Virtual Gifts: A Live Streaming Business Model Breakdown

Why virtual gifts have the potential to make more money for streamers than advertising, subscriptions, and donations

Livestar Christmas Snowball Event

I wanted to do a quick breakdown on the virtual gift business model that many streaming platforms use today to monetize content (for both the platforms themselves and the broadcasters). This is something fairly new to Western markets but has been common for quite a long time in Asia (see my previous post for more background).

Most (realistically — all) of the Chinese platforms use this model: including YY, Inke, Huajiao, Yizhibo, Douyu, Panda.tv, Momo, and Kwai.

Western platforms have started to catch on, and virtual gifts can now be found on: Livestar, Live.me, Live.ly, Periscope (with their new ‘super-likes’), YouNow, and Twitch.tv (with the fairly new ‘bits’ system).

How It Works

The virtual gift model of monetization is a bit difficult to understand for those not familiar with the space. Here’s how it works:

  1. Users purchase a special in-app currency (i.e. ‘star coins’ on Livestar)
    - Coin price linked to real-world currency (i.e. $1 USD = 50 star coins)
    - Purchased through the App Store and Google Play on mobile
    - Purchased by Paypal or CC on the web
  2. In-app currency can be used to purchase different gifts to send to streamers
    - Gifts can range anywhere from $0.01 to $100 or more
  3. Users send the virtual gifts to broadcasters
    - Smaller (cheaper) gifts can be ‘combo’d’ (sent in multiples)
    - Bigger (more expensive) gifts usually come with a special animation
    - Gifts may represent emotions (i.e. ‘lit’, ‘poo’, ‘thumbs up’) or boss status (sports cars, jets, rockets, etc.)
  4. Broadcasters, the streaming platform, and the payment platform split the proceeds
    - Apple takes 30% of all recharges on iOS, Google takes 30% on Android
    - The streamers and platform split the rest of the 70% (different platforms have different splits)
  5. Broadcasters may choose to cash out, or convert their proceeds back into in-app currency
    - Broadcasters may cash out their proceeds through Paypal, or
    - They can convert their proceeds back into in-app currency (such as star coins) which they can then turn around and send to their own favorite broadcasters
Live Streaming App Virtual Currency and Stream Gifts
Live Streaming Conversion and Cash Out

While it’s a common business model in the East, ‘gifting’ has only recently caught on in the West. Companies like Meerkat and Periscope struggled in their early days trying to figure out how to monetize their content, while YouTube and Twitch continue to iterate on their own business models, working to find the best solution for both their broadcasters and themselves as a company.

Here’s a breakdown of some of the other models out there and their pro’s and cons:

Advertising

Many live streaming platforms have thrown around the idea of monetizing content through advertisements. Advertising revenue has always been YouTube’s bread and butter, and YouTube influencers generate a majority of their income through AdSense revenue split. When it comes to live streaming, however, showing in-stream advertisements has many problems, including:

  1. Videos have their traffic spread out over weeks, months, or even years. A video might get tens of thousands of views a day, leading to millions of ad impressions and a good chunk of revenue generated for the content producer over time. Live streams, on the other hand, are live. Once the stream ends, the stream ends, and it’s pretty hard to fathom a two hour live stream being watched by millions of people at once. Obviously, live streaming platforms can choose to allow saving content so users can watch it later, but, honestly, what’s the fun in that? (Live streaming will never replace video, just like live TV will never replace normal TV. Even reality shows are only fun to watch because of how scripted they are).
  2. 120% of video watchers do not like advertisements (don’t quote me on that). It deteriorates the viewing experience.
  3. With today’s CPM rates, you really need a shitload of followers/views to make decent money from ads.

Relying on advertising alone is no way to make a living as a streamer. Replays can augment this a bit, but live stream replays are rarely interesting for social live streams (with some exceptions). In general, advertising is not a great option for new streamers and platforms alike.

Subscriptions

In live streaming, subscriptions usually work like this:

  1. A user subscribes to a streamer’s channel for $X a month.
  2. The streamer gets a portion of that $X, the platform and Apple/Google (on mobile) get the rest
  3. The subscription (on Western platforms) recurs monthly until the user cancels it
  4. The user gets gamified ‘status perks’ in the streamer’s channel (i.e. different-colored chat, unique badges, special gifts or emoticons, etc.)

Subscriptions are actually a pretty cool business model, and a decent amount of many larger Twitch streamers’ income come from this. Subscriptions can also be found scattered around Chinese live streaming apps (although without recurring CC billing).

While Twitch’s subscriptions are fairly affordable at $4.99 each, Chinese subscriptions can sometimes run up to and over $100 a month. The Chinese version of subscriptions are usually heavily gamified, and are almost all called some version of ‘Guardian’, ‘Protector’, etc. While it is normal to see hundreds of subscribers in a top Twitch streamer’s room, it’s rare to see more than 5–20 ‘guardians’ per top streamer in a Chinese app.

‘Guardian’ Monthly/Yearly Subscriptions on Chinese Streaming Platform: Laifeng

Another benefit of the subscription model is that content producers know exactly who it is that’s supporting them. While revenue generated from advertising is based on an overall view count, streamers know who their subscribers are (and those subscribers pay their bills), and can therefore show appreciation appropriately.

One of the major drawbacks of this business model is that if a viewer sees a streamer he/she likes and decides to subscribe, if the streamer becomes less active or stops streaming, there’s the potential for the subscriber to feel cheated. I myself have dropped expensive subscriptions (guardians) on multiple streamers before only to have them disappear off of the app days or weeks after I subscribed. Waste.

Donations

Donations have been big on Twitch for quite a while, and can make a LOT of money for big streamers (we’re talking six figures a year). Donations are fairly simple to understand:

  1. I donate you money (i.e. $10)
  2. You get money ($10)

Donations are fantastic on platforms like Twitch because 100% of the money goes to the streamer (minus any payment channel fees). Donations let streamers know who their supporters are, and just how big they are. It’s not uncommon for streamers to show extra love to their top fans, whether that’s giving them special shoutouts, inviting them to private chats, offline events, shipping them care packages, etc.

I like to think of donations as more of ‘tipping’ for good entertainment than ‘donating’. Tipping is customary in Western (specifically American) culture and does well on Twitch (but hasn’t been adopted successfully by many other platforms).

There are a couple main drawbacks with this model:

  1. Streamers on Twitch get their donations through Paypal, a company who’s anti-fraud leaves a bit to be desired. Streamers are forced to deal with refunds and chargebacks on their own, which can be an incredible pain in the ass.
  2. As it currently stands, Apple and Google are not huge fans of the donations model, and not even Twitch’s own mobile app allows for donations to streamers. (A notable exception on mobile is the Busker app).
  3. Sending real cold hard cash to strangers on the Internet might feel a bit weird to some people.

This brings us back to the main subject of this article, virtual gifts.

In Favor of Virtual Gifts

Virtual gifts are similar to donations in that each gift usually represents a fixed amount of real-world money (i.e. one ‘private jet’ gift will always cost $10). The difference between this and a donation is the gamification layers of using a virtual currency (which costs money) to purchase virtual gifts, i.e.:

$10 USD = 500 star coins = 1 private jet

Gamifying donations has many benefits, including:

  1. Psychologically, it feels more acceptable to gift a virtual item than actual money; more users are willing to take the first step of contributing to streamers.
  2. Virtual gifts can cost as little as $0.01 to $0.02, and there’s nothing wrong with only throwing a streamer a few at a time. With cash donations on the other hand, it would be awkward to join a stream and donate only 5 or 10 cents cash to a streamer.
  3. Virtual gifts can be designed to link to users’ emotional states, (i.e. hearts / thumbs up / ‘poo’s / sad faces / roses), current events (Trump/Clinton faces, ‘fake news’ gifts), holidays (snowballs on Christmas, fireworks for the Fourth of July, candy corn on Halloween), etc. Additionally, gifts can trigger exciting animations and, with recent facial tracking technology, face-changing effects on the streamer. This makes gifting more fun, which encourages more people to gift, which generates more revenue for the streamer, which further incentivizes that streamer to view this as a business and continue streaming on the platform.
  4. It is easy to link virtual gifts to gamified leveling systems (i.e. contributor levels, streamer levels), events/achievements (collect 10 rockets), leaderboards, etc. As evidenced by video games, leveling systems, liveops events, achievements, and leaderboards all lead to increased user retention.
  5. In general, and just to reiterate, it’s more damn fun.

From a psychological perspective, it is very rewarding for a user to send a gift to a streamer and get immediate feedback in the form of emotion and thanks. With one click of a button, a gift is sent, and the gifter is able to immediately see a smile come across the streamers’ face, which just feels great (giving to a worthy cause is scientifically proven to make people happy — we’re not going to debate here whether or not gifting to a streamer should be considered a worthy cause).

At the same time, the streamer is part of a super-fast feedback loop in that he/she knows immediately and at all times how they are performing. Did you try singing a song and get a bunch of virtual hearts sent at you? Maybe your viewers like your singing and you could do that more often. Did you try streaming from a different location from normal today and the gifts didn’t seem to come in? Maybe your viewers didn’t like the change.

Rapid feedback is incredibly important to humans, and feedback loops are part of the core design philosophy of most apps and video games. In the real world, we never quite know how our decisions and actions today are going to affect us down the road. We feel we work hard, but don’t know whether or not that could lead to an actual promotion and a bump in salary. We try to exercise and eat healthy, but it's sometimes hard to see the effect this has on our bodies without looking at a longer timeline. With live streaming being a real-time media, feedback should be given in real-time.

Unfortunately, there is one major issue with live streaming apps utilizing virtual gifting right now, which is the low revenue split to streamers at around 30–50%. A major reasoning behind this is not the greed of the live streaming platforms themselves, per se, but rather the 30% tax (revenue split) of all in-app purchases that is collected by Apple and Google, which leaves only 70% to be split between streamer and streaming app (and it’s pretty damn expensive to run a streaming app).

Both Apple and Google currently treat all in-app purchases as equal (i.e. buying a $10 sword in a mobile game vs. buying a private jet in a streaming app). Unfortunately, virtual gifting is a new business model, and this one-size-fits-all model for IAP hurts the advancement of the industry. With juggernauts like YouTube and Facebook getting into the space, as well as with Twitch’s push to mobile, it would be nice to see Apple and Google reconsider their policies on IAP as it pertains to virtual gifts, just as they did with subscriptions previously (all we can do is keep our fingers crossed).


I’ll be using this blog to write more about business, technology, gaming, social media, and China in the future.

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