Davos Interviews: Max Levchin Says Slide Now Makes Almost All Of Its Money From Virtual Goods

Continuing his series of Davos interviews, Michael talks to Slide CEO and founder Max Levchin in the video above. Levchin discusses the ” shift from advertising to virtual goods” and reveals that most of Slide’s revenues now come from sales of virtual goods, whereas it was the reverse a year ago. Slide makes some of the most popular apps on Facebook and other social networks, and the fact that it is no longer focussed on advertising says a lot about the prospects for social ads. Last year was a huge transition for Slide, made possible by the fact the company has raised a total of $78 million.

Levchin is now steeped in the dynamics of virtual goods and how to get people to pay for them, which he discusses at length in the interview. He makes a distinction between buying virtual goods as a “consumption decision” (because you want to level up in a game immediately, for instance) and an “investment decision” where you spend to improve your standing in a community. He believes there are “less diminishing returns” in getting consumers to make see spending on virtual goods as an investment rather than just consumption.

Levchin also says that Slide is working on the ability to allow consumers to create (and sell) their own virtual goods. You can also watch Mike’s other Davos interviews with Brightcove CEO Jeremy Allaire, Facebook COO Sheryl Sandberg, MySpace CEO Owen van Natta, Salesforce CEO Marc Benioff, Russian DST investor Yuri Milner, and a run-in with Michael Dell.

Transcript courtesy of PhoneTag:

Mr. MIKE ARRINGTON: Mike Arrington here, I’m here with a very tired Max Levchin, CEO and founder of Slide. How are you?

Mr. MAX LEVCHIN (CEO, Founder of Slide): Good.

Mr. ARRINGTON: You’re wearing a suit today. You never wear suits.

Mr. LEVCHIN: I never wear suits.

Mr. ARRINGTON: Kind of a world economic forum thing.

Mr. LEVCHIN: It is.

Mr. ARRINGTON: No sleep at all? You’ve been up late working?

Mr. LEVCHIN: Up late working but some sleep. Just the sleep depriviation several days that’s what gets to you.

Mr. ARRINGTON: It adds up.

Mr. LEVCHIN: Yeah.

Mr. ARRINGTON: So, tell me, I haven’t talked to you in a while, tell me about Slide, how things are going and where it is going.

Mr. LEVCHIN: We’re doing well. We’ve evolved as a business in a pretty cool way. I think a year and a half ago we made, all the money that we made is from advertising. At this point, we make almost all the money that we make through sales of contents to consumers which is a pretty huge transformation for a business at our scale and is a relative success. We have expanded our product line. We’ve realized that some products weren’t going to last so we changed them. But, the most interesting is really the shift from advertising to virtual goods. We’re going to do that more. Probably the most interesting wrinkle in virtual goods that we have is, we also think once we enable our users to create the goods as opposed to us which we believe in a scalable model and we’re going down that road pretty well.

Mr. ARRINGTON: You always sell toward cash. You don’t do much in a way of offers other than some stuff with flowers or something like that, right?

Mr. LEVCHIN: We’ve done exactly one offer.

Mr. ARRINGTON: The one with flowers?

Mr. LEVCHIN: Yeah. Actually it was pretty cool. It was a… strange people…

Mr. ARRINGTON: You know that guy whispered “thank you” in my ear because he was filming us, he was filming me filming you. I wonder who it was.

Mr. LEVCHIN: That’s very meta.

Mr. ARRINGTON: He was behind me. Is that what he’s doing, he’s filming me filming you?

Mr. LEVCHIN: He’s doing more than that, probably more than that. Anyway, yes we’ve done exactly one offer type of thing which was really demand discovery as opposed to demand generation. Demand generation is very tricky. It’s really easy to create from demand generation to lead generation which is an easy thing to drive towards pretty unethical behavior is a slippery slope. Demand and discovery is a lot easier to deal with but it’s also a lot harder to execute. And so, we’ve done one experiment (unintelligible).

Mr. ARRINGTON: If you buy flowers for somebody…

Mr. LEVCHIN: Yeah, if you’re getting something already.

Mr. ARRINGTON: But you didn’t like it, you didn’t like the financial results. You felt it was a slippery slope or…

Mr. LEVCHIN: No, no, from the moral compass perspective, it was pretty –

Mr. ARRINGTON: It’s clearly okay?

Mr. LEVCHIN: Yeah, absolutely. In fact I would recommend it to others. This is neither something I’m ashamed of nor do I think it’s a bad business; it’s just hard to do well. If you’re looking for scalable direct to consumer sales behavior where you’re making things or somebody’s making things and they’re selling through the users and it’s a smooth process creating a really nice smooth demand discovery is hard because then you say, alright, well, it’s Mother’s Day, so we should do flowers. It’s pretty manual labor. It ultimately winds up being about as lucrative as just direct sales merchandising. So, ultimately it’s neither cannibalistic nor massively mass improvement over just direct sales which offers certainly is massive improvement because all sorts of people had said, I will never spend money, pretend spend, through that, which is how you wind up on a slippery slope.

Mr. ARRINGTON: What percentage of customers can you convert to giving you money – single digit, couple percent, five percent?

Mr. LEVCHIN: I think we are well within the industry average. So, it’s – between one and three percent. I think 3 percent in the Western markets is fantastic and I always certainly say it’s fantastic for us. Below half percent is what most people I think can get to and we tend to float substantially better than the lowest and well within the best.

Mr. ARRINGTON: What happens to the other 97 or whatever percent? Are they there to get other users and to have some ads reserved? Is that basically their use?

Mr. LEVCHIN: We don’t do much ads or in fact, we’ve really cut down our advertising efforts by quite a significant margin. Not that we don’t think advertising is a bad business. We do think that commodity advertising is a bad business. So, if you’re in a world of just click on this banner and just get more, it’s hard to get privacy well accounted for. So, a large scale pure reach, just give me anyone or even some modest marketing, low price CPM advertising I think is a declining business in general, but certainly within the world of social networks. Because, in that case, the only differentiating feature is reach and reach is firmly in the hands of Facebook and MySpace. So, at any one time, the only way you can compete if you’re a social advertising network or platform or whatever, is on price. And that is just – that’s another slippery slope I’d like to not be on.

Now, slipping around to a high-end or brand advertising where the audience is uniquely predisposed towards the brand or towards the transaction being promoted, that’s an excellent business model. You look at, before the current, our times, the mortgage refinancing ads, I think, went for like $60 CPM and still probably go for similar amounts of money on sites that have to do with personal finance. Same exact ads on the front page of some random gaming portal will probably go for very little because they’re just pure (unintelligible). So, having the extremely targeted advertising is still a lucrative business even on social networks. An even better version of this and which is what we’re interested in is what is essentially product placement. If you can work a brand successfully into the narrative of your product, then it’s really cool. Then people actually take the brand up and say, my positive experience in your product is directly connected and influenced by this brand and that worked great.

Mr. ARRINGTON: So, in a virtual world, having a can of Coca-Cola should have been an ad sitting and having fun.

Mr. LEVCHIN: If Coca-Cola is listening, I’d love to have their cans in my virtual world.

Mr. ARRINGTON: Do you find, this is a little off topic, back to the old topic. Do you find that users that pay, their friends are more likely to pay? Or that statistically they’re only three percent likely to pay? How do you find those ones that actually pull their wallet out?

Mr. LEVCHIN: I think the best predictor is their commitment to the product. You can predict whether they will or will not pay both to backing up for a second, there are two ways we think of virtual goods and this is possibly leading to us but I think it’s one good way to split up.

One is the consumption decision, one is an investment decision. The consumption decision is if you’re playing a game and you’ve got to level up and you just can’t wait another 24 hours for your crops to mature, for your fish to be sold or whatever, and so you pull out a dollar and say, oh look, I used to be level 15, now I’m level 16 which is great. It works and it is a true consumption decision. It is like watching a movie, you don’t really expect anything in return but you had a lot of fun.

Investment decision is where you are involved in a proto community or perhaps a real community and their conversations, they’re not necessarily on the game topic or a topic of whatever the community was originally formed around, where your standing in the community matters, where you have a voice where people care for who you are and how you differ from others and most of all, you care. If you’re really committed, you start caring a lot. In fact, you’re willing to invest in your standing and personality within that community which is the other way in a virtual-based goods become relevant where your avatar or persona or whatever term is somebody actually are willing to actually invest in cash. The ones I’m most interested in are the latter because they are ultimately a more scalable model in a sense that people are less likely to say diminishing returns. I graduate from level 15 to 16 for a dollar, grow to 500 to 501 for a dollar. Why would I possibly give out in two to 503? And some people are very happy to keep going but on average, I believe, there’s diminishing returns which just has to be. Most people don’t level up to over 500 on anything.

On the other hand, in a real world, as people gain standing and status in their community, they actually do invest more in it. You can join in a parent teacher’s association, next thing you know, you’re donating money to it and helping with the after-school activities. And that’s very possible. So, the investment type, virtual goods I think are probably somewhat more sustainable although they do have their shelf life and their lifespan. The predictor of that behavior is commitment. Will you join the PTA? Are you going to go post on the feedback forum or are you going to help others get better at this game? So, that’s what we found to be the best way to predict that. The thing that you first referred to, my friend is spending money, maybe I should spend money follows naturally from that second type of behavior. It also does sort of follow from the first type of behavior but that’s competitive. You’re level 15, I’m still level 14, if I got to beat you, I got to beat you. I think most people in social gaming or social entertainment in general are on average not as competition driven as they are driven by other means. And community is one of them but also escapism, the desire to have complete control over the process to understand in real life but don’t have full control in their own world, e.g. people play – there’s farming games I think in a big way because it’s something I understand, is very complex and they could never accomplish in the real world, but having a farm that sits there and just produces revenue even if it’s completely virtual is pretty awesome, you can control it.

Mr. ARRINGTON: How long does it last, those types of games? How long does the user last, a month on average, less?

Mr. LEVCHIN: I think it really depends on the game. But there are several different retaining factors. One is content. If the game designer produces more content than he can consume per month, some fraction of the people will say more quests, more tests, more challenges, more whatever and they will be compelled by it. There are diminishing returns there as well. At a certain point he will say – well, this challenge is kind of like the one from last month and I already solved that one. The other retention factor obviously is the community. If you play with your friends and they’re still playing, you’ll probably have higher odds of playing. There are lots of other things and they all add up to some sort of retention curve. That retention curve, it drops down to zero within 30 days then you have a – 30 days of their attention. I think it really – I will only go as far as claiming that from most products their retention curves are not too similar. I mean there are products that have incredibly high retention, and incredibly low retention.

Mr. ARRINGTON: So what about this year for you? What’s going to happen to Slide this year? Any new big product launches that you’re excited about, you want to talk about now? Raising good money that you want to talk about? This is the one like (unintelligible) easy questions.

Mr. LEVCHIN: Right. There are some product launches that I’m excited about, that I’m not willing to talk about.

Mr. ARRINGTON: New games and applications.


Mr. ARRINGTON: And this is all still Facebook, MySpace focused? Looking at mobile at all?

Mr. LEVCHIN: On mobile, there are several questions in there so I’ll choose which one I want to answer. The mobile view that we have is as follows. It’s a fantastic extension of a committed community or committed group that exists on the web, and whether it is from the Facebook or MySpace or on any destination site or – it doesn’t really matter that much. But given the distribution cost and dynamics on the web versus the same on mobile, makes a great deal of sense to tell someone to take your favorite game with you versus discover your favorite game on mobile even if mobile is in some cases certainly is more compelling or more lucrative or whatever, just the footprints that it needs to get to, to become financially interesting is much easier achieved as a buyer instead of the people from a Facebook game extending it to their iPhone than a hundred percent of people discovering it through the App Store, for us. I think there are many companies that have mastered the App Store distribution to the point where they can get to a similar financial footprint, but I don’t think that’s a core competence for Slide. Probably it isn’t likey to change this year although hoping to do that one if I can figure out how to do it, I’ll definitely try.

Mr. ARRINGTON: Anything else?

Mr. LEVCHIN: Pretty exciting here for us. I think so. A lot of really interesting maturation that will happen in the overall industry. I think many different assumptions will be challenged.

Mr. ARRINGTON: You want to expand on that a little bit, like which assumptions?

Mr. LEVCHIN: Assumptions of – assumptions of what it means to have a successful social app and possibly the assumption of what categories are going to be successful in social apps. I think this may be the year where things start becoming more blurred about what’s a game, what’s not a game.

Mr. ARRINGTON: Interesting.

Mr. LEVCHIN: How do I delete that part? It’s way too vague, even I think it’s vague.

Mr. ARRINGTON: It’s vague but it sounds like it’s begging to be unpacked a little more. For instance, are you talking about taking Slide social tools and extending them over to platform to other things? By things I mean other apps for other people, other sites, other…

Mr. LEVCHIN: I think what we’re trying to get to is in effect a platform where some of the content is created by the users and…

Mr. ARRINGTON: Yeah, they create a shirt and then other people sell it or something.

Mr. LEVCHIN: Or they create a shirt and then they sell it.

Mr. ARRINGTON: Right. But even other people could theoretically.

Mr. LEVCHIN: Sure.

Mr. ARRINGTON: I mean, you know, I’d love to have, you know, there’s virtual gifts on Facebook, occasionally I give one. I’d love to be able to create my own gift and give it. It would be really cool if it was so popular other people will give it. That’s the kind of thing you’re talking about?

Mr. LEVCHIN: That’s certainly a big part of what we think we’re going to do. And if you look at the historic expertise of our company, it is in the tool-making skill of enabling consumers making something out of practically nothing. And I don’t mean to disrespect the occasionally fabulous but mostly just nice and sentimental pictures that people have but combined with our now five-year-old slideshow product…

Mr. ARRINGTON: Has it been that long?

Mr. LEVCHIN: Maybe it’s been four-and-a-half years, four years, but it’s been around and it’s helped at this point millions of people who go from regular expected to pretty awesome and I think in some cases that pretty awesome becomes financial lucrative. So, we try to think of ourselves as enablers of that.

Mr. ARRINGTON: Right. That sounds like that’s all you’re going to give me right now. You’ve been generous with your time. I’d love to hear more about these when you guys are ready though.

Mr. LEVCHIN: Sure.

Mr. ARRINGTON: Thanks, Max.