"One of the major forces that has led to growth in virtual goods this year is the explosion and seeming ubiquity of social networking in the U.S.," said Smith in an interview. Combine that with the popularity of gaming and marketing savvy and you have the perfect storm boosting demand for virtual goods.

Virtual goods are typically offered in free Web applications or games to let users accessorize avatars or supply weapons or other items that will help players speed their progress through games. They're purchased directly by credit card, PayPal or other payment method or "earned" by accepting offers, like signing up for a trial subscription of Netflix or taking a brief research survey.

In addition to the app and game developers that benefit from virtual goods sales, the second method alone has spawned some 15 companies in the last two years such as Offerpal Media and SuperRewards that are thriving as well. "It's almost like the ad network explosion of a few years ago," said Smith.

Allowing these new types of businesses to flourish has been the expansion of social networks such as Facebook and MySpace, which provide the platforms for users to easily access the games and applications where virtual merchandise is sold. Facebook has gotten into the game itself with its own gift store selling things that like virtual flowers that can be purchased with Facebook "credits"-the company's virtual currency.

Facebook has recently begun allowing third-party developers to sell virtual goods inside the gift shop and to accept Facebook credits ($1 buys 10 credits) as a payment method inside apps. Its virtual goods business is projected to make up about 10% of Facebook's estimated revenue of $500 million this year.

Companies such as AdNectar are also launching branded virtual goods on Facebook, Twitter and LiveJournal on behalf of marketers such as Godiva Chocolates, ING, Gillette and Lionsgate. "A side angle is that some branded virtual goods are being sponsored inside of social networks and third-party apps by advertisers who now think of them as a more engaging ad unit," noted Smith.

Besides social networks and apps, the report also indicated that virtual worlds such as Second Life and massively-multiplayer online games also continue to grow as meaningful parts of the virtual goods market.

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