How Much is the Virtual Economy Worth? Try $5 Billion.

The BBC has an interesting report up that puts the virtual economy's banner $30 million in virtual holiday sales into perspective: Within five years, the virtual economy of the United States alone could be worth a staggering $5 billion.

Pixels and Policy takes a look at how the virtual economy is set to expand through 2015, and what this means for real-world business.

Why Are Virtual Markets So Profitable?

A recent BBC report points out that virtual economies are curiously positioned to take advantage of future growth. Why? First off, social gaming straddles two fast-growing areas of consumer interest: Social media websites like Myspace and Facebook, and pay-for-premiums online gaming like Second Life and the newly open-beta Blue Mars.

Jeremy Liew, a venture capitalist responsible for funding some of the online gaming industry's pioneer social game developers, is optimistic about the future of virtual commerce over the next half decade. That's because people are moving en masse into social networking, and wherever large groups of people congregate, markets tend to form. From the article:

"Increasingly as people's relationships migrate online, your interactions occur there," said Lightspeed's Mr Liew.

"That
makes it more natural for those acknowledgements of how important
someone is to us to occur there also. Buying something like virtual
champagne or a birthday card is telling someone they are important to
you."

"We have found
tens of millions, hundreds of millions of people playing these social
games and many would never consider themselves as gamers. Yet they
spend real money to play these games and in some cases really
meaningful amounts of money.

Liew's logic makes sense: As we spend more time online for both work and pleasure – and all signs show that we are – our entertainment and communications will migrate with us. This creates a huge market opportunity for services that span several fast-growing sections of the virtual economy. Online gaming is one of those things, as Second Life's vastly profitable mix of government terrorism simulators and pornographers can attest.

Figuring out just how much the virtual economy is worth is problematic. There's no real definition of what constitutes the "virtual economy," and different researchers use different criteria. If FarmVille is part of the virtual economy, is Microsoft's XBox Points system? What about services where currency isn't converted into a virtual equivalent but still spent on purely virtual ends, like Facebook's in-client advertising program?

The standardization problem will create different interpretations of a virtual economy's scale, but the BBC does its best to include transactions that take place entirely in the virtual world, from Second Life to XBox Live to FarmVille and beyond. Surprisingly, social gaming comes away as a major growth leader in the virtual economic landscape:

About two thirds of the top 15 applications on Facebook are games,
according to analytics firm AppData. Those ten games are said to draw
more than 100 million users a month.

Earlier in December, one of the biggest social gaming companies,
Zynga, sold a stake in the firm to Russia's Digital Sky Technologies
for $180m (£113m).
And in November, Electronic Arts, agreed to buy Playfish in a $400m deal (£251m).

How Much is the Virtual Economy Really Worth?

Scaled for their size and the low overhead of graphically simple social media games, first-year developers are putting up impressive profit margins and appear to be catching the eyes of major venture capital and investment houses. But what is it all worth?

The BBC and its venture capital experts hazard the guess that the virtual economy of the United States alone could be worth $5 billion in a few years. When coupled with the booming world virtual economies of Southeast Asia, where virtual goods sales have already topped $5 billion, we could see the rise of a virtual economy larger than Cambodia, and nearing the size of Jamaica.

South Korea alone is contributing nearly a billion dollars in virtual transactions every year, and the wide scope of virtual goods for sale on the peninsula has led to legal battles over the legality of online trading. Not only is the virtual economy reshaping how companies align for business, it's also taking on and reforming the way the law looks at the virtual world. Expect to see some of this come to the United States, as indeed a bit already has in the form of Stroker Serpentine's copyright infringement lawsuit against Linden Lab.

A $10 – 12 billion worldwide virtual goods economy isn't outside the realm of possibility, especially if companies like Zynga continue to grow and pursue initial public stock offerings. Zynga's stock market debut is roughly aimed for the beginning of 2011, with other social media developers either launching similar stock moves or getting gobbled up by established video game and entertainment developers. Either way, it'll prove immensely profitable for the purchased company.

Virtual economies won't always move up and to the right, and it's unfair to expect them to operate without a few down quarters along the way. But we're looking at the beginning of something very real and very game changing, and the forward-thinking innovators whose names are unknown now will become powerful forces over the next half decade.

And it's all because you want to tend to your virtual farm a bit quicker.