Investment in the Virtual Goods Market Triples in Size Over 2008 Figures

We kicked off 2010 with our report on how the virtual goods market – the virtual farm seeds and dragon-slaying armor you buy with real currency – could hit $5 billion in just under five years. But how has the virtual goods market grown over the past year, and is it an indicator of future trends?

Pixels and Policy takes a look at how the market for swords, armor and Farmville equipment exploded over 2008 and 2009, and why 2010 looks great for the continued expansion of virtual commerce.

A Bull Market in Virtual Trinkets

A few readers wrote in with some variation of the following question: "It's great that virtual worlds are going to top $5 billion in virtual goods transactions in a few years, but how much is the virtual economy bringing in right now?" Admittedly, it's a tough question to answer, owing to the lack of a standardized definition for what constitutes a virtual economy. But that hasn't stopped researchers from trying.

Chief among the organizations trying to standardize research is Engage Digital Media. Engage recently took a survey of some 87 sanctioned virtual goods sellers (no TOS-breaking thrid party vendors in this group) to gauge just how much money institutional investors were providing to start-up virtual goods vendors. This isn't a perfect statistic, as it doesn't count in the sales of these vendors, but the investment figure is heartening nonetheless.

Engage's report is impressive: Institutional investors have poured nearly $1.4 billion into the virtual goods market, which amounts to triple the investment levels of 2008. The number of investment companies looking towards virtual commerce as a strategic investment also more than doubled, from 34 in 2008 to 87 in 2009. All of these things symbolize the evolution of virtual commerce from Facebook novelty to serious profit-making opportunity. And it's far from over.

If the virtual economy shows slightly slower growth rates for 2010 due to a combination of fading novelty and returns coming back down to earth as unpicked fruit becomes rare, we can still estimate that investment in the virtual economy will measure around $2.75 billion for the year, a healthy sum for a still-emergent technology.

That figure also holds the number of investors constant – if investment houses continue to show interest in virtual worlds and social media, the investment figure could easily top $3 billion. As we saw towards the end of 2009, Nokia decided to invest some of its $350 million growth fund in start-up virtual worlds with promising revenue streams. A few successful trial runs could lead to much more insider buzz about the profitability of virtual worlds – especially if it becomes clear that virtual economies maintain their strength even when the real-world economy falters.

Engage Media has a great chart of exactly where the investment money is going – some social gaming and virtual worlds developers are bringing in hundreds of millions in angel investing and venture capital. The start-up Playfish received $300 million in investment, while Facebook got a $200 million investment boost form private capital. Compare that to 2008, when the virtual world that received the most venture capital investment was a Chinese developer 9You, which received $100 million. 

Virtual worlds and virtual goods aren't the small market they were five years ago. Companies like Offerpal have made corporate fortunes by standardizing and simplifying the way we trade real currency for virtual goods, and it's not surprising that investment firms are looking to encourage the vastly profitable success of Zynga, Offerpal, and their competitors. As consumers around the world gain access to pick-up-and-play social media games, Offerpal and others are faced with a swell of potential customers.

Institutional investors see that potential, and it's fueling a huge explosion in investment. Look for more big firms to jump into virtual commerce through 2010.