Are Skins the Future of Digital Goods?
Tags: Gaming, Venture Capital, Investing, Digital Goods, Videogames

Imagine a way to totally change your look for a couple of hours. Would you pay for it? Avid gamers do it all the time — they change their player models, weapons, and items they use in the virtual world. They are ready to pay big money for skins and other digital goods.

The digital goods market is following the trend of the general digital entertainment industry and is growing dynamically. In 2018, that market was valued at 30 billion dollars and is estimated to grow to $50 billion by 2022. This shouldn’t come as a surprise in a world where last March, the Steam platform has observed 1.15 million concurrent users in one of the most popular multiplayer online games of the last decade, Counter-Strike: Global Offensive.

The growing popularity of gaming has led to a whole related ecosystem developing around it, and with it came the investment opportunities. Investment funds taking more and more interest in the gaming sector. Funds such as Tar Heel Capital Pathfinder invest in ventures catering to different branches of the gaming landscape: cloud gaming and platforming service, esports and betting, digital goods trading, and esports data solutions and analysis.

The versatility and range of those show the potential of the gaming-related market. Yet, to benefit from it, one needs to understand the basic rules of its functioning.

Digital goods: what does that actually mean?

“Digital goods” is an umbrella term for a plethora of tradable commodities functioning within gaming. They differ greatly in their specificity, environment, implementation, monetisation, and distribution. In a gaming environment, they include virtual currencies (gold, diamonds, coins, credits — all those that work as a replacement for money) and micro-transactions (in-game trades unrelated to the game’s retail price).

One of the most interesting types of such “goods” are skins or external visuals for weapons and characters that can be changed like clothing. As cosmetic items, they don’t increase your performance, but let players express themselves virtually. They are also an example of the most complete digital goods ecosystem, as in many cases the trading is enabled not only between the player and the developer but also between players themselves.

The skin ecosystem: how does it work, and who pays for the skins?

Valve Software provides a great example of that. Within Steam, which is their distribution platform, they’ve launched a platform to facilitate the trading of CS:GO items between players.

The skins are created by Valve’s internal designers or by community creators who share their work within the Steam Workshop. Players vote for their favorite skins — the most popular ones often end up being introduced into the game as a part of a skin collection, and the creators get a cut of every sale.

Skins are injected into the market with the use of cases — for a player to open such a case, they need to acquire a key for $2.50. In exchange, they acquire a random skin from those assigned to that particular case. However, some of them are rarer than others. You can drop a common skin worth a couple of cents or an exceedingly rare knife worth thousands of dollars.

The skins acquired this way can be traded on the Steam Community Market. Their worth is based upon the probability of unboxing one (calculated on the statistically average amount of keys needed for a chance to draw one from the pool) and its subjective popularity among players. The price range is enormous, starting at a couple of cents for a less interesting skin for a less popular gun up to literally thousands of dollars for a rare and desired mesh.

The rarity of some items leads to some shocking prices. The highest ever cash transaction is rumoured to be the $61,000 sale of a Factory New AWP | Dragon Lore with the virtual autograph of Tyler “Skadoodle” Latham, sold right after he became the MVP of the 2018 Boston Major.

Where does the need to buy these virtual goods come from? A majority of players spend most of their time within the game, not outside of it, and the virtual world replicates the patterns of the real world. Being in possession of a rare skin for a knife or an AK-47 worth around $1200, became a matter of status and prestige.

How does that benefit the creators of the game and the system they’ve created? Valve earns the aforementioned $2.50 needed to open each case, plus a 15% share from each transaction on the Steam Community Market. Community creators whose skins enter the market also earn their share from these transactions.

Okay, I’ve got myself a skin, what next?

Steam locks all the funds used for transactions within their system — once you charge your Steam Wallet with real money, you can use those funds only to buy games on the official store or cosmetic items on the community market. Enter third-party platforms, which enable trading goods beyond the official market — subsequently allowing you to pay out real funds for your items. Some of them, like Skinwallet, allow you to instantly sell and withdraw your money to a portfolio of eWallets and online payment providers. There are also others that allow you to trade freely and transfer funds afterwards. There are also exchange markets for cross-platform digital currencies or even third-party auction houses. Sale offers for items, skins, or even volumes of game currencies can be found on popular online auction services.

One can as well invest with skins, as they bear characteristics resembling stable cryptocurrencies. Their value is connected with both the stable presence of CS:GO in the pro gaming world and the technical limitations and safety measures of skin trading. To name one, an obtained item can be traded away only after several days of a “trade hold”, preventing automatised laundering.

Esports and digital goods

The value of digital goods is also under the influence of esport, meaning the competitive side of gaming. The price of a skin rises if it’s used by a popular professional player, similarly to real-world athletes endorsing products, hence “skin influencers”.

Higher skin value can also be caused by virtual stickers signed by teams and players, obtained only during official CS:GO tournaments, commonly called Majors. A weapon skin with such stickers is treated as a trophy by many, which also makes such skins a subject to lucrative investment. There’s a good example of that. The prices of stickers signed by the all-Polish Virtus.Pro squad skyrocketed after the organization terminated their contracts. This caused the stickers to rise 40% in value.