These are interesting times for Chinese software and Internet services company CDC
No need to adjust your eyes. You read that correctly: virtual broadswords and enchanted armor. As of last month, CDC is now in the business of selling virtual in-game merchandise to players of Yulgang, its new online fantasy game.
Online gaming is incredibly popular in China, but until recently game producers such as Motley Fool Rule Breakers picks Shanda Interactive
Virtual merchandise, real-world profits
While the concept of paying real money for virtual merchandise may sound absurd, it is already big business around the world. Indiana University economics professor and "virtual economy" researcher Edward Castronova estimates that the nebulous virtual merchandise market ranges from $100 million to $800 million annually. Critics of the practice complain that it allows deep-pocketed players to buy their way to the top and that third parties are allowed to capitalize on someone else's intellectual property. Some companies, Blizzard Entertainment and Sony
Under these circumstances, a thriving secondary market has emerged, and online brokers are filling the void. A prime piece of virtual real estate from the game Project Entropia famously sold for more than $26,000 last year. Some entrepreneurs have taken this concept to extremes, setting up online gaming "sweatshops" where laborers collect in-game merchandise to resell.
In game-crazy South Korea, producers such as Nexon have been quick to capitalize on the trend by selling virtual merchandise directly to consumers. Last year, Nexon attributed a whopping 85% of its $110 million in revenues to sales of virtual auto upgrades and accessories from online racing hit Kart Rider.
The sanctioned sale of gaming merchandise may be one of those fabled Rule Breaking disruptive innovations. And others are already following suit -- where there is money to be made, corporations are sure to follow.
Enter Corporate America
Last month, in a reversal of its long-standing policy, Sony launched "Station Exchange," its online auction site designed to facilitate virtual merchandise transactions among players.
Never shy about following the money trail, Microsoft
As American Technology Research analyst P.J. McNealy noted, "An online marketplace will provide varying high-margin incremental revenue opportunities for all of the major video game publishers with the Xbox over the next five years."
What does this mean for investors?
The market for virtual in-game merchandise is still in its nascent stages, but if the early returns from companies like Nexon are any indication, this market will provide tremendous opportunities for online gaming companies to pad already-fat profit margins. Industry giants and Rule Breakers recommendations Shanda and NetEase will be watching intently to see how Yulgang fares. Add that revenue potential to the explosive worldwide sales growth and growing streams of online advertising and marketing relationships, and this is a Rule Breakers industry ripe to take off.
The team at Motley Fool Rule Breakers is always on the lookout for the next lucrative craze. As John Smedley, president of Sony Online Entertainment, put it, "Online gaming is always evolving. ... From our perspective, it's always wise to keep pushing the envelope." All Rule Breaking investors should agree.
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