Virtual Goods as a Foil to the impending Recession

The East has been milking it for the longest time now – Nexon (of MapleStory fame) knows it very well, with 85% of its $230M revenues in 2005 coming from virtual asset sales. The majority of Silicon Valley poo-poohed the free-to-play model when it was first mooted, and had to eat its words sometime around 2007. Susan Wu, Venture Advisor with Charles Rivers Ventures wrote about Virtual Goods as the next big business model in 2007.  Recently, Jeremy Liew of Lightspeed Venture Partners estimated that Facebook has dramatically increased its sales rate of digital gifts. I attended the Virtual Goods Summit 2008 last week, and learnt that USA is considered to be an ’emerging market’ (and playing catch-up!) as far as virtual goods were concerned. I say, any talk about recession should be preceeded by regression first!

A recent research report by Pubmatic noted that banner ad pricing has fallen for a second quarter in a row, dropping to US$0.27 per 1,000 impressions on average, off 21% from last year and 27% quarter-on-quarter. Although ClickZ attributed the fall to the rising popularity of social networks generating billions of page impressions (and the resulting shift in ad buys), the rise of vertical ad networks (e.g. Amobee, Celltick) and doubts over the efficacy of standard banner ads, the sub-prime impacted global economy would play a much larger role in influencing corporate ad buys going into 2009. Suddenly, companies that tout typical online advertisement business models are feeling the breeze on the back of their threadbare pants.

All these can only aid in the proliferation of the Virtual Goods business model (free-to-play + micro-transactions on virtual assets). Gordon Golson, contributing editor for The Industry Standard notes that virtual goods is no match for advertising, and rightfully so for the big boys – Facebook won’t be too hung up trying to grow the US$34.5M ‘virtual gifts’ slice out of its approximate US$350M revenues in 2008. However, when it comes to fledgling consumer-facing start-ups, every dollar counts, especially when it is coming from absolute thin air.

As consumers feel the hurt and cut back on discretionary spending, a dollar or two a pop for instant gratification starts making a whole lot of sense – certainly beats justifying paying $50 for that latest hottest PC or console game to your mom or wife!

If you have less than 12 months of runway and have yet to come up with a clear monetization strategy, I’d advise you to think about such a model or its variant – it could mean the difference between life and death!

About James Chan

James Chan is an entrepreneur, investor, geek, photographer and husband/father based out of Singapore. Apart from frequent travels to Vietnam, Myanmar and Indonesia for work, James can also be found online via his trusty 15" Retina MacBook Pro or iPhone 6+.