The Fake Cow Cash Cow

A few weeks ago it was announced that social gaming powerhouse Zynga, who makes its money primarily through the sale of virtual goods, had a higher valuation than retail gaming powerhouse Electronic Arts, who makes its money primarily through the sale of hard goods. With the Farmville creator's value being estimated at $5.5 Billion (compared to EA's 5.1 Billion) and a recent study from the Inside Network estimating virtual good sales to hit 2.1 Billion in 2011, it appears that a sea change is taking place. For the first time buying fake things in games is gaining more traction than buying games themselves.

Being in the games business, I'm not surprised by this. Virtual goods have been helping to drive game profits in Asia for years. It was only a matter of time before the right platform (Facebook) combined with the right type of game to make virtual goods just as appealing to a US audience. What I am surprised about is the enmity that I hear and read both from casual observers and gamers about the value of virtual goods. Look at any article or blog on the subject and it will be followed by comments on how "wasteful," "useless" and "lame" virtual goods are.

So how much are people actually paying for this fake stuff? Reports tell us somewhere in the neighborhood of $23 per paying player per game. The kicker of course is that only 1-3% of a game's entire audience will actually ever buy something.

While on the surface it may seem insane to some to spend $0.50 on a virtual cow or $1 to clean a fake fish tank, virtual goods actually provide a good value when compared to many other forms of entertainment. In a study earlier this year by game maker PopCap, over 60% of respondents were playing social games for more than 30 minutes every day. If someone stays with a game for three months, that would equal over 40 hours of entertainment. Considering how much I regularly spend on movies, retail games, and mobile apps, I think virtual goods are hardly a wasteful way to spend my money.