Page last updated at 23:30 GMT, Tuesday, 29 December 2009

The US virtual economy is set to make billions

By Maggie Shiels
Technology reporter, BBC News, Silicon Valley

Paying real money for products that do not exist is big business

Virtual goods such as weapons or digital bottles of champagne traded in the US could be worth up to $5bn in the next five years, experts predict.

In Asia, sales are already around the $5bn mark and rapidly growing.

For many, virtual goods are one of the hottest trends in technology and are fuelling huge growth in the social gaming sector.

"This is just an exploding part of the gaming business right now, said venture capitalist Jeremy Liew.

"It is the most exciting area in gaming," he said.

Mr Liew, whose firm Lightspeed Venture Partners has invested $10m in virtual goods companies, said the rapid growth of the sector was unprecedented.

"We have seen companies go from nothing in the last 18-24 months to tens and hundreds of millions of dollars in revenue."

Revenue model

Playfish is a social gaming company that started two years ago. Today it has 11 online games and more than 61 million people who play those games worldwide.

Playfish believes virtual goods will continue to lead to more riches

Crucial to its success is the sale of virtual goods, ranging from furniture for your pet to menu items for your own restaurant in games like Pet Society and Restaurant City.

"Virtual items within the Playfish games are the centre point of the way in which Playfish derives its revenue," Tom Sarris of the firm told BBC News.

"We have two different revenue models. The primary is the sale of virtual goods and the second is in-game advertising, but that is a very minor aspect at this stage."

Mr Sarris would not reveal how much Playfish makes from the sale of virtual goods, but admitted that it accounts for the lion's share of the company's revenue.

That, according to Mr Liew is fairly typical.

"Virtual goods is the whole story in the world of social games. It accounts for 90-95% of revenue for a lot of these social game developers."

The new gamers

And it is not just the stereotypical gamers that are spending their hard earned cash on goods that only add up to a handful of pixels on a website

Emma Cox is probably fairly typical of the new breed of social gamer who plays as a way to stay connected to friends and family.

Emma Cox
Ms Cox buys virtual goods to get ahead in the game

"I am not a traditional gamer. I don't buy console games or go out and spend $40 on a game for my PlayStation," said Ms Cox.

"I am playing online games for a different reason and it's instant gratification, playing with friends, showing off to others and have them see all the virtual goods you have bought for yourself and even for them."

Ms Cox told the BBC she spends about $10 a month per game on virtual goods and plays two to three games. Her favourite is Country Store where players trade real money for coins allowing players to move ahead in the game or to buy goods.

The game bills itself as an opportunity to let players get away from the hustle and bustle of life by hanging out in the country tending crops and breathing the country air.

On her last visit, Ms Cox bought fertiliser and seeds for corn and peppers.

"These virtual goods are easy to buy, they are accessible, they are online," said Ms Cox.

"The immediate impact is being able to move throughout the game a lot more quickly. It also enhances your overall experience of the game - it is about total entertainment."

Playfish's Mr Sarris said that is the main reason people are willing to purchase products that do not exist.

"The way we look at it is it's no different from paying money to go and see a movie or rent a dvd. What you are paying for is the experience and that notion of entertainment."

Social is key

Central to the early growth of this virtual goods revolution have been social networks like Facebook, MySpace and Bebo.

Mark Zuckerberg of Facebook
Ten of the top 15 apps on Facebook are social games

Users of these networks can also pay for virtual goods, such as digital birthday cards, champagne or flowers.

"Increasingly as people's relationships migrate online, your interactions occur there," said Lightspeed's Mr Liew.

"That makes it more natural for those acknowledgements of how important someone is to us to occur there also. Buying something like virtual champagne or a birthday card is telling someone they are important to you."

However most of the momentum in this virtual goods market happens through social games which Mr Liew said is responsible for bringing a new type of new gamer to the fore.

"We have found tens of millions, hundreds of millions of people playing these social games and many would never consider themselves as gamers. Yet they spend real money to play these games and in some cases really meaningful amounts of money.

"That is what makes the expansion of this market so exciting," added Mr Liew.

Bright future

The market is clearly one with a lot of life in it.

About two thirds of the top 15 applications on Facebook are games, according to analytics firm AppData. Those ten games are said to draw more than 100 million users a month.

Jeremey Liew
Mr Liew said the virtual goods revolution will remain big news in 2010

Earlier in December, one of the biggest social gaming companies, Zynga, sold a stake in the firm to Russia's Digital Sky Technologies for $180m (£113m).

And in November, Electronic Arts, agreed to buy Playfish in a $400m deal (£251m).

Proof of how successful the virtual goods business has become is evident in moves by Facebook itself to test a payment system to get a cut each time an online-game player buys a digital tractor or pair of flip flops.

"We are still in the growth stage of this industry," said Mr Liew.

"We are still seeing people come out of nowhere and become a leading player. Five years down the line, it will become more stable with five to ten companies becoming more valuable.

"The virtual goods industry is one of the most exciting categories of 2009 and will remain an exciting category in 2010," he added.

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