Virtual Goods and Games-As-A-Service: Money for Nothing, or Here to Stay?

facebook-virtual-goodsAs the Facebook Platform economy has matured over the last two and a half years, it’s become clear that virtual goods have become the predominant source of revenue for application developers. While there are still good debates going on about the size and shape of different segments of the market three, five, or ten years into the future, virtual goods inside social games are here to stay.

Nevertheless, there are still some who criticize the idea of virtual goods inside social applications and games as “paying for nothing.” This is a question we’ve gotten from many people interested in learning more about our Inside Virtual Goods: The US Virtual Goods Market 2009-2010 report. Why are millions of people paying billions of dollars for something that “doesn’t exist”?

The answer is that while virtual goods are, physically speaking, just a few bytes of data in the cloud, their value is actually primarily derived from the emotional experience they provide consumers in the context of the game or application. Today, a diverse number of social games allow users to purchase virtual goods for a variety of purposes, ranging from functional items like power-ups to decorative items like avatar accessories. The most common types of virtual goods include:

  • Functional items – Functional virtual goods are in-game items like power-ups, tools, energy packs, or weapons that allow users to realize some functional benefit within the game. When users purchase functional virtual goods, they can complete the task at hand more quickly and move on to the next level or stage.
  • Decorative items – Decorative virtual goods are items like clothing or accessories for avatars, goods for virtual homes or rooms, or profile themes. These decorative items generally allow users more customized forms of self expression than they would otherwise have access to. (It’s important to note that, inside the Facebook Platform, real profile photos are often an important element of a user’s in-game identity, unlike many virtual worlds.)
  • Consumables – Consumables are items that players can purchase for some short-term benefit, like time savers or health packs. After the resources have been depleted, users must purchase new ones.

Thus, it may be helpful to think about virtual goods not just in merchandising terms, but also in terms of premium content. People have always paid for content like movies or concerts because of the emotional experience they get from watching or listening, even though they don’t end up with anything physical to take home at the end of the day. In this sense, social games are like a much more interactive form of entertainment media that also happens to allow for a wide variety of inexpensive a-la-carte premium content purchases that enhance the experience.

But you don’t have to take our word for it. The best way to understand the value of different types of virtual goods is to get involved in the experiences that are driving sales yourself. Check out what these users are saying (these are pretty standard posts from user forums and blogs):

  • “Snow, Instead of grass. Mistleto/holly bushes/trees, chasing reindeers and sleighs for the reindeer to sit in. Warm barns for the animals to stay in.Xmas trees and lights.” by FarmVille player chicfing in response to the thread, What seasonal decorations/items would you like to see in FarmVille?
  • “Jo-jo is a little bit cuckoo today. Of all the Pet Society rare food items that i have, she wants to eat Lotus Seed Mooncake. Not Jujube Mooncake, not Sweetbean Mooncake, but only Lotus Seed Mooncake. Jo-jo wasnt even around when Mooncakes first appeared at the Pet Society foodstore, lol. Nope, i dont have any Pet Society Mooncakes.” – from Rare Food Items entry on Pet Society Anonymous
  • “I have: Quite a few flour, Loads of sweet corn (unlocked), Sugar, 4 apple, 2 bread, 4 ice, 4 oregano, 4 pumpkin, Loads of turkey, A few vanilla (5k each), 7 butter… Please, post here if you need anything of these and make sure you have your menus displayed.” by Restaurant City player jane_robs in the Trading forum.

As we found in our Inside Virtual Goods report, it’s important to note that consumers of virtual goods in social games don’t fit into traditional demographic niches associated with other forms of gaming. Virtual goods aren’t just being bought by 18-25 male hardcore gamers or 35-44 stay-at-home moms. Rather, virtual goods are popular across age, sex, and location demographics. If the idea of buying $1 time savers, decorations, and power-ups is just a flash in the pan, it is a pretty broad flash.

The emergence of games-as-a-service (should we call them “GAAS”?) businesses is still early, and developers still have a lot to prove. But the fundamental dynamics driving consumption, and early data on monetization and unit economics, appear strong. The Facebook Platform is enabling games to reach a much bigger audience than will ever play on consoles – most social game players would not even consider themselves “gamers.” We expect these fundamental trends to continue over the coming 24 months as the social games space continues to grow.

To dig deeper into the virtual goods market, check out our new report: Inside Virtual Goods: The US Virtual Goods Market 2009 – 2010.