We all know that the global economy is in the toilet at the moment. Discretionary purchases are slowing as people tighten their budgets in anticipation of a long recession, and businesses–especially those that sell more expensive products–are going to suffer. On the other hand, it provides opportunities for certain types of businesses.
In the New York Times this morning, the world of virtual goods was profiled revealing an important fact: when consumers can’t afford a real Gucci handbag they may opt for a virtual one in order to express themselves. It seems silly, but the industry is successful. Gaia Online, a youth-oriented virtual world with roughly 7 million visits a month, sells $1 million of virtual goods monthly–an impressive conversion rate. And that’s only a small part of the $1.5 billion generated annually from the global virtual goods market.
While most virtual goods sales are confined to virtual worlds like Second Life and Gaia and social networks like Facebook, it seems the time is right for location-based social networks grab a new revenue opportunity. Bigger LBS networks like Loopt are still raising capital for expansion, all but confirming a lack of profitability. As I mentioned a couple of weeks back, I think virtual goods would bring an excellent revenue stream to LBS. People would likely be willing to pay a dollar for a virtual good related to a place they’re visiting. Maybe for the sentimental value or maybe just because it’d be fun to do. And for the company selling the product, they’d be rewarded with profit margins of 70 to 90 percent because virtual goods don’t require huge warehouses for storage or factories for production.
Venture capitalists are bullish regarding the virtual goods market too. PlaySpan, a virtual goods marketplace, recently raised $16.8 million in a Series B round (PDF file) bringing the company’s total funding to $24 million. If VC’s are spilling cash into the industry, they think it will succeed, and any location-based social network that doesn’t jump at the opportunity is nuts.
Then again, maybe I’m completely wrong. Maybe the best way to monetize an LBS service is to write a completely unrelated book.
