What virtual content creators can learn from Netflix

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Netflix now accounts for the largest share of Internet traffic. According to a new report from Sandvine, Netflix movies and television episodes are now more than 22 percent of the stuff traveling through the Intertubes — finally knocking peer-to-peer filesharing networks out of first place.

The reason isn’t that people suddenly became more law-abiding and more willing to pay for digital content. The reason is that Netflix makes the legal alternative more convenient, more appealing, and reasonably priced compared to the illegal one.

But there’s another transformation at work, as well. We are beginning to think of digital content as a service, rather than as a product.

In fact, 49 percent of Internet traffic is now “real-time entertainment,” according to Sandvine, which includes not just Netflix but also Hulu and YouTube. These are legal services where users pay for the content with either subscription fees, or by watching ads, or — in the case of Hulu — either of the above.

But the same “content as a service” model can also be applied to other kinds of digital goods.

Clothing as a service

Consider virtual clothing — a commonly pirated item in Second Life. As a result of the piracy, vendors are caught up in an arms race, trying to use digital rights management technology, encryption, server-side scripting and other techniques to combat theft. This only makes the products pricier and more difficult to use — which, in turn, encourages more piracy.

Consider some of the problems consumers currently have with virtual goods:

  • They are expensive. Virtual products have no production costs, so, over time, costs will tend to converge to zero — after all, once the initial design labor costs are covered, all future revenues are pure profit. It’s in a merchant’s interest to sell as many copies as quickly as possible, to cover initial costs, and then to lower prices as much as possible in order to drive out the competition. As a result, consumers’ sense of the underlying value of virtual goods is confused.
  • They are hard to find. Search is difficult to use in Second Life, and generally unavailable in OpenSim grids. There are no recommendation engines such as what Amazon and Netflix have.
  • They are hard to keep. Virtual goods cannot currently be legally backed up out of Second Life, InWorldz or other major commercial grids. Unless you’re the creator of the object, it’s against Second Life’s terms of service to export it. So if something happens to the asset server, your stuff is gone.
  • They are hard to use. I don’t spend much time shopping in Second Life, but my inventory is so full that I have a hard time finding anything I need. If I need a new outfit for a meeting, it often takes me longer to find clothes that match than it takes me to attend the meeting itself. (Okay, maybe that’s just me.)
  • They’re aren’t transferable. I’ve got my Second Life clothes and accessories. And I’ve got my OSGrid clothes and accessories. And I have a separate set of clothes on my company grid. And yet another set on ReactionGrid (since I can’t do hypergrid jumps between it and OSGrid — they’re running different versions of OpenSim). If I go into Avination or InWorldz, or another closed commercial grid, I show up as Ruth — unless I go through all the effort of outfitting yet another avatar and uploading my skin from my hard drive (it’s based on my photograph, and I use it everywhere).

Of course, content creators have problems as well:

  • Virtual goods are hard to market. With freebie alternatives, copybot pirates, search issues, and a crowded SL Marketplace it’s hard to get your goods out to your potential customers.
  • Virtual goods are hard to protect. Content creators have to stay on top of things, monitoring for potential violations, and filing endless DMCA takedown notices. With the explosion in OpenSim grids, this only gets harder, as each grid has its own DMCA policies, its own marketplaces, its own in-world shopping malls.
  • Virtual goods are hard to price. Similar products from competitors can be found for free, or for orders of magnitudes more in price.

Now, Netflix doesn’t solve the piracy problem. What Netflix does is make it irrelevant. Yes, a pirate can order as many DVDs as they want, copy them, and distribute them on file sharing sites. Or stream movies, grab them, and share them. The entire Netflix catalog could be released to the world overnight. Well, not overnight, especially if you have to wait for mail delivery of each DVD, but eventually. Especially if there is a network of pirates all working together, ordering movies and ripping them.

But the thing is — all those movies are out there already. And if they aren’t, it’s because the pirates just haven’t bothered to rip them yet. Yes, Netflix might make a pirate’s life marginally more convenient. But it doesn’t really make a difference to the total amount of pirated content.

Where it makes a difference is on the consumption side, by making legal purchases more convenient and more appealing. The pirates can steal all the movies they want — if they’re on Netflix and available at the click of a remote, why should people bother with hunting down the pirated versions and dealing with the potential legal repercussions, viruses, and guilt?

A Netflix for digital goods

But how would a Neflix-style service for digital goods actually work?

Here is one idea — there are probably a million others.

You start with a viewer. Maybe an open-source third party viewer like Imprudence. Or a commercial web-based viewer like Tipodean. And you build in a virtual closet, one that you log into the same way you would log into your Netflix account.

Neither Second Life nor OpenSim currently support external asset storage — though that is bound to come, at least on the OpenSim side.

So, to start with, when you get a new outfit from the virtual closet, the viewer will upload it into your inventory, then wear it for you. When you’re ready to take it off, the viewer will remove it — both from your avatar, and from your inventory. That’s a lot of power in the hands of the virtual closet folks but all existing viewers could, potentially, be used maliciously — and are run by anonymous volunteers, free from legal repercussions.

Having a third-party inventory service like a virtual closet will also have an added benefit of reducing the load on grid asset servers.

And since the virtual closet lives in your viewer, it doesn’t matter what grid you’re on — your closet is always there, right at hand.

You can still keep your old inventory — after all, Netflix doesn’t force you to throw out all your old DVDs when you sign up. But over time, you might find that, except for certain “must have” items, or gifts, its easier to check your virtual closet than to go on shopping trips.

So where will content for the virtual closet come from?

Netflix started out by buying up licenses to old movies and art films, that weren’t really selling well anymore through the traditional channels. And it also offers public domain movies like Buster Keaton’s The General.

Similarly, there’s a large amount of digital content out there that’s in the public domain, or that’s out of date and no longer fashionable, is competing with freebies, or isn’t selling well for some other reason.

Designers could license warehouses of their old content to the virtual closet and make money from it without having to struggle with trying to market it.

An alternative approach is the iTunes way — sell content one piece at a time, store it in the virtual closet, and make it accessible on any grid the user wants to use.

Here, content creators would benefit by getting a revenue share on each item sold, and would be encouraged to release their latest, newest creations.

And it’s possible that the virtual closet vendor could creatively combine the two approaches — a fixed price subscription service to most virtual goods, with an a-la-carte option for new releases — similar to the way cable companies work, with their standard channels co-existing on the same platform with pay-per-view movies and sports events.

Another approach is to allow users to have a certain number of items checked out at any one time for a particular subscription. To check out a new item, they would have to check an old one back in, or increase their subscription level. This would allow customers to get items that they can’t wear, such as furniture, buildings, productivity tools, or landscape items. These items could be scripted, so that they automatically remove themselves from the grid, and from user inventories, when they are returned back to the virtual closet.

Finally, another approach borrowing from the cable industry — customers could sign up for particular “channels” such as women’s clothing, role playing accessories, or office furnishings and productivity tools.

Myself, I can see myself taking advantage of this service, using a Netflix-style virtual closet for my basics, and going shopping occasionally for “must have” designer items for special events on individual grids.

Eliminating pricing issues

Netflix, Hulu, iTunes, and cable companies all take care of setting the prices for their content, reducing consumers’ fears that they are overpaying for content.

The downside is less pricing freedom for the creator. But how many content creators are also expert market analysts? Yes, you could make more money by having a clever pricing strategy and deftly manipulating prices in reaction to market conditions. But who has the time? And, for goods that are in low demand — the “long tail” products — it’s just not worth the effort.

I love paying Netflix $8 a month to watch all the movies and TV shows that I want. (Even as I occasionally shell out $30 or more to take the kids out to see a single movie.)

I would be more than happy to pay a virtual closet service say $5 a month to never have to worry about what to wear.

As an enterprise customer, I’d pay extra for subscriptions to particular channels, such as office furnishings and productivity tools, or for multi-user subscriptions for my staff.

Solving search

Since the virtual closet folks do nothing else except run this virtual closet for you, they can focus on giving you the best experience possible. It could show you your favorite outfits first, with little preview photos so you can quickly glance through and find what you need.

Today, sorting through avatar inventories is limited to searching by type or by key word — and designers have to come up with some creative names for their items so that you don’t have 50 different items all labeled “black top.”

In addition, clothing and accessories often come in multiple parts, with separate attachments for sleeves or hems or collars or jewelry. A virtual closet could group these together into one item and allow a user to simply put on a pair of shoes without worrying about finding the matching shoe base — or finding out that for some reason they’ve got the right shoe but not the left one.

And that’s just to start with.

Netflix and Amazon have amply demonstrated the power of recommendation engines. Similar systems could work for virtual goods, as well.

For example, a virtual closet could recommend similar outfits that fit your taste, based on what other people have picked. It could recommend new items based on your favorite colors, or your favorite designers, or your favorite style. Over time, the virtual closet will grow very familiar with what kind of clothing you prefer to wear, and get better and better at picking out things you might like.

Even if I had purchased items in my inventory, I might be more likely to wear items from the virtual closet if they were easier to find — even if they were not quite as fashionable. Similarly, I’ll often watch older Netflix movies instantly, instead of waiting for the DVD delivery of newer releases.

Backups

Linden Lab has a lot of things to worry about. Keeping track of user assets is important, but it’s not 100 percent of what the company does.

And on smaller, startup grids running on OpenSim, asset databases can be adversely affected by upgrade issues or management incompetence.

The folks running a virtual closet would have nothing else to worry about except keeping assets safe, with redundant backups and plenty of failsafes.

Better yet, they don’t have to actually keep track of every single user’s inventory (unless they do the iTunes model) because users are buying subscriptions to the service, not individual items.

After all, I really don’t care if Netflix loses track of which movies I’ve checked out. If I want them, I’ll just check them out again.

I would care, however, if iTunes lost track of my purchases and I lost access to songs, apps or ebooks that I had already bought, so a virtual closet vendor following that business model should take extra care with backups and redundant systems.

Winner takes all

Today, we have several companies selling digital goods online — Netflix and Hulu on the subscription model, and YouTube and Hulu again with ad-supported content.

Over time, however, clear winners tend to emerge and dominate due to the network effect, the way that Facebook has come to dominate the social networking arena, and LinkedIn the enterprise networking market.

The early movers have the advantage, as with Netflix. Other companies have tried to compete with Netflix on its own turf, including Blockbuster and Walmart — and have failed. The longer Netflix is around, the more familiar it becomes with user tastes — and the more relationships it forges with content providers.

Similarly, the virtual closet that comes out first would have an early mover advantage in striking deals with designers and creators, and in learning its customers’ preferences.

That doesn’t mean it will be unassailable. It could fail to innovate, or lose its way, and go the path of Friendster and MySpace.

In the digital world, there are no guarantees.

Mixed model

Eventually, I believe virtual goods will evolve into a mixed ecosystem similar to that of movies.

Just as people are willing to spend money to go out to a movie and pay way too much for popcorn and a Diet Coke, so people will be willing to go out shopping as a special event — to socialize with friends, to attend a sale, to get new designer products before anyone else has them.

And, just as people are willing to pay extra for a special director’s cut of their favorite movie, people will pay extra for a “must have” purse or jacket.

However, the majority of content consumed will be either subscription-based, or advertising-supported, just as movies are delivered free over broadcast TV or Hulu, and by subscription through cable channels and Netflix.

Maria Korolov
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