Virtual Goods Make Real Impact


Virtual goods used to be just for serious gamers who were willing to pay real money for a new game level or to buy extra weapons for their character. But today, virtual goods have gone mainstream. Consumers of all ages are buying up products ranging from virtual greeting cards to virtual roses, despite the fact that they will never be able to touch, taste or smell these items.

Like it or not, gamers may have permanently altered the way consumers shop.

When Sebastien de Halleux launched Playfish, a social gaming company, with three friends in 2007, he knew that the video game industry needed to make a change. As he saw it, the industry as a whole was focused more on appealing to consumers who already played video games, rather than going after the non-gamers, and this had hurt the industry’s growth.

“Everyone listens to music, everyone watches movies, but very few comparatively play video games,” de Halleux said in a recent interview with MainStreet.

To rectify this, Playfish decided to release games onto social networking sites like Facebook with the hope of appealing to a wider audience. In between updating their statuses and writing on each other’s walls, tens of millions of Facebook users now had the option to spend a few minutes playing one of the games created by Playfish.

This model proved hugely successful, and the company now boasts 60 million monthly users. In the process, Playfish has become part of the larger movement that has quickly transformed consumer shopping behaviour.

Playfish, along with several newer social gaming services including Farmville, Crowdstar and Playdom offers users the option to pay to expand the in-game experience, either by purchasing new levels or by buying new characters. In Pet Society, a game made by Playfish, users can purchase a virtual fishing pond where they can fish. Similarly, in Farmville, a farm simulation game especially popular among teens, users can continuously pay real money for fake virtual coins to buy more farmland or animals.

This idea of selling virtual goods within games became popular in China, Japan and Korea back in the early 2000s, but in the U.S., virtual goods were nearly nonexistent for most of the past decade. A few niche sites like Second Life, an online virtual world, let users buy and sell everything from virtual clothing to virtual homes.

Yet even by the most liberal estimates, Second Life remains a niche site with about 15 million-20 million registered users. Facebook now has more than 500 million users. So, as this new crop of games partnered with social networks during the past three years, millions more Americans have begun to open up their wallets to buy items that they will never be able to hold in their hand.

In 2008, virtual goods accounted for about $500 million in sales in the U.S, but this year, the virtual goods industry is expected to rack up $1.6 billion in sales. And according to a recent report from the Inside Network, a market research firm focused on virtual goods, that number may actually increase to an astounding $2.1 billion next year. That’s some real money.

“The category of virtual goods that is the largest and fastest growing is social games,” said Justin Smith, the founder of Inside Network. “As Facebook has exploded, so has social gaming and virtual goods.”

According to Smith, the audience that buys virtual goods is quickly expanding too, largely because playing a game on Facebook is an experience that appeals to a broader population since users “can get engaged with a game for five minutes in between classes or during a lunch break.” By comparison, virtual worlds like Second Life are more “hardcore experiences.”

To a lesser extent, Smith also credits the rise of virtual goods to newer mobile devices like the iPhone, which allow users to buy games and purchase add-ons like virtual goods while playing. And with social networks and smartphones getting more popular by the minute, Smith is confident that virtual goods will be a part of consumer culture for years to come.

“Virtual goods are here to stay,” he said.

Not Just for Gamers

While gamers may have led the charge to create a virtual goods marketplace, they are not the only ones trying to take advantage of this revenue stream.

In 2007, Facebook introduced a new feature on their site called the Gift Shop, where users could buy everything from virtual cupcakes to virtual squirrels, and post these items on their friends’ profiles. Gifts usually sold for $1, but while the price tag was low, some estimated that Facebook earned as much as $35 million a year from these goods.

Earlier this year, Facebook shut down the Gift Shop and instead created a virtual currency called Credits, which users can buy with real money in order to use in games like Farmville and Pet Society. The Credits program is expected to grow in the coming months.

“We're still in the early stages of testing Facebook Credits,” said Jonny Thaw, a Facebook spokesperson. “We're in investment mode, and we're reinvesting the revenue to build out the program and increase the distribution of Facebook Credits.”

Part of the goal with Credits was to provide a tool to get retailers involved in the virtual goods industry and some big names have already taken advantage of this option.

In September, Target announced that it would begin selling gift cards loaded with Facebook Credits. If you don’t have a credit card or don’t want to give out your credit card information to Facebook, you can purchase its virtual goods with these gift cards. It is one of the first, but surely not the last, examples of a brick and mortar store finding a way to profit from the virtual goods marketplace.

At the same time, even though Facebook no longer has an official Gift Shop, independent retailers can still continue marketing gift items on the site. Hallmark is another retailer that has recognized the potential of selling virtual goods and currently offers virtual greeting cards on Facebook for less than $1 each.

In fact, even celebrities are beginning to get into the virtual goods market. One service called Cameo Stars lets Facebook users purchase images of celebrities like Carmen Electra and Tony Romo, which can be posted on someone’s profile or sent in a message, and come with a pre-recorded message from the celebrities themselves.

"For celebrities, beyond the obvious financial upside of extending their personal brands, making social cameos through Cameo Stars enables them to more directly engage their fans in a novel way, and to say and do things that they wouldn’t be able to in any other medium,” said Gene Cornfield, the Chief Marketing Officer of Cameo Stars.

Cornfield notes that his company is currently negotiating partnerships with music labels and television networks in order to expand the service. So one day, you may be able to buy up all your favorite stars in the virtual world.

Why Should We Buy and Sell Virtual Goods

From a business perspective, it’s not difficult to see the incentive for selling virtual goods.

“It’s a terrific business model because you have fewer costs for producing the goods,” said Jeremy Liew, Managing Director at Lightspeed Venture Partners, a company that invests in Internet and mobile sectors including social games like Playdom.

The products themselves come with very few manufacturing costs, other than graphic design, and there is essentially no distribution cost, since they are sold online and do not need to be shipped, placed on store shelves or stowed away in a warehouse somewhere. So, with the market for these products expanding each year, there is great potential to make money and little chance of losing it.

Beyond this, the process of designing virtual goods and tailoring them to the consumer’s taste is easier and more efficient than with physical products.

“You have complete ability to test everything, from color and pricing to the look of the objects to what they can do, in order to optimize them,” Liew said. “And you can do that very quickly, unlike in the physical world. Your cycle time is much faster, and you can take feedback from your users and players as you go.”

The question of why consumers purchase virtual goods is a bit harder to answer.

In the context of a game, buying one of these products may simply be a means to boost the quality of game play, by purchasing a new character for instance or being able to reach a new level. But what about the person who decides to spend real money on a virtual greeting card for a friend’s birthday or a virtual rose for their significant other?

According to Liew, these virtual purchases may not be as different from normal products as one might think. He compares the example of a consumer who buys a virtual birthday greeting with someone who buys an actual birthday card. In both cases, he notes it’s really the thought that counts, not the product.

“Over the long term, both are still just about the idea of someone caring enough about you to share a message with you through a purchase,” he said.

One study last year found that consumers do in fact purchase virtual goods for all the same reasons they purchase physical products, such as affirming their own identity and in some cases, to boost their status in the online community with a unique or limited edition item, much as one might buy a designer product in the real world.

“We live in a consumer culture that is becoming increasingly digitalized,” said Vili Lehdonvirta, a researcher at the Helsinki Institute for Information Technology and the author of the study. “It should be no surprise that consumption will go digital as well.”

What Consumers Should Know

For all the newfound buzz surrounding virtual goods, this marketplace, like any other, does carry certain risks for consumers. No, you probably won’t ever hear about a recall of a virtual car, but there is a chance that you’ll still have buyer’s remorse.

In April of this year, one 12-year-old in Britain ended up racking up a $1,400 bill on his mother’s credit card buying up virtual currency while playing Farmville.

“Part of the problem is that these items are priced in a way that makes it seamless to make impulse buys,” said Ravi Dhar, a marketing professor at the Yale School of Management who studies consumer psychology.

According to Dhar, because many virtual goods cost as little as $1 and most cost less than $20, it’s easy for consumers to make a series of impromptu purchases, which can still add up in the long run.

On the other hand, there are some virtual goods that are surprisingly expensive. One online user decided to spend $26,500 to purchase an island in Entropia, a virtual world much like Second Life. Though the island may be fake, the money spent is very real and the decision needs to be weighed seriously.

“It’s like being at an auction house, you get caught up in the frenzy of the moment to buy this or bid for that,” Dhar said. “So if you're the type who has buyer’s remorse, it might be a good idea to step back and say ‘let me think about this’ before you take the plunge.”

Beyond this, it is important to be mindful of who you give your information to. In order to purchase most virtual goods, you must give out your credit card information. This may be safe on certain trusted sites like Facebook, but be sure to research the site you’re on to see if it’s safe before you make your purchase, just as you would if you were ordering any other item online.

—For a comprehensive credit report, visit the Credit Center.

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