Virtual Goods are Becoming Real Money Makers

While virtual goods don't actually exist, people in the U.S. and abroad, particularly in Asia, are spending real money to "purchase" these goods. And these purchases add to up big money, with very significant margins.

So-called virtual goods, like a $1 illustration of a Champagne bottle on Facebook or the $2.50 Halloween costume in the online game Sorority Life, are no more than a collection of pixels on a Web page.

But it is quickly becoming commonplace for people to spend a few dollars on them to get ahead in an online game or to give a friend a gift on a social network.

Analysts estimate that virtual goods could bring in a billion dollars in the United States and around $5 billion worldwide this year — all for things that, aside from perhaps a few hours of work by an artist and a programmer, cost nothing to produce.

“It’s a fantastic business,” said Jeremy Liew of Lightspeed Venture Partners, a venture capital firm that has invested $10 million in several virtual goods companies. “Because it’s digital, the marginal cost for every one you sell is zero, so you have 100 percent margins.”

The companies that create and sell virtual goods, including Zynga, Playfish and Playdom, three online gaming start-ups in the San Francisco area, say they are recording significant revenue and profits, which have been elusive for many Web companies.

Virtual goods have been popular in Asia for years. In the United States though, only ardent video game fans spent money on them, mostly for swords and spells in virtual fantasy realms. That is rapidly changing, driven by the popularity of widely appealing games for social networks like Facebook and mobile phones like the iPhone.

“The people playing these games on social networks don’t define themselves as gamers — they are just killing time, having fun,” Mr. Liew said.

In Restaurant City, a game by Playfish on Facebook, 18 million active users manage their own cafe and stock it with virtual casseroles and cakes. In Zynga’s game FarmVille, 62 million agrarian dreamers cultivate a farm, plant squash seeds and harvest their crops with tractors.

These games and many others have casual gamers reaching for their wallets, along with a few rationalizations, as they make the peculiar purchase of pixels on a computer screen.

It definitely seems like the monetizing of virtual goods is here to stay. The next question is what new virtual goods will the marketers think to sell next?