at the company’s developer conference, Innovate,. PayPal has also formed a number of high-profile partnerships with companies to implement the digital goods product, which will also be announced at the conference.

In order to best understand how big this feature could be, it’s important to know what PayPal includes in its definition of “digital goods.” According to the company, the new product will include specialized payment support for micropayments for online video, music, games (including the sale of virtual goods and currencies), paid content, books and software.

We’re told that PayPal wants to replicate the act of putting another quarter in a gaming machine to continue to play a game, except in an online equivalent. The company wants to lower the friction point of leaving things, whether that be within a game, while reading content, or watching videos.

While PayPal declined to name its partners for the new product, we do know that the companies who are selling the most in digital goods using PayPal are Zynga, Blizzard, Apple (via iTunes) and Gaia Online. Both Zynga and Apple would be ideal initial partners for PayPal considering the vast amount of transactions that flow through both platform.

This product will no doubt bring in a whole lot of cash for PayPal. In 2009 alone, PayPal processed more than $2 billion in transactions for digital goods (out of $72 billion in total). In the first half of 2010, the company has processed more than $1.3 billion, and is in track to see $3 billion by the end of the year. In fact, over 50 percent of direct in-app transactions for virtual goods within social gaming environments are going through PayPal.

According to the most recent “Inside Virtual Goods” report, the micropayments and the virtual goods alone market is expected to grow by 51 percent from 2009 to 2010. More than $500 million in total virtual goods transactions occurred on social networking platforms in the US in 2009, and this number is expected to double in 2010.

Video content is also a big money maker. Downloaded video content is a $467 million market in the US today; however, Forrester forecasts it will grow to more than $900 million by 2013.

If you want to catch PayPal’s announcement live, you can by tickets to the conference here. And PayPal is running a special promotion until Friday; if you enter the code TWEET between 11am PT on Tuesday and 12 am PT Friday, you will get access to Innovate for only $49.

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Authors: Leena Rao

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