What Is a Virtual Good?

A virtual good is an intangible asset that is traded in a virtual economy, such as in online games. Virtual goods are by definition non-physical; their value is determined solely by what users are willing to pay for them.

The market for virtual goods has experienced exponential growth in recent years, spurred by the growing popularity of social media platforms.

Key Takeaways

  • Virtual goods are intangible assets traded in virtual economies, such as in online games.
  • The market for virtual goods has exploded in recent years, with annual revenues estimated to be over $15 billion.
  • The line between physical and virtual goods may blur in the years ahead as transactions involving the exchange of physical and virtual assets become more common.

Understanding Virtual Goods

To those unfamiliar with the phenomenon of virtual goods, it may be difficult to understand how companies are able to charge significant sums of money for assets that have no presence in the real world. Nevertheless, their popularity is undeniable. In 2013, the popular online game "Farmville," published by Zynga Inc. (ZNGA), generated over $1 billion in revenue from the sale of virtual goods. More recently, the free-to-play video game "Fortnite" sold $1 billion worth of virtual goods in 2018. Globally, recent estimates for annual virtual-goods revenues have totaled over $15 billion.

One way of understanding the popularity of virtual goods is by viewing them not as a product, but as a service. This is because, for their customers, they enhance and improve the experience of the game or community in which they spend their time. This is especially clear considering that many of the games in which virtual goods are most popular are in fact free to play, meaning the decision to purchase virtual goods is truly voluntary.

Yet despite their popularity, virtual goods do come with unique challenges. Because of their virtual nature, virtual goods can be lost due to hacking or technical glitches. Likewise, their legal status can become unclear, especially when several layers of historical transactions are involved. Many platforms have sought to encrypt virtual goods transactions in order to protect against these risks.

Real World Example of a Virtual Good

In the years ahead, it is likely that the line differentiating physical goods from virtual goods will begin to blur. Indeed, this process has already begun. In China, the practice of trading virtual goods for physical ones became so widespread that the Chinese government had to ban the practice in 2009. Likewise, Zynga Inc. announced in March 2012 that it had launched a partnership with Frito-Lay whereby buyers of Frito-Lay chips would find coupon codes for virtual goods redeemable inside their games' virtual economies.

It is also likely that the total size of the virtual goods market will continue to surge, driven by the growth of online gaming. This will likely increase demand for avatars, power-ups, and other in-game items through in-app purchases, which are being made increasingly convenient by app developers. There is likely to also be increased demand for items that impart prestige to users or are otherwise rare. For example, a user of the online science fiction game "Entropia Universe" paid $330,000 in 2010 for a virtual space station.