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Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction withimportant disclosure information, i ncluding an attestation under Regulation Analyst certification, found on pages 8 - 10 of this report or at the following site:http://www.piperjaffray.com/researchdisclosures
Internet
Will People Really Pay Money For Virtual Goods?The Answer Is Absolutely
CONCLUSION:
Many investors wonder whether Internet users will truly adoptthe emerging virtual goods model exemplified by Facebook's gifts platform and themany third party social game developers tied into social networks by paying cash toparticipate. Based on a recent survey of 332 Internet users, we believe the clearanswer is yes, and with more consumers stepping into the fray near term. Weestimate the worldwide virtual goods market to grow to $6 billion by 2013, up from$1.3 billion in 2008, and believe virtual goods will likely be the fastest growingopportunity online over the next five years.•
Internet Users Show Willingness To Spend Money On Virtual Goods.
In arecent Piper Jaffray survey of 332 Internet users (qualified by making one ormore online purchases in the last three months, which was 90% of respondents),we discovered that 8% of Internet users say they are willing to spend real moneyon virtual items. Another 9% are unsure if they are willing to spend money onvirtual items or not and the remaining 83% claim to be unwilling to spend onvirtual goods. While this is the first time we have collected data on the topic webelieve the number of Internet users willing to pay for virtual items is likelyhigher today than it was a year ago based on the extreme growth in popularity of social games like Farmville and Mafia Wars. We expect the consumer comfortlevel to grow as users spend more time playing social games and using socialnetworks.•
Virtual Goods Estimates: Most Exciting Growth Opportunity Online.
Weestimate the worldwide virtual goods market totaled $2.2 billion in 2009 and weexpect the market to grow to $6 billion by 2013. We believe a significant portionof this revenue will continue to come from the International markets. We estimateU.S. virtual goods sales will make up only 28% of total virtual goods in 2009, butgrow to 41% of the total by 2013 as social gaming and widgets become moreadvanced and more widely used. We expect consumers to become increasinglycomfortable with paying real cash for virtual items, with the near termopportunity in converting the 9% of the Internet users that are unsure if theywould be willing to pay real dollars for virtual ones. We believe ultimately, by2013, the U.S. will contribute $2.5 billion to the overall virtual goods markets.
Other Survey Highlights Regarding Virtual Goods Users:
• Currently, Internet users at the lowest and higher ends of the income spectrumseem to be purchasers of virtual goods. We believe this suggests two takeaways:teens and pre-teens are engaging in these games and finding ways to pay forgoods; and young professionals are likely also engaging heavily in social gaming.• Buyers of virtual goods seem to generally be heavy video (TV, online, etc.)consumers.• Buyers of virtual goods seem to generally be comfortable with purchasing otherdigital items online as many current buyers of virtual goods also consume paidcontent on iTunes.• Subscribing to email marketing programs appears to be popular among users of virtual goods.• Virtual goods buyers are frequent buyers of real goods online and expect to spendmore online in general and on big ticket items over the next year.
RISKS
Risks to the growth of the virtual goods market include inability of companies todevelop compelling games and services utilizing virtual goods and consumer slowdown in online spending.
Industry NoteJanuary 22, 2010
Gene Munster, Sr Research Analyst
Douglas J. Clinton, Research Associate
Nicholas R. Gallus, Research Analyst
Reason for Report:
Industry Overview
Related Companies: Share Price:BIDU 439.97KONG 11.13SINA 41.46SNDA 51.58SOHU 60.32
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Internet Users Show Willingness To Spend Money On Virtual Goods.
In a recent Piper Jaffray survey of 332 Internet users(qualified by making one or more online purchases in the last three months, which was 90% of respondents), we discovered that 8% of Internet users say they are willing to spend real money on virtual items. Another 9% are unsure if they are willing to spend money onvirtual items or not, and the remaining 83% claim to be unwilling to spend on virtual goods. While this is the first time we havecollected data on the topic we believe the number of Internet users willing to pay for virtual items is likely higher today than it was ayear ago based on the extreme growth in popularity of social games like Farmville and Mafia Wars. We expect the consumer comfortlevel to grow as users spend more time playing social games and using social networks. We estimate the worldwide virtual goodsmarket to grow to $6 billion by 2013, up from $1.3 billion in 2008. We believe that by 2013, the U.S. will contribute $2.5 billion to theoverall virtual goods market.Question: Would you be willing to pay real money for virtual items in a game? For example, paying $1 for more 'energy' in acompetitive online game with a friend.
Yes and IhaveYes, but Ihave notdone it yetNo, Iwould notbe willingto pay Not sure Total
14 13 275 30 332
TOTAL
4% 4% 83% 9%
Source: Piper Jaffray
Virtual Goods Estimates: Most Exciting Growth Opportunity Online.
We estimate the worldwide virtual goods market totaled$2.2 billion in 2009 and we expect the market to grow to $6 billion by 2013. We believe a significant portion of this revenue willcontinue to come from the International markets. We estimate U.S. virtual goods sales will make up only 28% of total virtual goods in2009, but grow to 41% of the total by 2013 as social gaming and widgets become more advanced and more widely used. We expectconsumers to become increasingly comfortable with paying real cash for virtual items, with the near term opportunity in converting the9% of the Internet that is unsure if they would be willing to pay real dollars for virtual ones. We believe ultimately, by 2013, the U.S.will contribute $2.5 billion to the overall virtual goods markets.
U.S. Virtual Goods Revenue Estimates
$-$500$1,000$1,500$2,000$2,500$3,0000%20%40%60%80%100%120%140%160%Revenue ($m)$265 $621 $1,087 $1,547 $2,019 $2,462Y/Y Growth134% 75% 42% 31% 22%2008E 2009E 2010E 2011E 2012E 2013E
Source: Piper Jaffray
Industry NoteJanuary 22, 2010
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Worldwide Virtual Goods Revenue Estimates
$-$1,000$2,000$3,000$4,000$5,000$6,000$7,0000%10%20%30%40%50%60%70%80%Revenue ($m)$1,325 $2,219 $3,107 $4,070 $5,047 $6,006Y/Y Growth67% 40% 31% 24% 19%2008E 2009E 2010E 2011E 2012E 2013E
Source: Piper Jaffray
Other Highlights; Unsurprisingly, Virtual Goods Buyers Are Comfortable Shopping Online Among Other Activities.
Oursurvey also revealed a number of themes among current buyers of virtual goods:• Currently, Internet users at the lowest and higher ends of the income spectrum seem to be purchasers of virtual goods. We believethis suggests two takeaways. First, teens and pre-teens are engaging in these games and finding ways to pay for goods. Second,young professionals are likely also engaging heavily in social gaming.• Buyers of virtual goods seem to generally be heavy video (TV, online, etc.) consumers.• Buyers of virtual goods seem to generally be comfortable with purchasing other digital items online as many current buyers of virtual goods also consume paid content on iTunes.• Subscribing to email marketing programs appears to be popular among users of virtual goods.• Virtual goods buyers are frequent buyers of real goods online and expect to spend more online in general and on big ticket itemsover the next year.
Industry NoteJanuary 22, 2010
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