Internet Micropayments Gain Traction In Online Gaming

Five dollars a month may not sound like much, but it’s enough for seventeen-year-old Alexis Corocan to buy clothes, accessories and various shapes and shades of eyes for her online persona on the popular Internet hangout IMVU.

For instance, Corocan can spend $1.21 for an infant named Baby Candy, or 29 cents to buy a pair of deep gray eyes with dark lashes, or sixty cents to purchase a white tiger. These tiny microtransactions, which typically consist of payments of as little as a quarter for virtual items, add up to nearly $1 million in monthly revenue for IMVU.

Until now, the idea of micropayments has been one of the Internet’s most-hyped yet underperforming concepts.  But video game makers and creators of virtual worlds are increasingly relying on these transactions to generate revenue as users purchase virtual goods in tiny increments.

Micropayments have already taken hold in Asia, where piracy is notorious, making it more difficult for companies to profit from conventional models of selling the games themselves.  U.S. game companies are now making a run at micropayments as a key revenue source.

Micropayments are implemented through bulk credits purchased via PayPal or credit cards, or in retail stores such as Target, typically for $5 to $25 at a time. Then, instead of purchasing each virtual item separately, players spend their credits in small installments, often amounting to just a few cents.

Corocan says the money she spends is worth it, but adds that anything in excess of a few dollars a month "is taking it too far."

In South Korea, Nexon Corp.’s entire $266 million business is based on giving away its games and then charging tiny amounts for extras that enhance the game-playing experience, such as virtual clothes for online characters.

It’s a classic example of selling razors at a loss while recovering revenue through the sale of razor blades, said the company’s vice president of marketing, Min Kim.

Having become an established success in South Korea, the company is now expanding in North America, where most video game money is still made in large retail chains.  Later this year the company will launch "SugarRush", its first game targeted for North American users, players will be able to customize their characters and compete against or with others.

The company’s $10 and $25 game cards are big sellers in at large retailers such as 7-Eleven, Best Buy, and Target.  In fact, Nexon’s game cards are the second best-selling prepaid cards at Target, second only to Apple Inc.’s iTunes, the company said.

Although Target spokeswoman Brandy Doyle wouldn’t confirm that, "I can say that we are very happy,” she said.

The success of firms such as Nexon is not going unnoticed by major game companies such as Electronic Arts Inc (EA).   John Riccitiello, EA’s CEO, recently told an investor conference that micropayments will be critical for the company’s business as it distributes more games directly to customers via the Internet.

For example, he cited "Spore", a highly anticipated game that launched Sunday in the U.S. after years in development. The game allows players to create a virtual, evolving universe consisting of everything from single-celled organisms to civilizations capable of intergalactic travel.   Although the game does not yet use micropayments, Riccitiello said he eventually envisions selling separate accessories for the game, including "body parts and planet parts and vehicle parts."

"The microtransaction potential for this game is huge," he told the Associated Press.

The company also plans to release "Battlefield Heroes" later this year.  It will be EA’s first online game whose revenue will be entirely derived from selling virtual items.

"The game is about creating action heroes, war heroes, almost like making a GI Joe toy," Ben Cousins, executive producer of the "Battlefield" franchise, told the AP.

Cousins expects that "dress-up doll" items like a bullet belt, cool helmet or boots will be popular items, in addition to convenience items, such as the ability to double the amount of points a player is awarded for slaying an enemy.

Online micropayments first emerged in the 1990s, but never truly took hold, in part because people were required to spend tiny amounts of money – a dime, or a quarter for instance – instead of purchasing bulk credits up front and using them a tiny bit at a time.

But that problem has now been solved, with players buying virtual credits in larger increments and spending them over time.  As a result, companies no longer incur the costs of using credit cards or other payment methods for these small individual transactions.

There may also have been a psychological hurdle for people reluctant to spend money on digital goods they couldn’t physically hold.  However, this reluctance has lessened as Apple’s iTunes Store initiated people to the concept of purchasing digital tracks for 99 cents, said Craig Sherman, who heads the online fantasy world Gaia Online, which generates $1 million in revenue every month from players who buy virtual goods.

For now, U.S.-based Internet gaming companies still mainly rely on subscriptions and ad sales to generate revenue.  However, with the growing use micropayments this is beginning to change.

For example, to play PlayFirst Inc.’s popular "Diner Dash”, players can either purchase the game outright for $19.95, or download an ad-supported version at no charge. Extra in-game accessories, such as marble floors or Japanese lights, are also available for a small fee to those players wishing to enhance their eateries.

Nexon’s Kim expects a "microtransaction explosion" over the next few years, as the young players used to paying for virtual goods get older.

"It’s a new, Web-savvy demographic," Cousins told the AP.

"Micropayments and virtual worlds and social networks are a totally normal, completely unscary thing for them."