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Money for Nothing? Virtual Goods Market Takes off

Social networking and multiplayer online games are fueling dramatic growth in hard cash earned from goods that exist only in the world of online make-believe, according to companies in that market gathered at the Consumer Electronics Show in Las Vegas.

For mainstream consumer electronics vendors, last year may have been "a year none of us would wish to repeat," as Consumer Electronics Association President and CEO Gary Shapiro put it in a speech opening CES Thursday. Industry revenue dropped 7 percent in 2009, he said.

But for the group assembled Wednesday at a CES panel discussion on the business of virtual goods and online gaming, 2009 was a very good year indeed. Some vendors estimate that U.S. revenue grew from a negligible base in 2008 to US$1.2 billion in 2009, with projections to at least double in 2010. (The worldwide market, led by Asia, is estimated at about $6 billion.)

"The concept of virtual goods is exploding beyond virtual worlds," said Cary Rosenzweig, president and CEO of IMVU, a social network and 3D virtual world. Like the other panelists, he credits social networking with convincing more people to buy virtual goods.

The hugely popular Farmville game on Facebook may be the killer app opening up the virtual goods market to a new and more adult demographic, the members of social networking communities. Farmville lets players tend virtual agricultural holdings, work cooperatively with other "farmers" and purchase goods with virtual currency.

"Twelve months ago we weren't even thinking of that demographic," said David Laux, global executive for games and interactive entertainment at IBM. Farmville has shown that "Midwestern housewives are willing to spend" on virtual goods, he added.

Indeed, in the fourth quarter of 2009 the percentage of Americans who had purchased a virtual good or service doubled to 20 percent, according to a survey by Playspan, which provides a digital goods commerce and micropayment platform.

People purchase virtual goods for essentially the same reasons that they buy real goods, according to Karl Mehta, Playspan's co-founder and CEO. Items may give them a performance edge, whether they are the latest skis in the real world or a powerful weapon in an online game. Vanity -- the desire to impress with a real Rolex watch or dress an avatar in a standout virtual outfit -- also plays a role. And finally, people buy virtual goods online as social gestures just as they buy tangible gifts for friends and family.

More people may be participating -- and spending money in -- games on social networking platforms because there they are playing with people they know, said Andrew Schneider, co-founder and president of Live Gamer.

Interacting with unknown avatars in old-style virtual worlds may not have held much mainstream appeal. But because Facebook allows people to play and interact in virtual environments with their "real friends" the industry is now reaching people who were never identified as gamers, Schneider said.

Facebook also has economic appeal to online entertainment executives. It's the "cheapest form of customer acquisition on the planet," said Craig Sherman, CEO of Gaia Online, another social networking virtual world.

The bottom line for the virtual goods and services business, though, is making it easy to extract real-world money from a market where most transactions have a cash value too low for credit-card use to be practical. In many cases, users spend around $12 to load up on virtual currency, which they spend in increments of less than a dollar, according to Rosenzweig.

The infrastructure to support micropayments is now maturing, though, said Matt McAllister, marketing director of Offerpal, in an interview after the panel session. His company helps game and virtual world sites monetize an audience that ignores conventional banner ads. They craft offers where users engage with an advertiser online in exchange for virtual currency to spend in the game.

But in the end people will only buy what they want or think they need. Developers must design their virtual goods component into games and virtual worlds from the beginning if they want to cash in on the market, panelists said.

"People are in these worlds to play and socialize," said Mark Hansen, Lego director of business development and project leader for the Danish brick giant's Lego Universe massively multiplayer online game, which debuts later this year. Items that help gamers accomplish those objectives will be successful.

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