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| Selling internet air |
| Jeff Segal / May 19, 2009, 00:58 IST |
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Selling nothing for something seems like the ideal business model. As fantastical as it may sound, some web companies have actually found a way to do just that. The sale of so-called “virtual” gifts, services and other fictitious charms on the internet is becoming a big business. Yet while billions may be made, this made-up industry faces some very real barriers.
First, it helps to explain what a virtual good actually looks like. It is essentially a product or service that has a real value to a user online but no tangible value in the outside world. It can range from imaginary flowers you plant on a friend’s Facebook page, to virtual lipstick smeared on a user’s online character, or avatar. In online gaming it might include virtual flaming swords for bit-to-byte combat.
While small in the grand scheme of things, it represents a big and fast-growing business. Chinese social network Tencent recently reported a 75 per cent annual increase in first-quarter revenues to $366 million. Nearly all of that came from sales of virtual goods to internet and mobile phone users. Not surprisingly, the company’s operating margins on these imaginary products is an eye-popping 70 per cent.
China isn’t the only place where real money is being made from virtual stuff. Facebook sold some $40m worth of virtual gifts last year, according to analysts. Now it is developing a payments system for developers’ virtual goods that gives the company a cut of the resulting revenues. The overall virtual goods market on Facebook is expected to bring in $500mn in revenues this year, according to executives at Super Rewards, a virtual currency company.
While the industry is promising, it also presents some problems. There’s no legal precedent stating that a user actually owns their goods. As a result, counterfeiting could undermine the business. There are also the issues of novelty and overproduction. How long can a product with no real-world value stay useful? And how fast do prices drop when such items are mass produced? Companies will have to churn out different goods in limited editions just to keep users amused.
And, of course, there’s the chance that users will realise they’re paying something for nothing and go buy some real flowers. Until then, these companies have the ultimate business model.
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