The Deal
Saturday, August 2, 
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[Posted on February 21, 2008 - 6:01 AM]
puzzle_pirates.jpgOne of the cliches in the venture capital industry is that a startup must solve a pain point in order to receive funding. Of course, the greatest startups create services that most people couldn't have imagined they ever needed. But the cliche is rooted in truth because solving a problem that many share is an obvious path to success.

Based on that, it will only be a matter of time before some enterprising soul solves the challenge that a packed room full of massively multiplayer online role-playing game (MMORPG) executives and developers kvetched about for a good part of the hourlong session at today's Game Developer's Conference in San Francisco; payment fraud and billing.

Many of the operators of online games such as GoPets, KartRider, Magic Online, TuneTown, Secret of Solstice, Puzzle Pirates and Habbo Hotel are struggling with charge backs from users who pay real money for virtual goods that can be used in these games. For example, a user of GoPets might buy a flashy leash while a KartRider player might buy rims. The problem is that after paying the company for these virtual goods, dishonest users then sell those goods to other users for real money and then go on to cancel their original credit card payment for the virtual goods. 

Alternatively, a teen may borrow their parents' credit card without permission to buy something for use in one of these games. When seeing their credit card statement, the parent oftentimes gets the charge reversed, which the companies are powerless to stop. This is costing the game operators a lot. Three Rings Design CEO David James said chargebacks came close to accounting for 2.5% of the company's gross billing at one point last year.

James, whose company operates Puzzle Pirates, put it best when he asked, "When did my company become a billing and fraud engineering company?" Some in the crowd offered up the names of companies such as Digital River and Vista that offer pieces of the solution. However, none offer up a turnkey payment solution that reduces chargebacks while offering users a wide choice of payment options. That's no small feat. Habbo Hotel offers users 186 different payment methods in 31 countries consisting of credit card, PayPal, premium SMS, cash, pre-paid game cards and other means.

As any casual observer (or World of Warcraft player) knows, this is a segment on the rise. Led by Benchmark Capital, venture capitalists have been placing their bets here for years. A few rumors circulated throughout the room indicate those stakes are lucrative. 
  • Nexon garnered $20 million for its pre-paid cards sold at Target last year
  • Facebook recorded $15 million in virtual good revenue last year
  • Registered users convert to paying customers at a rate of about 2.5% and active users convert at a rate of between 10% and 25%
  • Virtual good clutter is slowing down company databases forcing companies to initiate recycling programs that allow users to trade in many old items for one new one
If that last one isn't a sign that the virtual goods economy is growing fast, I don't know what is. - Joshua Jaffe

Joshua Jaffe is general manager of TechConfidential.com.



Comments
From: Scott Olson,

Joshua brings up some valid points on how massively multiplayer online games (MMOGs) feel powerless to various forms of charge-backs. With the online gaming industry on the rise, unfortunately, it’s become painfully clear that online gaming sites need to beef up their fraud fighting arsenals if they expect to effectively stop fraudulent and abusive behaviors from impacting their virtual environments and good members. To do this, though, they must improve their ability to identify where the fraud originated. Otherwise, fraudsters will simply return under a different identity to repeat the same fraudulent activity.

While most online businesses rely primarily on financial information and identity information to stop fraud, they are leaving out what is perhaps the most important element in organized fraud – the fraudster’s PC. Without including device information into their fraud management techniques, online gaming sites and their members will continue to fall victim to more sophisticated fraud tactics, not to mention repeat fraud, which continues to have a significant impact on online businesses’ operational efficiencies and profits margins.


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