US Virtual Goods Market To Hit $2.9 Billion In 2012, With Facebook Games Maturing, Mobile Booming

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The business of selling virtual goods in games has been around for a decade, but it only came into its own in this country when developers started building social games on Facebook’s developer platform in 2007. Since then, it has been one of the fastest-growing types of businesses online. But it may be maturing, according to a new report out today — at least on Facebook. In the meantime, mobile virtual goods are taking off.

The overall market for virtual goods in the US is headed towards $2.9 billion for 2012, according to the Inside Virtual Goods report. That’s up from $2.2 billion this year, and $1.6 billion in 2010.

Virtual goods on Facebook are continuing to comprise more than half of that, going from $835 million in 2010 to $1.2 billion this year to $1.6 billion next year. The gains each year are around $400 million, which means growth is going from 50% down to around 35%. While the report doesn’t break out company-specific numbers publicly, Zynga’s pre-IPO filings indicate it made more than $300 million last quarter. Assuming that number stays around the same, look for Zynga to continue to its historical dominance with about 75% of the Facebook virtual goods market.

Speaking of Facebook, you can also use this data to estimate its virtual goods revenue going forward, because it began taking a 30% cut of all virtual goods sales on its platform beginning this past July. When the company’s filings come out at some point next year, expect to see it registering somewhere towards $500 million in revenue from its developers.

Overall, social developers have gotten savvier about how to make money from virtual goods, even as traffic to many games has flattened or fallen. In particular, a significant portion of revenue is now coming from games that target hardcore gamers. Typified by early successes like Kabam’s Kingdoms of Camelot, these games don’t have that many users relative to hits like Zynga’s CityVille, but they make a lot more money per user. But because these games are attracting players who might otherwise buy virtual goods in web-based or downloadable MMOs, it’s unclear if this growth means more money coming into virtual goods overall.

Mobile has also been coming into its own in the last 18 months, report co-author Charles Hudson tells me. The report estimates that mobile virtual goods (for games only, not including other digital media like iTunes songs) made $350 million this year, and will grow to $500 million next year.

The key factors haven’t just been the introduction of in-app purchases and the proliferation of devices for iOS and Android. Many social game developers have shifted more resources to building for mobile. One reason is that Facebook’s viral channels aren’t as viral any more, so developers needing to spend more on advertising to get growth and retention. Another is that mobile platforms don’t have a single overbearing competitor like Zynga.

But mobile has its own limitations. Facebook provides a single venue for developers to build, grow and monetize their games, while the dueling mobile platforms have weaker social features and additional development costs; iOS also has the 30% tax on virtual goods sales, same as Facebook.

The report is based on quantitative analysis of publicly available traffic data, as well as dozens of interviews with developers and service providers. The authors have been deep in the social gaming industry since its early days. I know because I’ve worked with them. One, Justin Smith, was my cofounder at Inside Network, which he built up after leading Facebook app product development at Watercooler (now Kabam). The other is Hudson, a serial entrepreneur who sold Serious Business to Zynga in 2010. He’s now an investor with SoftTech VC as  well as cofounder of Android game developer Bionic Panda.