Google's "Lively" the beginning of the end of the virtual world craze

So a couple nights ago, Google announced that they were getting into the virtual world space with their new "Lively" offering. My first reaction to seeing this piece of news was "well, that's the end for the gazillion others trying to enter into the space". In many ways, I viewed the news as welcoming. Over the past year, I have seen more virtual world startups trying to raise capital (and get funding) than I have finger and toes and "virtual" appendages to speak of.

It is amazing how one or a couple of significant success stories like Club Penguin can bring these companies out of the woodwork and think they can all of a sudden raise money because they're the next new virtual world for kids or war veterans or Nike fans. What's even more amazing are the venture capital investors that have funded all of these ideas. Take a look at the latest update from Virtual Worlds Management on investment activity in the space. Article here: "$345 MILL INVESTED IN 39 VIRTUAL WORLDS-RELATED COMPANIES IN FIRST 1/2 OF 08."

On the one hand, Google getting into the space provides the ultimate validation for these businesses. Certainly, Google would not have gotten into the space if it did not believe in virtual worlds as a viable destination for users, particularly its own. On the other hand, it's probably a sign that the market is at its peak for companies in the space.

Some will say, well, wait, let's hold on here, Google's Lively offering is not at all as versatile and functional as some of the other players out there, like IMVU, or those that are focused on a niche audience like Stardoll or Cartoon Doll Emporium. In fact, you can make an argument that Lively is not really a virtual world so much as it is an avatar-based chat application, which, quite frankly are what IMVU, Stardoll and Cartoon Doll Emporium are as well. True virtual worlds are represented by the likes of the much ballyhooed Second Life or Habbo Hotel. There are so many players out there now that the boundaries seem blurred to the normal everyday Internet user.

The point that I am trying to express here is that with so many players out there - old and new, and especially now with Google - consolidation is imminent and we'll see a shakeout of the weaker players (which are the vast majority here). Some players may be bought, but if anything has been learned from the plethora of virtual world startups that have emerged, it is that the barriers to entry in this business are actually fairly low, and as a result a large media company could probably develop one on their own (or outsource to a third party that can manage the development and back-end for them). Those that do survive will do so because they possess the same ingredients for success that other Internet destinations do - virtual or not. And that is: content. The same sort of differentiation you see happening in social networking now will in due time happen in the virtual world space as well.

- Closet Digital Media Investment Banker