Take a stroll down the aisles at your local Target, Wal-Mart, Walgreens or Rite-Aid and you'll notice an interesting phenomenon -- pre-paid gift cards for as many as 26 virtual worlds. Let me try to explain what this means (if you have a fourth grader, feel free to skip the next couple paragraphs).
There are roughly 100 million people in virtual worlds at the moment and the vast majority of them are kids and teens. These worlds, which in general are rather simple looking, allow kids to hang out together on the web. Jeff Yang of Redpoint Ventures, a prominent investor in a variety of these worlds (he was also the sole venture capitalist behind Myspace), likes to call these worlds the "new mall." Collectively, the kids in this "mall" are spending over $1.5 billion on avatars, clothing, pets and the like. That's real money on virtual stuff.
Now here's where the cards come in. While these kids have a seemingly endless appetite for virtual goods, they don't have credit cards. Even if they did, the stuff they're buying costs between 20 cents and $5 -- creating a problem when the cost of clearing the transaction is greater than the value of the item. The cards solve this by allowing a parent to buy their child $10 or $25 worth of virtual currency. The card company takes a fee off the top, generally somewhere in the neighborhood of 20% (nice business model, huh?) and the rest goes to the kid to spend at the virtual mall.
Now I'm guessing a few of you are wondering why on earth anyone would spend real money on virtual stuff. Let me try to explain this in truly simple terms, because I think it's a really fundamental concept, no different than what goes on when we buy stuff in the real world.
First of all (and this is beyond fascinating), teenagers view their avatars, or characters in virtual worlds, very differently than adults. While you or I might refer to the avatar as "my avatar," a teenage just calls it "myself" or "me." Perhaps an equivalent for us older folks is that we'd never ask someone if they received an e-mail from our "e-mail account," we'd simply say, "Did you read what I wrote you?" So these teens see their avatars as themselves, which makes sense when you're spending over an hour a day communicating through that character. And when that's the case, how your avatar looks is critical to the way in which one's social status is perceived. So virtual goods become the markers of social hierarchy -- we are social creatures after all (even non-fourth graders) and that stuff really matters.
If you're still thinking that this is beyond bizarre, let me leave you with a little thought experiment. How much does your average pair of jeans cost? The truth is that if you bought jeans based simply on utility (in other words, discounting social perception to zero), you would spend $10. This means that the difference between what you really spend on jeans and $10 is the value you place on what other people think. In my case, it's embarrassingly high -- more than $100.
Guess those fourth graders spending $2 on virtual bling aren't so crazy after all.