Why will people spend $1 to send you a virtual beer on Facebook, but not to read a news story online?

On the surface, it defies logic. I think most people would agree that whatever economic value news and information has, it’s greater than a virtual piece of clothing, or something that gives your avatar a special power in a gaming environment, or that gives you elevated status on a social network. But in terms of consumers’ actions, the exact opposite is true.

I’ve been thinking a lot about this issue because the market for virtual goods has exploded. People are expected to spend $1.6 billion on virtual goods this year in the U.S. alone. The emergence of this market, I think, is one of the most important business trends on the web. In Silicon Valley, it’s reshaping assumptions about online business models. As the focus on ad-driven models loses favor, the virtual goods market is generating a lot of interest.

Lessons for the News Business?

Does the rise of the virtual goods economy have any lessons for the business of news and information? I think so, but I’m not sure exactly what they are. And that’s why I’m writing this post. I want to share some of my thinking about virtual goods and news. I’m throwing it out there in hopes of sparking a discussion, or catching the eye of some entrepreneurs (or future News Challenge applicants?) who might take this a step further.

The phenomenon of virtual goods confounded and fascinated me for a long time. I couldn’t get past the absurdity of spending money on such trivial things. And part of me was in denial that so many people were doing it.

My thinking began to shift when I visited the folks at Second Life last fall. It’s a company that had been written off by many, but which is in fact still growing and is profitable. Rather than rely on advertising, the “in-world” economy revolves around the buying and selling of virtual goods. This revenue stream has continued to grow and enabled Linden Lab, which created Second Life, to do just fine during the economic downturn.

Consider, also, the success of Zynga, the social gaming company that created mega-hits Farmville and Mafia Wars for the Facebook platform and other social networks. From nowhere, Zynga has grown to 750 employees in just 2.5 years, and has 300 job openings. That means it’s almost as large as Facebook, which has 1,100 employees. One of Zynga’s prime sources of revenue is virtual goods.

Or check out this interview that TechCrunch’s Michael Arrington did with the founder of Slide, Max Levchin. In this chat, Levchin explained how Slide, which makes many of the most popular widgets on Facebook, has moved from an ad-based business model to one built around virtual goods:

Levchin discusses the “shift from advertising to virtual goods” and reveals that most of Slide’s revenues now come from sales of virtual goods, whereas it was the reverse a year ago. Slide makes some of the most popular apps on Facebook and other social networks, and the fact that it is no longer focussed on advertising says a lot about the prospects for social ads.

The True Value of Virtual Goods

The person who helped me begin to get my head around this was Susan Wu, a virtual goods pioneer and former venture capitalist who has started an online gaming company called Ohai. Here’s what she understood early on about the value of virtual goods: In the real world, we have all sorts of intangible interactions, from shaking hands to smiling to offering blessings. The value of virtual goods is not about the object, but rather its ability to express an emotion or feeling in a way that has value.

“Sending someone a virtual beer is not about the beer,” Wu told me. “It’s a way to show, ‘I have an affection for you.’ It’s the same reason people have bought bouquets or other ostentatious gifts — to demonstrate a feeling.”

She pointed me to a post, “Virtual Goods: The Next Big Business Model,” she wrote for TechCrunch outlining her vision of virtual goods. That was published in 2007. It’s a good starting point if you want to dig into this topic.

Applying it to News

I’ve been trying to apply this framework to news. I think it provides an interesting, and different way, of thinking about where the true value lies: Not in the thing itself, but in something adjacent to the thing, some feeling you have about it, or something you can do with it in terms of expressing yourself.

Is there a feeling or emotion or something around consuming or sharing news that possibly has some value that can be captured and expressed?

Are there virtual goods that news organizations could create that would entice people to spend some money?

And are there models in social gaming that provide structural lessons for news organizations of all shapes and sizes that would demonstrate better and more powerful ways to harness the power of social networks?

I think the answer to all of these questions is, “Yes.” But that said, I don’t really know. It’s still a considered hunch at this point.

I do think this convinces me that, in terms of business models on the web, we are still in early days. There’s been a lot written here, and elsewhere, that the search for business models is futile. I would agree that there is no single revenue stream that will ever replace the classified, ad-based model. I think most news organizations that are sustainable will have to be built on a vast array of revenue streams.

I’m wondering if virtual goods is one of them. What do you think? Do virtual goods have anything to teach us about the economic value of news and information?