Virtual worlds are relatively nascent IT platforms with the potential to radically transform business processes and generate significant payoffs. However, in striving to achieve specific outcomes, firms may incur significant risks. Although many companies claim to have attained substantial benefits from their virtual world initiatives, many others have recently scaled down or even abandoned their experimental virtual world projects. This paper assesses the value proposition of virtual world initiatives from the real options perspective. Specifically, we argue that virtual worlds act as a firm's growth option, and we adopt the lens of real options to evaluate the value of this emerging and uncertain technological platform. We employ the event study method to assess the stock market's perception of the future revenue streams of 261 virtual world initiatives announced between 2006 and 2008. Our results indicate that, overall, the market reacts positively to virtual world initiatives. Our findings also show that investors' reactions to virtual world initiatives are contingent on four key characteristics of virtual world initiatives: interpretive flexibility (i.e., technologies that allow managers to experiment), divisibility (i.e., ability to incrementally implement the technology), strategic importance (i.e., an initiative that affects a process of strategic importance to the firm), and exploitable absorptive capacity (i.e., ability to exploit the knowledge acquired through the initiative). We discuss the key implications for real-world practitioners and suggest directions for future research.
Although research on three-dimensional virtual environments abounds, little is known about the social and business aspects of virtual worlds. Given the emergence of large-scale social virtual worlds, such as Second Life, and the dramatic growth in sales of virtual goods, it is important to understand the dynamics that govern the purchase of virtual goods in virtual worlds. Employing the stimulus-organism-response (S-O-R) framework, we investigate how technological (interactivity and sociability) and spatial (density and stability) environments in virtual worlds influence the participants' virtual experiences (telepresence, social presence, and flow), and how experiences subsequently affect their response (intention to purchase virtual goods). The results of our survey of 354 Second Life residents indicate that interactivity, which enhances the interaction with objects, has a significant positive impact on telepresence and flow. Also, sociability, which fosters interactions with participants, is significantly associated with social presence, although no such significant impact was observed on flow. Furthermore, both density and stability are found to significantly influence participants' virtual experiences; stability helps users to develop strong social bonds, thereby increasing both social presence and flow. However, contrary to our prediction of curvilinear patterns, density is linearly associated with flow and social presence. Interestingly, the results exhibit two opposing effects of density: while it reduces the extent of flow, density increases the amount of social presence. Since social presence is found to increase flow, the net impact of density on flow depends heavily on the relative strength of the associations involving these three constructs. Finally, we find that flow mediates the impacts of technological and spatial environments on intention to purchase virtual products. We conclude the paper with a discussion of the theoretical and practical contributions of our findings.