Virtual goods in Asia: it’s even more than you think! (25 times USA?)

Following the publication of our free report on virtual worlds in Asia, that was downloaded several hundred times in a couple of weeks (which in itself is a testimony of the rising interest in virtual worlds), we got a few nice quotes here (Virtual Goods News) and there (PocketGamer) as well as good Twitter buzz. We also realized that there was a bit of confusion around it. We’ll try and clarify what is actually going on in Asia with virtual goods, and how we evaluated the market at 5 billion USD, which is 25 times the US market.

1. The report is about Virtual Worlds, but what is a virtual world?
Frankly, we don’t really know. What used to be a clear category (a virtual world is… Second Life!) is now increasingly overlapping with online games, especially MMOs (”3D virtual worlds with a purpose”) and social networks (”asynchronous virtual worlds with no graphics?”).

2. Virtual goods are not only in virtual worlds
The report focused on 2D and 3D non-gaming & non-business virtual worlds. Some services are given as comparisons and got noticed: Cyworld in Korea, Mobile Game Town and Gree in Japan. From our point of view, none of those are virtual worlds, but all three make the majority of their revenue from virtual – we prefer the term “digital” – goods.

3. What is the size of the virtual goods market in Asia?
An article last December suggested the US market for virtual goods to be around 200 million USD. We hereby claim that Asia’s virtual goods market might be above 5 billion USD. Here is why:

• In China, most online games monetize with digital goods (subscription, packaged software and advertising bring very little revenue)
• China’s online game market was estimated at over 3 billion USD in 2008. Several Chinese online game companies are listed on NASDAQ and NYSE: Changyou listed last week for over a billion USD (with 200 million revenue and 100 million profit – so the multiple is not crazy), others are Shanda, Perfect World, Netease, Giant Interactive. All of them have profit margins between 30% and 70%. Even drug dealing does not profit that much.
• Tencent, China’s largest IM+Avatar+SNS service brought it revenue of 1 billion USD in 2008, 90% from digital goods. The update of our ever-popular “Inside QQ” report is on its way – over 200 pages covering Tencent and China’s Internet at large with a special discount for purchasing now (-10% and a free update with the new version)
• Korea has an estimated 1 billion USD online game market, with similar conditions. This does not count Cyworld.
• Japan’s online game market is not so strong on digital goods, but two mobile social networks, Mobile Game Town and Gree, bring in quite a bit (250 and 60 million USD in 2008 respectively for the the SNS business only), with over 80% of their revenue coming from digital goods.

All this adds up to:
3 + 0.9×1 + 1 + 0.8x(250+60) = 5 billion USD and a bit more.
This is 25 times the US market.

4. Is this a surprise?
Not for us :-) but it might be for many as:

• Virtual goods is a nascent revenue model in markets with strong packaged software and console legacy
• Asian Online games are not well accounted for in Western reports (we call it the “English-speaking LAN” bias)

5. Will this transfer to other markets?
Some think it won’t. We think it will. Our years of research and the gradual transfer we observed lead us to be quite sure that the fundamental human drives behind the success of those services are the same East and West. In addition, there are now enough examples with 2D and 3D worlds in the West (Habbo, Stardoll, Club Penguin, IMVU etc.) to validate this idea. Simply check the parallel economy of World of Warcraft, the “gifting” and various virtual goods in Facebook or even the in-world transactions in Second Life and you’ll get an idea or where all this is going. Funny enough, the main sellers of virtual goods in the very Western WoW and SL are reported to be from Asia ;-)

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