Last week saw an unusual burst of acquisition activity among Web companies. Yahoo bought email add-on Xoopit for about $20 million, Nokia bought social address book provider Cellity, and overshadowing them all was Amazon’s $928 million purchase of Zappos.
But the week started off with another acquisition which quickly got lost in all the subsequent news. Advertising network Adknowledge bought KITN Media for its flagship virtual currency product, Super Rewards. The acquisition price was undisclosed, but Eric Eldon at VentureBeat noted that the rumored price was $30 million (he also noted that AdKnowledge disputed that number as “patently inaccurate.”)
I heard the same number the night before the acquisition was announced. It was being floated by one of AdKnowledge’s competitors. When I asked Adknowledge and Super Rewards about it, they gave me the same line: that it “was incorrect and it would be a material misrepresentation of the transaction.” I dug around a little more and found out that the price was actually more than $30 million. A source with direct knowledge of the deal told me that it was closer to $50 million. When I ran this new number by Adknowledge CEO Scott Lynn, he wouldn’t confirm it. But he didn’t deny it either like he did the earlier figure.
How does a company most people have never heard get a $50 million exit? Super Rewards started in the back room of KITN Media founder Jason Bailey’s house three years ago with a single computer and no funding. Within six months, it had made its first $1 million in revenues and was profitable. Today, its annual revenues are more than ten times that size.
Super Rewards helps grease the wheels of the virtual economy on social networks and gaming sites by offering app developers an easy way to convert their virtual currency into real cash or advertising subsidies. Super Rewards provides a white-label virtual currency system to more than 1,000 apps and games (such as Mob Wars) on Facebook, Hi5, Bebo, Tagged, and other social networks.
But the real action is in the ad sponsorship model, and is the reason AdKnowledge bought the service. Super Rewards connects those 1,000 app developers with 4,000 advertisers. While many players pay directly for the virtual currency to advance in games, buy better gear, or obtain virtual goods, the majority accept virtual currency from advertising sponsors in return for signing up for a product or filling out a form. For instance, Netflix might offer $$20 in virtual currency for someone to sign up to Netflix. For the consumer, it is an even swap. They still pay $20, but they get the virtual currency for free. Netflix ends up paying $25, with Super Rewards pocketing the difference and Netflix chalks it up to customer acquisition costs.
What is happening is that the advertisers are subsidizing the virtual currency and converting it to real cash for app developers (and Super Rewards). In other words, they are effectively paying lead generation fees directly to consumers in the virtual currency of their choice. Super Reward’s biggest competitor is Offerpal, and it is doing the same thing.
At a time when conventional ads on social networks still aren’t hitting the mark, virtual currency is a small, but quickly growing, bright spot. Industry estimates peg the size of the virtual currency economy coursing through social networks at $100 million last year, going to $600 million this year. Adknowledge believes the size of the overall market will be several billion dollars within a few years. And it is not just social networks. Mobile apps on the iPhone and elsewhere are going to tap into virtual currency as well. If Super Rewards can maintain a 20 percent margin and remain one of the top virtual currency platforms, that $50 million price is going to look like a bargain.