[There's lots more than meets the eye in augmented reality. Research Director, Andreas Constantinou talks about Augmented Economics, a new form of economy where value is created by superimposing virtual value on top of our physical world]

Economics is an area of continuous research, both academic and industrial. Once in a while, new revenue models or new markets surface, which are followed by a string of industry capital movements. Take for example new revenue models being pioneered in the Internet like the cost-per-follower (ie being paid based on how many people are following you on twitter) or in the mobile domain (pay-per-app-activation when B2B provisioning applications on a device). New markets are continually formed around new solution types; in the fast-moving mobile industry for example, App Stores,  Social Addressbooks and Service Analytics are  new solution markets which emerged only in the last two years.

What’s more interesting is when entire new economies emerge, ie new systems for creating value and monetising from that value. I would argue that in the last few years we have been witnessing the creation of Augmented Economics, ie the economy formed by superimposing value on top of our physical world. But let me take a step back to explain.

There’s been a lot of buzz recently around augmented reality browsers. These browsers bring augmented reality to the mass market; now you can scan through the surroundings through your phone’s camera and see information superimposed, from advertising to siteseeing in real time. Augmented reality browsers have been made possible in a mass market sense thanks to the GPS and compass sensors  first appearing within Android and iPhone devices. The value in augmented reality browsing is in the connection between the physical world (what the camera captures) and the commercial information that is displayed on top. Already a number of startups have emerged to capture value in augmented reality browsers like Metaio, Total Immersion, Zugara, Layar, Mobilizy and Tonchidot (see here for a detailed review of augmented reality startups)

In a sense, Facebook is no different. Facebook is a platform that overlays virtual games and applications on top of the people profiles and mesh of relationships that exist in the physical world. Facebook is indeed a connecting platform between the physical world and 1000s of virtual worlds created by third parties. Facebook monetises through on-site ads for now, and moving to off-site ads, self-service ads and virtual goods which is expected to increase ARPU (average revenue per user) from $0.25 to $0.50 according to Fred Wilson, a prominent VC.

Flirtomatic, a popular mobile dating service in the UK, Germany and USA, monetises by offering social capital for sale. Flirtomatic allows users to buy social capital; users can send virtual ice cubes, auction themselves to the top of the service homepage, or even buy Ego services so they can eliminate bad ratings on their profile or bend the voting rules (see here for a good review of the service by Tomi Ahonen). Flirtomatic again monetises by bonding together the physical world with the virtual world where users can defy physics.

There’s lots more examples.
- Monopoly City Streets creates capital by allow users to buy virtual real-estate (viewable only through your browser) in exchange for real money.

- Cyworld, Everquest, World of Warcraft and Second Life are virtual worlds which monetise by subscriptions, virtual goods, virtual currency exchanges and ads by physical world brands. Fortune reported that the market in China for virtual goods is larger than the market for online advertising with Tencent, China’s largest messaging+Avatar+social networking service, generating $1 billion  in revenues in 2008, 90% of which is from virtual goods, as cited in the Business Model Database.

- A barcode (or QR Code, Data Matrix and Ezcode)  allows a mobile device to connect a physical product in a store or a poster in the train station to a wealth of online information, such as where the product ingredients came from, or when is the next train (the Economist has a good update on the commercialisation of 2D codes). Again monetisation is by providing the connection between physical and virtual worlds.

- Anoto, a Swedish company, produces technology to connect a digital pen with the origin of the paper that it’s writing on. For example, by writing on a business card, you can send that to the contact directly, or by writing on a recruitment form, you can have your job application dispatched immediately. Anoto monetises by acting as the link between the physical world (pen and paper) and the virtual world (that of service providers of business information, recruiters, etc).

There’s probably lots more examples where companies have formed connections between the physical world and countless virtual worlds. And as Clayton Christensen et al argue in Skate to Where the Money Will Be, those who control the interdependent links in a value chain capture the most profit. In other words, the platform that links the physical with the virtual worlds stands to profit the most.

It’s amazing how value can be created out of thin air.. in this case creating social capital that allows users to ‘augment’ the physics of the real world (time, money or influence). And as S Schaffer said the next Google might be a physical world connection company. That’s the world of Augmented Economics.

Looking forward to your comments,

- Andreas
follow me on Twitter: @andreascon