Why sales of virtual goods are soaring.
BURLINGAME, Calif. -- What is the most you're willing to pay for a virtual item in a videogame or virtual world? Five, ten dollars? How about $26,500?

That's the amount David Storey, a 27-year-old graduate student living in Sydney, Australia, paid for a virtual island, the "Most valuable object that is virtual," according to Guinness World Records.

It's easy to write off Storey, who goes by the name "Deathifier," as a geek gone wild, but he now owns a million-dollar empire. Storey runs Amethera Treasure Island, which he purchased in the virtual world Entropia, as a rare game preserve and taxes hunters on his land. Storey says the taxes bring in more than $100,000 in real money per year.

"I thought it would be cool to own an island, and I knew I could run it and be able to pay for my play" says Storey, who has picked up skills he never imagined learning in a game. "Entropia continually evolves, so you have to constantly be watching for new developments. It's sort of like real life."
While Storey's example is extreme, buying and selling virtual goods in videogames and virtual worlds is becoming mainstream. The virtual goods market in the U.S. is estimated to reach $1.6 billion this year, up from $1 billion in 2009, according to research firm Inside Networks. And the U.S. is just a part of the worldwide market, which some experts put as high as $10 billion; countries like China and Korea are major players.

Virtual worlds and massively multiplayer online role-playing games (MMORPGs) like Entropia and Second Life are where virtual goods economies began. But in recent years, casual and social games like "FarmVille" and "Pet Society" on Facebook have also become important players.

Typically, virtual transactions can be divided into two categories. In one type of transaction, you "cash in," or exchange real dollars for virtual currencies, and use the virtual currencies to buy virtual goods, like a new cow in FarmVille. The other type of transaction lets you cash in and, like Storey, earn real money. In addition, virtual worlds and MMORPGs have also gotten very good at monetizing the user; industry experts estimate that the average revenues per user usually range from $10 to $20.
In comparison, social and casual games are relatively newer, less mature markets that usually only utilize "cash in" transactions. A fairly successful social game might have average revenues per user of a dollar or two. Still, Inside Virtual Goods estimates that sales from social games will make up more than half the total U.S. virtual goods revenues in 2010.

"Social games are growing extremely rapidly," says Edward Castronova, an economics professor at Indiana University, Bloomington, who has written about virtual economies. "The places where this phenomenon was birthed, like online role-playing games, have leveled off, but virtual economies are exploding in social networks like Facebook."

But with lower average revenues per user, how do social games do it? Volume.

The most successful social games can have 10 to 20 times the number of users of virtual worlds or MMORPGs. For example, "World of Warcraft," a popular MMORPG, has more than 10 million monthly subscribers. FarmVille has some 76 million active monthly users due to its popularity on Facebook. "Instead of getting people to come where the game is at [as in MMORPGs], you put the game where people are," says Charles Hudson, an analyst at Inside Virtual Goods.

To be sure, the more mature virtual worlds and MMORPGs aren't idly standing by. Taking a page from social games, some are looking into ways to incorporate social networks and micro transactions into their frameworks.

Second Life, for instance, is considering integrating with something like Facebook Connect, and other ways to increase the social nature of the world. Tom Hale, chief product officer at Second Life parent company Linden Lab, thinks social games have had a positive impact on the overall industry. "What social games have done is make it perfectly acceptable to spend $10 in a game," says Hale.

Beyond PCs and laptops, the spread of virtual goods markets is also making its way onto other devices. Many developers have begun to replicate the model on mobile devices, especially after Apple allowed free-to-play virtual goods-supported games in its App Store just a few months ago.
Videogame consoles are also often overlooked, but they have greatly benefited from the rise of the virtual goods industry. Sony says the entire PlayStation Network has brought in more than $520 million in revenue as of December 2009. Hudson estimates that Microsoft's Xbox Live is a nine-figure business.

But for all the buzz around virtual goods, you might still wonder why people are willing to pay for things that don't really exist. Susan Wu, founder of social games developer Ohai, says her game's players use virtual goods as a form of communication and as decorations on their sites. Virtual goods can also help them win games. "It's about relationship building, and things like rank and status," Wu says.
Castronova had perhaps the simplest explanation. "Why do people buy diamond earrings?" he says. "They are something that make you feel good."


Thoughts? I am not sure if he paid 26.5k for the island, or if he used in game money worth 26.5k, as the picture mentioned the exchange rate.