Economic Activity in Virtual Worlds

Over the last few months, I’ve been try­ing to get a bet­ter under­stand­ing of what is hap­pen­ing with the con­cept of vir­tual worlds. Let me go into more details as to why I think this phe­nom­e­non has some real poten­tials. In this first entry in a series, I will explore the eco­nomic activ­ity sur­round­ing this phenomenon.

Size of the market

When talk­ing about vir­tual worlds, I am focus­ing on the new space cre­ated by the gam­ing indus­try that allows to cre­ate online avatars and inter­act with other play­ers in a fully immer­sive envi­ron­ment. From an eco­nomic stand­point, esti­mates range from around 100 mil­lions to a high of US$1.5 bil­lion a year. These are not insignif­i­cant num­bers and they point to an emerg­ing phe­nom­e­non and poten­tially the rise a new indus­try, with its own set of mar­ket­places, gath­ers, own­ers, cre­ators, and marketers.

Mar­ket­places

To under­stand vir­tual worlds mar­ket­place, one must first under­stand what si going on in those vir­tual worlds. When a player sets up an account, he’s given a basic set of skills. As he or she pro­gresses and inter­acts with the vir­tual world and its denizens, the player gains more and more skills and goods. How­ever, this type of inter­ac­tion requires time. Some peo­ple have fig­ured that, because time is money, the amount of time spend in a vir­tual world could be con­verted into real hard cur­rency. Thus was born the con­cept of Real Money Trad­ing (aka RMT), whereas play­ers go to spe­cial­ized sites and buy vir­tual goods with real finan­cial currency.

The action ini­tially started on auc­tion sites like Ebay, where char­ac­ters or other vir­tual goods range in price from a few cents to sev­eral thou­sands of dol­lars. Because the trades were largely unreg­u­lated, some com­pa­nies, like Sony, decided to set up their own exchange while oth­ers (Inter­net Game Exchange, Mas­sive Online Gam­ing Sales, Tek Gam­ing Sup­plies, Swag Vault, and Gamers’ Loot) have cre­ated spe­cial­ized mar­ket­places to cater to this new phe­nom­e­non. This, in turns has led to the rise of two new classes of activ­i­ties: infor­ma­tional ones that pro­vide analy­sis on the finan­cial going ons in those worlds and arbi­tra­tion, whereas com­pa­nies use peo­ple in the devel­op­ing world to build up assets they resell to peo­ple in the devel­oped world. Let’s go deeper in those areas.

Infor­ma­tion Sites

There is now a nascent infor­ma­tion indus­try sur­round­ing the costs of goods in vir­tual worlds. For exam­ple, Eyes on Mogs is a shop­ping search engine for vir­tual goods. All the attrib­utes of other search engines are part of it, includ­ing com­par­i­son shop­ping, com­par­isons of the dif­fer­ent ven­dors, pric­ing, deliv­ery date, and buy it now info. GameUSD tracks the finan­cial value of vir­tual cur­ren­cies over time, pro­vid­ing price trends across not only the provider but also the alter­na­tive mar­ket­places. MMOfx claims to track “over 18,000 price quotes daily” and pro­vide infor­ma­tion on the fluc­tu­a­tion of vir­tual currencies.

Arbi­tra­tion

Another type of eco­nomic activ­ity to have arisen out of the mar­ket­place phe­nom­e­non is the arbi­tra­tion of vir­tual work. As the pri­mary pur­suit in these worlds is the acqui­si­tion of wealth, sta­tus or lev­els, an emerg­ing mar­ket has arisen to give peo­ple with real money a chance to bypass the time invest­ment required to acquire those things. For exam­ple, Chi­nese work­ers get paid between $75 and $250 a month to work in World Of War­craft, in 12 hours shifts, “killing onscreen mon­sters and win­ning bat­tles, har­vest­ing arti­fi­cial gold coins and other vir­tual goods. Afflu­ent online gamers who lack the time and patience to work their way up to the higher lev­els of game­dom are will­ing to pay the young Chi­nese to play the early rounds for them.” Sim­i­larly, Roman­ian play­ers can make a liv­ing wage (the ABC News story I linked to says that $200 is a good wage for Roma­nia) on the same kind of activity.

Edward Cas­tra­nova, the lead­ing econ­o­mist on the sub­ject of money in vir­tual worlds has been quoted as say­ing that “They’re exploit­ing the wage dif­fer­ence between the U.S. and China for unskilled labor.” What is basi­cally hap­pen­ing here is that these com­pa­nies have found a niche on the global mar­ket­place to accu­mu­late goods at a low cost and resell them at a pre­mium. This type of arbi­trage has been the way a lot of devel­op­ing mar­kets have rev­o­lu­tion­ized indus­tries, from the export of man­u­fac­tur­ing capa­bil­i­ties in the 20th cen­tury to the export of some ser­vice jobs nowa­days. It’s a nat­ural phe­nom­e­non and shows that those mar­ket­places are start­ing to develop a high level of matu­rity, which should be noticed by a lot more people.

Vir­tual Goods Ownership

Beyond the buy­ing and sell­ing of vir­tual goods in vir­tual mar­ket­places, there is also an emerg­ing trend in the real estate busi­ness, which can be bro­ken down into three main groups: real-estate own­ers, cre­ators and inte­gra­tors, and marketers.

Sec­ond Life is a vir­tual world more focused on the social aspect of vir­tual envi­ron­ments than on the goal ori­ented aspect of mis­sions and war-craft. For­tune Mag­a­zine reported last year about the inter­est­ing case of Anshe Chung, a char­ac­ter cre­ated by a Ger­man woman who has accu­mu­lated more than US$200,000 in vir­tual land hold­ings in Sec­ond Life. She rents the prop­erty out to other peo­ple, after hav­ing devel­oped the prop­erty. Sim­i­larly, the BBC reports that a 23-year-old spent £13,770 in Project Entropia and recouped his invest­ment in under a year. In fact, the land rush has been so strong that Sec­ond Life has build a model around land use fees, gen­er­at­ing a nice chunk of income in the process.

While vis­it­ing this world, I’ve talked to peo­ple who had few prob­lems pay­ing $75 per month to Lin­den Labs for those fees. This is pretty incred­i­ble when you think that all they are buy­ing is por­tion of disk space on a server. In a way, the real estate mar­ket pre­sented by those vir­tual worlds can be seen as a host­ing fee in a 3D envi­ron­ment and could rep­re­sent a high growth mar­ket (in a future entry, I will look at the oppor­tu­ni­ties in the Vir­tual Spaces in more details).

The Inte­gra­tion Model

Another nascent por­tion of this new indus­try is the inte­gra­tion game. As with any new tech­nol­ogy, devel­op­ing and man­ag­ing some­thing in a vir­tual world is an endeavor that requires spe­cial­ized skills. New com­pa­nies like The elec­tric sheep com­pany and Space Think Dream have emerged as developers/integrators, offer­ing their ser­vices to other com­pa­nies. Their main busi­ness is to use the skills they’ve acquired to help exist­ing com­pa­nies exper­i­ment in these new worlds. This is, in a way, sim­i­lar to the type of work that was done by early web design agen­cies, treat­ing vir­tual worlds as a new inter­face either to exist­ing sys­tems or to cre­ate a new value proposition.

Other com­pa­nies have emerged with the sole pur­pose of sell­ing dig­i­tal goods in those worlds. SLex­change is a vir­tual mar­ket where peo­ple can buy and sell such goods. Sim­i­larly, the Elec­tric Sheep com­pany has cre­ated SLBou­tique as a com­peti­tor to SLex­change. What is inter­est­ing here is that there is a whole ecosys­tem build­ing around Sec­ond Life, allow­ing other com­pa­nies to pros­per based on this new plat­form. This is sim­i­lar to what has hap­pened with Ebay and allows us to bet­ter under­stand Sec­ondLife as a plat­form for e-commerce rather than just a game, a fact that Philip Rosedale, CEO of Lin­den­Lab and the power behind Sec­ond Life, likes to empha­size. This explains why the com­pany has received invest­ments from peo­ple like amazon.com CEO Jeff Bezos, Lotus founder Mitch Kapor, Ebay founder Pierre Omid­yar, and Microsoft CTO Ray Ozzie. Those peo­ple under­stand that this a new emerg­ing plat­form and could see poten­tially high return on their invest­ment.

Bridg­ing the gap

The devel­op­ment of vir­tual worlds as a new plat­form is start­ing to take shape. Com­pa­nies and orga­ni­za­tions like Amer­i­can Apparel, the BBC, Major League Base­ball, NASA, The Amer­i­can Can­cer Soci­ety, Amazon.com and Wells Fargo are start­ing to exper­i­ment in that space. Increas­ingly, vir­tual worlds are becom­ing not only a new way to mar­ket but also a new inte­gra­tion point for e-commerce.

Some of the vir­tual worlds (Project Entropia, for exam­ple) have even gone as far as issu­ing ATM cards that allow denizens of those worlds to take vir­tual money and trade it for real money that they can use for reg­u­lar eco­nomic activity.

Con­clu­sion

With large amounts of real cur­rency already mov­ing through vir­tual worlds, we are look­ing at a major new eco­nomic phe­nom­e­non that par­al­lels the ini­tial devel­op­ment of the com­mer­cial web and the rise of soft­ware as plat­form in the last few years.

With a new ecosys­tem form­ing around some of the vir­tual worlds, there is a fair amount of incen­tive for a lot of peo­ple to see this phe­nom­e­non suc­ceed. Sec­ondLife will prob­a­bly be an early win­ner in this race, largely due to how quickly it has man­aged to get other com­pa­nies to rely on it. A few more estab­lished com­pa­nies are also early in stak­ing ground in this new space and will prob­a­bly reap rich rewards for their efforts, expand­ing their brand into those vir­tual spaces.

While it may appear that this is largely a sub­cul­ture of gam­ing, the phe­nom­e­non is much more wide­spread. In my next entry, I will go through the demo­graphic pro­file of denizens of those vir­tual spaces, show­cas­ing a rich and var­ied tex­ture to this phenomenon.

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