Virtual Goods: A New Business Model

The virtual economy has yet to attain its potential in Italy, in spite of having reached considerable levels in other countries. In 2011, it is estimated that sales of virtual goods through micro-payments will be worth $2.1 billion in revenues for US firms.

Virtual goods, and the companies able to produce them, are the new century's disruptive innovation in communication and entertainment. The explosion of virtual goods sales on social networks, virtual words and multiplayer games, as well as mobile applications and videogame consoles, is among the main trends recorded in 2010, and is likely to consolidate in 2011 and in the next few years.

What are the opportunities for firms in these digital businesses? Differing from the real economy, the virtual economy does not satisfy actual needs, but rather meets a demand for entertainment. Average monthly purchases are around €10-20 per month, but it's the volume of users that counts. In particular, virtual goods are intangibles that are purchased to be used in online communities and games, such as furniture for your virtual room or clothing to dress your avatar. Virtual goods are rocking established business models: in 2010, sales of virtual goods on iPhones have surpassed advertising revenues. Consequently, a little more than a year ago Apple has introduced the possibility for users to buy virtual goods within its apps.
Italian firms are missing on extraordinary opportunities. In fact they are largely absent from makers of Facebook apps such as virtual gifts, which have generated growing revenues, from $600 million in 2008 to $1,6 billion in 2010. For instance, in the Habbo 3D online community, where avatars interact as they would in a real city full of private apartments and public spaces, users buying virtual goods generate 90% of revenues. The turning point for companies operating in the digital world is to understand that traditional online business models based on advertising are no longer profitable, and have never been as profitable as sale of virtual goods through micro-payments have been. This new business model puts less pressure on firms, as it complements the stream of advertising revenues. Also, the opportunities for the digital side of the business to pull the real side are many, insofar as they enable integrated communication of brand values and augment brand awareness. To offline consumers, firms can either offer complimentary virtual goods or push them to consider the purchase of a digital product. All this is crucial to faithfully replicate on the online world the company's status, image, and preferences of the real world. Companies can no longer afford to ignore the economy of virtual goods.