Strategy & Competition

Who Wants to Buy a Digital Elephant?


A few months ago, Nita Flores—a 38-year-old health-care worker—began playing games on Facebook and spending real money on her virtual life. Though the games are free to play, Flores spends about $20 a month for extras like virtual outfits for her cat in Pet Society and a stable for her horses in FarmVille. The games are "very entertaining and relaxing after a hard day," says Flores, who lives in Queens, N.Y.

For years gamemakers mostly targeted the millions of young males who spent $50 and up for sports and shooter games to play on Sony's (SNE) PlayStation or Microsoft's (MSFT) Xbox. Now an increasing number of folks of all ages and both genders are minding digital farms, aquariums, and restaurants on social networks. The real growth in the games game is catering to their need for so-called virtual goods. Small amounts, like the 25 cents players pay for a plum tree on FarmVille or the dollar they pay for soup spices on Restaurant City, add up. Analyst Atul Bagga of the research firm ThinkEquity expects sales of virtual goods in the U.S. to almost double this year, to $1.6 billion. Women 35 and older, like Flores, are the "sweet spot," he says.

Startups such as Zynga and Playdom, which make some of the most popular games, are positioned to profit. Zynga, maker of FarmVille and other games, has a total of more than 240 million users per month, while social network games created by CrowdStar and Electronic Arts' Playfish each have more than 50 million. In comparison, Nintendo (NTDOY) has sold a total of 67 million of its popular Wii consoles since they were introduced in 2006, though of course the consoles cost $200 or more while Zynga's games are free. Traditional game sales are in decline, with U.S. sales of consoles, games, and accessories dropping 13% in January, according to researcher NPD Group.

PROMISE TO PAY

According to Bagga, only 1% to 4% of the people playing games on social networking sites spend for virtual goods. Now a wave of Silicon Valley startups is trying to make it easier for people to do so. Boku, in San Francisco, and Zong, based in Palo Alto, Calif., have created applications so gamers can easily pay for virtual goods via a mobile phone. They are appealing to kids who don't have bank accounts or credit cards and gamers in countries where phones are more common than plastic. "If you make the process seamless, it's definitely going to help," says Bagga.

Earlier this month, Kwedit, a Mountain View (Calif.) startup, began selling software to game companies that allows users to get currency for games immediately if they promise to pay later. Players of the animal adoption game FooPets, for example, can get an advance of digital cash so they can buy virtual food and shelter. They then print out a voucher for the amount owed and go to the nearest 7-Eleven store to make the payment. If the player doesn't pay up, Kwedit stops extending credit. "There is a group of players out there who would pay if they could [find a way]," says Danny Shader, Kwedit's founder and CEO. "We can drive a ton of revenue to the Zyngas of the world."

The interest in virtual goods is widespread enough that some companies are offering digital currencies to attract new customers instead of the airline miles or coupons they may have used in the past. Netflix (NFLX) gives first-time customers currency for social games. Connie Lai, a 31-year-old blogger and freelance writer in the San Francisco area, saw such an offer from retailer Shoebuy.com just before the holidays. If she bought two pairs of shoes, she could get $10 in digital coins for Pet Society. Though Lai already spends about $50 a month on virtual goods, she was happy to get the promotion. "I have to buy Christmas gifts and Halloween gifts and Thanksgiving gifts for my friends anyway," says Lai. "I might as well get the points."

Levy is a reporter for Bloomberg News in San Francisco.
Galante is a reporter for Bloomberg News.

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