A virtual good is a non-physical asset that is traded in an online community or marketplace. They are most commonly found in video games, as well as on social media platforms. In the platforms that provide virtual goods, especially video games, purchasing them enables users to level up more quickly or to unlock features that would’ve otherwise been time-consuming.
A virtual good is an intangible asset that is traded in an online community or marketplace.
Virtual goods were developed as a result of the demand for increased customizability in multi-user dimension video games.
Consumers don’t own the rights to the virtual goods they are purchasing.
History of Virtual Goods
The first virtual goods can be traced back to early multi-user dimension video games. The games involve players exploring a virtual world while interacting with other players within the game. The game publishers decided to capitalize on the willingness of users to pay to unlock features and customize their experience.
Applicability of Virtual Goods
An increasing number of platforms are using virtual goods as a way to enhance user experience and generate additional streams of income. They can now be found in online gaming, gambling, and social media. Within video games, many publishers are using virtual goods as a way to customize the user experience, allowing the players to purchase in-game components and costumes, such as shields, armor, skins, and otherwise unavailable maps.
Most gambling websites now use virtual money or tokens, which users must buy in order to participate in games. Even applications available through social networks, such as Facebook, are leveraging virtual goods in every way they can.
Issues with Virtual Goods
1. Lack of ownership rights
One of the major issues with virtual goods is that the consumers buying them don’t hold any ownership rights over the goods they are purchasing. The game publishers own all rights and can change or remove the goods to their own desire.
2. Unauthorized secondary markets
Secondary markets can arise where players buy and sell virtual goods unauthorized by their publishers. Scarcity is one of the main factors driving the price of goods on the secondary market. In 2000, US-based video game developer and publisher Blizzard Entertainment released a virtual gold within its World of Warcraft video game series, and soon after, a number of websites began buying and selling the gold.
Blizzard, among other companies, often includes rules in their terms of service against trading the virtual goods they offer on secondary markets. As a result, many game developers are taking legal action against mediators and participants in such markets
Lucrative Nature of Virtual Goods
In 2017, the global virtual goods market was estimated at $38.06 billion and is projected to grow by 500% by 2025. In 2018, the battle royale-style video game, Fortnite, reported sales of over $1 billion from virtual goods. An increasing number of tech companies are looking to capitalize on the phenomenon, offering various virtual items on their platform.
Also, developing a virtual good comes with a relatively low fixed cost and little to no variable cost to producers. The simplified model below shows why so many companies are capitalizing on selling virtual goods.
For example, in 2009, EA Sports launched FIFA Ultimate Team (FUT), an addition to their hugely successful FIFA soccer video game franchise. The FUT game mode allowed users to manage a soccer team, trade virtual players on their marketplace, and purchase packs of players.
EA stated in their 2019 annual report that approximately 28% of their revenue was generated from the FUT game. To put it in perspective, FUT is only a part of one of their hundreds of video game franchises.
Virtual goods aren’t just changing the way that users interact with the virtual world; they’re also changing the business model of the platforms. Epic Games charges nothing to download their game, Fortnite. Instead, it makes all of its revenue from the sale of player customizations.
With the constantly changing way in which consumers will purchase and consume content, companies will continue to become more creative with the ways they can capture digital sales.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: