Monday, June 25, 2007

Farming Gold on a Pauper's Margins

An interesting article by Daniel Terdiman (via Alice), in which he interviews Brock Pierce, CEO of Affinity Media, who used to own IGE, the pioneer firm in the area of barter and trade of virtual items.

Business is down, it seems, as pressure from competition, mainly Chinese, willing to live of thinner margins. The money quote: Chinese competitors get more and more sophisticated, they are also willing to accept less and less profit margin. And that means, "they're perfectly happy to accept $20,000 in profit on $2 million of revenue." That, for all you out there without a calculator, is a 1 percent profit margin...

While I'm not surprised that the margins are thin, and that the pioneer in the area is being squeezed out, I *am* surprised that the 'living of 1% margins' idea goes unquestioned (not just in Daniel's article, but in general), when it's a Chinese competitor in question.

Is it feasible? Perhaps, but it often seems to go unquestioned.

Let's take this example. If indeed companies are selling $2M worth of virtual items & currency at only 1% over what it cost them, what other possibilities might exist?

  • These competitors may actually be vertically integrated. These might be gold farmers (organizationally, a gold farming factory/sweatshop) that are looking to cut out the middleman. That 1% profit might be over the 5% they had to give up to a middleman in the past.
  • They may be living off the float. Not sure what the turn-around time is on cutting checks to sellers, but with enough capital coming through, they could put that money to work during the month it takes them to pay someone.
  • Trade off currency exchange rates between China & US.

I don't know that any of these is the case, of course. But it stands to reason that if they are only making one point off of it, there's something else helping pay the bills, cheap overhead or not.

1 comment:

Anonymous said...

That sounds completely reasonable to me... I mean isn't having a 0% percent profit margin pretty much the ideal for free markets?

Costs include salaries, which includes the salaries of the guys in charge; profits are everything above and beyond that. If I'm the big boss and I've given myself a salary of $100Gs, then that 1% is an extra $20G bonus on top of that. Not mega-bucks, but not that bad.

Virtual commodities are still commodities, and that's usually how those markets work, no?