An increase in the number of people playing free games is providing the gaming industry with an additional source of revenue as gamers shell out millions for virtual goods and add-ons.

Free games, once the bane of the gaming industry, are now proving lucrative for game developers who entice people to pay for virtual costumes or tools which enhance game experience.

According to a survey published by German tech industry association Bitkom earlier this month, 45 percent of German gamers opt for free-to-play versions only.

Matthias Hellmund, head of mobile development at German game developer Exozet said the target group for $70 console games was gradually shrinking as gamers get used to games on Apple's iPad which are free or cost 99 cents.

But people don't necessarily spend less, because fans might be willing to invest even hundreds of pounds for a game experience they really like - so some spend more money than they would on a premium-priced game, he told Reuters at Gamescom, Europe's largest video games trade fair.

Bitkom found that 43 percent of German gamers splash out on games which require them to pay before they play, spending an average of 15 euros a month.

But some gamers who use free-to-play games spend much more than that on a single micro transaction -- up to 1,500 euros ($2,113) for a rare sword or special armor in some cases -- Christian Funk, a virus analyst at Russian computer security company Kapersky Lab, told Reuters.

Funk monitored Ebay -- one of the most important sales channels for virtual goods -- in June found more than 3,641 virtual items for use in Activision Blizzard's World of Warcraft game were sold at an average price of 132.33 euros ($186.4) during a 14-day period.

Based on these figures, Funk estimates that gamers spend around 11.5 million euros on virtual goods for that one game per year, giving a glimpse of what kind of sums the micro transaction industry was handling, he said.

The value is in the rarity - gamers are prepared to pay real money for virtual goods, he said, adding some virtual items were status symbols for players.

Just as in the real world people are willing to spend lots of money on nice glasses, watches or sports cars, this is just a hobby, he said.

GROWING AUDIENCE

The audience for free-to-play games is growing rapidly. Wooga, Europe's largest social game developer, has seen the number of people who play its free games on Facebook rise from 3.15 million active users in January 2010 to 32.83 million in June 2011, data from media research firm Screen Digest shows.

Around 3 percent of people who play Wooga's games pay for virtual goods such as magic wands or for the ability to complete a mission instantly.

It's more attractive to pay if I like a game and if I want to progress faster and not pay 60 euros but not know what I get, Wooga spokeswoman Sina Kaufmann told Reuters.

The company claims to be the world's biggest supplier of magic equipment after selling more than 28 million magic wands to gamers who play its Monster World since the game's launch in May 2010.

But while these sales figures are good for the industry, the micro transactions business has brought challenges with it.

Game developer Richard Garriott said free downloadable games are here to stay and that the industry was becoming more creative about monetizing seemingly free-to-play games such as by charging players to move on to the next level or by converting people to paying a subscription.

(Reporting by Ludwig Burger; editing by James Jukwey)

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