Why use a virtual currency over real currency?

This question was brought up at the virtual goods summit last friday. I forget that not everyone understands why virtual currencies are used. Here's a short explanation from my experiences.

Alot of the reasons a casino uses poker chips instead of real money are also applied to virtual currency.

• Virtual currency does not hold the same psychological value as real currency does. And thus people tend to spend it like play money.
  
• You want to minimize the number of times you ask a player to open their wallet or enter credit card info. The less a player has to think, the more they will spend.
  
• Virtual currency allows you minimize your cost of goods sold by reducing the number of transaction fees/costs incurred. The less times you hit a payment processor, the better.
• With costs of goods next 0, you can charge as little as you like for your virtual items.
• With very low prices, minimal clicks, and a playful fiction you can create a frictionless purchase experience that becomes rhythmic and habitual.

In more detail...
Every real money transaction incurs some transactional and processing costs. Typical credit card transactions incur a % transaction fee and a flat processing fee. Its widely held that $5 is the minimum credit card transaction amount that profits can still be made. Since the majority of virtual items are between 25cents and $2, you would incur enormous costs due to the number of transactions that occur.

How does Apple Itunes do it then?
Apple relies on batch transaction processing to minimize their transaction fees: (they wait and process all your $1 transactions together instead of separately).

The facebook gifting system works this way as well. Virtual gifts are much more profitable than digital music, since there aren't any licensing fees.

Virtual Goods Summit 2008 & the affect of the economic downturn on the social gaming industry

I was lucky to attend the virtual goods summit 2008 in San Francisco last week. There were alot of facebook app developers in attendance. No doubt that with the economic downturn, virtual goods and virtual currency will play an important part of most social apps ability to survive.

Nearly every panel brought up the question of how the economic problems of the country would affect the industry. I agree with the panelists that the gaming and social entertainment industries should be least affected by the downturn but that families will obviously have less money to spend and thus children's allowances may be tightened.

Teenagers and children aren't going to be losing their jobs (since they don't have jobs in the first place). The demand for interactive entertainment only increases as people travel less and tend to stay at home more.

People often quote the virtual goods industry as being $1.5 billion dollars large. I'd say that seems small if we are talking about world wide demand.
- in China alone it is estimated that virtual currency is a $900MM business
- Maplestory has made $30MM in the US this year. In 2005, Nexon reported $250MM in revenue.
- Offerpal CEO, Anul Shukla, estimated demand for virtual currency through offers and signups was between $2-6 billion.