Habbo, formerly known as Habbo Hotel, was undoubtedly a social revolution. With their unique vision and a business model that was ahead of its time, it achieved a revenue of $74M in 2008, 16.5M unique users every month and collaborated with well known brands (MTV, Fanta, Calippo) and celebrities (Selena Gomez, Justin Bieber, David Guetta). In today's article, we will see how the company was a pioneer in:
Virtual Economy
Internet Safety for Teens
Social Entertainment
Virtual Economy
Economics helps you create a sustainable virtual economy, which is a requirement for sustainable virtual communities.
— Sulka Haro
In the Evolution on Habbo Hotel’s Virtual Economy conference, Sulka Haro, lead game designer at Habbo, describes how Habbo’s economic system has changed over the years to accommodate macroeconomic trends and changed end-user expectations. In this section, we will learn how Habbo learned to operate a virtual economy.
Six phases in Habbo economic system
Sulka Haro starts the conference by mentioning how difficult it is to operate 16 virtual economies since Habbo has opened 16 communities throughout its history. Each community is a separate virtual economy because they have launched at different times in markets with different levels of maturity.
Habbo has gone through six different economic phases:
No currencies at all
Emergent currencies
Paid currency
Tradable paid currency
Dual currency
“Official” secondary market
No currencies at all
Habbo is a free to play, pay for stuff virtual world for teens. The core play —register, login, play the game— doesn’t actually cost you anything. Users can freely access the game and are incentivised to pay microtransactions to access additional content.
Habbo was a pioneer in the use of SMS microtransactions for selling virtual items. In 2000, the Finnish home market mobile penetration was very high. The company saw an opportunity to make customer acquisition for teens easier since the cost barrier to purchase with SMS was lower than with credits.
How did it work? Just by sending a SMS with your nickname, you would get a virtual item in your account:
Send “HABBO CHAIR arturo”
As a funny note, it was then when the first social engineering attacks appeared by ingenious users:
Send “HABBO CHAIR x100 arturo”
…and you would get 100 chairs” —the scammer said to the victim.
Truth was, the scammer's nickname was, in fact, x100 and this text message would give the scammer the chair ignoring the rest of the sentence.
Users use furnis to decorate and customize rooms. Each furni serves a unique purpose to create more of a 'virtual life' experience, whether it be laying down, opening a fridge or changing the colors of a room:
Emergent currencies
Habbo allowed trading from day 1. Users could freely exchange their virtual items with other users. The trading ecosystem is essential for the community as these exchanges help to keep the rooms active and the objects attractive to players either out of necessity (looking for a new object for your room) or speculation (to increase your virtual fortune).
The need of the players to deal with different prices of virtual objects when exchanging led to the organic creation of emerging currencies: users invented their own currencies using some furnis as a reference price.
The need to deal with different prices of virtual objects when trading made users organically create emergent currencies: the users invented their own currencies using some virtual items as reference price.
“Where you have an economic system where people are participating in the economy, can trade and generate value, your economy just needs a currency, you need something to value other things.” explains Sulka Haro from a theoretical point of view. Instead of bartering for trading furnis, the users chose certain items as exchange currencies.
The Club Sofa, the first gift in the Habbo Club subscription, was used as in-game currency for many years. In fact, it was common practice for users to create external websites to set the price of items, especially rare and exclusive furnis, using the Club Sofa as the reference price:
Paid currency
In 2001, when Habbo was launched in the UK, there was an internal need to supply more than one payment method. The company needed a way to split £10 transactions into smaller pieces so users could later buy cheaper virtual items. That was when the Habbo credits, one of the first virtual currencies in the world, were created.
The value they chose at that point was 1 credit = 15 cents. Super cheap items cost 1 credit each, regular items 2-3 credits, and premium items between 4 and 15 credits. Micropayments were barely used globally when Habbo implemented them. Players could buy credits, subscriptions and virtual items using SMS, phone calls, prepaid cards and credit cards.
Habbo constantly produces new, limited batches of items to keep users engaged with fresh content. There are more than ten thousand different furnis:
The introduction of credits was a fundamental change in the Habbo economy. Before the credits, the company had this simple model where revenue was driven by the total number of SMS transactions since one message = one virtual item sale. In this new model, users first recharge their credit pool and later buy virtual items, making it harder to predict sales. Now, an increase in credit consumption doesn’t necessarily result in increased revenue.
On the other hand, even though persistent goods are a great value proposition for customer acquisition, it comes with inflationary problems such as the accumulation of value.
New Business Model: Subscriptions
It was then when the company introduced a way to add non-persistent value by creating a new subscription model: the Habbo Club. Users pay monthly for an exclusive club membership that gives you avatar customization and perks. In fact, there was social pressure to belong to that club, otherwise, you would not be cool and you would be singled out as a noob.
Compared to virtual goods which are used for room decoration and follow power-law distributions in item sales (a small number of users make most of the purchases), the subscription model follows a linear revenue distribution that is much easier to predict:
Is trading good for the revenue?
In 2005, a worrying trend appeared where the number of people who were trading but not paying for credits started to dramatically increase. These users were using the service without paying anything. This opened an interesting discussion in Habbo: if having a trading marketplace means people can opt not to pay, why allow trading in the first place?
Analyzing data from its users, the company found out that trading, in fact, was correlated to monetization. Why? First, trading is great content because users spend more time in the game. Second, it allows for item value speculation where the rarest items were more demanded and therefore more expensive. This incentivizes credit consumption and therefore sales.
Tradable paid currency
Later they realized the problem was not the fact that users were trading but the currency they were using for trading. The people doing the active trading (the richest) were not giving them money because they had no pressure to invest in credits. They had the emergent currencies to trade.
Habbo then took the risky decision to enable the trading of their paid currency. Now you could convert the credits in your wallet into a consumable furni. The consumable credit furni can be exchanged for other objects and also has the option to be redeemed back to your wallet, with the object disappearing.
Their assumption was that the most liquid currency is the most desirable because it makes the currency more usable. This would make the more liquid currency, in this case credits, become dominant, incentivizing its consumption. And they were right. People stopped using emerging currencies when tradable credits appeared.
Dual Currency
Periods of inflation also occur in a virtual economy. One of the causes of in-game inflation was the company giving out paid currency for free to reward users for certain tasks or competitions. This generated an excess of currency in the market, which meant that players didn't need to buy credits from the company as much, decreasing sales. Then, they wonder: if we can’t (shouldn’t) reward with primary currency, how do we reward users?
Item rewards are cool, but the production of cool new items is not sustainable. What they did was to create a new, non-tradable currency: the pixel. Pixels were earned, as opposed to credits that were bought or traded. Pixels could be used to buy expendables (like temporal skins) and discounts on the primary market. They were mainly used for retention and engagement.
“Official” secondary market
After learning that allowing the free exchange of credits was good for the virtual economy, they wondered whether removing friction from trading would increase spending.
In 2010, Habbo implemented the marketplace, a new secondary trading system that allows players to buy and sell furnis between them. Players no longer needed to advertise or meet in private rooms to make the trade, since the furnis could be found in a p2p marketplace. In addition, the marketplace had extra features such as a search engine and a price history.
Internet Safety for Teens
Thinking of your world in economic terms is not just about optimizing value flow, but also about understanding how to make your world a safer place to invest money and time into.
— Sulka Haro
One of Habbo’s value propositions is educating teens about internet safety. In 2009, 63% of users were between 13 and 16 years old and 93% still lived with their parents. Habbo purports to be a safe social environment for children and are committed to protecting their users from high-risk content like cyberbullying, hate speech and grooming. How do they do it?
Players are informed about the Habbo Way, a simple set of «community guidelines» to be followed online. Those who do not follow them may have access limitations, chat or even be banned.
The virtual world has also implemented a set of technical tools:
Word filters for swear words or sensitive information (bobba),
Reporting and ticketing systems
Auto-moderation tools to restrict other users’ bad behaviors.
There is also «panic button» through which users can access a child protection help-line run by human moderators
Habbo was one of the first online companies to create, divulge and promote online education for teens and parents. They have worked on initiatives like safety quizzes and collaborations with charitable or educational institutions like Unicef or Ditch the Label.
Social Entertainment
Habbo has been one of the largest virtual communities ever. Up to 2012, more than 273 million avatars have been registered with an average of 5 million unique visitors per month. What does Habbo do to keep users active and engaged?
Community Participation
Most importantly, Habbo is run by the community. It is the users themselves who create the community and entertain themselves in chat rooms, parties, contests and a myriad of unimaginable creative activities. Habbo users spent more than 50M cumulative hours per month in 2010. As in real life or on Twitter, some users were more known/followed than others.
Habbo selects certain users as community representatives to officially help design contests (Builders At Work), moderate and educate the community (Ambassadors) and create activities for users (Fansites):
Seasonal Competitions
The company has managed to entertain millions of teenagers by organizing competitions and activities for users. Working internally in rapid creative cycles, each month the company launched a themed campaign creating a brand-new line of items, clothing, events and contests. For example, February was the month of love and users had to write a poem for a contest. During Halloween, competitions such as the best costume or the best scary room were organized.
Players who won contests and activities are awarded with exclusive prizes, badges, and indirectly social reputation:
Branded Campaigns
The other important source of income for Habbo is in-game promotional campaigns with brands. Habbo creates furnis and activities for brands that are then consumed by the users. For example, a virtual party sponsored by Fanta:
Celebrity Visits
Celebrity visits, also known as VIP Visits, involved Habbo hiring (most-likely teen related) celebrities to come and interact with users inside of the hotel. Most celebrity visits involve a Q&A session, in which players ask questions to the visitor and they'll answer:
Closing Up
When the market changes, you change or die.
— Sulka Haro
Habbo's success was probably due to their analytical study of the virtual economy, their dedication to being a safe place for teens and their entertainment strategies with themed activities and collaborations with brands and celebrities. Far ahead of their time, they were the undisputed leaders of virtual worlds for teens. And when your user base grows and becomes more adult, you either grow your brand and business model with them or you die.
In the following article, we'll look at why Habbo went from 16.5 million monthly unique users to just 850,000 today after The Great Mute incident of 2012.