Industry Note

January 22, 2010

Gene Munster, Sr Research Analyst Internet
612 303-6452, gene.a.munster@pjc.com
Piper Jaffray & Co. Will People Really Pay Money For Virtual Goods?
Douglas J. Clinton, Research Associate The Answer Is Absolutely
212 284-9488, douglas.j.clinton@pjc.com
Piper Jaffray & Co. CONCLUSION: Many investors wonder whether Internet users will truly adopt
the emerging virtual goods model exemplified by Facebook's gifts platform and the
Nicholas R. Gallus, Research Analyst many third party social game developers tied into social networks by paying cash to
612 303-6324, nicholas.r.gallus@pjc.com participate. Based on a recent survey of 332 Internet users, we believe the clear
Piper Jaffray & Co. answer is yes, and with more consumers stepping into the fray near term. We
estimate the worldwide virtual goods market to grow to $6 billion by 2013, up from
Reason for Report: $1.3 billion in 2008, and believe virtual goods will likely be the fastest growing
Industry Overview opportunity online over the next five years.
Related Companies: Share Price:
BIDU 439.97 • Internet Users Show Willingness To Spend Money On Virtual Goods. In a
KONG 11.13 recent Piper Jaffray survey of 332 Internet users (qualified by making one or
SINA 41.46 more online purchases in the last three months, which was 90% of respondents),
SNDA 51.58 we discovered that 8% of Internet users say they are willing to spend real money
SOHU 60.32 on virtual items. Another 9% are unsure if they are willing to spend money on
virtual items or not and the remaining 83% claim to be unwilling to spend on
virtual goods. While this is the first time we have collected data on the topic we
believe the number of Internet users willing to pay for virtual items is likely
higher today than it was a year ago based on the extreme growth in popularity of
social games like Farmville and Mafia Wars. We expect the consumer comfort
level to grow as users spend more time playing social games and using social
networks.

• Virtual Goods Estimates: Most Exciting Growth Opportunity Online. We

estimate the worldwide virtual goods market totaled $2.2 billion in 2009 and we
expect the market to grow to $6 billion by 2013. We believe a significant portion
of this revenue will continue to come from the International markets. We estimate
U.S. virtual goods sales will make up only 28% of total virtual goods in 2009, but
grow to 41% of the total by 2013 as social gaming and widgets become more
advanced and more widely used. We expect consumers to become increasingly
comfortable with paying real cash for virtual items, with the near term
opportunity in converting the 9% of the Internet users that are unsure if they
would be willing to pay real dollars for virtual ones. We believe ultimately, by
2013, the U.S. will contribute $2.5 billion to the overall virtual goods markets.

Other Survey Highlights Regarding Virtual Goods Users:

• Currently, Internet users at the lowest and higher ends of the income spectrum
seem to be purchasers of virtual goods. We believe this suggests two takeaways:
teens and pre-teens are engaging in these games and finding ways to pay for
goods; and young professionals are likely also engaging heavily in social gaming.
• Buyers of virtual goods seem to generally be heavy video (TV, online, etc.)
consumers.
• Buyers of virtual goods seem to generally be comfortable with purchasing other
digital items online as many current buyers of virtual goods also consume paid
content on iTunes.
• Subscribing to email marketing programs appears to be popular among users of
virtual goods.
• Virtual goods buyers are frequent buyers of real goods online and expect to spend
more online in general and on big ticket items over the next year.

RISKS
Risks to the growth of the virtual goods market include inability of companies to
develop compelling games and services utilizing virtual goods and consumer slow
down in online spending.

Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decisions. This report should be read in conjunction with
important disclosure information, including an attestation under Regulation Analyst certification, found on pages 8 - 10 of
this report or at the following site: http://www.piperjaffray.com/researchdisclosures
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 Industry Note
January 22, 2010

Internet Users Show Willingness To Spend Money On Virtual Goods. In a recent Piper Jaffray survey of 332 Internet users
(qualified by making one or more online purchases in the last three months, which was 90% of respondents), we discovered that 8% of
Internet users say they are willing to spend real money on virtual items. Another 9% are unsure if they are willing to spend money on
virtual items or not, and the remaining 83% claim to be unwilling to spend on virtual goods. While this is the first time we have
collected data on the topic we believe the number of Internet users willing to pay for virtual items is likely higher today than it was a
year ago based on the extreme growth in popularity of social games like Farmville and Mafia Wars. We expect the consumer comfort
level to grow as users spend more time playing social games and using social networks. We estimate the worldwide virtual goods
market to grow to $6 billion by 2013, up from $1.3 billion in 2008. We believe that by 2013, the U.S. will contribute $2.5 billion to the
overall virtual goods market.

Question: Would you be willing to pay real money for virtual items in a game? For example, paying $1 for more 'energy' in a
competitive online game with a friend.
No, I
Yes, but I would not
Yes and I have not be willing
have done it yet to pay Not sure Total

14 13 275 30 332
TOTAL 4% 4% 83% 9%
Source: Piper Jaffray

Virtual Goods Estimates: Most Exciting Growth Opportunity Online. We estimate the worldwide virtual goods market totaled
$2.2 billion in 2009 and we expect the market to grow to $6 billion by 2013. We believe a significant portion of this revenue will
continue to come from the International markets. We estimate U.S. virtual goods sales will make up only 28% of total virtual goods in
2009, but grow to 41% of the total by 2013 as social gaming and widgets become more advanced and more widely used. We expect
consumers to become increasingly comfortable with paying real cash for virtual items, with the near term opportunity in converting the
9% of the Internet that is unsure if they would be willing to pay real dollars for virtual ones. We believe ultimately, by 2013, the U.S.
will contribute $2.5 billion to the overall virtual goods markets.

U.S. Virtual Goods Revenue Estimates

$3,000 160%

140%
$2,500

120%

$2,000
100%

$1,500 80%

60%
$1,000

40%

$500
20%

$- 0%
2008E 2009E 2010E 2011E 2012E 2013E

Revenue ($m) $265 $621 $1,087 $1,547 $2,019 $2,462

Y/Y Growth 134% 75% 42% 31% 22%

Source: Piper Jaffray

Page 2 of 10
 Industry Note
January 22, 2010

Worldwide Virtual Goods Revenue Estimates

$7,000 80%

70%
$6,000

60%
$5,000

50%
$4,000

40%

$3,000
30%

$2,000
20%

$1,000
10%

$- 0%
2008E 2009E 2010E 2011E 2012E 2013E

Revenue ($m) $1,325 $2,219 $3,107 $4,070 $5,047 $6,006

Y/Y Growth 67% 40% 31% 24% 19%

Source: Piper Jaffray

Other Highlights; Unsurprisingly, Virtual Goods Buyers Are Comfortable Shopping Online Among Other Activities. Our
survey also revealed a number of themes among current buyers of virtual goods:
• Currently, Internet users at the lowest and higher ends of the income spectrum seem to be purchasers of virtual goods. We believe
this suggests two takeaways. First, teens and pre-teens are engaging in these games and finding ways to pay for goods. Second,
young professionals are likely also engaging heavily in social gaming.
• Buyers of virtual goods seem to generally be heavy video (TV, online, etc.) consumers.
• Buyers of virtual goods seem to generally be comfortable with purchasing other digital items online as many current buyers of
virtual goods also consume paid content on iTunes.
• Subscribing to email marketing programs appears to be popular among users of virtual goods.
• Virtual goods buyers are frequent buyers of real goods online and expect to spend more online in general and on big ticket items
over the next year.

Page 3 of 10
 Industry Note
January 22, 2010
Income And Willingness To Purchase Virtual Goods
No, I
Yes, but I would not
Yes and I have not be willing
have done it yet to pay Not sure
Less than
$15,000 10% 0% 78% 13%
$15,000 -
$30,000 1% 5% 86% 8%
$30,001 -
$45,000 6% 2% 80% 12%
$45,001 -
$60,000 2% 6% 88% 4%
$60,001 -
$75,000 0% 0% 82% 18%
$75,001 -
$90,000 13% 13% 75% 0%
$90,001 -
$105,000 11% 11% 63% 16%
More than
$105,000 0% 0% 93% 7%
Prefer not to
answer 0% 0% 100% 0%
Source: Piper Jaffray

Hours Per Week Spent Consuming Video Media And Willingness To Purchase Virtual Goods
No, I
Yes, but I would not
Yes and I have not be willing
have done it yet to pay Not sure

0 to 3 3% 2% 86% 9%
4 to 6 2% 10% 78% 10%
7 to 9 3% 6% 85% 6%
10 to 12 0% 2% 83% 15%
13 to 15 6% 0% 80% 14%
16 to 18 4% 4% 85% 8%

more than 18 9% 4% 83% 5%

Source: Piper Jaffray

Page 4 of 10
 Industry Note
January 22, 2010

Online Sources Used To Watch Video And Willingness To Purchase Virtual Goods
No, I
Yes, but I would not
Yes and I have not be willing
have done it yet to pay Not sure

I don't watch
video over
the internet 1% 1% 87% 10%
YouTube 8% 8% 76% 7%
Hulu 10% 4% 79% 6%
Netflix 10% 6% 73% 12%
iTunes 33% 5% 52% 10%
Fancast 29% 0% 57% 14%
TV.com 24% 12% 47% 18%
blockbuster.c
om 50% 17% 17% 17%
cinemanow.c
om 60% 0% 20% 20%

Other, please
specify 5% 0% 86% 9%
Source: Piper Jaffray

Attitude Toward Email Marketing And Willingness To Purchase Virtual Goods

No, I would
Yes, but I not be
Yes and I have not willing to
have done it yet pay Not sure
I actively sign up
for them and
frequently shop
using them. "Love
them" 27% 0% 55% 18%
Sometimes I shop
for stuff I see in
them. 3% 5% 82% 10%
I use them for
information
purposes only. 4% 7% 79% 10%

I rarely look at them

or shop because
of them. 1% 1% 93% 5%
I unsubscribe
myself from all
email lists. "Hate
them" 2% 2% 87% 9%
Other, please
specify 0 0 0 0
Source: Piper Jaffray

Page 5 of 10
 Industry Note
January 22, 2010

Number Of Times User Makes Online Purchases And Willingness To Purchase Virtual Goods

No, I would
Yes, but I not be
Yes and I have not willing to
have done it yet pay Not sure
1x a month 3% 2% 85% 10%
2x a month 0% 5% 88% 6%
3x a month 3% 3% 84% 9%

4x a month or more 19% 8% 63% 10%

Source: Piper Jaffray

Expectations For Personal Online Spending And Willingness To Purchase Virtual Goods
No, I would
Yes, but I not be
Yes and I have not willing to
have done it yet pay Not sure
Plan to increase
online spending
20% or more in
next 12 months 40% 0% 60% 0%

Plan to increase
online spending
10% to 20% in the
next 12 months 0% 27% 64% 9%

Plan to increase
online spending 5%
to 10% in the next
12 months 0% 16% 76% 8%
Plan to spend
about the same
amount (+5% to -
5%) 3% 1% 85% 10%
Plan to decrease
online spending 5%
to 10% in the next
12 months 0% 0% 100% 0%

Plan to decrease
online spending
10% to 20% in the
next 12 months 0% 0% 90% 10%
Plan to decrease
online spending
20% or more in
next 12 months 4% 0% 88% 8%
Source: Piper Jaffray

Page 6 of 10
 Industry Note
January 22, 2010

Expectations For Large Ticket Item Spending Online And Willingness To Purchase Virtual Goods
No, I would
Yes, but I not be
Yes and I have not willing to
have done it yet pay Not sure

Spend more on
large ticket items in
the next 12 months 27% 14% 55% 5%
Same amount 2% 4% 83% 11%

Spend less on
large ticket items in
the next 12 months 4% 2% 89% 6%

Source: Piper Jaffray

Page 7 of 10
 Industry Note
January 22, 2010
Important Research Disclosures
Distribution of Ratings/IB Services
Piper Jaffray

IB Serv./Past 12 Mos.
Rating Count Percent Count Percent

BUY [OW] 322 47.10 61 18.94

HOLD [N] 264 38.60 17 6.44
SELL [UW] 98 14.30 1 1.02

Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliates received
compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closely correspond with
"buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead represent recommended relative
weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. See Stock Rating definitions below.

Page 8 of 10
 Industry Note
January 22, 2010
Important Research Disclosures
Analyst Certification — Gene Munster, Sr Research Analyst
The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my
compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. and/or its affiliates Piper Jaffray Ltd. and Piper Jaffray Asia
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covered stocks, with an eye toward above-average returns over the next three to six months.

Page 9 of 10
 Industry Note
January 22, 2010

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