So many great conferences going on this month... i'll be up in Sebastopol at Foo Camp this weekend, however i'm bummed i'm going to miss the Virtual Goods Summit being put together by Charles Hudson & Susan Wu. Susan also just posted a terrific summary of the digital goods market opportunity on TechCrunch. Susan is one of the smartest young VCs in the valley and put together a terrific panel at the Web 2.0 Expo conference a few months ago, and Charles is a really sharp BD guy over at Google i met in Tokyo last fall (and *almost* recruited into one of my startups, dammit!). They both have a great intuition for interesting new trends, and this conference is just another example of them being on the cutting edge of internet technology.
I definitely agree digital goods & payments is a huge, growing space that's been overlooked by startup entrepreneurs in Silicon Valley. When i was working at PayPal managing the PayPal Developer Network several years ago, the digital goods business was already big -- several individual PayPal merchants were transacting millions of dollars exchanging currency for Sony Everquest, buying Sims accessiories, & conducting commerce for other MMO's. At the time i was a bit disappointed eBay/PayPal didn't go after this market more aggressively, given the size & growth potential. In spite of the volume, PayPal wasn't really supporting -- and in fact was almost actively discouraging -- digital goods payments, primarily because of fraud concerns and the inability to verify "delivery" for a virtual item. (i actually suggested a possible hack to a few folks: if you mailed a physical copy of the receipt for digital goods payment, you could theoretically use it as proof of delivery and get PayPal to handle the transaction normally according to its standard policies for physical goods... check here for more PayPal Hacks ;).
Anyway, since PayPal wasn't as focused on digital goods back then i ended up directing a lot of customers to one of the guys i recruited for our PayPal Developer advisory board, Shannon Sofield, who had built out a digital goods payment service called PayLoadz. PayLoadz added a lot of functionality for managing digital good payments on top of PayPal (and now also works with Google Checkout as well). There are other services like EventBrite (for supporting event payments & ticketing) that function similarly, by additional functionality around PayPal for specific vertical or horizontal markets.
There were and still are many 3rd-party service opportunities that PayPal was too busy to address, and in fact this was part of my job running the PayPal Developer Network; to help identify & support new market development (or occasionally in gaps in our product features) by evangelizing PayPal as a payment platform other entrepreneurial startups & developers could build on. In hindsight, i'd have to admit we were only modestly successful with our platform efforts... we did get thousands of merchants & developers using PayPal, but we barely scratched the surface of all the platform opportunities in digital goods, subscriptions, events, storefronts, and many many other areas. And although PayPal is still a huge force in the payments market, at least as far as digital goods goes much of that innovation has been happening in other companies (see Susan's overview) & geographies (Korea, China, Japan, etc).
I'd still love to see PayPal open up further as a platform, and support the growth of digital goods as well as several other related markets. It will be interesting to see if eBay does more to push PayPal in this direction, or if other platform competitors such as Google (with Google Checkout, Google Analytics, & other Google APIs), Amazon (with payments, storefronts, digital publishing, & Amazon Web Services like S3 & EC2), and now most recently Facebook (with Facebook Platform), end up eating their lunch. Also somewhat missing from this platform discussion: Yahoo & Microsoft. Marc Andreesen, Jeremy Liew, and David Sacks (Geni.com) have some great posts on platforms recently... worth discussing further.