Pixels and Policy takes a look back at one of the biggest developments of 2009 – how a few small social gaming houses became industry titans by harnessing the power of microtransactions.
A Happy 2009 for Virtual World Companies
No less than USA Today recently posted a great article on the expansion and market dominance of virtual worlds in the entertainment industry, a sector of the economy that has definitely suffered from the decline in consumer discretionary spending. The article, which looked at retail sales for virtual products, paints an optimistic picture for virtual worlds heading into 2010.
An interesting note from the article:
Even though many virtual goods cost less than $1, these micropurchases add up. The market will reach about $1 billion this year and could grow to $1.6 billion next year, according to a report by market researcher Inside Network.
The growth is being driven largely by the increasing popularity of online social gaming, says Inside Network founder Justin Smith. Unlike virtual worlds, which involve more of a time commitment and have a narrower audience, Smith notes social gaming can be done during a lunch break and on mobile devices. It's more "mass marketed."
This might sound a bit familiar. That's because it's the same argument we used a few months ago to explain why virtual business was booming as the real-world business climate stagnated. Social gaming giants like Zynga are raking in the cash on microtransactions for addicting games like FarmVille and Mafia Wars at a shocking rate. FarmVille has even eclipsed 60 million active monthly accounts.
Social media games make money by selling "extras" to customers for a few dollars a throw – extra cash or points to level a character faster, special limited-edition items that carry social weight with the gaming community, even entire caches of member-only features, like those available to paying customers of the pioneering browser world Runescape.
The strategy seems an unlikely success story, given how little companies make off each individual transaction. What no one could have predicted is just how loyal virtual buyers would be, a loyalty that turned startup Facebook game creators Zynga into a multimillion-dollar force in online and social gaming. By TechCrunch's math, microtransactions are worth at least $50 million in revenue to Zynga alone:
Earlier reports put revenue at something around $50 million, but some new numbers obtained by Sarah Lacy suggests that it’s closer to $100 million. And clearly, it’s accelerating. We’re hearing that the run rate for 2009 may even be well above that.
Far from being simply an offshoot of online gaming, social gaming is rapidly becoming its own specialized field. Gaming and social media are increasingly finding the happy middle of a long-term partnership, and if the implausible profitability of social gaming can continue its climb into the high nine figures, low-overhead flash games could give subscription services like World of Warcraft a run for their money.
Looking Forward to 2010
The virtual market for avatars and in-game goods is expected to grow through 2010, according to the USA Today article. Given the cost-effective nature of online gaming compared to other consumer activities (a $10 movie ticket will get you quite a few FarmVille dollars) we're confident this is true.
Another interesting development going into 2010:
Virtual commerce has become big business for some of the parent companies, but it is also becoming profitable for many of the users themselves. IMVU, a social-networking site and virtual world that caters to 13- to 24-year-olds, does more than $2 million in sales each month. Almost all of the virtual goods sold on IMVU are made by users, who keep the proceeds.
IMVU makes its money selling the credits used to buy virtual goods. Overall December sales are expected to be up 20% over November, and sales will be about $22 million this year, mostly from the direct sale of virtual credits to users.
Second Life, IMVU, and other virtual worlds are letting their players take advantage of the boom in virtual commerce. In the case of Second Life, it may be leading the pack. Looking towards 2010, it's hard to see the explosion of user-created content going anywhere other than up. Even so, the increasing marketability of user-created content is bound to create ever more complex legal troubles for virtual worlds and content creators.
In 2009, virtual worlds helped change the way companies look at business. User-created content continued its ascent and received a big challenge from the rise of microtransactions and addicting, low-overhead social media games. In 2010, the legal disputes over intellectual property, copyright, and deceptive advertising will further transform the American legal system.
We could soon be living in a much more virtually literate world.