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Crossroads of Social Capital

The New York Times reported on virtual economies yesterday, noting how the U.S. economy for virtual goods is estimated to be around $1 billion this year, with a $5 billion economy worldwide.  Here’s a quote:

“It’s not about the good itself, it’s about the underlying human emotion or desire,” said Moshe Koyfman, a principal at Spark Capital, which has invested in two virtual-goods start-ups. “The recipient knows the person took time, picked something meaningful and spent money on it.”

“Most of the momentum in the virtual goods market comes not from gifts but from social games, where people buy items to improve their performance in the game or just to build up a collection that will impress friends.”

You see, this is why I think virtual economies are essentially reputation economies.  It isn’t irrational to buy something that is only pixels on a screen, if that purchase is an important signal in a web of social relations.

The important thing in this business, I think, is to scale in a way that you can situate yourself at the crossroads of the social/reputation capital market.  Google has done this with the market for free information on the Internet, and Facebook and MySpace are doing it with social networks.  If you control the crossroads and chokepoints, you can use that power to monetize how people want to connect with each other.  I don’t think we’ve fully grasped the economic policy implications of this shift, and the market for imaginary goods is disconcerting (to some) for that reason.

I’m really looking forward to reading this, by Vili Lehdonvirta, who has just defended his thesis on the topic of virtual consumption.