Facebook, Groupon and now Zynga

How to sell nothing and get people to buy nothing for a lot of money? Can you call it nothing. We are talking of Farmville and their creators. Its Zynga and its now worth $7bn-9bn thanks to all you game addicts. ... "oohh, see my lovely crops ... I have baked a pie ... I need a shovel" ... yea, shovel this.

Farmville ... where you buy a little piece of make believe.

Sydney Morning Herald:

Mark Pincus has amassed a $US1 billion fortune selling bits and bytes that have no intrinsic value to an army of virtual farmers and city planners. Every month, 275 million people sign on to one of Pincus's addictive games, paying real money to buy virtual seeds and crops in Farmville, to construct fake buildings in CityVille or to expand their criminal empires in Mafia Wars.

Pioneers of the "virtual goods" market, Pincus's company Zynga - just three years old - earned $850 million in revenue last year and is now valued at between $US7 billion and $US9 billion, according to The Wall Street Journal.

Mark Pincus, founder of San Francisco-based Zynga, creator of FarmVille

It's not a new phenomenon. For years people have been spending real money to buy their own virtual islands and toys in the online world Second Life , while others have spent thousands on rare items in online games such as World of Warcraft. Last year, a virtual space station in Entropia Universe sold for $US330,000.

But with Zynga, virtual goods have hit the mainstream, with everyone from stay-at-home mums to university students shelling out big for intangible items. The immense success of his virtual empire has seen Pincus join the Forbes Billionaires List this year with a net worth of $US1 billion.

'Who would pay for non-existent things?'

If you can't understand why anyone would pay real money for fake goods, you're not alone. Even Gigi Wang, chair emeritus of MIT/Stanford Venture Lab (VLAB) - which connects high-tech entrepreneurs with investors, technologists and venture capitalists - initially dismissed the idea.

"When I heard about virtual goods several years ago, I just thought it was stupid. Who would pay for non-existent things?" Wang told Fairfax Media's Digital Directions conference last week.

But then Wang discovered that Farmville players were spending $US100 million a year on virtual tractors, seeds and animals. She cited research estimating that in the US alone the virtual goods market overall will reach $US2.1 billion this year. Now Wang herself is a virtual goods convert, having recently spent $US30 on boosts in the game Bejeweled Blitz.

It's an enviable business model, as the marginal cost of producing an additional virtual tractor or sword costs the virtual goods companies virtually nothing, allowing for huge margins. It's become such a lucrative market that some buy virtual real estate as investments, while others hire armies of people working in sweatshop conditions to farm for virtual gold, which can then be traded for real money.

Facebook is further fuelling the growth of virtual goods with its currency called "Facebook Credits", which can be bought using credit cards and are spent within Facebook apps.

The legal issues thrown up by virtual goods have been far from intangible. Last year four virtual property owners sued Second Life developer Linden Lab for giving them the false impression that they actually owned their online holdings. In 2009, Taser International sued Linden Lab for allowing players to sell virtual tasers. But the case was dismissed after changes were made to remove Taser's trademarks.

Hundreds of millions of players

The AppData.com website reveals that city-building simulation CityVille and Farmville - available through Facebook or mobile apps - have 93 million and just under 50 million monthly users, respectively, making them the top two apps worldwide.

A spin off of Farmville set in the US old west rather than on a farm, FrontierVille, has just under 19 million users and Mafia Wars has a little less than 13 million.

A Sydneysider, who wished to be known only as Kim, 49, said she used to spend hours every day on Farmville and Cityville but recently was forced to cut down. She has so far avoided spending real money on the game but has invested countless hours of her time.

"At the moment I've had to cut down because I ended up actually getting myself tendonitis in my arm," she said in a phone interview.

Sign of a dotcom bubble?

Some have suggested that Zynga's huge multi-billion-dollar valuation is evidence of a new dotcom bubble that is almost certain to burst. Adding further fuel to this view is skyrocketing valuations of Facebook and Twitter, which are pegged at $US65 billion and $US10 billion ,respectively.

But Sydney-based Niki Scevak, an entrepreneur who created real-estate site Homethinking.com, has been following industry developments for some time and is convinced this is not the case.

The last dotcom boom and bust just over a decade ago saw very young companies going public early, with little revenues to show for their huge valuations. This time around, finance is coming from private means and the valuations are justified by giant revenue streams.

"Facebook and Zynga generate large amounts of cash, while growing at huge growth rates at scale," said Scevak, who is also the driving force behind Sydney tech entrepreneur mentorship program Startmate.

"There isn't a lot of cash being burnt (Groupon, Facebook and Zynga aren't even using [investors'] money to fund normal operations, it's for existing shareholders to sell out or for acquiring other companies), companies are staying private longer than they did and traditional internet firms are trading a bargain prices. If you want a bubble then take a look at Australian housing!"