VentureBeat

In a sign that the music industry is embracing the digital age, IMVU is announcing today that it will let users discover, share and buy music inside the virtual chat rooms of its 3-D social network.

IMVU lets members create their own 3-D animated virtual characters, or avatars, and decorate rooms that serve as 3-D chat rooms. Now the members can use IMVU Music to buy songs, create playlists, and listen them alongside other IMVU avatars. In essence, it recreates a kind of “listening bar” social experience that allows users to talk about the music — or even dance to it — with a group of friends as they hear it, said Cary Rosenzweig, chief executive of Palo Alto, Calif.-based IMVU. More than a million songs are available.

“Instead of being passive recipients of music, people can now be the DJs,” Rosenzweig said. “They can share the music they want, like going over to a friend’s house to share CDs.”

This is just the kind of extension of the music business into the social realm that MySpace co-founder Chris DeWolfe and Warner Music Group chief Edgar Bronfman Jr. were talking about last week at the Web 2.0 Summit as the key to saving the music industry from piracy. The entire music industry will watch this closely since it is banking that the discovery of new music in a social setting will directly lead to an increase in music consumption and purchases.

This is also a good way for IMVU to distinguish itself from other sites that offer virtual chat rooms — Vivaty, Whirled, Lively by Google, Gaia Online, Habbo — and the larger virtual worlds such as Second Life.

Rosenzweig said that the company responded to requests from members who wanted to have their 3-D virtual rooms come to life, like real world apartments or homes with mood music. Users can listen to music in private rooms or public spaces. Users can listen to streams of music or purchase downloads that are free of digital rights management from a big catalog of music from all four major music labels.

Notably, users must pay for the music. If you’re visiting a room owned by someone else, you don’t have to pay. The virtual room itself is free for the owner to create. But to stream a song inside the room, the owner of the room has to pay for the song one time.

Using IMVU’s currency, they pay 990 credits for streaming rights. That means you can stream the songs in your room and play them for those who visit your room. About 1,000 credits costs $1 in real world money, so the songs cost just as much as they do for most music on Apple’s iTunes. For DRM-free rights, the cost is 2,200 credits. Besides buying credits, users can also generate credits by creating virtual goods that other members buy.

The users can listen to those songs within IMVU or move them to their iPods and other digital music players. Songs are available from the majors — EMI, Sony BMG, Warner and Universal — as well as music distributors including IODA, Redeye, GetUPlayed, Tunecore, Iris, Song and the top artists from CDBaby. That latter group means that independent artists such as Liam Finn and Danielson Famile can get exposure on IMVU.

Rosenzweig said the company has been testing music sales for some time and is now generating sales of thousands of songs per day, forcing the company’s hosting partners to add new servers. The company is also inviting members to create their own songs and upload the music for sale on IMVU.

IMVU has added more than 25 million registered users since opening its doors four years ago. There are 10 million unique visitors a month, as measured internally through Google Analytics. Despite the tough economy, Rosenzweig said that October was a strong month, partly because the company’s fortunes aren’t tied to ads. Virtual good sales account for more than 90 percent of revenues. At any given time, 60,000 users are online at IMVU.

The company says it is generating $1 million a month in revenue through micro-payments, or the sale of the virtual goods, such as clothing or room decorations, that are created by members. The company has more than 100,000 registered developers, who have made more than 1.8 million items.

IMVU is backed by venture investors Menlo Ventures, Allegis Capital and Bridgescale Partners. It has 55 employees.

The Austin Game Developers Conference featured one of the first official public dissections of the Lively by Google virtual world (or virtual room), and I got a chance to sit down with the project’s creative director, Kevin Hanna in advance of that talk.

One of the news tidbits: Lively could be expanded into the casual game space as Google plans to release guidelines for more interactive components, meaning games, inside Lively spaces.

“We’re about to open up the API for interactive gadgets – meaning games,” he said.

He gives the example of walking into a room with classic arcade machines, and being able to play those games. The timeline for that is long term, but Hanna said that could eventually include larger scale games, “allowing users and developers to build games on top of the architecture.”

He said Google took a different approach to the project by creating a spin-off company in Seattle called X-Ray Kid.  They spent two years developing the content, and will continue to work closely with Google on Lively’s future.

The project was shrouded in secrecy from the start, and Hanna was previously at Disney and said that Google didn’t tell him what it was up to when he was interviewing for the job.
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“But I knew the type of people they were hiring,” he said.

Those early rumors – having something to do with Google Earth and Flight Simulators, said Hanna, were mostly inaccurate.  He describes Lively as a 3-D space to personify oneself through a cartoon-like avatar, or virtual character. In that respect, it’s a lot more like the 3-D avatar chat rooms of IMVU and the 2-D avatar chat rooms of Gaia Online and Habbo. The strategy resembles Sony’s Home virtual world for the PlayStation Network, available to PlayStation 3 users. Except Home, of course, is tied to the PS 3 only.

It’s different experience, he stresses throughout our talk.  It isn’t a replacement for MySpace or Facebook.  “Ours is designed to augment these existing ones.”  Nor is it supposed to be immersive like Second Life and it instead offers a more casual experience.

“We’re looking at a little more asynchronous things to do,” Hanna said, meaning that users can communicate without being logged into the room all the time, akin to exchanging text messages on a cell phone.

He said that as a way to answer critics who point out Google’s virtual world is deserted.  His example is a Facebook embed that let’s friends know about changes to a user’s Lively room.  “People who know each other are able to connect easily,” he added.

“This isn’t a fake beta – this is a very real beta,” Hanna continued, taking note of Google’s habit of starting things that don’t always get finished. “The Google model is ‘it’s finished when it’s done.’”  He referred to the Gmail beta, which simply went live one day.  The same will be true for Lively, he predicted.  “I think no one will even notice when it does.”

Internally, the company sees Lively as a rousing success, he said.  “Our user-base exceeded every number that we had put down,”says Hanna. “So, in that sense, our beta is more successful than most launched products.”

Hanna didn’t have current figures with him, and points out that there are many ways to parse the data, but he talks about how Google had data from similar and competing services, and what those retention rates were. The traffic pattern on Compete.com suggests that interest is starting to trail off already.

But Hanna said, “Our retention base is higher than what any reasonable expectations were.”

And going forward, this is all free, Hanna tells me, stating: “Google has no interest in virtual dollars.” That runs against the current business models of other players in the market, such as IMVU.

“It’s never been our intent to make money that way…we don’t want virtual dollars.” That doesn’t mean that the system is restricted.  “There is the architecture for user-to-user, peer-to-peer monetization.  There can be forms of peer-to-peer currency the users can develop themselves.”

But officially, the company has no plans or mechanisms for monetizing Lively.  Nor is Hanna able to speak about AdScape, the in-game advertising company that Google purchased in February of last year.

Gaia Online has raised $11 million in a third round of funding to complete its massively multiplayer online game as a supplement to its “hangout” site for teens and young adults.

Institutional Venture Partners led the round. In the past five years, the San Jose, Calif., company has built one of the largest worlds where teens can talk to each other via animated characters, or avatars, in a kind of virtual shopping mall. The company has more than 5.9 million active monthly users and Gaia Online is building a new massively multiplayer online PC game where those members can play starting late this summer.

The money will come  in handy as the company battles its newest competitor, Lively by Google, as well as its traditional “virtual room” rivals Habbo, IMVU and WeeWorld. Each of these rivals shares a common design. While Linden Labs’ has built a fully interconnected virtual world, these companies allow their members to create and decorate their own rooms and characters.

Gaia Online is in the midst of expanding its virtual hangout into a full-fledged online game, complete with an integrated continent, combat system, storyline and a campaign full of missions. WeeWorld, whose characters were used mainly to chat, also made the move to creating its own virtual world.

About 15 game developers have been working on that project for the past year. After that, the company plans to add virtual pets to the features that its users can enjoy, said Craig Sherman, chief executive of Gaia Online.

Gaia ranks as the second-largest virtual world, just behind Webkinz in terms of share of the U.S. audience, according to Hitwise data from May. Habbo is stronger in Euope. Sherman said that Gaia Online will invest the money to keep adding new features that will keep its users engaged. Previously, Gaia raised a second round of funding from Time Warner in January. The amount wasn’t disclosed.

Google is going into the virtual world business today as it unveiled “Lively by Google,” a product that lets users create highly personalized 3-D virtual rooms on the web. Users can create their own custom characters, or avatars, and interact with friends through text chats or animations.

The long-awaited move has been expected by rivals such as IMVU, Habbo, WeeWorld, and Gaia Online – all of whom offer virtual rooms and avatars targeted at young people. Lively by Google users will be able to embed videos or photos in the walls of their rooms. And the Lively rooms themselves can be embedded on a blog or web site with just a snippet of code. It will also be a Facebook application.

When Google moves into a new market, it’s a blessing and a curse. The small start-ups in the market can welcome the validation of their space. But then they have to watch out for some serious competition. In this case, Google signaled its interest early.

In 2005, the company made a secret bid to buy IMVU. The company turned Google down. The search giant did manage to hire one of IMVU’s five founders, Mel Guymon. Rivals such as IMVU and Gaia Online — which we wrote about here and here — have head starts with millions of members, but Google has a lot of marketing power to ease its entry into the market.

Niniane Wang, an engineering manager at Google, wrote in a blog post that she started working on the idea as a “20 percent project,” or one that Google employees are allowed to do even though it has nothing to do with their direct jobs. In contrast to worlds like Linden Lab’s Second Life, Lively by Google is available on places people already visit on the web, Wang wrote.

Update: Cary Rosenzweig, CEO of IMVU in Palo Alto, Calif., said that Lively by Google is much more squarely positioned against IMVU, no doubt due in no small part to the fact that one of IMVU’s founders is leading the Google effort. He said Google’s move does indeed validate the virtual world space and that the metaphor of the room makes Google’s effort much more akin to IMVU than Second Life. He thinks the category will be big enough for more than just one company; meanwhile, he notes that IMVU has 20 million registered members and 1.7 million virtual items for sale.

Google could have created its own world like Second Life, but that represents a huge artistic undertaking and requires a lot of server infrastructure. Virtual rooms, on the other hand, don’t have to be linked in a world and are therefore much more contained in terms of required art work and computing power. In this case, the users themselves will be creating all of the art work.

The ecosystem around this promises to be big. San Francisco-based Rivers Run Red announced today that it is going to help with some of the art for the 3-D spaces. And San Francisco virtual world marketing agency Millions of Us has also just launched a project in which it is taking the National Geographic Channel’s “L.A. Hardhats” TV program into Lively by Google.

Prior to the release of Lively by Google, the company was working closely on the virtual world project with Arizona State University. My guess is this is one way that Google is going to expand its advertising business.  A year ago, it bought Adscape, which makes it possible to insert ads into game worlds.

Gaia Online has built one of the biggest online hangouts for teens over the past five years. Think of it as an online shopping mall full of kids who express themselves through cartoon-like avatars. Today, it is taking the hangout one step further by revealing the details of a more elaborate, connected virtual world with its own storyline and missions.

The company’s Gaia Online site already generates 3 billion monthly page views and has more than 5.9 million unique users a month. While there are a dozen different things you can do when you log into Gaia Online (like meet other teens and play casual games), the place is currently not a single, continuous world.

That’s going to change in the late summer as the company rolls out its “massively multiplayer online” (MMO) game, said Craig Sherman, chief executive of the San Jose, Calif.-based company. Users have been demanding this game as the top thing they want for a couple of years.

The pattern with Gaia Online’s evolution is similar to what happened with the evolution of competitor WeeWorld. At first, WeeWorld enabled teens to create their own characters, or avatars, which were called WeeMees. Last month, the company went a step further in unveiling a WeeWorld virtual world. Gaia Online’s other competitors, Sulake’s Habbo and IMVU, also operate a series of user-customized rooms where users can chat, but not continuous worlds. (See our IMVU coverage).

The evolution of these communities makes them difficult to classify. You can play games or you can watch a movie in a virtual theater. Hitwise said that Gaia Online was the No. 2 virtual world in May, next to Webkinz. But Sherman said that Gaia Online is more a cross of a social network and a game.

It’s more expensive to maintain such games. But it’s not as hard for Gaia Online to make the leap to an MMO because it has simple two-dimensional avatars and background environments, not high-resolution 3-D graphics as with IMVU or Second Life. Gaia Online’s software runs in a browser and is based on simple Adobe Flash animations.

“We think we did this the right way by starting it as a social experience first,” Sherman said. “Now we’re adding the world that goes with it.”

David Georgeson, senior producer at the company, heads a team of about 15 developers in San Jose who have been working for the past year on the PC-based MMO. Gaians, as members are called, can use their existing avatars as their characters in the virtual world

Characters can put on rings that they find in the world in order to gain special powers. The characters can then explore the world or engage in combat against creatures in the world, which is populated with inanimate objects such as mushrooms or lawn-ornament gnomes that have come to life.

The world has a number of towns where players can peacefully explore and interact. They can, for instance, gather around a fountain and listen to a melody and then try to replay it as a group, as in the old “Simon” game. The further they get away from the towns, the more they engage in combat. Players can take the items they win after successful combat and then sell them in the towns or use them to build virtual goods. (Virtual goods sales are one way that the company makes money on the free online hangout).

The characters can engage in deeper adventures and follow a storyline from beginning to end with groups of friends. But Georgeson views it as a “light MMO,” or one that is casual enough in its game play for people to play a little bit at a time and not all-consuming like fantasy role-playing games such as Blizzard’s “World of Warcraft.” Over time, Georgeson’s team will release more and more environments, goods and other content for the world.

Gaia Online started in 2003 as a place where kids could go to enjoy comics. The community has blossomed into a virtual community, with a dozen stores, 37 Adobe Flash-based games, and an eBay-like market for virtual goods. There are a half million new posts daily in the site’s community forums. And Sherman said Gaia Online is the No. 2 art community on the web with 100,000 virtual goods auctioned daily. On a dollar basis, about $1 million in virtual goods transactions take place each month. Sherman said those stats show that it is a more active place than many of the biggest social networks.

After the MMO launches this summer, Sherman said the company will move on to the next thing that its users want: virtual pets.

Chat room site IMVU has been quiet for four years. But the company is announcing today that it has more than 20 million members in its online community where people can use 3-D avatars, or virtual characters, to meet in rooms and trade virtual goods.

The Palo Alto, Calif.-based company also says it has the world’s largest catalog of virtual goods for sale, with over 1.5 million 3-D items. Chief executive Cary Rosenzweig (pictured below) says the company has built the equivalent of the eBay of virtual goods. Sales of such goods are generating $1 million in revenue a month for IMVU, which thrives on a so-called “micro-payment economy.”

IMVU is now the No. 6 largest virtual world, according to Hitwise’s May data (see chart below). That’s up from No. 8 last year.

“We have quietly built IMVU into a major online economy,” said Rosenzweig, chief executive of IMVU. “We’re making money by introducing buyers and sellers of virtual goods.”

The company is the brainchild of IMVU chairman Will Harvey, a veteran game developer whose last creation was the virtual world There.com. Rozensweig says Harvey’s new effort is succeeding because it focuses on the creation of a great avatar and then builds an experience around that avatar. By contrast, There.com and other virtual worlds create an environment and then work their way down to the avatar.

The difference between IMVU and worlds such as Linden Labs’ Second Life is that there is no world in IMVU. There are countless individualized rooms created by the members. (Or they can choose from among 50,000 pre-fabricated rooms). And members interact by visiting the rooms, but there is no virtual world that is physically represented in 3-D graphics. The rooms can grow to become vast forums, although, according to Rozensweig, the company focuses on “one-to-one communication, or small groups.”  One of the big benefits of rooms over a full virtual world is that server costs are much lower for IMVU. Roughly half of the users are female, compared to typical online games that are mostly male.

Members of the world create their own 3-D animated characters and equip their rooms with virtual goods. The animations are stylistic, not realistic, but they look much better than rival 2-D experiences such as Sulake’s Habbo. People can chat instantaneously, shop through a virtual goods catalog, play games, talk on forums, and use developer tools.

The world is still in its public beta and only emerged from stealth mode last Friday during a panel that I moderated on user-generated games at the Social Gaming Summit in San Francisco. The company’s investors include Menlo Ventures, Allegis Capital, and Bridgescale Partners. The company has raised more than $20 million in three different rounds. The most recent was an $11 million round in April 2007.

In the next week or two, the company will launch prepaid cards to enable members to buy credits that they can use to buy virtual goods in IMVU. The cards will be available in major retailers such as Target, 7-Eleven, Blockbuster and Speedway. That will help younger people who don’t have credit cards to participate in the world more easily.

More than two million virtual goods have been created — about 3,000 each day. About 500,000 of those are 2-D stickers that people can use to customize their personal home pages. Other goods include clothes, accessories, pets, and scenes for rooms. People are creating the goods to express their own personalities, Rosenzweig said. (See sample room pictured left).

IMVU has 60 employees. The sweet spot for IMVU is adults ages 18 to 24.

Meebo, an instant messaging service, has grown 354 percent between now and ten months ago, according to Nielsen (pdf). Perhaps this is no surprise, considering the range of viral products it has been releasing, such as its embeddable chat rooms.

Other Silicon Valley tech companies also have fast-growing services. One is Google’s GTalk, at 149 percent, which integrates IM with Gmail. The other is IMVU.

IMVU is more similar to virtual worlds like Habbo Hotel or Second Life. It lets you create a cartoon avatar for your IM conversations, featuring virtual clothes and other goods — some of which are very revealing.

You start out with a free set of clothes and some furniture, then buy your way up. Then, you get to chat with your friends in what the company describes as “killer 3D scenes.” It requires a software download to run, and registration.

Someone has posted a YouTube video here, however, that depicts how IMVU users customize their clothes and their rooms. It also reflects how the company uses sexy-looking avatars to make itself more attractive to its teenage audience — so much so that this video was tagged by YouTube users as being too racy for those under 18.

Judging from some home-made clips also available on YouTube, users are taking their experiences on the site pretty seriously. That’s another good sign for the company.