Six Pixels of Separation - The Blog
July 27, 2010 8:08 PM

The Goods On Virtual Goods

While scaling and monetizing e-commerce is still an issue for many of the top retailers in the world, those merchants should also keep an eye out on virtual goods.

News came down this week that the Executive Director of Shop.org, Scott Silverman (a close friend of the Six Pixels of Separation and Twist Image community), was leaving the organization to join a start-up focused on virtual goods (more news on that here: DM News - Shop.org executive Silverman resigns to found startup). While this news sent shockwaves through both the online merchants and retailers associated with Shop.org and the NRF (National Retail Federation), this is a very forward-thinking move for Silverman, who is joining an industry so new that we can hardly even say that it is even in its infancy.

Why aren't all retailers seriously focused on virtual goods?

Think about the current opportunity (and where this is all going). Why wouldn't a department store start selling digital versions of products like music, movies and books? On top of that, think of the opportunity for doing multi-channel marketing campaigns by offering up specials or exclusives on things like a tractor in FarmVille or better armor in World of Warcraft with either an online or in-store purchase. While Facebook no longer offers the buying, selling or sending of gifts (more on that here: All Facebook - Why Facebook Killed A $100 Million Baby), this was a multi-million dollar business for the company. At a more primal level, just think of the baseline affiliate marketing opportunities for retailers as an entry point.

And this is only the beginning.

Some of the major retailers (like JC Penny and Target) are already embracing celebrity-endorsed brands, so why not extend this to the online/virtual goods channel? Imagine exclusive wallpapers for your iPad and/or iPhone designed by Demi Lovato and sold through her new relationship with Target? Yesterday, it was announced that Madonna will be designing and selling a new line of accessories through Macy's (more on that here: Wall Street Journal - Macy's Hopes Madonna's Line Puts Retailer On Map With Teens), this is another great opportunity to tie-in exclusive virtual goods to up the overall basket.

We tend to think with extreme shortsightedness.

The truth is that nobody can forecast the future of retail (or if virtual goods have a legitimate business leg to stand on), but as distribution gets more complex and the cost of building, maintaining and staffing individual stores continues to rise, the retailers of the future are going to have to embrace the very real reality that consumers no longer draw a hard line between their virtual goods and their physical goods. Don't believe me? Look at the quick transition the mass public made from a physical CD of music to an iTunes library. On top of that, we also got news today that consumer's habits are changing at the retail level. Customer service needs are dropping (they're probably being met by empowered consumers using the digital channels for information and more) and they are becoming much more price sensitive and driven.

Digitization is as digitization does. 

While some industries are being forced into digitization (music, movies, books, software, etc...), retailers may offer the world a Digital Marketing leadership stance by embracing and encouraging the sale and distribution of more and more virtual goods. Initially, this will look much more like strategic partnerships (where a company like Warner Bros. would team up with a major retailer like Urban Outfitters to distribute their virtual goods), but it could (and should) lead to that retailer developing their own merchandising team against virtual goods, and building that new category within their business. Look no further than Apple to see a glimpse as to how this can play out (you buy your computer, iPod or whatever at the retail level, but then fill it up with content and software through their digital channel - iTunes).

What's your take on virtual goods? Will people actually buy it?

By Mitch Joel


Comments Comments Feed
  • Posted by Anthony
    Mitch Joel

    People have, and will continue to buy virtual goods. Facebook Credits promises to be very interesting this year, with their inclusion in more games on that platform. The sale of virtual goods within games has worked in markets outside of the states for a few years, and it is starting to become more common in western markets, with additional downloadable content for single player games like Dragon Age.

    Currently it looks like most traditional retailers are being left behind by tech companies. Valve and Apple have been very good at putting their store fronts in front of people through applications such as Steam and iTunes. Apple has been especially effective in this.

    I don't think the question is if the market will hand over money for virtual goods, but will traditional retailers be able to enter the market in some meaningful way.

    Reply
  • Posted by Samuel Parent
    Mitch Joel

    From what I've read so far, Zynga alone is making a killing. Farmville is estimated at $4billion, 90% of Zynga's revenues come from virtual goods or points. They're PayPal's 2nd biggest merchant. Further, 7% of active social gamers spend an average 258$ over 4 months in virtual goods or points. This social gaming "industry" that's just beginning is estimated to hit 2.2$Billion in 2012, 95% of which is virtual goods boughts directly (55%) or indirectly (40%).
    And that's just social gaming. Virtual goods can extend very far.
    Good move Silverman!

    Reply
    • I think many people confuse the valuation of social gaming companies by not understanding that most of those dollars are driven through the virtual goods within the community. Thanks for adding those stats Sam... it's adds a ton of clarity.

      Reply
    • Samuel. Beware of private valuations of businesses. Private businesses are very illiquid (my finance degree talking here). We never know a firms value until its public. Remember how many people bought homes in 2007 that can't get 75% of what they paid or even sell today. (or the private equity crash) What we do know is that Zynga is making a lot of money right now and has great potential for future growth as well as potential to be gone in 2 years if they make wrong moves because they are in a 'fad' type business where consumer sentiment can more fast or get bored. Think Second Life.

      But the money does validate the concept! And its pure profit for brands to jump in. No worries on being stuck with 2million tickleme elmoes from China after Christmas. High upside almost zero downside.

      Reply
  • Posted by Craig Vodnik
    Mitch Joel

    Hi Mitch,

    One of our clients, Camshare, has been selling virtual goods within their videochat ecosystem for a couple of years. One big issue that will be faced is fraud due to the anonymity and digital nature of the gifts. It definitely is a trend that retailers need to keep an eye on now and in the coming few years. Good post.

    cheers,

    craig.

    Reply
    • As with all things digital, fraud is going to play a huge part in this (and how it is managed). We had this with search engines and click fraud and - of course - with tons of bootlegging, etc... It's depressing to see my Google Alerts for the audio book version of my book - tons of links to torrents and people grabbing it. It is what it is (sadly).

      Reply
  • Mitch I have some very futurist thoughts about online retail and why its been held back so long. Also did a patent search to see if my ideas have been patented...they have so while I won't be a billionaire it shows some people have been working on this. But the focus of this blog is not retail. But my tie in matches yours.

    The fact is games exist that sell virtual goods. Some bought and sold using real money. So if I am going to buy a chair for my house or armor for my Orc, why aren't more brands jumping on and customizing these items. We are all about vanity (even us humble monks are vain about our monkness).

    I think the challenge is 'can I show it off'. I will buy Volcom Skate Armor if I know when someone views my Battle Tested Fighter that others can tell its custom/branded. Or I should say people will be more likely to pay if they can show off.

    And brands get a win win. They learn how to sell better online and in future virtual worlds that mimic real life. (the reason web retail bites right now is it does not mimic real world).

    Reply
    • This reminds me of the Mr. T mohawk grenade for World of Warcraft. You're right, this isn't a uni-directional option. We saw this in Second Life where brands created areas, products and services within the virtual world. We also have many examples of this in Habbo Hotel. Branded virtual goods within existing platforms seems logical (and super-easy) to do.

      Reply
  • Posted by Michael Chase
    Mitch Joel

    Mitch... We're seeing more and more of our retail customers trying to monetize online tools and services that will inevitably lead the purchase of virtual and hard goods. So I'd say they are just beginning to test the waters... Michael

    Reply
  • Posted by Ted Rogers
    Mitch Joel

    Today, we pay a premium for fashion because it represents something we want to be associated with or makes a statement about our wealth or status. We buy gadgets to help us play a better game of golf or track our running progress. None of these are necessary, but allow us to advance ourselves in our chosen pastimes or careers. The same is true of virtual goods in the sense they will allow us to compete in an online game at a higher level, or give us status in a certain community. The next generation of consumers will be as comfortable buying virtual goods as we are buying the latest pair of designer jeans. Just as older generations questioned our buying choices because it was new and pointless spending in their opinion, many in our generation will question the validity and necessity of virtual goods. Many of those are running the same retail chains you are speaking about which may explain why they are not on board. This lack of understanding does not make it any less real however and the retailers that get on board first are the ones that are going to benifit. Great post Mitch.

    Reply
    • What about music, books, movies art? I do think that goods (both virtual and physical) can do things to change people... and it's not all about status or the perception it creates to others.

      Reply
      • Posted by Ted Rogers
        Ted Rogers

        I agree that there are goods that will help or change people for the better and didn't intend to appear cynical. My point is that the reasons people buy virtual goods are the same as the reasons people buy physical goods, whether it is to improve themselves or for status or some other reason, and that virtual goods to this generation of consumers are as relevant and 'real' as physical goods have been to previous generations. I agree that this is in its embryonic stages with many people, myself included, still trying to wrap our heads around where it will go but I think based on the explosive success of online gaming, download-able music, videos, and books, virtual goods are here to stay. It's exciting to watch and be a part of.

        Reply
  • Posted by karim kanji
    Mitch Joel

    The digitization of goods continues to grow no doubt. As you stated, we only need to look at the entertainment and leisure industries to see this.

    What I'm curious about are the virtual goods that really are virtual in that their value is hard to define. How much is a foursquare badge worth? How valuable is a Farmville character?

    Will this segment become valuable and long lasting?

    Reply
    • I think it's safe to say that it's worth whatever the most interested party is willing to pay for it. What is a cup of coffee worth? I bet the answer is very different from your corner gas station to Starbucks.

      Reply
  • Mitch Joel

    The same is true of virtual goods in the sense they will allow us to compete in an online game at a higher level, or give us status in a certain community. The next generation of consumers will be as comfortable buying virtual goods as we are buying the latest pair of designer jeans. Just as older generations questioned our buying choices because it was new and pointless spending in their opinion, many in our generation will question the validity and necessity of virtual goods. Many of those are running the same retail chains you are speaking about which may explain why they are not on board. This lack of understanding does not make it any less real however and the retailers that get on board first are the ones that are going to benifit.
    ..........................................................................................................................

    Reply
    • I used to love buying and collecting books. I still like buying books, but the digital version (also a virtual good). Is there more value in it for? Strangely enough, the answer is "yes". It's easier to carry around (on my iPhone), I can take notes, I can see what others have found useful in the book and I carry around more than I can possibly read and buy them instantly. Huge value.

      Reply
  • Posted by Karthik Ram
    Mitch Joel

    Apart from social gaming and MMPG, are there other genres of web properties where virtual goods are starting to emerge in a big way?

    Reply
  • Posted by Don Lange
    Mitch Joel

    Perhaps a little off base, however Fundraisers have had considerable success with virtual gifts such as "a goat that provides milk, or a "well for a community" or even "education for a child". These allow donors to really get a sense for where their donation dollars are going.

    Reply
  • Posted by Scott Silverman
    Mitch Joel

    Wow! I made the big time and have been mentioned by Mitch in his blog. I'm honored! It's great seeing the comments on the blog. Lots of great insights.

    I agree that the digitization of existing goods such as books and music are important. Virtual goods in social games are something new and different, however, and deserve some separate attention.

    It's hard for many people to relate to the power of social games who aren't participating in the games. But when you look at the data, it's clear that these games are resonating with a very large swath of consumers to the tune of $1 billion spent on social games this year, which is mind boggling.

    I am very excited to be a part of this industry and get wait to get started in my new adventure.

    Reply
    • What interests me more than the social gaming aspect is how Facebook is moving towards Facebook Credits. With over 500 million accounts, it sounds to me like they are looking to create their own economy and they're starting with their own currency. Something tells me this is going to upset the social gaming companies, as this is where the bulk of their revenue is coming from. Once other companies embrace the idea of virtual goods and/or Facebook Credits, imagine the shift that's going to have with all consumers (not just the gamers).

      Reply
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