Visa plays with virtual goods

Contact: Jarrett Streebin

This week marked another major entrance into the virtual goods market with Visa snapping up PlaySpan for $190m in cash. The deal comes a half-year after Google struck the first significant transaction in the market, paying a reported $55m for Jambool. With the market for social games and virtual goods amounting to real money, it’s likely that these giants won’t be the last buyers here.

We predicted these sorts of deals in our recent virtual goods Sector IQ. In fact, we named PlaySpan as one of the startups likely to get taken off the market. However, we matched it up with eBay’s PayPal. Our reasoning: PlaySpan would have provided an avenue to improved developer relations for PayPal, where it has struggled, as well as massively boosted its market share. Instead, credit card behemoth Visa took out the Santa Clara, California-based startup and it’s likely that PayPal will suffer as a result, particularly in its all-important relations with developers.

Consumers are becoming more and more comfortable not only buying virtual goods, but also buying real goods in games. This should continue to fuel the amazing growth in this emerging market. Both PlaySpan and Jambool are particularly well-positioned to capture this business because the back-end technology and security required for purchasing goods – even if they are make-believe goods – is incredibly complex. Most developers prefer to leave that to outside providers like Jambool and PlaySpan, just like online retailers left the transaction part of their business to PayPal for years. Given that Google and Visa have bought into this market in the past few months, it’s clear that virtual goods are here to stay.

Social gaming grows up

Contact: Jarrett Streebin

Having already seen massive consolidation within the social games development industry, a related area is beginning to be consolidated: virtual goods. A subset of the social gaming industry, virtual goods are one way that developers make money from popular games. Google recently expanded into this market by buying Jambool. Although it’s the first purchase by a major player, there are bound to be more deals.

This isn’t Google’s first play in payments processing. The search giant stayed in-house back in 2006 when it rolled out Google Checkout. The only problem was that it was already years too late to unseat PayPal’s market dominance. Now, Google knows better than to get ‘PayPal-ed’ in the virtual goods market. With Jambool, Google obtains a social payments processor for social media games known as Social Gold. Although a relatively small player within the market, it has one of the most secure back ends in the business, with a Level 1 PCI security rating. This, along with the fact that it has support for a number of international currencies, makes it a very scalable service. Since Slide Inc, the social games developer recently acquired by Google, isn’t large enough on its own to warrant the purchase, it’s likely that Google will continue to expand the Social Gold offerings to meet outside demand. Additionally, Google may have more social gaming offerings coming that could use the product.

The virtual goods industry has been on shaky footing lately. Ever since Facebook announced Facebook Credits, which threatens to make all virtual goods companies obsolete on that platform, many of the companies have been scrambling to diversify away from the social media giant. As of yet, Facebook hasn’t made its Credits mandatory, so there’s still room for other players. But with RockYou, Playdom and Zynga all having signed exclusivity deals, it’s likely that we’ll soon see Facebook Credits used across the board.

One company that has diversified beyond Facebook is PlaySpan, which has a broad range of products that cover many areas of virtual goods monetization. The Santa Clara, California-based startup just received another $18m in funding, on top of approximately $20m. The firm could very well become the PayPal for virtual goods. If it does succeed in that, we wouldn’t at all be surprised to see PlaySpan also get picked up by eBay, which acquired PayPal in 2002. (We’ll have more in an upcoming Sector IQ on virtual goods.)