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The Very Real Investments in Virtual Goods

According to the latest market study by Engage Digital Media, an amazing $1.38 billion was invested in 87 virtual goods-related companies.

The amount invested in 2009 represents more than three times the investment in the virtual goods space in 2008 -- when $408 million was invested. The total number of companies receiving investment money also increased year-over-year -- 87 in 2009 compared with 34 in 2008, an increase of more than 100 percent.

Of the $1.38 billion invested for the year, $398.3 million is acquisition related.

"Virtual goods was the hot story of 2009, driving investment that crossed over into game development, virtual currency, payment services, and social networks," said Christopher Sherman, CEO of Engage Digital Media.

In the fourth quarter alone, companies raised an astounding $944 million -- more than double the amount raised in all four quarters of 2008. Also noteworthy was the number of acquisitions in the space -- 18 of the course of the year -- with half of those taking place in the 4th quarter.

The single largest investment in the virtual goods space was the $300 million game publisher Electronic Arts paid to acquire social games developer Playfish in November. The second largest acquisition was China-based KongZhong's $80 million acquisition of China-based Dacheng. In total, 18 acquisitions took place during the year.

In all but five instances the transaction amounts were not disclosed.

Russian firm Digital Sky Technologies was by far the largest investor in the space in 2009 with its investments in Zynga and Facebook. Digital Sky invested $200 million in the social network Facebook, and it invested a further $180 million in the social game publisher Zynga. Facebook serves as the primary platform for most of Zynga's games.

While Facebook does not derive the majority of its income from virtual goods, it still generates about $75 million annually from sales of virtual gifts. It has also launched a "virtual currency platform" that may begin generating significant revenue for the company in 2010.

These factors, and its role as the primary platform for Zynga's games, underscore the close relationship Facebook has with the virtual goods industry. Facebook's role in the virtual goods space is not expected to diminish significantly in 2010.

The fourth largest investment in the virtual goods space, in the U.S. market, went to social gaming firm RockYou, with $50 million invested by Asian backer Softbank. The fifth largest investment in the U.S. was $43 million for social games developer and publisher Playdom.

Social gaming is an important trend in the overall virtual goods space in 2009. In 2008, only about $82 million was invested in the entirety of the social games space. In 2009, over $600 million was invested directly in the space, not counting any investments in social networks or non-gaming social developers.

A major Chinese investment of the year -- one that ties the massive $180 million investment in Zynga -- took place when U.S. firm Sequoia Capital came together with Chinese firms Fountainvest Partners and CITIC Capital to pour $180 million into the Chinese web portal Sina.

This web portal features its own virtual currency and limited virtual goods offerings, though its overall revenue has been estimated to be 70 percent advertising-generated. Regardless, the investment was counted in light of Sina's rivalry with Chinese virtual goods giant Tencent.

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