1 September 2010

Real money from non-real stuff: The business of virtual goods

By Rodney Lim and Ee Yaw Seng

(Published in’Campus & Beyond’, a weekly column written by Swinburne academics in the Borneo Post newspaper)

Social gaming is big business. Farmville, Café World, Treasure Island and the multitudes of games by third-party developer that populate popular social networks like Facebook are pulling in players in the hundreds of millions, raking in unprecedented revenues and attracting investment interests from established entertainment media giants like Disney, Electronic Arts and Google.

Unlike many of the older Massively Multiplayer Online Role-Playing Games (MMORPGs), social games allow people to play for free but earn revenues from the sales of virtual goods that can enhance the game-playing experience. Although it is not compulsory to buy anything to play, the fact that social game developers like Zynga and Playfish are pulling in revenues in the hundreds of millions of dollars has put the limelight on digital goods and turned the industry on its head.

Virtual goods are essentially goods or services that do not take on physical form but exist as computer codes. Virtual goods have been around for a while – in MMORPGs for instance, players purchase digital weapons and armour, in Second Life, residents make and sell digital properties for profit, and in Facebook, members send friends digital gifts. They are bought and sold using in-game currencies, and micro-payments, like US$1 for a Christmas tree, are used to facilitate purchase of virtual items. Currently, only one in five social network gamer have bought virtual goods, contributing to a worldwide virtual goods market of about US$3.1 billion. This, however, is expected to soar to US$6 billion by 2013.

This begs the question: Why would people pay real world bucks for things that only exist virtually?

Studies into gamers’ purchasing behaviour seem to indicate that game players fork out money for virtual goods for essentially the same reasons they buy real-world goods.

Just as a real world product provides a solution to a particular problem, a virtual good is bought to help accomplish in-game purposes. In a sense, buying a pixellated battle axe to slay a monster, or a tractor to help with the farm chores is essentially equivalent to purchasing a top end putter for your golf game in that it provides a functional value. People want to win, and they are willing to pay to get ahead.

Secondly, virtual goods, like physical products, also help establish a player’s personal and social position. In the real world, a person’s identity and status is commonly determined by his or her clothing, car, and other personal possessions. Similarly, virtual goods reflect a player’s personality, values and interests, as well as their affiliations with brands, products and celebrities. In social games, the social context within which they are embedded within provides the possibility of peer influence over the purchasing of in-game items. Even as virtual items are bought to help the player blend in with the crowd, stand out from everyone else, or simply to declare personal interests and concerns, there are plenty of opportunities for companies to leverage marketing propositions in these environments. In this regard, the branding of virtual goods is receiving increasing attention from marketers. Rapper Snoop Dogg’s brand of virtual goods- found on avatars, pets and clothing- has sold over US$ 200,000 in various online communities like Gaia Online. Currently, the branded virtual goods market is estimated at US$16 million, and is forecast to hit US$900 million by 2015.

However, some digital items are acquired not for their functional or social implications, but simply for the satisfaction and ‘fun’ of owning them. They are bought for simple aesthetic reasons, like their ‘cuteness’, uniqueness, or simply for curiosity’s sake. Some buy them for collection, especially the rare and unique ones, some buy them for resale for profit, while others just enjoy playing, customizing and engaging with virtual objects.

Finally, some people buy virtual goods to foster or reinforce friendships and acquaintances. In this era of automated birthday reminders on your favourite social networking site, sending a digital teddy bear can distinguish your birthday wish from the other birthday wishes since yours costs money (a whole dollar!).

In light of all these, the ‘realness’ of virtual goods is still up for debate. For instance, is giving a digital flower for Valentine’s the same as giving a real flower? Is it as romantic as the real thing, or should the guy be dumped?

At any rate, virtual goods are proving to be a viable alternative to advertising or subscription models for many social networks and games, particularly in Asian online contexts. For instance, the US$1.8 billion revenues earned by Chinese social networking behemoth Tencent in 2009 via its virtual goods revenue model is about three times the amount that Facebook made last year.

The monetizing power of digital goods provides strategic opportunities for social games to develop and extend to niche networks, various digital platforms and devices like smart phones, and gaming consoles like X-Box Live. As social games grow, so will the virtual goods market.

Still, whether virtual goods will scale in a big way will hinge largely on whether users will perceive them as ‘real’ goods, or if they are paying money for nothing.

Rodney Lim and Ee Yaw Seng are lecturers with the School of Business and Design at Swinburne University of Technology Sarawak Campus. They can be contacted at rlim@swinburne.edu.my and yee@swinburne.edu.my