Online games, social networks drive virtual goods

Asia and Europe leading way in growing virtual goods market due to more users subscribing to social networking sites and accessing online games via mobile devices, industry insiders note.
Written by Kevin Kwang, Contributor

The virtual goods market continues on an upward growth curve as more revenue is generated from new subscribers on social networking sites and online games that can be accessed on the go from mobile devices, industry insiders said.

Leslie Lin, marketing communications manager at Asiasoft Online, for one, said the virtual goods revenue globally is growing, powered by the increasing popularity of online games and social networking. Citing figures from research firm In-Stat, he said the virtual goods revenue from online games and social networking exceeded US$7 billion in 2010 and will more than double by 2014.

Asia accounted for about 70 percent of the 2010 revenue, or about US$4.9 billion, he added in his e-mail.

Explaining this growth, Lin said the emergence of social and casual games on social networking sites and more advanced mobile phones that can access these games have helped create "a new virtual goods market with rapid growth".

"Users buy virtual goods in different types of online games such as massive multiplayer online role-playing games (MMORPGs), first-person shooters (FPSs) and casual games for three main reasons: status, socializing and winning," he said. "And because virtual goods are a core part of the overall product and social experience, [the] demand will remain high."

Another industry watcher, PopCap's Bart Barden, agreed with Lin, pointing to social games on Facebook or other social networks and mobile platforms as the "biggest channels" for virtual goods consumption over the next 24 months. The director of online business for the social games publisher also noted that Europe and Asia-Pacific are "higher growth candidates", driven primarily by the increasing user base on Facebook and other social networks in these regions.

While PopCap has not conducted specific studies on the virtual goods market as a whole, Barden told ZDNet Asia in his e-mail that several of his sources have quoted the industry size to be somewhere between US$2.2 billion and US$2.5 billion in 2011, an increase of almost 40 percent from 2010.

Asia's ardor for online games
Zooming in on Asia, Allison Luong, managing director of Pearl Research, said China and South Korea are the biggest markets for virtual goods in Asia.

In an e-mail, the executive pointed out that less than 5 to 10 percent of gamers in these two countries pay for virtual goods. However, these paying gamers tend to be high-spenders and their devotion to the games mean they will help support the other 90 percent of gamers that play for free, she added.

"The market is driven by players who often want to decorate their avatars, gain an advantage in the game or unlock certain levels," Luong noted.

She also identified the ease of using and accessing the payment systems associated with purchasing virtual goods as a key determinant for success in selling virtual goods.

For instance, Korean gamers have latched on to mobile payments as their preferred mode while Chinese players tend to use physical or virtual prepaid game cards to buy their virtual goods, she said.

Subscription-based MMOs encourage illegal activities
With regard to people hired or forced to build up online game credits to trade for real money, Lin of Asiasoft Online said such illegal activities are usually "more prevalent" in subscription-based massive multiplayer online games (MMO) because most game operators do not allow trading of most forms of virtual products and services with real currency. This, he noted, creates a large demand waiting to be fulfilled by other third-party game service vendors.

Free-to-play MMOs, on the other hand, leverage their in-game marketplace to provide players with the option to buy their virtual currency or gear at rates pegged to real currency, he explained.

"This free-to-play model addresses the problems of gold-selling spam during the game, potential overseas human decency issues and efforts in curbing third-party gaming services," Lin said.

The executive was responding to a May report by U.K. broadsheet Guardian which revealed how Chinese prisoners were forced to play online games to build up credits by prison guards, who would then trade these credits for real money. This practice is known as "gold farming", according to the report.

Guardian quoted a former inmate, Liu Dali, who lamented that when he was serving his sentence, he would spend his day breaking rocks and digging trenches in China's coal mines. When it came to night, he was given no respite as he, and "scores" of other inmates, would be ordered to play online games.

"Prison bosses made more money forcing inmates to play games than they do forcing people to do manual labor," he said in the report. "There were 300 prisoners forced to play games. We worked 12-hour shifts in the camp."

Liu added: "I heard them say they could earn 5,000 yuan (US$773) to 6,000 yuan (US$973) a day. We didn't see any of the money. The computers were never turned off."

The value Chinese gamers place on their virtual goods is not going unnoticed by other industries, too. Last week, Chinese insurance firm Sunshine Insurance Group, in collaboration with online games operator Gamebar, launched a "virtual property" insurance aimed specifically at the Chinese online gaming community.

The new service was introduced against a backdrop of an increasing number of disputes between online games operators and their customers, which are often related to the loss or theft of gamers' virtual property such as "land" or "currency", according to the insurance firm.

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