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Virtual Goods To Generate $2.9 Billion In 2012

Only a small percentage of app users are buying virtual goods, but they're still producing large amounts of revenue.

This year, the sale of virtual goods is expected to generate $2.9 billion in revenue in the United States, with $500 million of that flowing through mobile devices.

That's up from $350 million on mobile devices in the U.S. in 2011, according to a report scheduled to be released next week by social media analytics firm Inside Network.

Justin Smith, co-founder of Inside Network and co-author of the report, said the mobile market segment is where virtual goods sales are growing the fastest.

"Mobile is really starting to take off now that Apple has a large installed base of iOS devices linked to credit cards," he said in a phone interview. "That makes the experience of buying virtual goods inside an app very low friction. This was unimaginable on phones a few years ago."

For a sense of how fast the mobile market is growing, consider that analytics firm Flurry estimates that there were 64 billion application sessions across more than 500 million iOS and Android devices in January and February 2012. The majority of those sessions, 52%, involved mobile games. The firm projects the total number of sessions during the first quarter of the year will be more than 20 times higher than the same period in 2010 and more than 5 times higher than in the first quarter of 2011.

[ Read iPad Apps: 10 Hidden Gems. ]

Now that phones are mobile computers with integrated payment methods, Smith said, buying virtual goods has become a mass-market phenomenon. Items purchased in apps through Apple's In-App Purchase system and Google's In-App Billing system qualify as virtual goods, but downloaded applications do not, he explains.

At the moment, developers say they're generally better able to earn money from virtual goods on iOS devices, Smith said. "Apple simply has a much larger number of consumer credit cards on file," he said. However, he added, Android is growing very quickly and developers expect it to become a larger source of revenue in the future.

Virtual goods have become the primary method of monetization for makers of social apps and games, said Smith, pointing to companies like Zynga. More established gaming companies like EA and Disney have made moves to capture more virtual goods revenue through their respective acquisitions of Playfish and Playdom.

One problem with the virtual goods market, said Smith, is that only 1% to 3% of players are engaged enough with games to pay for virtual goods. That's led, he said, to an effort to identify and retain "whales," those who spend heavily on social sites and games.

"Developers are trying to identify who those players are and to keep them there interested once they find them," he said.

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