Only a year ago, the typical holiday online present was an ornament or icon posted on a friend’s Facebook profile. But as we live more of our lives online, virtual gifts no longer suffice as a means of self-expression, but as objects (albeit pixilated) with offline value.

Take, for example, Little World Gifts. The British iPhone App allows iPhone and iPod Touch users to share with one another 3-D interactive curios and trinkets that you can touch, move and play with — like a rotating single red rose or a swiveling Las Vegas Elvis.

“Little World Gifts redefines virtual gifts, giving them the charm and personality of a ‘real world’ present,” explains co-founder, Katie Lips. “We want people to see virtual gifts as more than representations of real world objects.”

But that’s only part of the story. In China, local portal Tencent reported $730 million US in revenue last year. Their top revenue-maker? Digital goods: virtual pets or clothing to accessorize an individual’s social network profile.

So, how do you get people to pay for something they’re used to getting for free? It’s a question that bedevils the music and film industries, and it’s no less of a challenge for anyone trying to charge for an app for Facebook, MySpace or Bebo.

A new approach is emerging: Make it cheap; really cheap. Charge just a few cents for a bingo card, an accessory for a virtual pet or a weapon for a game character. Get enough people signed up and, once you’ve added up all those pennies, you’ve made a tidy bundle.

In Asia, these “nanopayments” have been earning social networks big money for years. In 2007, Tencent raised $523 million in revenue — four times as much as Facebook — in a country where the average monthly wage is less than $20.

Only 13 per cent of that revenue came from ads. Two-thirds came from Internet services like games and digital goods: “gifts” like virtual flowers, background music for users’ profiles, virtual pets, fashion items to dress avatars in, and so on.

One of Tencent’s top revenue-makers is a service where users can buy virtual items like clothes and jewelry to outfit an online avatar, according to digital strategy and research company Plus Eight Star. Others include games that are free to play but allow users to buy items to help them with tasks such as raising pets, according to the research company.

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