Making Real Money from Virtual Goods

from GigaOM by Wagner James Au

The latest revenue model for online communities doesn't exist—literally. Several companies are already making quite a lot of actual money, not through advertising or subscriptions, but by selling items that are really just images on a screen. That's the main theme of the Virtual Goods Summit, a conference held at Stanford last week, the brainchild of Google's Charles Hudson and my friend Susan Wu, a VC at Charles River Ventures.

While the term evokes gold coins and magic items bought and sold in MMORPGs, conference attendance by social networks like Dogster and Hot or Not suggests how pervasive the concept has become. Virtual goods can also be gifts you send to friends on your network (as in Facebook), and it's an already growing income stream. Consider some highlights from the conference:

• Three Rings' CEO Daniel James on Puzzle Pirates, a casual MMO: "We do about $350,000 a month in revenue, of which $250,000 is virtual currency sales."

• Craig Sherman of teen hangout Gaia Online : "Virtual economy, we have about 50,000 completed auctions every day. Plus 12 virtual stores that are like an Amazon space, 6,000 items sold."

• Dan Kelly from virtual currency exchange site Sparter, on the total value of the industry: "It's easily a billion dollar [secondary] market. Consumers have told us these things have value, the industry now is trying to reconcile that with their business model."

The question is why they have value, and Robert Scoble began the moderating of one Virtual Goods panel by noting a real Swiss watch that sells for $20,000—roughly $19,500 more than meaningful functionality and quality would ever require. With Hot or Not, users can buy each other virtual flowers, and according to CEO James Hong, intention drives the willingness to pay more: "We sell more expensive flowers to people that have a relationship."

Kudos to Mark Wallace and the staff of Virtual World News for taking such copious notes to the conference's many panels—read more here, here, here, and here. Be sure to also read the conference presentation– first in the West, I believe– on the phenomenal success of QQ , China's largest IM/games/social network, where you can buy virtual penguins as pets (54 million sold so far), with a virtual currency that's so popular, the Chinese government is worried it'll destabilize the official one.