Virtual Goods and Viral Challenges

One of the current trends being debated on the Internet is the rise of the virtual economy – the trade of virtual goods that only exist online. And often only exist within a specific platform online. If the platform goes away, so do all the virtual goods. This leads many academics to ask why do people buy virtual goods? I assume they wonder why people buy tickets to the theatre or cinema too, since once you’ve attended and watched the performance, you have nothing left but the memory. The ticket doesn’t buy you anything physical that you can keep, other than a piece of paper with your seat number printed on it.

In December 2009, BBC News reported that the US virtual economy is predicted to be worth up to $5 Billion in the next 5 years, and that sales in Asia are already at the $5 billion mark and growing.  They are predominantly being driven by games played in online social networks, from massive multiplayer online games (MMOGs) such as World of Warcraft and 3D virtual worlds such as Second Life to web-based sites like Facebook.

One of the key traits of virtual goods at the moment is low cost – individual items usually cost pennies/cents to purchase. That might not sound like much of a business model. But people are far quicker to handover money for cheap goods than expensive ones. And thanks to social networks, virtual products can benefit from viral marketing, leading to 000,000’s if not millions of sales. Those numbers start to add up.

This all sounds wonderful for the business selling the product. However, we are beginning to see that viral growth can have a sting in the tail. As demonstrated last year in Second Life with the plight of the digital chicken:

The trouble with exponential growth is that it rarely persists. An exponential curve will either flatten out or, as seems to happen more often, will plummet. It seems social networks are increasingly driving behaviour towards viral purchases. If you’re betting your business on viral sales, be careful with your forecasts and be prepared for the drop.

Hat to New World Notes for this case study and referencing the above video. His post covers the impact this trend and resulting revenue had on Second Life’s economy.