OT Bernie Madoff would be proud

November 7, 2009
Virtual Goods Start Bringing Real Paydays
By CLAIRE CAIN MILLER and BRAD STONE

SAN FRANCISCO - Silicon Valley may have discovered the perfect business:
charging real money for products that do not exist.

These so-called virtual goods, like a $1 illustration of a Champagne
bottle on Facebook or the $2.50 Halloween costume in the online game
Sorority Life, are no more than a collection of pixels on a Web page.

But it is quickly becoming commonplace for people to spend a few dollars
on them to get ahead in an online game or to give a friend a gift on a
social network.

Analysts estimate that virtual goods could bring in a billion dollars in
the United States and around $5 billion worldwide this year - all for
things that, aside from perhaps a few hours of work by an artist and a
programmer, cost nothing to produce.

"It's a fantastic business," said Jeremy Liew of Lightspeed Venture
Partners, a venture capital firm that has invested $10 million in
several virtual goods companies. "Because it's digital, the marginal
cost for every one you sell is zero, so you have 100 percent margins."

The companies that create and sell virtual goods, including Zynga,
Playfish and Playdom, three online gaming start-ups in the San Francisco
area, say they are recording significant revenue and profits, which have
been elusive for many Web companies.

Virtual goods have been popular in Asia for years. In the United States
though, only ardent video game fans spent money on them, mostly for
swords and spells in virtual fantasy realms. That is rapidly changing,
driven by the popularity of widely appealing games for social networks
like Facebook and mobile phones like the iPhone.

"The people playing these games on social networks don't define
themselves as gamers - they are just killing time, having fun," Mr. Liew
said.

In Restaurant City, a game by Playfish on Facebook, 18 million active
users manage their own cafe and stock it with virtual casseroles and
cakes. In Zynga's game FarmVille, 62 million agrarian dreamers cultivate
a farm, plant squash seeds and harvest their crops with tractors.

These games and many others have casual gamers reaching for their
wallets, along with a few rationalizations, as they make the peculiar
purchase of pixels on a computer screen.

"It's an experience, like going to the movies. That's how I describe
it," said Sara Merrill of Parsonfield, Me., who plays Pet Society on
Facebook with her two young sons five times a week.

Recently, the family used a credit card to buy $20 worth of the game's
currency, then bought items like a haunted mirror and a potion that
helped their pet, Demon Baby, grow bat wings. "It's still cheaper than
taking the kids to Target where they will ask for a toy," she said.

For outsiders, the selling of virtual goods - items with no actual value
in the real world - might seem the very definition of a swindle.

But often, strong - and somewhat rational - motives are at work. Users
of social networks can buy one another gifts, like images of flowers and
birthday cakes, typically for a dollar each. Facebook recently expanded
its gift store to allow other companies to list their virtual wares,
like greeting cards.

"It's not about the good itself, it's about the underlying human emotion
or desire," said Moshe Koyfman, a principal at Spark Capital, which has
invested in two virtual-goods start-ups. "The recipient knows the person
took time, picked something meaningful and spent money on it."

Most of the momentum in the virtual goods market comes not from gifts
but from social games, where people buy items to improve their
performance in the game or just to build up a collection that will
impress friends.

Unlike traditional games, social games are generally free, and the vast
majority of players never spend any money. In Zynga's games, less than 3
percent of players pay for something, said Mark Pincus, the chief
executive of the company.

Players can also earn virtual currency by signing up for subscription
services or installing pop-up advertising software. But some social
gaming companies have cut back on such offers after criticism that they
were misleading and in some cases defrauding players.

Zynga says direct purchases of virtual currency and goods will account
for most of its more than $100 million in revenue this year, and that
the company is profitable.

Game creators talk openly about their strategies to make people pay for
virtual goods: get them addicted, then steer them to purchases that
speed up the pace of the game and help them succeed. In FarmVille, for
example, the tractors' gasoline tanks replenish themselves slowly over
the course of a day. Instead of waiting, players can pay to buy gas -
something that might be considered cheating in more traditional games.

"You put intentional friction in, and a small number of people who value
their time and want to play at a faster pace can spend money," Mr.
Pincus said.

Players of the games have competitive reasons to buy, too. Wendy
Pickering of Columbus, Ohio, plays Sorority Life, a game in which
players create and dress groups of co-eds, and then, rather violently,
pit them against one another until the most glamorous house wins. She
discovered very quickly, she said, that she would be trounced in every
showdown if she didn't have enough fashionable items.

Ms. Pickering has paid more than $30 in the last few months to buy the
game's virtual currency, called Brownie Points, which she has used on
items like the Miss America tiara and hair, and the Cinco de Mayo party
outfit, which included a sombrero.

"That is about as much as I'd be willing to pay for a game off the shelf
in a store," she said.

Some game fans claim that in some cases, virtual goods can be better
than the real thing. Jamie Kwong, a 13-year-old in Altadena, Calif.,
spends hours a week on a "paper doll" site called Stardoll, buying
dresses and handbags. She created Juillet606, with brown eyes and hair
to match her own. Unlike the actual paper dolls she used to play with,
the tabs do not rip off.

"With Stardoll it all stays on there, my brother can't get on it, and
everything is good," she said.

Copyright 2009 The New York Times Company
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