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No one can contest the dramatic rise of virtual items as a monetization stream for social networks and casual gaming companies. QQ generates hundreds of millions of dollars selling virtual items, and there are many US counterparts including Gaia Online, Zynga, Playfish, among others.

The kinds of items sold range from poker chips to pink penguins to battle shields, depending on whether the item is sold within a social network as a gift or an item needed to participate in a casual game.

The backdrop for this growth has been a decline in the online ad market. According to Barclays, the growth rates of online advertising in 2007, 2008 and 2009 are/will be 25%, 10%, 2.6% – a pretty dramatic decline. This decline has been driven in large part by the economy.

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Consumer debt as a percentage of household income is now about 130%. This all translates into less purchases which implies fewer marketing dollars.

Comparing online and offline spending

Interestingly enough, there’s a very significant difference in the way offline goods and services are paid for compared to online. According to analysis by Goldman Sachs, in the offline world, the costs of goods and services are shared equally by advertising and consumer payments. For example, an NBA match is 50% paid by the advertising in and around the stadium and 50% by ticket sales.

However, online it’s very different. 75% of costs are covered by advertising. Considering the massive decline in growth, rate, it wouldn’t be a stretch to suspect a correction, rather a reversion to the mean, to occur – hence, virtual goods in social and gaming environments.

I fully expect this movement to continue to other revenue models online. Subscription will make a comeback!

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