Updated: Competitive rivalry in virtual worlds. Part 1/5 – The power of buyers

What are the factors influencing the level of competition in the metaverse sector? Applying the Porter’s Five Forces framework for assessing specific areas affecting the intensity of competition sheds a great deal of light into the sector.

The Porters Five Forces model identifies the following areas:

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The factors shown in the chart all combine to influence the level and nature of competition in any sector. And, importantly can identity key strategic areas for virtual worlds to address in order to maintain and grow market share.

This series of posts will take each element in turn and identity the specific attributes associated with the virtual worlds sector. Part 1 deals with the Bargaining Power of Buyers. This relates to the impact that buyers/customers have on an industry. A prime strategic objective for any virtual world is to ultimately control and lower the power of buyers – potential residents. The bargaining power of buyers is comprised of the following elements:

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Bargaining leverage

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How much control do potential or existing residents of virtual worlds have over the companies owning or managing them? At present, not a great deal to be honest. This is because of the transactional nature of becoming a customer (a resident) and the ‘one to very many’ relationship between worlds and residents. New residents are presented with ‘take it or leave it’ options. They have no real say or influence over the ‘product’ they are subscribing too. This is further reinforced by the fact that all virtual worlds have a free resident option. This means you don’t have to pay in order to create an account/avatar and experience a virtual environment. Couple this with the remote nature of becoming a resident in a virtual world and the net effect is that buyers have low bargaining leverage in virtual worlds.

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HOWEVER. As the number of worlds available increases, the fight for residents will increase. We’re starting to see this appearing now with the high number of worlds in beta. We read the press releases announcing new worlds but very rarely get presented with updates on how successful the early stages of attracting residents actually is – unless it’s externally analysed of course.

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Bring brands and companies into the equation and the bargaining leverage changes. Brands now have a lot more control and influence in terms of selecting which virtual world to enter. Take a fashion brand for example targeting teens – they can select from Stardoll, vSide, vMTV and even IMVU and now Lively (to name a few)

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Related article: Brands and worlds – Who’s the Daddy?

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Buyer volume

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The more of a product or service bought by a company (as a buyer), the more control that buyer has over a supplier and also the sector as a whole. Similar to buyers in virtual worlds having a low bargaining leverage, the low volume of purchase transactions means they can not exercise and enjoy buyer volume advantages. On the enterprise/B2B side however, buyers volume does come into play. Companies will increasingly look at a range of virtual world options (be it bespoke or white-label).

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Brand identity

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Are prospective residents drawn to particular virtual worlds because of the brand identity of the world? This is certainly true at present if brand identity equals brand awareness (think Google Lively). Ask a relatively informed person off the street to name a virtual world and they will say Second Life. SL is the world almost always quoted by the press and media for stories relating to virtual worlds. So, the high awareness of SL acts to lower the power of buyers. Taking a more holistic brand on brand identity, there’s a very strong case for real world brands to take their equity and advocates into the virtual world. If a brand can leverage into a metaverse and create virtual offerings in line with (and ideally exceeding) real world solutions then buyer power can be strongly managed (lowered), primarily due to content. An early glimpse of this strategy is Virtual MTV.

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Thinking slightly longer term, just with almost every category on the planet, advertising will play a crucial role in resident acquisition and price sensitivity. The way virtual worlds position themselves through brand positioning and identity will influence the levels of pricing they can deploy to drive their business models. Read more about advertising and brand positioning here. So, a virtual world can lower the power of buyers by creating and managing their brand identity.

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Price sensitivity

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How important a role does price play when people are selecting virtual worlds? The standard model used currently for virtual worlds is a free basic membership and an enhanced premium membership. The line drawn between basic and premium (free or paying) typically relates to either the ability to create objects/own land or the number of features made available. Voice chat for example in There is limited only to premium accounts.

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In Second Life you have to be premium in order to own land. A premium membership of Club Penguin gives you the ability to customise your igloo and obtain more clothes – because it’s important for penguins to wear clothes right?! Here are the initial costs associated with joining three virtual worlds: Second Life: Basic is free, premium membership costs $9.95 per month or ?Ǭ£72 as an annual payment. There: Basic is free, premium is a one-time fee is $9.95. Club Penguin: Basic is free, premium is $5.95 per month or $57.95 for a year. Like all web-based business models with subscription revenue business models, the secret lies in placing the most engaging content on the paying side.

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But would increasing a subscription fee create price sensitivity and thus an increased churn rate of members? Probably unlikely because, using Second Life as a reference, residents spend more time in-world the longer they are members. On this basis, they become more involved and engaged and therefore less likely to leave if the price was increased. Land ownership also plays a large role in Second Life with price sensitivity. If you’re a premium member, it’s highly likely you own land and have various obligations to it.

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For potential residents, as access into every virtual world is free, pricing and therefore price sensitivity is not an issue. Taking a more medium-term view on virtual worlds (if this is actually possible, due to the speed of which the sector is evolving), price sensitivity will have greater importance in the future. As the population bases expand into the mass market, we will eventually see virtual worlds created (probably as vertical worlds) offering extremely engaging yet similar experiences. The price of premium membership will have a more pivotal role in this instance as consumers have to make a decision between worlds – as opposed to opt for premium membership in more than one. Pricing will play a main role in selection.

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Of course, there are some companies that adopt zero-fee business models and have an interest in virtual worlds. Can you guess which ones yet? This type of model creates a large threat to the more traditional basic/premium set-up. Currently in terms of the power of buyers, price sensitivity is low but will rise in the future.

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Backward integration

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Backward integration takes place when a buyer of a product or service buys the supplier of these solutions. Can this occur in the virtual world sector? Not from an individual avatar perspective primarily from the buying volume angle as explained earlier in this article. However, there is a threat of backward integration therefore making the power of a buyer extremely high when a company is investing significant budget in virtual worlds and bringing with them high numbers of residents in a group.

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We already have examples of this in the metaverse sector. IBM is a classic example. They not only have a very high number of employees in virtual worlds but also commit major budget to the sector. Rather than be customers of a virtual world, a potential strategic option for them is to purchase a virtual world – or create a new one of course.

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Another potential example is Virtual MTV. They’ve created their own metaverse platforms using There technology and expertise. This in a way is backward integration already albeit of a more collaborative partnership fashion.

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Switching costs

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What is the level of ease of changing from one virtual world to another? And in the content of buyer power, what are the costs associated with such a move? If the cost of switching between products is low then buyer power is generally high. Inversely, if it’s more difficult to change supplier than vendor companies have greater control over their customers.

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At present, with all virtual worlds offering free basic membership to their platforms, switching costs are extremely low. They are obviously low from a price perspective but also low in terms of time and ease. So, for a virtual world to lower the bargaining power of buyers using switching costs, they have to put barriers in place to ‘lock-in’ (both metaphorically and symbolically in this instance) residents and make it more difficult to switch worlds. How can they do this? One more positive way of doing this is of course by offering additional functionality not available in other worlds. We’re already seeing features such as voice over IP and social network integration being launched into worlds.

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Creating more engaging activities and environments is another technique. So, NPD is set to be key piece of the jigsaw for the success of virtual worlds moving forwards. So, is switching a good thing or a bad thing? Recent discussions and development relating to enabling avatar movement from one world to another (Interoperability) will lower switching costs even more. Do the companies operating virtual worlds realise this? And do they realise interoperability (IOB) is a two-way street? In other words, what IOB will ultimately mean for metaverse owners is that they could end up losing residents as people realise the grass is virtually greener somewhere else? Either way, lowering the switching cost via IOB means virtual worlds will have to constantly evolve and add value in order to remain both competitive and attractive.

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Product information

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Buyers have more power if they are informed with comparable information about the companies in the category they are seeking a vendors. Having this data means they can easily compare features, functionality, pricing, customer support etc etc. This information used to be not readily available for virtual worlds – it required effort to obtain information about the difference in experience (for example) between metaverses. And it must be noted that there’s still a relatively low number of virtual worlds available. As the number of platforms increases the need for cross-world information will increase. Services which provide this information will be popular and therefore increase the power of buyers.

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