Well, actually, it's about money. A lot of money in the macro sense and even a lot of money in the micro.
The micro refers to 'vitual durable goods,' those items essential to video game play that you can buy with real money on that big interweb thingy. Or that your kids do. Like magic wands and extra life candies and virtual cows. The revenues from which are in the billions. And so there are a lot of issues about revenue recognition, depreciation, valuation, currency translation and so forth. The sort of head-scratchers that economists and their accounting friends actually need to think about. Because the world's tax and revenue services certainly are.
It's a very interesting subject if you care about that sort of thing or believe you can make a couple of bucks by arbitraging the market for fairy dust.
But it may be even more interesting as a metaphor for the way value is increasingly created on the web. As the service economy expands and through technological innovation even comes to dominate what used to be thought of as manufacturing, we are faced with the challenge of figuring out how to identify and measure value. For auto makers, aerospace, equipment manufacturers and other purveyors of heavy metal , this may mean that financing and servicing are generating more income than the sale of the item itself.
For the larger question of what it means to provide digital marketing, web site development, internet reputation management and social media strategy, some fundamental questions arise about the nature of value and wealth creation. Military and security services must determine how to protect and defend such accumulations, even when they are primarily bits and bytes. Without Fort Knox or the Federal Reserve caverns filled with gold beneath Wall Street, in whose virtual pipes does such wealth reside or transit and, therefore, who is responsible for what and when do those obligations begin and end?
There are those who think the whole shebang is nothing but fairy dust and that the entire virtual structure will come crashing down any second. But all those acquisitions of startups with twelve employees and a beta test that sell for nine or ten figures appear to be collecting real money in their real bank accounts. Whatever that means these days.
The fact is that our ability to measure and manage the nature of wealth has not kept up with the economy's ability to generate it. There are concepts and white papers and conferences, but there is no comparable data nor is there a global governing body - or set of bodies - to provide anything other than encouragement. Given the degree to which our economy is dependent on growth of this sort of intangible, ephemeral value, we had better figure this out before it all goes poof! JL
Emily Chasan, Noelle Knox and Tiziana Barghini report in the Wall Street Journal:
Anticipating when players will move on is an essential part of recording revenue where the sale of “virtual durable goods,” is a major source of income.
Lucia Rubin was an avid player of “Candy Crush Saga” for a few months last year. She spent about $5 buying extra life candies and more playing time for the mobile videogame.
Then, she switched to “Virtual Families 2,” a game that lets players build their dream home and adopt children. She accidentally bought $50 in virtual coins—oops, instead of $5—to spend on food, furniture, gardeners and maids.
Again she lost interest after a couple of months.
“I don’t play anymore because it’s kind of boring if you don’t have that much money,” in the game, said the 9-year-old New Yorker.
Anticipating when players like Lucia will move on is an essential part of recording revenue in the mobile-game industry, where the sale of “virtual durable goods,” such as cows and tractors in “FarmVille” or cannons and dark barracks in “Clash of Clans” is a major source of income.
When game companies change their assumptions it can skew their short-term results.Some virtual goods, like potions and spells, are good for a single use, and are accounted for as a one-time sale.
Virtual durable goods are those that are continually available to the player. They might include a superhero character or a tractor, depending on the game.
These goods are accounted for like services or club memberships. Companies book part of the player’s payment upfront, but defer the rest until the end of the average period in which the item will be used—whether four days or 14 months.
“The thing that’s so weird is if people lose interest, and start playing for a shorter period, it drives faster revenue recognition. The shorter playing period is a negative for the business, but it is going to drive higher revenue,” said Jill Lehman, head of technology, media and telecom research for forensic-accounting analysis firm CFRA.
Game makers say they base their estimates on historical data, but that the playing periods can change substantially each year, especially for the newest and more popular games.
The Securities and Exchange Commission has sent more than two dozen letters to the companies since 2010, asking them to explain more about how they come up with these estimates.
Earlier this year, the SEC asked Zynga Inc., the maker of “FarmVille” and other games, to reveal more about how its estimates of the average life of durable virtual goods affect its financial data.
The agency noted that changes Zynga made in its average-life assumptions boosted revenue by $12.3 million and $14.1 million in 2013 and 2012, respectively.
When it went public in 2011, Zynga said its virtual durable goods had an estimated average life of 15 months, down from 19 months in 2009. In its latest annual report, the company said it expects paying players to stick with its games for between six and 18 months.
In June, Zynga told the SEC that it had “carefully considered the disclosure requirements,” and would note in future regulatory filings how changes in its assumptions affected net income, per-share earnings and income from continuing operations.
Zynga declined requests to be interviewed for this article. The SEC declined to comment beyond its letters.
Companies that make similar games might make different choices in booking sales and costs, which can make it tough for investors to make comparisons.
“Candy Crush” maker King Digital Entertainment PLC, which went public in February, used to sell virtual durable goods and spread its revenue over the estimated life of its games, which it put at between two and nine months. The company stopped selling durable goods more than a year ago.
“We have no more durables in our games today” said Melissa Nussbaum, King’s senior director, finance.
In March, the SEC asked King Digital to explain why it was recognizing sales from packs of nondurable virtual items at the time the final item in the pack was consumed, rather than as each item was consumed.
King Digital responded that it waits because the average time between a player using the first and last item in a pack is four days, but that it reassesses that estimate periodically.
The U.S. Financial Accounting Standards Board is considering whether to issue further guidance to “reduce the potential diversity” in revenue recognition for virtual goods in electronic games, said FASB Chairman Russell Golden.
Mr. Golden added that “to be fully honest, I had to consult with my 10-year old son to be better informed about these types of transactions—and then I consulted with my wife on how we control the spending on his iPhone.”
Gamers are expected to spend more than $20 billion on mobile games this year, about a third more than last year, according to research firm Gartner Inc.
But players are fickle. Six of the games among the industry’s top 10 revenue generators in September weren’t on last year’s list, according to data tracker App Annie. And a small percentage of players account for the bulk of purchases.
“A lot of companies struggle until they put in good systems to track information” in specific detail, said Bryan Anderson, a partner at accounting firm Deloitte & Touche LLP.
Investors and analysts say they get around the confusion by looking to other performance benchmarks that don’t adhere to U.S. accounting rules.
Analysts look more at bookings than revenue, said Chris Merwin, a senior U.S. Internet analyst at Barclays PLC. Bookings include all the cash paid for any virtual item, consumable or durable, and independently of whether those items have been used or not. “The booking is realized right away, and people are really focused on that metric,” Mr. Merwin said.
“ Kim Kardashian : Hollywood” has been a flashy success for Glu Mobile Inc. since its launch in June. The game, which invites players to try to become A-list celebrities by doing things like wearing the latest fashion to attending parties, raked in more than $43 million in third-quarter revenue, or about $470,000 a day, more than half the company’s total.
“We are in the business of doing all we can, and our power to keep the title where it is in the grossing chart and keep extending its popularity,” CEO Niccolo de Masi told analysts last month. “We are in uncharted territory for this title.”
Last year the SEC asked the company, which makes more than 50 games, to explain the assumptions and judgments it uses to determine the average playing period of its paying customers, and it applies those estimates to its various games.
Glu told the SEC it would improve disclosures in the future. It declined to elaborate.
Keeping up with the industry’s changes is hard even for accountants and auditors. “We re-evaluate revenue recognition every single quarter,” said Ed Hackert, a partner at accounting firm Marcum LLP, who has worked with game companies. “It all comes down to a contractual arrangement, and the devil is in the details. It is a real hot-button issue for the SEC.”
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