Five Lessons From The +$15B Virtual Goods Economy
While it’s tempting to dismiss virtual goods as a niche product category limited to online role-playing games or emoji “stickers,” the impact of this market is actually much bigger than you might think. Dating back to the earliest social networks, virtual goods have played a critical role in shaping the behaviors and business models behind major trends in online engagement. Here are five ways developers and entrepreneurs can directly benefit from those learnings.
Lesson #1: Maintain Flexibility In Your Business Model
Like many online publishers, some of the earliest social game developers focused on monetization opportunities via digital advertising. Launched in 2001, one of the first to gain traction with this approach was a massive multiplayer online (MMO) role-playing game called Runescape.
The game was set in a medieval fantasy world, and featured an inventory of hundreds of virtual items which players could use to level-up their characters — attainable by completing missions or bartering with each other.
Even in the earliest days, some of the most active players expressed a willingness to pay for these items in order to enhance their experience. In fact, three surveys conducted between 2005 and 2009 suggested that at least one in five MMO players already traded game goods for real money.
Unfortunately, a sizeable portion of this trading was taking place in “black markets.”
The developers behind Runescape had certainly taken note of the behavior, but chose to clamp down on it in order to preserve the “sanctity” of their game. The official policy was to actively prohibit the buying of gold, items, or any other products linked with the game, for real world cash.
As a result, players found ways to build their own secondary markets — effectively achieving a hacked-together style of freemium economics.
Today’s modern startups have learned that ignoring the behaviors of their most engaged customers comes at a great risk. While Runescape earned its developer a respectable $30M in advertising revenue in 2008, that figure paled in comparison to an overall virtual goods market that was already valued at over a billion dollars annually (based primarily on the gaming market).
Quite a missed opportunity for a game that Guinness World Records crowned the “World’s Most Popular Free MMORPG” (2008) that same year!
Lesson #2: Fringe Behaviors Can Open Up New Markets
Runescape may have been one of the first major MMOs to fuel a “black market,” but it certainly wasn’t the last. With the rise of games like World of Warcraft, the unofficial market for virtual goods transactions grew considerably.
Among the most notable outgrowths of this trend was the practice of gold farming, whereby some players focused their time solely on accumulating in-game currency for resale. In effect, these players approached the game as their primary employment, with a relatively predictable minimum wage.
To get a sense of scale, it was estimated that the gold farming market was already worth nearly two billion non-virtual dollars globally by 2009. One article in the New York Times from 2007 estimated that 100,000 people were employed in this practice in China, with worker salaries ranging from $40 to $200 per month.
Often these operations were run as small businesses, with “bosses” earning a profit of nearly 200% on top of worker costs. In fact, this practice became so lucrative that at one point prison inmates in China were forced to play World of Warcraft in lieu of manual labor.
In addition to gold farmers, the demand for illicit virtual goods also gave rise to third-party platforms focused solely on facilitating exchanges between players. In a testament to how mainstream this market was as far back as a decade ago, a significant portion of this industry initially migrated to eBay.
However, citing a violation of its terms of service, the auction site began cracking down on virtual goods sales in 2007. This move pushed virtual goods transactions towards less transparent destinations such as Internet Gaming Entertainment (IGE).
Today there are hundreds of platforms offering “secure” opportunities to buy and sell everything from in-game currency to entire player accounts. We’re even witnessing the emergence of these transactions for casual mobile games. Days after the launch of Pokemon Go, there were already a bevy of leveled-up accounts for sale across dozens of sites. Although sales of mobile game accounts are still a small component of the secondary market, they will likely take on far more significance in years to come.
Lesson #3: Adapt To New Platforms
Over the past several years, it has become clear that smartphone screens have become the most important battleground for consumer attention. As of 2014, the number of mobile users officially surpassed the number of desktop users, and the gap continues to widen.
Mobile gaming has become a strong beneficiary of this trend. Not only have mobile games already surpassed console games in terms of total revenue, but they’re also growing at nearly five times the rate.
In fact, mobile gaming currently represent a staggering 85% of all app revenues, in any form.
According to a recent study by Slice Intelligence, the average paying player on mobile spends $86.50 per year on in-app (virtual goods) purchases. Some games far exceed that, with Game of War: Fire Age bringing in a whopping $549.69 per paying user, and over $2M in total revenue per day at its peak.
With those kinds of economics, it’s no wonder the game’s developer, Machine Zone, could afford to drop $40M on an ad campaign featuring Kate Upton.
The rapid acceleration of this market is evidence that the appeal of virtual goods has successfully made the jump from desktop experiences to the casual smartphone market. In fact, it’s no coincidence that the same freemium model of gameplay demanded by early MMO players has emerged as the dominant framework among mobile games.
By tweaking the same model for games with shorter duration, developers successfully leveraged virtual goods in opening up an entirely new base of casual users.
Lesson #4: Engage Your Community of Makers
While developers dictate the structure of a game, users dictate its culture. Following the patterns of social engagement across the web, there is often a small subset of highly engaged players who create the customs, quirks and content that imbue a game with its lasting appeal and sense of community.
When given the tools to make things and earn recognition, this subset of users can unlock creative new experiences for all players.
One great example of this trend comes from the world of Second Life, which grew to over 1M monthly active users since its launch in 2003. Much like earlier social networks and immersive worlds, it was free to create an avatar on the platform and engage with other users. The twist came in the form of the company’s revenue model.
Second Life charged users for the purchase and rental of virtual real estate, on which landowners could build businesses (such as nightclubs and fashion outlets) and potentially earn a profit from other players. In addition, users were given the opportunity to create and sell unique virtual goods to each other.
Empowering the creativity and entrepreneurial spirit of the platform’s makers gave rise to a massive market for virtual goods. In 2009, the total size of the Second Life economy reached $567M, and by the platform’s 10 year anniversary, Linden Labs estimated that approximately $3.2 billion dollars (USD) worth of transactions had taken place. A handful of top users were reportedly cashing out over $1M in earnings per year from virtual businesses in real estate, fashion, and events management.
More recently, Valve has benefited from this phenomenon within its Steam platform for PC gaming. As of January 2015, the company announced cumulative payouts of $57 million to community members that had made in-game items, with average earnings of $38,000 per contributor. As an additional signal of market potential, Steam even announced it would facilitate the sale of virtual items for third-party games outside of its ecosystem.
Both examples demonstrate that by allowing a subset of creative users to take greater control of product experience, developers can exponentially increased both the scope of their products and community engagement.
Lesson #5: Social Capital Is An Effective Motivator
Following on the success of Second Life, Minecraft rode a similar wave into mainstream popularity after its launch in 2009. Often referred to as a “sandbox game,” Minecraft is a virtual environment where users can create their own maps and experiences using building blocks, resources discovered on the site and their own creativity.
Since launch, the game has reached 100M registered users, of which about 60M use a paid version.
Like Second Life, much of the content that makes Minecraft unique comes from its players. However, the two worlds differ in terms of the nature of incentives those players are offered. While some have managed to charge other players to engage with their content, Minecraft’s developers actually started discouraging the practice. Instead, Minecraft’s appeal was in the robustness of its creation tools, the ability to co-create with other community members, and the recognition for building something truly amazing.
Another unique attribute of the Minecraft community was that makers took their engagement beyond the virtual world itself. According to Newzoo, Minecraft-related YouTube videos were watched 4B times in May of 2015 alone. The community even crowdsourced support for an official Minecraft LEGO set, which sold out almost immediately upon release.
While Minecraft may not have directly pushed users to create external content, it acknowledged their passion for self-expression, collaboration and even bragging rights. In doing so, the game touched off a broader movement among makers that exponentially improved the experience for everyone involved.
A Look Ahead
Since their initial adoption nearly two decades ago, virtual goods have come to represent a core part of our engagement on the web. From in-game items to full-blown currency, they have been adapted by online communities to promote an ever-expanding set of experiences. By continuing to monitor their evolution, we’ll undoubtedly gain valuable insight into the changing rulebook for building lasting digital products.
