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An interesting pre-lunch panel at SDForum on the virtual world value chain was moderated by Sharon Wienbar of BA Venture Partners, a $400 million venture fund that invests in software, hardware and life sciences companies. BA has several investments in the game space, including in mobile games, though they don’t have any virtual-world investments yet. “A couple of people have suggested we should start doing VC for in-world businesses,” she said. Her initial reaction was negative, but she later realized that Second Life’s in-world market is bigger than some target markets of companies BA has invested in. “In a virtual world, there is a much longer, more complex value chain” than in the real world, Wienbar said.

The panel included Shital Mehta, founding partner of Shanth Interactive, an interactive communications agency that takes “an untraditional approach to what’s traditionally been PR and marketing”; Will Harvey, CEO of IMVU and founder of There.com; Sibley Verbeck, CEO of Electric Sheep Company (anchor sponsor of this blog); and Daniel James, CEO of Three Rings, makers of Puzzle Pirates.

Wienbar asked whether value accrues to the content, or to the enabling technology. Verbeck weighed in by noting that “whatever pieces of the economy are open to us, we go in and use that. We use the technology that’s been opened by the platform provider. Where the value accrues is very different on every platform.” The company behind the world may or may not be a significant part of the value chain. The Sheep are also building consumer applications for using virtual worlds more effectively, he said. This creates value for not just the user but the game company as well.

Wienbar pointed out that tools businesses are “pretty crappy businesses.” Can enabling technology be a big business by itself or do you have to be that plus something more to make a lot of money, she asked.

Will Harvey noted that “enabling technology doesn’t have any value unless there’s content on top of it. For virtual worlds, what’s interesting is that there are mutiple value chains. Infrastructure companies have a bit of chicken and egg problem. For the technology to be interesting to developers, they have to bring a body of users to the developers, so that developers have a body of users to sell their content to.”

Verbeck pointed out interesting differences between the virtual and the real: All virtual goods have essentially no marginal cost of production. Everything is software, so it’s useful to think about the value chain of the software industry, including tools to help you create goods. There’s no geography, no real-world geography that has an influence on the value chain. “I think that’ll play out in some subtle ways,” Verbeck said. “We don’t realize the degree to which geography plays a role in establishing the real-world value chain.”

Shital Mehta spoke about what it means to do marketing in-world. Big brands are starting to take notice, she pointed out. “What people have to realize is that the culture is evolving in itself and it’s quite unique. If you look at new forms of media, the trend that we see is that people are participating. We see that in blogs, in places like MySpace, and now in virtual worlds.”

“I’m a bit of a skeptic about the value of advertising in games,” Daniel James said. “If you look at most successful games, very few of them particularly amenable to widespread advertisements.” More likely in places like Second Life and IMVU, there will be a bifurcation between smaller niche products and larger brands,” he said. There are going to be opportunities for advertising, but it’s not necessarily going to be Coke buying vast amount of ads, it’s going to be more like Google Adwords, where it’s very context sensitive.

Will Harvey also described the shadow economy of IMVU, in which users buy and sell credits and cash them out for real money much as they do in places like The Sims Online and elsewhere. Harvey pointed out that the company actually encourages currency traders rather than trying to shut them down. “The only way that IMVU makes money is by selling our currency,” he said.