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.

  • This is a great post with a lot of clear assumptions are helpful to anyone trying to understand the size of these markets. The numbers here (at least order of magnitude) jive with what I've heard and seen. I'd be curious to hear more about some of the bigger international players and the kinds of revenues they're bringing – esp Cyworld's latest. I'm also curious about the Facebook apps and how much of their revenues come from US-based Facebook users versus international. Finally, if anyone has any data on age distribution that's also another VERY interesting cut, especially to see which players have been successful in tapping into tweens versus into adults, and whether any have been equally successful across the board.

    Quite a wishlist I just pulled together šŸ™‚ Thanks again for the insightful post

  • This is a great post. Here are some numbers I gathered from the IGDA white paper, MTX section that I was in charge of:
    In February 2007, North American players spent $1.6 million on 600,000 virtual products within Maple Story; From November 2006 to June 2007, $6.7 million worth of virtual gems were purchased to upgrade features on Pogo.com; King.com collected $27 million from gaming micro-transactions in 2006. Habbo Hotel has more than 75 million avatars worldwide (7.5 active users), and more than 90% of its revenues (estimated $77 million in 2006) come from virtual goods; 50% of transactions made on Diner Dash today are below the $4.99 price point. A full 36% of the revenues from Diner Dash Hometown Hero are coming from MTX, the rest being download sales; Three Rings did $3M in Doubloon sales last year with a price point going from $2.95 to $99.95 with average sale at ~$20 and ARPU for a paying user of ~$50 in a particular month, lifetime north of $100; and over at Cafe.com, 42% of the earliest users have utilized more than 5 purchasable items per game session.

  • Great summary post, I can see this getting referenced a lot. These numbers match pretty well with what I have heard from other people in the industry. I can see this getting referenced a lot. I think the “other casual MMO” segment has somewhat higher revenue, although that has minimal impact on the overall numbers. As Roman points out, MapleStory probably makes in the order of $20m per year. The WSJ reported Nexon revenue for 2007 around $29m and it is widely assumed that a substantial part of that is virtual items. While Facebook itself makes substantial revenue from virtual goods, I don't think third party facebook applications profit much of this. I know numbers for one top 100 Facebook application that sells virtual goods. Their total revenue from these transactions will be below $1m in 2008.

  • Julio,

    Yes, I have a bunch o other questions that I'd like to have answered, particularly about how well the Korean in-country revenues are holding up. As for FB apps, a lot of them do have a meaningful portion of their revenue coming from overseas, but I don't think it's way off base to assume that top performers are still generating $100K domestically.

  • Roman,

    Thanks for the good numbers. As I get more of them, I'll update this post.

  • curious

    Roman, can you post a link to the Whitepaper you mention? thx

  • Great stuff Charles and great to see you back to blogging (been following your shared items for a while now =))!

  • Juho Hamari

    Great post Charles.

    I have started a forum thread concerning revenue data and other metrics at VERN forum, feel free to contribute, thanks.

    http://virtual-economy.org/blog/revenue_data_an

  • Jim

    I went to a Meet Up where the founder of Red Octane (developer of Guitar Hero) shared a bit of history about his company. It was a great story of persistence and making the best of every opportunity.

    He mentioned that Guitar Hero is projected to gross about $1.7B to $1.9B in sales in 2009. Yes, B for Billion.

  • Fascinating take. However, I wouldn't agree with this part: “ne 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 donā€™t think excluding this revenue has a major impact on rough market estimates.”

    Second Life residents transact among themselves on the order of $1 million per day. While it is true that Linden Lab doesn't see it, that is a pretty darn big number on an annual basis, compared to the other numbers you are estimating. And Second Life is pretty small. If it fails to thrive, feel free to ignore. But if it takes off, secondary markets (or, more accurately, markets for user-generated content) are definitely worth considering as 'major impacts.'

  • FaeWayard

    I couldn't agree with Robert more here. The Second Life market for virtual goods (and Services) is 8.8B L$ or 33M USD as of October , and while LL does not charge a percentage of sales, it does make revenue on providing the marketplace – virtual store space, premium membership fees, classified ad charges, content upload fees, etc.
    IMVU, it could be argued, is in exactly the same boat- it's a marketplace where the content is User-Generated, and how much of that 1M/mo revenue comes directly from commissions on Goods Sales, and how much is overall service/subscription fees/”virtual land”(rooms)?
    There are even Tertiary Markets, from your terminology, handling comparably large volumes in USD transactions and making commissions/service fees solely for the SL Virtual Goods market, such as OnRez and XStreetSL (previously SLExchange).
    SL's Geographic split in usage has been consistently around 44% US for a while (published monthly). 44% of a 33M/mo worldwide market still makes many others a rounding error in comparison. Can anyone find a quotable citation of geographic breakdowns for Gaia or IMVU?

  • Robert,

    Yes, I agree that there is a ton of activity among SL users. From what I have seen, a lot of this economic activity that you reference doesn't involve U.S. users and is more common among the international audience.

    You do bring up a really good point. It is worthwhile to try to distinguish between user-to-user trade and true secondary markets. Lots of worlds allow user-to-user trade but only in in-world currency. I excluded secondary markets as they're more about resale in many cases – I'll noodle on how to include the SL data in future estimates.

  • Fae,

    Your numbers line up with what I've heard about the international reach for Second Life – I've chosen to focus on the US piece and I've attributed a relatively most contribution based on what I've heard about the distribution of their active users. You do raise a lot of good points here and it sounds like you know a lot about the SL community.

  • Wow, thanks for sharing all this, Charles! Definitely the most thoughtful and thorough analysis I've seen yet. I'm curious — a lot of people at the Virtual Goods Summit were estimating the global market at somewhere between $1.5 – 2 billion. Does that seem right to you? And if so, doesn't $200 million for the U.S. seem a bit low? I realize that other countries, in Asia in particular, are probably farther ahead than we are in virtual goods ubiquity, but maybe not THAT far ahead? Specifically, I'd argue that your $50 – $75 million estimate for social networks and social applications is particularly low. For starters, Jeremy Liew did a more recent post where he put Facebook's revenue from virtual goods at $50 – $60 million all by itself (http://lsvp.wordpress.com/2008/11/12/facebooks-…), and I can say from our experience at Offerpal that the revenues from social applications are definitely greater than the $20 – $30 you've posited. Also, don't forget about MySpace, which isn't far behind Facebook. Still, you're analysis is extremely strong and valid. I wonder when the big research firms are going to start paying more attention?

  • Hi Matt,

    Thanks for the comment. I have no problem believing the global figure being 10x what we see here in the United States. The U.S. is still getting its feet wet with virtual goods and there are companies in Asia doing hundreds of millions of dollars in virtual goods as standalone entities – I have a hard time seeing the global market at anything less than $1-2 billion.

    My $200 million estimate is very conservative. It assigns no revenue to the spaces where I have no insight (subscription MMOs and console games, music-oriented ones in particular).

    Jeremy's estimate is for Facebook's global virtual goods revenue, a portion of which must be non-US given their traffic. Given what I know from Serious Business and what I've heard from you, I applied some conservative estimates to the social nets piece. Given what I know about one large company in particular, there is a lot of money globally in this space. I just didn't know how much of the incentivized offer and virtual goods revenues to US folks so I kept the guesstimate low relative to the total.

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  • These are really some interesting facts. Im a part of MMO gaming myself (for a couple of years) and was totally clueless about such developments.
    If possible, some estimates on Runescape MMO (by Jagex. Ltd)?

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  • ivanwalsh

    Hello Charles,

    Great article. I work in China and have some insight into the gaming marketing over here.

    Something you might want to factor into other research pieces is the growing trend (at least in China/Korea) for kids to 'rent' virtual goods.

    Why rent?

    They rent things like wallpapers, clothes and other VGs on a try now, buy later philosophy.

    They also rent items when gaming at certain times of the year (market opp there for someone) to boost their profile and bling up.

    also, fwiw, most kids over here dont have PCs at home. too expensive so play games at web cafes often sharing terminals with their mates. sometimes they also share the payments/credits.

    Regards,

    Ivan

    http://www.ivanwalsh.com

  • The views expressed in this report accurately reflect my … NYSE, and the United States Securities and Exchange Commission!

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  • Wow I had no idea!

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