January 6, 2009

The Virtual Goods Business

A number of internet companies are now looking for revenue sources beyond ads. One of the most surprising model for reaching masses of consumers, that has emerged recently is virtual goods.
Virtual goods have been most common in online worlds such as Second Life, where people create avatars to play and collaborate in a game-like setting, and in hard-core online games including World of Warcraft, where people acquire tools, trinkets, or magical potions. 
The business of virtual goods is now worth more than $1 billion worldwide. For years virtual goods have been the key business model on popular sites in Asia. Two-thirds of the $523 million in sales by China's Tencent social sites comes from virtual goods such as pets; only 13% is from advertising.
It is expected that virtual goods may turn out to be a crucial money maker for burgeoning casual gaming sites and social networks in the U.S., too. For example, a site like Facebook has struggled to make money from advertising because ads are more distracting than alluring on sites where people are there to interact with one another rather than surf for information or products. By contrast, virtual goods are essentially social artifacts that people use to gain status among online peers. That makes them a better fit than traditional advertising on socially oriented sites. Facebook sells virtual gifts such as roses and beers for $1 apiece, and they're now a multimillion-dollar business.

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