Redefining Virtual Currency

Transcription

1 Redefining Virtual Currency Jordan McKee, Analyst, Executive Summary Virtual currencies are frequently used by consumers as a means of exchanging value, whether they realize it or not. In fact, many of the media of exchange we use outside of traditional currencies like cash are actually virtual currencies. For instance, commonly used items such as credit card points, air miles and coupons are virtual currencies, given that they re a proxy for value. Even time and personal data, when bartered to receive something in return, are virtual currencies. While the virtual currencies market is clearly multifaceted, it s also lucrative. Yankee Group estimates the virtual currencies market to have been worth U.S.$47.5 billion in 2012, and we project it to grow 14 percent during the next five years to reach U.S.$55.4 billion in Undeniably, this is a sizeable and growing opportunity. Table of Contents May 2013 Executive Summary 1 Defining Virtual Currencies 2 The Evolution of Virtual Currencies 2 Virtual Currencies Market Sizing 3 Mobile Device Owners and Virtual Currencies 5 Ad Views and Personal Data as a Virtual Currency 9 Conclusions 11 According to a February 2013 Yankee Group survey of more than 2,000 mobile device owners, there is a clear interest in and familiarity with using all types of virtual currencies. Device owners are using virtual currencies frequently, and they are quite comfortable in doing so. Of particular interest for device owners is using virtual currencies to obtain the digital content, such as apps and app-based coins and tokens, they value so dearly. Interestingly, the proliferation of the mobile device has been instrumental in fueling the growth of existing virtual currencies while giving life to new areas namely the use of time and personal information exchanged for digital content. Marketers are quickly realizing that by adapting their initiatives to the mobile channel and leveraging virtual currencies, robust and meaningful engagements with device owners can be realized. This custom publication has been sponsored by Tapjoy.

2 Defining Virtual Currencies The concept of virtual currency is not a new one. In fact, all currencies can be treated to some extent as virtual given that for centuries they have been separated from the value of the goods that they represent. Consumers no longer have to carry precious metals as a form of tender, and coins are no longer literally worth their weight in gold. However, traditional currencies are backed by a central issuing bank that guarantees the value of the token (bank note, check, electronic card transaction) as a proxy for the actual value. Virtual currency still retains the main characteristic of traditional currency: It is a proxy for a value. However, that value can vary it may be directly tied to an existing currency such as U.S. dollars, it could be tied to other physical-world commodities such as precious metals (e-gold), or it could be tied to some other item of value earned by the loyalty of the participant through miles flown, locations visited, advertising viewed or groceries purchased. The concept of exchanging value without the need for a central bank is core to the benefit behind any virtual currency. In many instances where traditional currencies are too cumbersome and inapplicable (e.g., for retailers, coupons trump cash as a means of delivering value to consumers), virtual currencies are leveraged as a quick and seamless means of exchanging value between parties. As this whitepaper demonstrates, participation in virtual currencies is already far more widespread than may be understood by the general population, and new forms are quickly gaining traction. There is a new form of virtual currency emerging across the marketing and payment landscape: personal information coupled with advertising exposure, where consumers earn points and rewards that can be cashed out for content, goods, and even plain, oldfashioned money. The Evolution of Virtual Currencies Virtual currencies can take on a variety of forms and are seeing use across the payment landscape. Of the many applications of virtual currency, its use as a marketing and loyalty tool has been most prolific, helping to propel it into widespread use today. Leveraged by enterprises for more than a century, virtual currencies can trace their roots as a marketing strategy to 1887, when Coca-Cola issued the first-ever coupon. As the success of Coca-Cola s bold and revolutionary ploy was realized and replicated, more advanced forms of corporate-issued currency such as retail loyalty points and air miles soon developed. And of course, no conversation on the evolution of virtual currencies is complete without highlighting one of the most widely used today: credit card rewards. Diners Club unveiled a credit card points and rewards system in 1984, with Discover expanding on the concept in 1986 by introducing cash back for accumulated points. Credit card points as a form of currency have proven to be a powerful motivator and loyalty mechanism for users, and they are often seen as the key differentiator between cards. Since its inception, the credit card points model has been emulated to varying degrees across a wealth of industries. Technological advances over the past decade have increased the application and usage of virtual currencies even further. The current landscape is evolving at a rapid pace as a result of the following areas: Online tokens have gained attention thanks to social network games and mobile apps. In the case of Zynga s Draw Something and Imangi Studios Temple Run, success largely hinges on obtaining virtual coins, which can be either earned by completing tasks within the game or purchased using real money. Under this model, coins can be used to buy various upgrades in the game and, depending on the circumstance, make purchases in the real world. This model is not just limited to games, however. HitBliss provides users with virtual points for engaging with targeted advertisements; these can be cashed in for movie and TV show downloads. The emergence of monetization platforms including Tapjoy, SessionM and TrialPay, which provide users with virtual currencies in exchange for engaging with advertisements, show further promise. Page 2

3 Peer-to-peer currencies have increased in popularity as a means of exchanging value between parties without the need for a central bank. Peer-to-peer currencies have come into the spotlight lately given uncertainty and diminishing trust surrounding traditional banking systems. At the forefront of this revolution is bitcoin, which originated in 2009 as an open source, countryagnostic currency that is controlled by its users rather than by a single entity. Despite qualms about its security and legitimacy, bitcoin is experiencing growing use and acceptance today. Mobile payments and location-based rewards are leveraging virtual currencies as a means of gaining adoption. The proliferation of the smartphone has allowed for new payment schemes where merchants reward consumers with tokens if they use their mobile devices to pay or check in. LevelUp, for instance, offers users discounts at select merchants when they use their app to pay. The Shopkick app, on the other hand, provides users with points that can be redeemed for goods by simply shopping in a certain store or scanning a certain item. As mobile payments and location-based rewards gain traction, virtual currencies will be an essential value-added tool in sparking merchant and consumer adoption. Taking on a variety of forms, virtual currency is a tried and true medium of exchange applicable for use in a range of circumstances. In fact, many virtual currencies trump traditional currencies as a means of exchanging value. For example, most dissatisfied airline passengers would be pleased to receive a credit of air miles to their account as a form of compensation. This exchange tends to be quicker, easier and more useful for both the customer and the airline as opposed to the arduous process of mailing a paper check for reimbursement. Similarly, mobile applications that leverage coins and tokens as a currency provide users with a quick and seamless way to access upgrades and digital content. In this environment, virtual currencies such as coins and tokens win because entering credit card credentials for a purchase is far too cumbersome and would result in considerable dissatisfaction. Undeniably, virtual currencies provide a means of transferring value in a way that is difficult for any traditional currency to replicate. Classifying Virtual Currencies As virtual currencies continue to evolve, it s necessary to separate them into two distinct categories: Mature virtual currencies include air miles, loyalty points, credit card points and physical coupons. Typically, these currencies are leveraged by mature industries and enjoy widespread use. Given their continued use over decades, paired with significant penetration into the market, they tend to exhibit high volume and slow growth. Up-and-coming virtual currencies include app-based coins and tokens, mobile coupons and time and personal data exchanged for digital content. These currencies have emerged more recently and are currently experiencing rapidly increasing use across a number of industries. As a result, volume is lower than mature virtual currencies but growth is significantly higher. Consumers are quickly becoming more familiar and comfortable with both mature and up-and-coming virtual currencies due to their applications in many different aspects of society. In fact, many consumers utilize numerous forms of virtual currency on a daily basis without even realizing they re doing so. The widespread application and use of virtual currencies has created a thriving market far bigger than initially projected. Virtual Currencies Market Sizing Yankee Group defines the virtual currencies market to include air miles, coupons, retail loyalty points, credit card points, bitcoins, game-based currencies and personal information and ad views/time. Based on this definition, Yankee Group estimates the virtual currencies market to have been worth U.S.$47.5 billion in 2012 and projects it to grow 14 percent during the next five years to U.S.$55.4 billion in Without question, the multifaceted virtual currencies market is large and set for continued growth. Page 3

4 As seen in Exhibit 1, mature virtual currencies comprise the majority of the market, making up a collective 95 percent. This is not surprising considering their widespread application by brands and high usage by consumers. While these currencies are clearly enormously popular, their annual growth rate during the next five years is expected to remain in the low single digits given that their respective industries are in mature stages. Despite slowing growth, mature virtual currencies will remain the pillars of the market for the foreseeable future. However, up-and-coming virtual currencies are poised for rapid growth and will make a profound impact on the market throughout the next half-decade. Exhibit 1: The Virtual Currency Market Is Large and Poised for Growth $60 5-Year Virtual Currency Market Growth ( ) $50 Retail Loyalty Points In Billions $40 $30 $20 $10 Credit Card Points Air Miles Coupons Personal Info and Ad Views/Time Game-Based Virtual Currency Bitcoins $ As Exhibit 2 on the next page shows, app-based virtual currencies (currencies used within apps and currencies used to obtain apps and content) are growing fast. Between 2012 and 2017, this segment of the market is expected to increase from a collective U.S.$1.2 billion to U.S.$3.2 billion. Personal information in exchange for apps and content is the largest component of this market segment, sized at U.S.$577 million in By 2017, it is expected to grow 131 percent to U.S.$1.3 billion. The area set for the most rapid growth is ad views in exchange for apps and content, which is anticipated to grow 206 percent in the five-year span to a nearly U.S.$900 million market. Purchasing app-based coins and tokens is another promising area, projected to increase 188 percent during the same time span from U.S.$339 million to nearly U.S.$1 billion. High consumer interest in digital content and further mobile device proliferation will be the primary drivers of this rapid growth. Page 4

5 Exhibit 2: App-Based Virtual Currencies are Among the Fastest-Growing 5-Year App-Based Virtual Currencies Market Growth ( ) $3.5 $3.0 $2.5 In Billions $2.0 $1.5 $1.0 Personal Info for Free Apps and Content In-App Virtual Currency Purchases Ad Views for Free Apps and Content $0.5 $ Of the many virtual currencies that compose the market, bitcoin should be viewed as the biggest wildcard. Bitcoin is a poor representation of a virtual currency because unlike most, it has tremendous uncertainty and an immense lack of trust surrounding it. In the first quarter of 2013 the bitcoin exchange rate to U.S. dollars was highly volatile, sporadically shedding and gaining significant value. Moreover, despite growing use and acceptance, the longevity of bitcoin is in question given its checkered past as a means of conducting illegal transactions. Bitcoin will continue to garner more attention and scrutiny from regulatory officials and consumers in the near term, which will have a direct impact on its future. Mobile Device Owners and Virtual Currencies Mature Virtual Currencies Show High Use and Comfort As expected, mature virtual currencies exhibit the highest comfort levels and are among the most used by consumers. Paper coupons, the oldest marketing-based currency, are used by 85 percent of device owners, and 77 percent of owners claim to be comfortable or very comfortable in utilizing them. Device owners are also experienced in collecting and using retail loyalty card points, with 67 percent having engaged in this process and 69 percent feeling comfortable or very comfortable in doing so. Close behind are credit card points, with penetration at 63 percent of device users, and two-thirds feeling comfortable or very comfortable with their use. Although collecting and using air miles lags behind in usage compared to other mature virtual currencies, at 43 percent, this is as expected considering the majority of the population does not fly on a frequent basis. Mature virtual currencies, such as those depicted in Exhibit 3 on the next page, have permeated the lives of consumers and their application has become widespread. It s difficult to find a Sunday newspaper not stuffed with coupons, or purchase a shirt without the retailer mentioning its loyalty program. With so much attention around mature forms of virtual currency, it s no wonder consumer usage and comfort are at impressive levels. Mature virtual currencies are reaching ubiquitous status across a variety of industries, helping position them as the foremost currency used by marketers. Looking ahead, many of these areas will see continued use and growth as marketing initiatives adapt to the mobile channel. Page 5

6 Exhibit 3: Mature Virtual Currencies Show High Penetration Mature Virtual Currencies Paper Coupons 77% 85% Retail Loyalty Card Points 67% 69% Credit Card Points 63% 66% Air Miles 43% 54% Have used currency Comfortable or very comfortable with currency While these mature forms are undeniably the most prominent, up-and-coming virtual currencies are rapidly gaining pace as a result of the mobile device and the app boom. Mobile Devices Fuel Up-and-Coming Virtual Currencies Mobile device owners are app fanatics. The recent app boom has largely been fueled by the proliferation of the mobile device, which has moved daily activities such as shopping, financial services, games and news to an application on a user s phone. Device owners are realizing apps valuable role in everyday life, translating to significant usage and comfort across the board. Not surprisingly, virtual currencies are rapidly adapting to this shift and becoming an integral component of the mobile channel. Smartphone and tablet owners exhibit high levels of app engagement, robust download rates and a willingness to pay all adding relevance to virtual currency in the forms of app-based tokens and coins, mobile coupons, personal information and ad views. Yankee Group s in-depth market analysis shows that mobile apps are helping new virtual currencies quickly gain ground as a result of the following: Mobile device owners are playing app-based games and doing so frequently. In fact, 81 percent of smartphone owners play games on their device (see Exhibit 4 on the next page), with 41 percent doing so daily, and 66 percent doing so weekly or more frequently. Tablet owners show similarly high levels of use, with 79 percent playing games. Interestingly, tablet owners play games on their device less frequently than smartphone owners, with 24 percent doing so daily and 54 percent doing so weekly or more frequently. This is likely a result of smartphones simply being more accessible and heavily used throughout the day. With usage of appbased games at such high levels, more and more device owners are being exposed to and utilizing in-game coins and tokens. Page 6

7 Exhibit 4: Playing Games Is the Most Popular Smartphone Activity Smartphone Owners Who Have Done the Following on Their Device Play games 41% 81% Visit Facebook Listen to music 28% 33% 77% 77% Visit Twitter 24% 68% Do a location check-in 7% 40% % Daily % Overall Mobile device owners are downloading apps at a breakneck pace. Ninety-two percent of smartphone owners and 85 percent of tablet owners have downloaded free apps, and they re doing so regularly. On a weekly or more frequent basis, 44 percent of smartphone owners and 45 percent of tablet owners download free apps. More telling of their interest in apps are the robust monthly download figures. Looking at smartphones and tablets collectively, upwards of one in three users are downloading two to three apps per month, and one in five are downloading four to six. Mobile device owners are paying for both apps and upgrades. In fact, 63 percent of smartphone owners and 64 percent of tablet owners have paid for an app, helping disprove theories that consumers are only willing to download free apps. Similarly, device owners are expressing a clear interest in upgrading their apps, with 54 percent of smartphone owners having paid for an upgrade (e.g., extra colors, custom characters) within an existing app, and one in five do so monthly or more frequently. Tablet owners are also paying for upgrades, with 41 percent having done so and more than one in four making an upgrade monthly or more frequently. By purchasing apps and paying for upgrades within existing ones, device owners are clearly showing a clear value for digital content and a commitment to mobile apps that goes beyond just freebies. Page 7

8 Mobile device owners are willing to engage in advertising for free paid apps and upgrades. While smartphone and tablet users are clearly willing to pay out of pocket for apps and upgrades, free is always better. As demonstrated by Exhibit 5, 41 percent of smartphone owners would pay for an app or upgrade priced between $0.99 and $2.99. However, nearly 70 percent of smartphone owners would engage in advertising to receive that same app or upgrade for free. Similarly, 56 percent of tablet owners would pay for an app priced between $0.99 and $2.99, and 46 percent would do so for an upgrade falling within the same price range. When presented with the opportunity to engage in advertising to receive that same app or upgrade for free, however, 77 percent would do so for an app and 73 percent for the upgrade. Although mobile device owners are willing to pay for apps and upgrades, engaging in advertising to receive them for free is far more compelling. Exhibit 5: Willingness To Engage in Advertising Trumps Willingness to Pay for Apps and Upgrades Willingness to Pay ($0.99 to $2.99) % Willing to Engage in Advertising for Free Content App 41% 56% App 77% 70% Upgrade within app 46% 39% Upgrade within app 73% 67% Tablet Smartphone Mobile device owners are using mobile coupons. In fact, 63 percent have used them, with nearly one in three (30 percent) doing so on a weekly or more frequent basis. Coupons are one of the best examples of a mature virtual currency adapting to the mobile channel, with 61 percent of device owners feeling comfortable or very comfortable using them. In essence, mobile applications have helped make coupons more relevant than ever before. Consumers no longer have to remember to cut out coupons and bring them to the store; they can now be easily collected and utilized directly from the smartphone. The wealth of coupon and daily deals apps, in addition to mobile wallets that integrate coupons (e.g., LevelUp), have been instrumental in growing this area of virtual currency. Coupons are an integral component of the virtual currency market and the mobile channel has aided in ensuring their longevity. One of the largest developments mobile has provided the virtual currencies market is the increasing tendency of consumers to engage in advertising in exchange for digital content. Not only are smartphone and tablet owners willing to hand over their personal information and dedicate time to viewing commercials, they re already doing so at a rate more frequent than most would expect. Page 8

9 Ad Views and Personal Data as a Virtual Currency For decades, consumers have been willingly using their personal information and time as a means of exchanging value. Take for example a magazine that offers a free trial in exchange for contact information, or a music streaming site such as Pandora that requires users to watch and listen to advertisements to access free music. While many of us do not view these commonplace activities as a form of virtual currency, they undoubtedly are. Interestingly, device owners are engaging in similar exchanges to obtain apps, upgrades and in-game currency for free. In fact, one out of five mobile device owners engage in online advertising in exchange for virtual currencies or content on a daily basis, and nearly one in two do so monthly or more frequently. Moreover, nearly half of smartphone and tablet owners (49 percent) feel comfortable or very comfortable partaking in this exchange. Clearly, this presents a sizeable opportunity for brands to engage with device owners by exchanging a promising new virtual currency. As demonstrated by Exhibit 6, device owners are very willing to spend time engaging in advertising to receive free digital content. Owners of smartphones and tablets see a clear value in digital content, so much so that their willingness to engage in advertising to obtain free apps or upgrades is on par with or greater than their willingness to engage in advertising for physical content such as a free newspaper (66 percent willing to engage), coffee (71 percent willing to engage) or paperback book (75 percent willing to engage). Exhibit 6: Consumers Are More Willing To Spend Time Engaging in Advertising for Digital Than Physical Content Willingness to Engage in Advertising for Free Content Tablet app Paperback book MP3 download Tablet app upgrade Coffee Smartphone app Smartphone app upgrade Newspaper 77% 75% 73% 73% 71% 70% 67% 66% Page 9

10 Strengthening this concept is the number of smartphone and tablet owners who have actually engaged in advertising to access free digital content. For instance, as seen in Exhibit 7, 70 percent of smartphone owners have willingly provided personal information to receive a free download of a paid app, with more than one in four doing so monthly or more frequently. Similarly, 53 percent of tablet owners have viewed commercials to access a free download of a paid app, with nearly two out of five doing so monthly or more frequently. This telegraphs a sizeable market opportunity for advertisers looking to use virtual currencies and content as a medium of exchange to incentivize engagement. Given that those who choose to participate in the exchange are electing to do so, the engagement can be far more meaningful and powerful than other forms of advertisements such as pop-ups, Web banners or TV ads. The payoff for brands leveraging this model can be enormous, with heightened brand awareness, interaction, message recall and valuable consumer data as the primary rewards. Exhibit 7: Device Owners Are Engaging for Virtual Freebies 80% 70% Percent of respondents who have done the following for a free download of a paid app 60% 50% 40% 30% 20% 10% Once a year Once in six months Every 2-3 months Monthly Weekly Daily 0% Viewed Commercial (Tablet) Viewed Commercial (Smartphone) Provided Personal Info (Tablet) Provided Personal Info (Smartphone) Device owners place a high value on digital content (e.g., apps, games, music and movies), with more than one in three valuing it more than physical goods (e.g., food, clothes, gadgets), as shown in Exhibit 8 on the next page. This is promising news for marketers interested in exchanging digital content for a consumer s time and personal data. In fact, the success of leveraging digital content to incentivize advertising engagement has already been realized by large corporations across a variety of industries. Conair, Energizer, GMC, HBO, and NBC Universal, among many others, are familiar with the powerful results this model can yield. With a virtual incentive, companies can encourage meaningful engagements with consumers in a way that s difficult to do with any other incentive. Any company marketing to consumers in the mobile channel will find it s typically significantly cheaper and easier to provide digital content as an incentive for engagement as opposed to physical goods. Moreover, with digital content, brands can entice consumers to engage (e.g., take a survey or view an advertisement) and provide a subsequent reward (e.g., free app or MP3 download) instantaneously. Not so much if the reward were a physical good such as a book or t-shirt sent via postal service. Page 10

11 Exhibit 8: Device Owners Value Digital Content Higher value than physical goods 38% Value of Digital Content Lesser value than physical goods 62% Marketers must look for opportunities to incentivize device owners with virtual currencies and digital content in exchange for ad views and personal information. This exchange allows for a more robust engagement between marketers and consumers, providing a stronger and more valuable experience on both ends of the spectrum. Essentially, exchanging ad views and personal information for digital content creates a symbiotic relationship between both parties something traditional forms of advertising fail to substantiate. With device owners exhibiting high usage of and interest in virtual currencies, paired with a promising valuation of digital content and a willingness to engage in advertising for virtual credit and content, this emerging marketing opportunity is ripe for the picking. Conclusions Given the widespread application of coupons, loyalty programs, gamed-based coins and tokens, ad views and personal information as a means of exchanging value, virtual currencies are becoming increasingly relevant in the lives of consumers. Moreover, the growth of smartphone ownership in recent years has helped increase the relevance and use of a variety of virtual currencies, allowing them to adapt to a rapidly changing digital world. Looking forward, their usage and application is positioned for further growth as a direct result of smartphone proliferation and the current trajectory of the mobile ecosystem. Virtual currencies are here for the long term and stakeholders in the payment ecosystem must realize: The virtual currency market is large and growing. As a market that s currently sized at U.S.$47.5 billion and poised to grow by 14 percent to U.S.$55.4 billion by 2017, virtual currencies are undoubtedly a lucrative area. Furthermore, given sizable adoption rates and comfort levels, consumers are clearly expressing that they value virtual currencies, helping set the stage for continued growth. The most promising areas include personal information and ad views as a currency, which are both projected to more than double in size within the next five years. Page 11

12 Mobile device proliferation has sparked the growth of new virtual currencies. Consumers are rapidly moving more and more of their daily activities to the mobile channel, and as a result, virtual currencies are adapting and evolving. Robust growth can be expected for virtual currencies including mobile coupons, mobile game-based coins and tokens, ad views and personal information given their strong fit for mobile commerce. Mobile device owners value digital content. More than three out of five device owners having purchased an app, and 54 percent of smartphone owners and 41 percent of tablet owners having purchased an upgrade within an app. Moreover, more than one in three device owners actually place a higher value on digital content than physical goods. Given considerable consumer interest in this area, marketers have an opportunity to entice their audiences into engagement by offering free digital content. Mobile device owners are willing to engage in advertising for free paid apps and upgrades. Consumers have been using their time and information to get something in return from companies for decades without realizing it s a form of currency. Given their familiarity with this exchange, it s no wonder comfort and usage of this virtual currency is high in the mobile channel. Brands looking to swap digital content for personal information and ad views will be met by interested and willing device owners who view it as a worthwhile exchange. About the Author Jordan McKee Analyst Jordan McKee is an Analyst on Yankee Group s Mobile Marketing and Commerce team. His research examines the development of mobile devices being used in the physical world for payments and other forms of transactions. HEADQUARTERS Corporate One Liberty Square 6th Floor Boston, Massachusetts phone fax European 30 Artillery Lane London E17LS United Kingdom phone fax Copyright Yankee 451 Group, LLC. Yankee Group published this content for the sole use of Yankee Group subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of Yankee Group, One Liberty Square, 6 th Floor, Boston, MA All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.