilling social needs, self-expression, and control, including customization.

This diversification began in a big way in 2007. The site underwent a complete overhaul; the majority of the pet designs were redrawn, making them customizable from the get-go. In March, the team held a month-long competition, sponsored prominently by a children’s movie. It was the first time ads were placed on the loading screen of every minigame involved in the challenge, and the event itself required players to play a sponsored minigame to win. In June, another game challenge, Altador Cup II (based on the World Cup), was held and advertised on Viacom cable channels, leading to a spike in new accounts and site traffic.

Also in June, the NC Mall, the result of a development and marketing partnership between MTVN and Nexon, debuted in beta. The most prominent example of the new diversified business model, the NC Mall is a microtransaction-based item shop. It allows players to purchase “Neocash,” a new virtual currency, and then swap that for virtual items. MTVN helped market Nexon’s MMOG MapleStory in exchange for their microtransaction framework.

The introduction of the NC Mall caused a storm of protests among the community, which rage on even today. A protest site became a popular link on Digg, and various players decided to quit. Many saw the feature as another broken promise, going back to Powell and Williams’ vow that the site would always remain free. Supporters of the system were quick to point out that participation was completely optional. The team also assured players that the mall’s introduction was carefully designed to not provide anyone an unfair advantage. The FAQ states that these items “do not in any way effect [sic] the game play on the site.”

However, the discovery that a “Winged Talisman” sold in the mall granted gameplay advantages within one minigame threw gas on the fire. Eventually the item was removed from the mall, and the dev team reassured players in the August 3 news that they were aware of the community’s concern about the unbalancing effect such items can have. “We can think about these things until our brains implode and not know what exactly will happen with certain items, so this was a very informative accident,” part of the statement read. This echoes the uncertainty expressed by Reppen at the VGS: “This is something that, clearly, we’re going to be listening and learning as we go.” That said, two other functional items have appeared but have not yet been available for sale. One allows a player to choose his or her own minigame of the day, thereby theoretically granting an advantage, since “Neopoints,” Neopets’ original virtual currency, on the featured game are doubled.

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As far as market-wide acceptance goes, the dev team hopes players’ emotional investment in their activities and the virtual world will convert into financial investments. Reppen believes selling virtual items is a logical extension for a loyal audience this young. “The emotional connection makes the pixels go away, and it’s about these experiences,” she said.

As part of the Neopets community, I witnessed the anger and sense of betrayal a lot of the younger members expressed. Children, who may only see their virtual pets and not fully understand the need for a company to generate revenue, may protest the sudden introduction of a microtransaction feature merely because it’s a change. But that same kid might snap up the latest Neopets licensed toy, not realizing they are two sides of the same coin. There was a real sense of division between mall-using members and those without the means to engage in microtransactions: Since mall items are nontransferable, those who paid got more items, and there was no way for someone who couldn’t pay to catch up.

Or that was the case until September, when a minigame that allows all players a chance at winning 150 Neocash (the equivalent of $1.50) appeared on the site. This made it possible for those under 18, without credit cards or who simply didn’t want to pay to obtain NC Mall items. The game seems to have eased some of the controversy over the stratification between those with and without credit card access, though the debates over the mall continue.

Going into the microtransaction business, the Neopets team knew the community was loyal and wanted to utilize that in a way that would grow revenue without alienating the user base. Along the way, they hit a major hiccup by barring much of their players from accessing new content, but ultimately found a way to make money and give everyone a chance to enjoy the whole game without spending a dime.

Christina González may be found at http://christinagonzalez.net.

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