Public market buys ChangYou’s virtual goods model, stock up after IPO

In a public market vote of confidence on the business of virtual goods, Chinese game-maker ChangYou (CYOU) has gone public on NASDAQ today and its stock is currently up around 25 percent on heavy trading. Why? The company is seeing $202 million in annual revenue, more than half of which is profit, according to The Economist. Initial shares were priced between $14 and $16 but now it’s leveling out around $20.

ChangYou makes money from selling items in games, such as virtual clothing, swords, gems, etc, in an online role-playing fantasy game called “Tian Long Ba Bu.”

While this may be one of the most successful stock offerings in a year, ChangYou isn’t the most successful of the Chinese companies making money on these sorts of good. Most prominently, Tencent’s web conglomerate makes most of its $1 billion plus revenue from virtual goods.

U.S. social networks like Facebook and MySpace have so far only paid lip service to virtual items, introducing virtual gifts but otherwise not offering a more comprehensive currency or goods-focused gaming features. Both have left it to third-party developers to do so, and many — like Zynga, Playfish, SGN and smaller ones, are doing so. A cottage industry of analytics firms and virtual offer providers have sprung up to support these companies. It’s not clear how big the overall market is at this point.

Meanwhile, Facebook could be on track to make between $400 million and $500 million this year, possibly in part because of its experimental ads. MySpace made somewhere around $800 million last year, from what I’ve heard — mostly from banner ads, with help from its expiring advertising deal with Google. Meanwhile, other leading social networks, like hi5, have struggled to monetize through advertising — that company is moving wholeheartedly towards virtual goods now.