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My Best Estimate for the Size of the Virtual Goods Market in the United States

Over the past week or so, a number of people have asked me if there is any good data that one could use to estimate the size of the virtual goods market in the United States for 2008. I haven’t seen too many published estimates that make sense to me, so I thought I would start working through the exercise of coming up with an estimate of my own. For those of you who are short on time, I’ll save you the need to read the entire post – my guess is that the virtual goods economy in the United States is at least $200 million and possibly more. But please do read on and help me refine my estimates by providing some additional information.

Before I get too deep into my analysis and assumptions, I wanted to suggest a few important questions to consider when trying to come up with a sensible estimate:

Subscription vs virtual goods revenue – There are a number of companies, both in the free-to-play and subscription gaming space, that blend both virtual goods powered by microtransactions or macrotransactions and subscription revenue. So how should we treat this subscription revenue? For my own purposes, I’m going to exclude what I estimate to be revenue driven primarily by subscription fees unless those subscription / recurring fees are used as a way to provide premium access to special features not available to the general public. So, for free-to-play games these subscription / premium services are included in the total revenue estimate whereas I am going to exclude them for games or services where a subscription is required to access the service.

Primary vs Secondary markets
One of the biggest challenges in estimating the overall size of the virtual goods market is understanding the breakdown between transactions that take place in primary and secondary markets. There are lots of games with thriving secondary markets, some of which operate for cash and some of which operate for virtual currency, some of which are sanctioned and some of which are not, some which operate openly and some of which that don’t. Adding in various forms of currency farming, which are just secondary markets on their own, it becomes really difficult to quantify the scale of secondary market activity. So instead of speculating, I’m just going to exclude it.

One thing worth considering – in many (but not all) cases, secondary market transactions reflect revenue that flows between players and the revenue does not accrue to the publisher. So I don’t think excluding this revenue has a major impact on rough market estimates.

U.S. vs Global Estimates
I would have really liked to make a global estimate, but I think that’s really difficult. The reason why it’s so hard to estimate is that there are a lot of players in various countries that are large players in their own geographies but not major players on a global scale. So making a global estimate would require a deeper understanding of what’s happening in some specific key countries such as Korea, China, Germany, and some of the other emerging gaming markets.

One other reason I don’t think it’s that a global estimate is as useful is that relatively few companies have shown an ability to succeed in multiple countries. There are a few exceptions (Habbo, Runescape, Nexon) and a few others that prove the rule (CyWorld).

Casual MMOs and Virtual Worlds: $50 million to $75 million
Gaia Online has stated publicly that they do more than $1 million per month in virtual goods. In the spirit of disclosure, I used to work at Gaia and I know that this figure is both accurate and not an anomaly reported based one month’s performance. And, believe it or not, Gaia’s traffic skews heavily toward the US. IMVU has also stated that they do roughly $1 million per month in virtual goods sales as well, but I have less visibility into the geographic split of their traffic and how firm that $1 million has been over time. Habbo does somewhere in the range of $60 to $70 million annually worldwide, but a relatively small chunk of that activity (my guess is 10-15% by revenue volume) takes place in the United States. Based on what I’ve observed from other players in the space, including Stardoll, Meez, Neopets, and others, I have a rough idea for how much they’re making. Rather than try to estimate each of their revenues, I’ll lump all of them into the “other casual MMO and virtual worlds” bucket and call that $20 million per year. The last company I want to specifically call out is Second Life. They make a very healthy topline revenue based largely on real estate and a bit on the premium accounts a well. Second Life, however, has a very international user base so I’m not going to attribute a ton of revenue in this total to their activity.

You’ll notice that there are a lot of familiar names missing here. No Club Penguin. No FlowPlay. And I’m excluding most of the kid-focused virtual worlds and communities here as those are driven primarily, if not exclusively, by subscription revenue. To my knowledge they’re less focused on a microtransaction-based business model than they are the classic subscription model. I don’t find that too surprising as kid-focused virtual worlds have the opportunity to have a parent in the loop (and hence make selling subscriptions to young people more lucrative).

Social Networks and Social Networking Applications: $50 to $75 million
Of all of the places where virtual goods are making hay, the one place where I think it’s being underestimated is on social networks. Estimates, including this one by Jeremy Liew, place Facebook’s virtual gifts revenue at somewhere in the neighborhood of $35 million on an annualized basis. If you add in the revenue streams that top application developers are generating by selling virtual goods and services on social networks (both MySpace and Facebook), I think there is another $20-30 million at a minimum. Top applications can do anywhere from $100,000 to $1 million per month in virtual goods, with the high end of that range being more anomalous than average. I would add an addition $20 to $30 million in revenue from app developers on social networks to the Facebook total, bring the category total to around $75 million (if each of the top 10-15 social networking application developers were to generate $100K per month on average in virtual goods revenue, you start getting in the $15-20 million range very quickly).

Let me pause for a moment here and say that I feel pretty good about the order of magnitude of the calculations above. Those are two spaces where I feel like I have a pretty firm grasp on the . The next two or three categories are far more speculative and I’ll need your help to better fill in the gaps.

Free-to-play Flash and downloadable games: at least $50 million
Nexon has stated in the press that they have done revenues of almost $30 million in 2007. There are other games, such as Puzzle Pirates and Runescape (in the range of $60 million globally on an annual basis) that are generating millions of dollars in revenue in the United States.There are also a number of other free-to-play games, some of which are Korean / Chinese IP repackaged for the US environment and some of which are net new IP developed here, for which I have no idea how much revenue the generate. Nexon appears to be the clear leader in making this model work. Gameforge is a very large company in the FTP space, but I don’t have much sense for how much revenue they do in the United States. There are also many other large regional or country specific publishers who do huge revenue outside of the United States. I have to say that I’m at a loss at estimating the market size here.

I am curious to hear more about people who are succeeding in this market today. If you have data or want to chat, you can leave a comment or just message me directly.

Subscription MMOs: unsure, but my hunch is that it’s large
Okay, this is probably the trickiest sub-segment to target. This one definitely deserves its own post as I continue to get data. There are two things that make this really difficult to gauge. First, there are just a ton of subscription-based MMOs whose financial performance is difficult to track. It’s hard enough to figure out what their actual subscriber numbers are and the breakdown between subscription revenues and virtual goods. Second, many of the most popular MMOs have thriving secondary markets, some of which are sanctioned by publishers and some of which are not.

Console Games with Online Components
I have even less insight here as there are new generations of games coming to market that will have a major microtransactions components. I’ve heard some really large numbers tossed about in this space, some of which are so large as to defy reason (specifically around the music games like RockBand and Guitar Hero). If you have thoughts on this one, let me know.

This is just a thinking out loud exercise. Please contribute your thoughts to make this a better estimate.

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