Virtual goods are becoming a huge industry, and there’s no reason to think it’s just a fad given the penetration of technology and the internet in our lives. This year, the virtual goods market is projected to reach $2 billion dollars, more than $800 million of it coming from social games [edit: those are U.S. numbers, btw. The entire global market is much larger]. Those are pretty massive numbers, and virtual goods could very well be a $5-10 billion dollar industry by 2020.
There’s a bunch of interesting things about the virtual goods industry:
– It’s got crazy high margins. CRAZY high. Zynga, the most prevalent and dominant company making facebook games, was recently discussed as being the most profitable company ever, with a profit margin of 47% (for context, Apple and Google are around 30%, Amazon is around 5%, and the previous record might have been Chanel at 45%). [http://read.bi/fsBlIJ]. Helps when you sell things that don’t actually exist.
– That’s all we REALLY know about the industry so far. May sound a bit dismissive, but really, it’s a very young industry and the economics of it are still being examined as the market changes, as new competitors arrive, and as the industry grows to new non-facebook non-second life sectors. Part of the reason for this lack of wisdom is:
– It’s unregulated. At multiple levels, this rather large industry is controlled entirely by private funding, but many of the companies are getting big enough to sit in an awkward space of having a near-public secondary market for trading stocks. This is bound to go badly, and most people seem to think it will pretty soon: as you can see in the article linked above, the huge valuations and margins these companies are drawing is leading to a lot of investment in the companies AS IF they were public, but without the oversight or reporting requirements of public companies. Board members are the venture capitalists who invest in all manner of companies to get an edge on the industry, and the information disparity between those professionals and the everyday man who ends up invested through the secondary trading market is massive. One of these companies is bound to tank, leaving regular investors with shares of a worthless, revenue-less internet company after all the sophisticated VCs jumped ship. And that will be quickly followed by regulation.
– It’s a luxury goods market that caters primarily to the middle class. Most of the users of the most successful virtual goods application to date, Farmville, were middle age women. I don’t know the income distributions of virtual goods purchasers across the whole ecosystem, but I don’t imagine they are any more well-off than the average middle-class American. Virtual goods, as I think most would agree, are a luxury good. Maybe a strict economist would point out that we don’t have enough data to know about the elasticity of the demand in the market, but something tells me the first thing most people would cut out of their budgets in a time of crisis would be their virtual tractor oil or new shirt for their avatar. The goods don’t even EXIST, it’s perhaps the most ‘luxury’ good ever. So this is an industry that makes pure luxury goods, selling to the middle class, during probably the worst recession in the history of the United States. And it’s working. Investors will pay anything to get a piece of it.
I originally titled this post as if I was going to make a critique of this pattern in human society, noting the strange disparity in wealth in the world when one society is spending billions of dollars on nonexistent goods while others die of starvation and disease and war… but I’m actually not so sure spending money on nonexistent goods is any more ridiculous than spending money on any other luxury. Is paying $400 for a handbag really much better than paying $2 for a different set of pixels? I’m not advocating either form of discretionary spending really (both seem like a borderline moral wrongs for a society with massive unemployment and legions of medically uninsured), but perhaps the virtual goods are actually better: at least they never go in the dump, and most of the virtual goods are made in America! Maybe that will reduce those unemployed and uninsured numbers by 2020.
danielmarkmiller.net 