Over $408 Million Invested in 41 Virtual Goods-Related Businesses in 2008*

Virtual Worlds Management released a report today announcing findings from a comprehensive study of publicly disclosed transactions which shows that venture capital and media firms have invested approximately $585 million in 41 companies [see below for corrections] $408 million in 40 companies that monetize at least in part through sales of virtual goods and currency in 2008. This is the first year in which Virtual Worlds Management has issued an investment report specific to the investment performance of microtransaction-based models.

With no prior years to compare the collected data with, trend analysis is still difficult. There are a few clear signals sent by the numbers, though. One, microtransaction-based businesses are growing at an explosive and sometimes unstable rate despite worldwide economic adversity. Two, venture capital investors worldwide are demonstrating confidence in profitability of the microtransaction-based business model despite adverse economic conditions.

Investments total a healthy $147.73 million in Q1 2008 and drop slightly to $101.7 million $100.7 million in Q2 2008. Q3 2008 boasts an incredible $266.54 million invested, even though this period marks the official saw $91.54 million invested even though this period marks the official beginning of an ongoing global economic downturn. The downturn shows its effects more in Q4, when investment dwindles to $69 million.

Nearly $100 million of the 2008 grand total for virtual goods investments went to Chinese firms operating MMORPGs along the Eastern free-to-play, microtransaction-oriented model.  This is not in any way unexpected, as the free-to-play model is well-established and has shown strong performance in  Southeast Asian territories.

The Chinese firm Shanda Online received the year’s largest investment of $175 million, while competitor 9you received the second-large largest investment at $100 million. The thirdsecond-largest investment of $40 million went to American MMORPG publisher Turbine. While Turbine’s flagship products are currently subscription-based MMOs like Lord of the Rings Online, the company announced earlier this year that it was entering development of a new project that would monetize through microtransactions.

MMORPGs received the lion’s share of this year’s virtual goods-related investments, with nine eight companies receiving a total of $383.6208 million. This reflects the proven success both of the platform and the free-to-play model as a way of monetizing through microtransactions in markets around the world. With increasing investments in Western companies, it also indicates that this model still has robust growth potential, as the free-to-play basis of these games and the relatively low cost of any virtual items purchased in them is likely to be very appealing during an economic downturn.

Virtual goods are becoming a significant part of other types of businesses, too, as reflected by the diversity of the companies listed in the report. $83.282.2million in venture capital was invested in companies developing social games, sometimes played through network platforms like Facebook, which monetize primarily through microtransactions. Third-party payment providers that help users spend on virtual goods across a variety of platforms received $35.3 million in investments.  The bulk of remaining investment funds, $55.67 million, went to youth-oriented virtual worlds like Gaia Online that monetize through sales of virtual goods.

It remains to be seen whether the massive drop-off in investment at the end of 2008 signifies the beginning of a decline in virtual goods business in 2009 or, more likely, just a fluctuation in the growth of a relatively new and somewhat unpredictable business model. With both the JP Morgan Net Investment Guide and most contributors to the 2009 Virtual Worlds Management Report calling for growth in virtual goods revenue in 2009, though, a sustained decline seems unlikely. 

Instead, it seems likely that growth for virtual goods businesses will continue throughout 2009, though perhaps at an unsteady and unpredictable pace. It is very likely that growth of virtual goods in 2009 is going to parallel a predicted downturn in advertising spending, and as such, the stability of a microtransaction-based revenue stream is likely to be attractive to potential investors.

Note that this report is limited to investment data for games, worlds, and platforms that could be confirmed as monetizing or intending to monetize, at least in part, though sales of virtual goods or currency.  There may be more whose data was excluded due to lack of public availability or simple error.  If that’s the case, please let us know in the comments or e-mail me at alicia [at] showinitiative [dot] com.

Data for games, world, and platforms that monetized exclusively through subscription payment or ad support models was excluded intentionally.

To help in analysis of the data numbers, this report annotated whenever possible which microtransaction revenue streams individual platforms were using as part of their business. Note that individual platforms can (and frequently do) use combinations of these streams. The three main revenue streams considered for this report were:

• Virtual Goods Sales:  30 businesses covered by the report encourage users to purchase virtual goods from an official store. In some apps it will be possible to amass the goods in other ways, such as by playing a game, trading, or amassing virtual currency without engaging in RMT, but usually in this model, spending cash is the quickest way to amass lots of virtual goods.

  In some youth-focused virtual worlds, a parent must subscribe their child to the service before the child is allowed to buy or trade virtual goods within the platform. In these cases, the platform was considered to be monetizing at least partially through indirect virtual goods sales.

• Virtual Currency Sales: 34 businesses covered by the report encouraged users to spend real money in order to obtain virtual currency for use in the game. The platform may have ways of obtaining virtual currency besides spending real money, or may in fact have multiple currencies. Simply being able to spend real money on any particular currency in a platform still means it’s monetizing through this model.

  This is also used to denote the way third-party payment services monetize. Generally a payment service in some way facilitates a user’s ability to buy virtual currency or virtual goods within a game. The payment service may act as a backend technology solution for a platform’s developer or may be one of many payment options open to a user.

• Ad Offers: Offer-based advertising is a way of monetizing through ads that is only possible in platforms where virtual currency is a major part of the user experience. Seven businesses covered by the report incorporate it into their business model. Generally with an ad offer, users have the option of clicking on an ad and then perhaps taking a survey, buying something from a sponsor, or engaging in some other activity. When the user’s participation in the offer is finished, the platform compensates them with a virtual currency reward.  The platform, in turn, generates revenue based on click-through its offers are receiving.

For more information, check out the full list of companies and come visit us at the Engage! Expo (March 10-11), in New York City, where we'll have an entire track dedicated to the new business of virtual goods.

Correction: This report originally listed a total of $585 million
invested across 41 companies. $175 million in Q3, however, was raised
by Shanda Interactive as a round of debt financing, as was $1 million
in Q2 from Playfish. We have corrected the list below and the totals
above.

Join us for the App Developers Conference – October 26-27, 2011 in Santa Clara