Virtual Cupcakes, Teddies Generate Real Cash

March 15, 2010 — -- A $1 green balloon dog. That's what John Majkrzak likes to send his friends on their birthdays, along with a note that reads "hand-made gifts are the most thoughtful."

Don't be fooled: Majkrzak doesn't make the balloon dog himself. He buys a picture of it on Facebook and puts it on his friends' profile pages. It's a virtual gift.

"It's fun to do," says Majkrzak, a 52-year-old dispatcher from Blaine, Minn., who admits the gift doesn't hold much real-world value. But because his friends are inundated with birthday wishes on Facebook, he buys the gift to make his wish stand out.

It's the Thought That Counts

It's strange but true: Americans are expected to spend $1.6 billion on virtual goods this year, with a small but growing share going to virtual gifts. Popular presents include cute icons that represent bouquets, cupcakes and teddy bears. Gamers also give each other "seeds," "ammunition" and other objects that can be used in online games.

To traditionalists, it seems crazy to spend money on pixels. But virtual gifting fans say they're quite sane, arguing that birthday cards or perishable flowers aren't much of an investment either. It's the thought that counts.

"When you give someone a sweater for Christmas, the value isn't, 'Oh my God you bought me a piece of clothing,'" says Justin Smith, founder of Inside Network, a technology research company.

Most Christmas presents are all about gesture, Smith says.

"This kind of value can be captured through a virtual gift," he says.

Within the virtual gifting sector, most of the growth can be found in social gaming, where friends will buy each other "seeds" to plant in their "farm" or "dresses" for their avatars.

Companies Make Real Profits

Some companies make a handsome profit selling virtual gifts. In most online settings, gifts can be bought and sold using virtual credits, but these always have to be bought with real cash from the parent company. On Facebook, for example, a $1 gift will cost you 10 credits.

Cary Rosenzweig, CEO of a booming online community called IMVU, says his company sells $3 million of credits each month that customers use to dress avatars or build homes, with almost $1 million a month spent on gifts.

Big Profits On Valentine's Day

"People say they get as much mental enjoyment out of the act of buying things online as they do offline," says IMVU's Rosenzweig. "It's like going shopping at the mall, but they spend just a few bucks."

Gifts at IMVU usually cost between 50 cents and $1, and include everything from eyebrows to scenic backdrops.

In virtual worlds, as in the real world, the gift economy receives a sharp boost around Christmas and Valentine's Day.

On Second Life, the wildly popular virtual world run by Linden Lab, users exchanged thousands of virtual gifts on Valentine's Day. Unlike gamers in other worlds, Second Life users create their own gifts with computer code -- you can make a teddy bear, for example, by combining three circles and adding a fuzzy brown color -- and can keep any profits they make by selling gifts.

One nifty gift consisted of a software application that allowed users to invite a loved one to dinner and propose to them with a diamond ring.

On most other platforms, the profits flow straight into company pockets.

Zynga, the company behind Facebook's immensely popular "FarmVille" and "Mafia Wars," made an estimated $200 million last year simply by enticing players to buy and sell virtual seeds and chickens, according to Inside Network's Smith. In fact, some of FarmVille's vital goods, such as chickens, can only be gifted.

Facebook and Zynga would not comment on their financials.

New Cultural Norms

Growth of online gifting is expected to continue, as the social gaming industry booms. Thanks to platforms such as Facebook and Twitter, consumers are more comfortable interacting with their friends online.

"It used to be weird to wish someone happy birthday on Facebook, and now it's a cultural norm," says Inside Network's Smith.

And while in the past virtual goods were mostly bought by teens and young men with X-Box consoles, women have started making a big dent in the virtual economy.

Better Than Nothing

This doesn't mean that virtual gift-giving can ever replace the real thing, however.

Bruce Weinstein, an ethics expert and author of "Is it Still Cheating if I Don't Get Caught?" says virtual gifts don't add that much value to a real relationship, but don't do any harm either.

"They're similar to that boyfriend or girlfriend who isnt quite meeting your needs but is better than nothing," he says.