Real Money for Virtual Coin

“Virtual goods” are imaginary playthings that exist only inside computer games. But their rising popularity is creating billions of dollars in very weal wealth and might even establish a beachhead for a new payment system for physical goods.

Different kinds of virtual goods are available in different types of games. Role-playing adventure games might offer shields and swords; a car game might have new racing courses for sale. The research firm In-Stat projects that the global market for such goods will be over $14.6 billion by 2014, more than double its 2010 value.

Virtual goods first became widely known about a decade ago in the online virtual-reality platform Second Life. Players could buy new clothes, hairdos, and other accessories for the avatars that they controlled in the virtual landscape. But the category has exploded in the last few years with the popularity of “casual” games like PopCap’s arcade-style Bejeweled, in which players must line up colored gems; playing time can be extended by buying “energy.” Electronic Arts bought the company in August for $1.3 billion.

The poster child of this new market is Zynga, the San Francisco company behind FarmVille and other popular games. The four-year-old company is on track for yearly revenue exceeding $1 billion, nearly all from virtual goods, and is shortly expected to go public with a multibillion-dollar valuation.

See the rest of our Business Impact report on The Business of Games.

Game companies typically say that fewer than 5 percent of players ever make a purchase. Those players pay an average of $12 a month; they usually shrug off the payment as the price to be paid for entertainment, like a movie ticket or cable bill.

Game makers have become extremely sophisticated at knowing exactly when to offer a player the chance to buy a virtual good. Designers speak privately of using a carefully crafted “compulsion loop” to hook players on a game, then proffering a virtual good at a moment of extreme frustration. For example, the massively popular Angry Birds casual game offers a $1 “Mighty Eagle” that will allow players to smash all obstacles when they fail to solve a level.

Some observers aren’t sure the boom will last; Mark Beccue, the author of the market research firm ABI’s generally upbeat report about the future of virtual goods, says he worries that “all this might be a fad.” But many game companies say that virtual goods are the future of their industry.

One of the big winners is Facebook, which demands a 30 percent revenue split from companies that sell virtual goods in return for hosting their games and collecting payments. While game companies would like to keep more of what they take in, many of them acknowledge they probably wouldn’t be able to make it outside the Facebook empire.

Facebook games use a system called “Facebook Credits” for all purchases of virtual goods. But if Facebook users can apply their Facebook Credits to virtual goods, why not to real ones, like books or DVDs? Industry watchers say Facebook may well try to transform Credits into a full-fledged micropayment system for Web commerce. If so, it will face stiff competition from the likes of PayPal, the credit card companies, and even Amazon and Google, which all have online payment ideas of their own.