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Virtual goods continue to make (real) serious money

Sales of virtual goods will continue to grow at an enormous rate, according to a new report. But the lack of third-party vendors may strain user's desire to spend.

The U.S. market for virtual goods will reach $1.6 billion in 2010, with social gaming contributing $835 million of that, according to a new report released Tuesday by research firm Inside Network. Virtual good sales were expected to clear $1 billion in 2009, a substantial increase year-over-year.

International sales of virtual goods have outpaced the U.S. rather dramatically, as witnessed by the explosive growth in South Korea and China, which had 2009 sales estimates of $3.5 billion to $4 billion with the market expected to reach $5.5 billion by 2012.

"Inside Virtual Goods: The Future of Social Gaming" shows not just the potential for revenue growth but how many opportunities are still available for game developers to better leverage virtual goods in place of advertising and offers.

Also interesting is the fact that the bigger vendors don't all have offerings in each of the gaming segments. Zynga, for example, has a strong presence with four resource management and simulation games, but only one game in the gambling space.

Inside Network

Virtual goods show impressive growth but are still nowhere near mainstream entertainment such as movies, where "Avatar" earned $500 million domestically in little more than a month of release. That said, virtual goods, and the companies that offer them games are significantly cheaper to build and launch.

However, there are several challenges for virtual goods sales--the primary obstacle being limited distribution channels. To date, virtual goods sales have been dominated by Facebook and games developed by vendors that build virtual good sales directly into the game play.

Accordingly, there isn't much of an opportunity for third-party virtual good manufacturers to sell into a network (in contrast with advertising, which is much more promiscuous).

Regardless, I remain very bullish on virtual goods as nice additions to games if not an actual industry unto itself. In addition to being low-cost enhancements to many games and social networking sites, they represent a very positive business model shift away from advertising and annoying offers.