There’s Real Money in Virtual Goods

Editor’s note: The following guest post is by Gurbaksh Chahal, the CEO of gWallet, a virtual currency offers startup. Previously he founded BlueLithium, which was sold to Yahoo for $300 million in 2007.

Don’t be surprised if one day soon the must-have item of the season doesn’t even exist. Not in the real world, anyway. Then again, what did reality ever have to do with desire anyway? The psychology of the fast-growing virtual marketplace is turning out to be uncannily similar to the real one.

It’s been easy to overlook the rise of virtual goods and the virtual currency used to buy them. Tucked away in the back pages of social games, offer walls seemed like obscure alleyways frequented by only the most determined (or foolhardy) players—especially in the wake of the Scamville controversy. Talk of “gold farmers” toiling in sweat shop conditions to harvest coveted items in MMOGs like World of Warcraft and EverQuest added to the sense of shadiness hanging over the virtual economy. Sure, a few people might be willing to trade a chunk of their time—or even their cash—for products that exist only online, but how big could virtual goods ever really get? The answer is increasingly clear: really big—and getting bigger all the time.

230 million social gamers can’t be wrong

The emergence of virtual currency from the shadows has come in tandem with the mainstreaming of the social games in which it plays a prominent role. Like the social networks on which they run, games like Farmville and Mafia Wars draw a far more diverse, broad-based player population than even the most popular console and PC games. With more than 230 million unique users per month, games by Farmville publisher Zynga alone are played by half of the world’s Facebook users each month. According to games manufacturer PopCap, roughly a quarter of the people in the U.S. and U.K. play social games regularly. Strikingly, more than half of them are women—a far cry from the traditional “gamer” stereotype. Over time, social gaming will play an increasing part in family time—especially for family members in remote locations, where such games will substitute for the board games of years past.

Easy to get drawn into, and based on open-ended narratives as well as social interaction which heighten engagement and long-term loyalty, social gaming has generated a wealth of anecdotes testifying to its addictive nature: the nighttime curfew imposed in South Korea after one couple allowed their real baby to starve to death while they were busy feeding their virtual baby. The 12-year-old kid who blew $1,400 playing Farmville. The countless hours of productivity—to say nothing of sleep—lost to compulsive play. For publishers, the question hasn’t been as much how to gain a large audience—but how to monetize it.

That’s where virtual currency comes in. By rewarding players with in-game cash for watching a movie trailer or taking a quiz, publishers can command high CPMs from advertisers. It’s worked reasonably well so far—virtual currency is already the fastest-growing segment of monetization in the social gaming industry, and more than half of the players in the PopCap study report earning and spending virtual currency each day, most of them either to gift friends or to advance within game play. Letting players earn virtual currency rather than pay for it is now a $720 million business, and a 2009 PlaySpan/VGMarket Landmark Digital Goods Study projected that virtual goods could account for 20 percent of gaming revenue by 2011. Of course, those are last year’s numbers—given the rapid growth of casual gaming (Zynga alone will make as much as $1 billion this year, I am hearing from reliable sources), the true scale of virtual currency is an upwardly moving target.

As a new generation of easy-to-use toolbars replaces those sketchy deal walls, and opportunities to obtain virtual currency are woven more seamlessly into games—and as tighter publisher controls reign in the worst of the Scamville-type abuses—more and more mainstream consumers will be willing to participate in the virtual economy. With real money at stake, publishers, social networking sites, retailers, and other members of the ecosystem will continue to push virtual goods to new levels of visibility. And as the virtual economy grows, its psychology will increasingly resemble the real marketplace.  At least, that is what people like me in the industry are betting on.

Virtual Versace

Brands are already a prominent part of the social Web. Facebook users post branded gifts on each other’s walls—paid for with real money—and become fans of those brands’ pages. And why wouldn’t they? The essence of social networking is the expression and projection of one’s identity, and brand affinity is a central theme of nearly every modern consumer’s persona. Why buy a Gucci dress when you can get the same look from DKNY or even J Crew? Because it helps you express something different, and feel better doing it. Virtual goods are no different, except they are don’t cost as much. Already, branded virtual goods are clicked ten times more often than non-branded equivalents. In this light, it isn’t hard to visualize the virtual marketplace of the near future.

As more real-world brands in more categories extend into the virtual marketplace, branding will increasingly seem like the norm, pushing unbranded virtual items down in status to the level of store brands and generics. For some consumers, this provides the opportunity to replicate their existing brand relationships; for others, virtual items can help satisfy the desire for their unaffordable real equivalents. The hottest brands will command the highest prices, even if practically indistinguishable from lesser labels and knockoffs—just as in the real world.

What’s Next

As is already beginning to happen, virtual currency will become a much more accepted form of payment for both online and offline environments. Brands will infiltrate games to a much greater degree by not only circulating virtual items, but skinning and creating games from the ground up that are embedded with strong brand messages. This isn’t a new idea, but with console games, big budgets and the finite development processes meant brands had to commit a lot of money to messages that could not be guaranteed to stand the test of time. By contrast, social media games are relatively cheap to develop, and they can be constantly manipulated and improved to communicate the right message for brands at the right time.

New business models will emerge as well. Virtual malls will sell branded virtual goods directly to consumers. Consumer-friendly, eBay-style secondary markets will emerge for virtual goods across multiple social games where prices are dictated by actual demand, at least for those games whose publishers are willing to allow it—and why wouldn’t they, given the deepened engagement and loyalty such transactions will foster? In fact, much of this kind of thing is already happening in the world of MMOGs; now, it’s just a matter of applying these proven models in the much broader world of social gaming.

For advertisers, I believe the momentum behind social gaming and virtual goods will prove irresistible. Rather than being dependent on a single consumer behavior to deliver an impression, they’ll integrate ads throughout the interactive social gaming environment to capitalize on the huge amount of time their customers now spend there.

Just five years ago, anyone predicting that we’d be talking about mainstream virtual goods in 2010 would have been dismissed as a dreamer. Last Fall, in the wake of Scamville, people were ready to write its obituary. But virtual currency and social gaming are both here to stay—and the opportunities they generate are growing faster than anyone thought possible.