October 21, 2008 4:00 PM | Simon Carless
[Sister site WorldsInMotion.biz has been finding out about the relatively un-noticed market of prepaid online game cards in U.S. physical retailers like Target. It's much bigger than you might think, with claims here that the sector is set for an estimated $100 million in revenue this year - pretty intriguing stuff, going back into meatspace to help the kids pay for games online.]
GMG Entertainment is a publisher of "digital currency cards" for online gaming/entertainment companies, working with major U.S. retailers such as Target, Best Buy, Wal-Mart and Safeway, and has just announced a new range of pre-paid virtual item cards to be sold exclusively at Toys "R" Us.
The cards are individually branded with titles from GMG partners, including AdventureQuest, Cartoon Doll Emporium, Gala-Net, Stardoll, WildTangent and Zwinky, as well as a new partner, WeeWorld, allowing children to take the card and then enter the code in the online game of their choice, giving them in-game currency or items.
The announcement was made today by Rob Goldberg, founder and CEO of GMG Entertainment, and sister site Worlds in Motion talked to Goldberg to discuss the company's entry in to the space, the unusual way that retail buying works, and the potential of pre-paid cards for both retailers and publishers.
How did the pre-paid card business start to take off in North America?
GMG started in the marketing services working with retailers -- specifically Target -- but around the same time as that, well, it's not very well known, but it's Target who actually brought the idea of the pre-paid iTunes card to Apple and sold them on that.
The first iTunes cards were co-branded and were exclusive to Target. In terms of retailers in North America who were focused on pre-paid cards for digital entertainment, Target were ahead of the curve.
So a few years ago that led to their head of digital entertainment, Tim Pechmann, looking for additional cards to sell. He tried the eMusic card, the Rhapsody card, none of those sold particularly well, until Nexon met with him and offered him the same kind of prepaid cards that they explained were selling so well for them in China and the rest of Asia. After a little research Target decided to sell those cards too.
Now, there's an interesting fact about these cards. Retailers love them over any other product they have in their store, because the cards themselves don't take up any inventory.
They're not activated until they're purchased, so they don't sit on the balance sheet of the retailer. They feel like "free money" to retailers. So it's a very positive business for retailers to get into, and it really lowers the bar for any retailers who are unsure about it, they don't need to worry about losing money on it.
So, Target and Nexon. The only advertising that they did for that card was on their website, and yet in-store, it did exceptionally well. I can't quote the revenue, but it did very, very well. So Target looked around for other companies to buy cards from.
Now, a very common part of retail is that the buyers are moved around the company constantly. So the DVD buyer from Target was promoted to diaper-buying, because it was a bigger category. So it's not like the gaming buyers at Target have years of experience buying games and know every new trend. They don't know free-to-play or microtransactions; they may not even have rudimentary gaming knowledge or experience.
Even with this kind of lack of knowledge Target were trying to get into the space. It's almost certainly the only time in history that a seventy billion dollar company has been cold-calling companies asking to sell their product.
Most of the comments Tim got back were along the lines of "we're a digital company, we can't get into the physical space," "if you do it for me maybe we'll think about it," that sort of thing. As GMG had been working with Target, I got a call from Tim to help find these companies and bring them to Target.
As we started to walk through this possible business, we realized that a couple of things. First of all there was a potential for huge growth; not just because of the retailers who were excited by these cards but by how much the digital entertainment companies were growing; not just in company size but in userbases.
Secondly, we returned to the fact that buyers very often didn't know about the industry they were buying from. The person who replaced Tim at Target had been buying country music before that; the games buyer at Walmart used to buy jewelry.
We saw that we could be the intermediary there -- we could use our expertise in both aspects to help both sides, and thought it sounds cliché, help grow the business for everyone. It's not as simple as just "place the cards in a store and they're a payment method." We look at them as a wonderful opportunity for brand building for the digital partners.
The really big untapped market for these digital media companies is gift giving. No matter how much someone loves an online world no one is going to say "hey, merry Christmas. I logged into your account and gave you 25 bucks." Not to mention the impulse buy.
Something I don't quite understand here is the idea that retail buyers don't understand the industry they're buying from. How does that possibly work?
Welcome to retail! The short answer is that it often doesn't. But I wouldn't say they always have no knowledge.
It's not as if they rotate all the buyers on a regular basis and all of a sudden you have five new people on a buying team none of whom has any experience. One of the ways it is made to work is that there is a chosen vendor for each category who is the "category captain."
So for example, GMG is the category captain for Target, Best Buy, GameStop, the entire Blackhawk network which includes stores such as Safeway and Toys "R" Us, and the role of the category captain is to provide industry analysis and data to the buyers. So for example the category captain for home video at Target is Fox, and for cereal it's General Mills at Walmart.
So what that vendor's responsibility is to provide that buying team with industry analysis, overviews… One of the things that we make sure to do as category captains is not just push our own views, but to show them why this business makes sense, whether it’s a demographics fit or any number of different things that could help the retailer.
That's what we do to try and work with this system, but to be honest, for the first six months in any new category a buyer tends to have no idea what they're doing. But you know, it's their job, so they do learn it, get good at it, and then get promoted… Out of that category to something else they don't know!
Why did you decide to offer individual cards for each IP?
For a number of reasons. People have said to us "what happens if some universal gaming card puts you out of business?" and we say there's already a universal gaming card -- it's called a prepaid Visa. If people really want to get their cash onto the web you can buy a prepaid Visa at millions of outlets across the country.
What we have seen -- not only from our digital and retail partner side but from our consumer side -- is that the individual cards are very positively received, even just down to consumers enjoying the collectability of them, because we refresh the art periodically.
In addition, we have the ability to do a lot more when the cards are individual -- for example, with Zwinky, when you bought a card you also received your choice of a free super power. That's the kind of value you can add when you're doing a specific unique branded card, rather than when you have a card that merely acts as a payment method.
Eventually there will be some value in the universal gaming card, but we think the space is simply too new. There needs to be a lot more education of the consumer to understand the value of these cards and what that kind of card could and couldn't do.
How popular have the cards been so far?
I estimate this year that you'll see EA enter this space for some of their games, and a few other big names are absolutely interested. In fact we're in final negotiations with a couple of recognizable names.
We tend to estimate the size of the total prepaid gaming card business when we do our numbers, and this year we're looking to something between $75-100 million dollars in sales across North America. We see that going to $250-300 million in 2009 and being in the region of a half-billion by 2010.
We see this market growing dramatically in the next two to five years.