Micro Mart ‘The Rise of Virtual Economies’

Out of this World: the Rise of Virtual Economies

How much would you pay for a single M&M? A strange question, true, but one that someone reportedly answered in 2004 with the princely sum of $1,500 USD. What about a cornflake? If web lore is to be believed, one went on eBay for $1,350 USD in 2008. Of course, these weren’t your average day-to-day food items. By dint of having just returned from the first privately funded trip into sub-orbital space, the M&M was galactic grade confectionary and as such, carried with it all the associated sci-fi cachet. And the cornflake? A bit less excitingly, it was in the shape of the state of Illinois.

There’s no getting around it, value economics are just plain weird. The M&M and cornflake are anomalies, but they serve as a reminder that people are willing to spend real money on extraordinary things. Extraordinary things like the online virtual replica of the city of Amsterdam which went for $50,000 USD in 2007, currently thought to have fetched the highest price of any transaction so far in Second Life’s immersive virtual environment. That’s small fry compared to figures reported in November 2010 for the sale of Club Neverdie in Planet Calypso, thought to be the largest single virtual land deal with a whopping $335,000 USD changing hands. With revenue from development sales, rent and advertising space for high ‘dwell’ zones, it seems virtual land is a big bucks operation.

It’s almost a decade since economist Edward Castronova published a paper proposing that, if it actually existed, the virtual land of Norrath in Sony’s Everquest would have the 77th richest economy in the world, putting it somewhere between Russia and Bulgaria in 2001. However realistic his calculations, Castronova’s claim woke people up to the potential of virtual economies, sending questions and theories spiralling out into the infosphere. Was it possible to make a real world living in a virtual environment? If so, how would developers protect in-game assets with real world value from virtual theft? Who would write the laws? Could governments impose taxation? What would be the effect on real world societies and economies? In short, how were virtual economies going to change the game?

In the ten years since Castronova’s study, the game has most definitely changed. Virtual economies which interact with real world currency are no longer just stand-alone titles populated by hard-core gamers; they’re everywhere. Facebook, with its 500 million active users and counting, is no longer just a place to poke people and stalk their photo albums, it’s also changing the face of gaming. 40% of the total time people spend on the social networking site is now taken up tending virtual crops in Zynga’s Farmville, breeding exotic fish in CrowdStar’s Happy Aquarium or pampering pooches in Playfish’s Pet Society to name just three.

Meanwhile, back at the farm…

By far the most popular such game is Farmville. Available as a free app on Facebook or the iPhone, Farmville players can earn virtual currency to spend in the game by trading farmed goods they produce, but like most things in life, real money can grease a few wheels for you (in the case of this game, that’s all it can do as the only people taking real currency out of Farmville are its developers). Impatient virtual farmers can speed up their in-game progress by buying virtual coins with real world currency, but unlike in Second Life, farmvillians have no facility for making real cash. Not that it stops them spending. In just three weeks of March 2010, one 12 year old boy was reported to have run up a real-life bill on his mum’s credit card of more than £900 in Farmville. Struggling to imagine what £900 of pixelated cowsheds and crop-dusting biplanes looks like? You’re not alone.

Not all Farmville players are gormless 12 year olds though. A study conducted last year by PopCap Games revealed that the average UK and US social gamer is actually a 43 year old woman; a whole new gaming demographic bringing with it a whole new disposable income. According to games designer Jesse Schell, there are more Farmville players than there are Twitter accounts worldwide. Even if, as PopCap’s survey revealed, only 30% of social gamers admitted to having bought virtual currency with real, that still translates as an awful lot of real cash being converted into an awful lot of virtual radishes. I told you this was going to get weird.

And weird it gets. If you were wondering exactly what people are spending their hard earned cash on in virtual worlds, a quick appraisal of ‘Today’s most popular items’ in Second Life’s marketplace reveals the strange combination of risqué clothing and pet food. How much are people actually spending on this stuff? It varies: a manicure for your Second Life avatar will set you back around L$199, which may seem heart-stoppingly expensive at first sight, but actually equates to about 45p in real money. A Jacuzzi hot tub to brighten up your virtual pad is priced at L$1,450 – a slightly steeper £3.27 – but then after a hard day of feeding a pixelated rabbit whilst wearing a PVC corset, everyone needs a place to unwind…

Facebook nation?

If I asked you to name the currency of a destination with a growing population of more than 500 million, you’d be right in answering either the Chinese Yuan or Indian Rupee, but soon a third name could be added to the list: the Facebook credit. Just before Christmas, UK high street retailers Tesco and Game began selling Facebook credit gift cards which the UK’s 33 million Facebook users can exchange for virtual goods and in-game currencies on the social networking site (with Facebook itself receiving a 30% cut every time they do so). At the beginning of this year, Facebook announced that these credits are to be made the mandatory method of purchasing in-game currency as of 1st July 2011. Like the introduction of the euro, their argument runs that things are just simpler if a common currency is shared across the site’s games, but it doesn’t seem likely that they’ll stop at gaming. A future where FB credits are rolled out for real purchases would have an unknowable but potentially massive impact on world markets, opening up a family-size can of worms in terms of taxation, monopolies and the fairly scary sci-fi-type question of what happens when a global currency is controlled by a corporation and not a government.

We need only look at the music industry to see what can happen when virtual spending overtakes the purchase of tangible goods. High street music retailers are on their last legs as digital downloads, legal or otherwise, take over the market. We know it won’t end with music; every pound spent on virtual goods in an online world or game comes out of someone’s pay packet (or mum’s credit card), which means money diverted from other markets. Shifts in spending trends are a natural part of any economy, but it’s the potential scale of this one which makes it so significant. Castronova’s 2007 book Exodus to the Virtual World, imagines a not so distant future when swathes of the population essentially ‘migrate’ into virtual realms, taking their spending power with them. If it’s possible to make a virtual living say, as a property developer in Second Life, then it’s possible to spend a large part of both your working and leisure time in that virtual environment. Why spend money on real-life home renovations, clothing, cars, games consoles or birthday presents for your family when you can do all of that virtually and be a 6ft 5” Viking vampire to boot?

Mind games

At the DICE convention in February of last year, game designer Jesse Schell urged the world to pay closer attention to the psychological tricks used to create revenue by the controllers of virtual economies. Free to play initially, developers of a number of social games introduce charges to unlock particular rewards or capabilities at a point when players are already invested in the game. Schell cited Club Penguin, Disney’s online virtual world for children, as a prime example. Free to join and play, Club Penguin allows children to win virtual coins during the game but requires a paid subscription if they want to spend them, locking parents into a monthly payment.

That’s not the only trick developers have up their sleeves to separate us from our money. Schell reminded his audience of the financial blind spot which causes parents to consider a $20 price tag the equivalent of a $12 one when buying something for their children. If this is the case with real money, then what happens to our currency perception when we’re not counting in dollars, pounds or yen, but in Linden dollars or Microsoft points?

Rarely do virtual currencies equate simply to the same amount in real currency, making consumers even more susceptible to psychologically smart pricing strategies. We may be hip to the power of £0.99 and its sneaky role in making purchases seem less expensive than they are, but that doesn’t stop it being effective. With exchange rates fluctuating around L$444 (Second Life currency Linden dollars) to a UK £1, or a nicely round 5000 Microsoft points for the less rounded sum of £42.50, some of us are bound to lose track of the numbers. Ostensibly introduced to reduce the number of small credit card transaction fees for companies, Microsoft and Nintendo points have already come under fire for being seen to obfuscate costs and forcing gamers to purchase greater sums than immediately needed, thus holding our as-yet-unspent cash in their bank account rather than our own. It would seem ludicrous in another context: imagine pre-paying Asda £50 when you only want £32 of groceries and so leaving them with your £18 until the next visit, which then happens to come to £19.50…

A different kind of criticism and a since-dropped law suit have been levelled at Farmville makers Zynga. The developers reported in 2009 that one third of their revenue came not from micro transactions (people buying virtual cows, for instance) but from lead generation (people signing up to phone contracts or credit cards for virtual currency rewards). Jesse Schell estimated in February 2010 that that, though they were unlikely to admit it, the balance had tipped so lead gen was now making developers more than either direct payments or micro transactions. This healthy revenue source may have contributed to a somewhat less healthy ethical reputation for Zynga, who were accused of colluding with unscrupulous credit card companies and misleading premium phone rate subscriptions who advertised in Farmville. Whether these particular accusations hold any water, history teaches us that there’s no shortage of unethical people online looking to make a quick buck, meaning virtual economies are vulnerable to attack.

Fun loving criminals

People will always covet things of value, something that seems true regardless of whether those things actually exist. Copyright and intellectual property rights on in-game creations are a big deal for gamers, more and more of whom are seeking redress for ‘crimes’ committed by hackers, griefers and other players in virtual worlds, whether real assets are involved or not. Complicating things further, the god-like powers of developers and publishers who reserve the right to cancel and ban accounts if misconduct is suspected are resented by many who feel that their virtual world is just that, theirs. Some are even willing to virtually fight for it. A group of Second Life residents calling themselves the Second Life Liberation Army have reportedly banded together with the goal of overthrowing Linden Lab’s “authoritarian government”. Their method? Detonating virtual bombs near corporate targets.

Virtual terrorism is just one of the sensational headlines we’ve witnessed in the last decade. Real world divorce and death is reported to have been provoked by virtual world activity, the most renowned being the story of Chinese gamer Qui Chengwei. Seeking revenge on friend  Zhu Caoyuan after Caoyuan stole (and later sold for real money) a virtual sword from Chengwei in the massively multiplayer online world Legend of Mir 3, Chengwei sated his anger by stabbing Caoyuan to death. In real life. Though the world of virtual crimes can be an ambiguous one, there was no ambiguity in the case of Chengwei, who, since 2005 has been living out a very real life sentence for murder.

Perhaps it was cases such as Chengwei’s which prompted US Law professor Greg Lastowka to warn of a potentially “anarchic frontier online” in his 2010 book Virtual Justice: The New Laws of Online Worlds, which suggests that the “lawless frontiers of virtual worlds” need more rigorous policing. Lastowka calls for laws covering not only theft and copyright, but freedom of speech, defamation and even the tricky potential of inheritance when gamers wish to pass powerful avatars down the family line. Things got tricky the moment virtual goods began to amass real world value. In increasingly sophisticated virtual worlds, punitive measures like the poetic justice of toading – a kind of virtual death sentence coined in the world of LambdaMOO in which punishment was meted out by turning naughty players’ avatars into toads – just aren’t going to cut it anymore.

Fair play

All this talk of wrong-doing in virtual worlds can only lead us to one place: the controversial issue of real money trading. Known as RMT, real money trading has drawn battle lines between virtual communities with a pronounced split between those worlds which allow it (Second Life and Everquest amongst others) and those who prohibit it (World of Warcraft; online editions of Warhammer, Final Fantasy and more). Those against RMT argue that it tips the playing field unfairly in the direction of wealthy players, and ultimately makes virtual worlds a little too much like real life.

One of the attractions of spending time and money in virtual environments is that fantasy destinations such as Blizzard’s World of Warcraft are idealised places where everybody genuinely starts off equal. Players can create items, complete quests and raids to earn gold, level up or gain experience points but nobody gets a leg up just because they have wealthy parents. The sticking point in World of Warcraft comes when human ingenuity or greed (whichever you choose to call it) provides a short cut: don’t want to spend your own time collecting tedious gold or levelling up? No problem, there’s no shortage of poorer people who can be paid real money to do it for you. Known as gold farming, the practice is strictly prohibited by Blizzard’s end user licence agreement which threatens to close down and ban any account involved. Despite this risk, the trade of real world currency for World of Warcraft gold remains a buoyant market with a nasty sting in its tail for the developed world.

It’s difficult to gauge just how prevalent gold farming is due to its illicit nature, but the circumstances in which it takes place are beginning to come to light. The vast majority based in China, gold farming workshops internationally export virtual gold, level ups or whole accounts for real world currency.  In the case of one such Chinese workshop, WoW7gold in the south-eastern region of Changsha, it is usual for gold farmers to work 10 hour shifts, 7 days a week sourcing gold or slaying dragons to gain level ups for those willing to pay for a step up in the virtual world. Mostly young and unqualified for other types of work, nationally, ‘playbourers’ earn an average of £77 per month (less than 30p an hour) as well as basic food and on-site accommodation. Research from Manchester University in 2008 estimated that  400,000 Asian workers were employed in the trade which at that time was thought to be worth up to £700m a year.

Labelled the sweatshops of the massively multiplayer online world due to a lack of regulation and the invisibility of many such operations, underground workshops are thought to have little concern for the conditions (or age) of their workers. Despite attempts to curb the trade, the industry shows no sign of abating and the virtual population is only growing. The speed of this online population growth led American writer Nicholas Carr to consider another way in which virtual worlds were impacting the real world, namely, environmentally. Though the methods he used to arrive at the calculation have been since questioned, his 2006 headline that a Second Life avatar consumed as much electricity per year as the average citizen of Brazil was an eye-opener to say the least.

It’s not only Blizzard who are opposed to RMT, but also a huge section of its in-world population who think buying ‘farmed gold’ just isn’t cricket. Discussing the recent growth in virtual world RMT Castronova made a pithy analogy to a game of Monopoly, pointing out that few of us would think it fair if our opponent used real world currency to purchase Park Lane or put a hotel on Mayfair to advance their in game progress using out of game advantages.

On the whole, gamers say they don’t mind when economic inequality occurs in World of Warcraft, as long as there is an equal distribution of opportunity. Stances like this one are more usually found in party political manifestos than on games forums, but this is the kind of language being employed to debate these new virtual societies. We’re no longer just playing a game, we’re planning social policy. Blimey, this is all starting to sound a bit real isn’t it?

In a word, yes. For all intents and purposes, many of these virtual economic exchanges are as real as, say, paying your bills online or buying insurance. We spend money every day on so-called ‘real world’ intangible things without blinking an eyelid. The London stock exchange fluctuates according to the abstract concept of how much confidence people have in a something, our own tangible currency of pounds and pence, like nearly every other in the world, has no value apart from that given it by the state, just like the Mickey-emblazoned dollars you might spend on a hot dog in Disneyland. Maybe what we need to get our heads around in all this is the realisation that virtual economies might be a little more real than we first thought, while real economies are more than a little bit virtual.

What’s the attraction?

Every aspect of human society exists in virtual online worlds: friendship, romance, work, power, politics – it’s all there. A major difference (apart from the obvious) is that unlike the real world, developers are able to structure the environment in any way they like and since it’s in their profit-seeking interest to make people happy, they structure it to do just that. Judging from the numbers flocking to spend time and money in social games and immersive online environments, it seems to be working.

It’s not difficult to understand why ordinary people might want to spend their leisure or work time in a fantasy where they can make money, be powerful and respected – heroic even – whilst feeling part of a community. Virtual worlds and the economies growing up around them encourage people to become artisan entrepreneurs whilst providing them with just enough challenge, a lot of control and masses of choice. In short, virtual worlds seem to be scratching an itch that for some, the real world just can’t reach.

This article originally appeared in issue 1147 of Micro Mart on 3rd March 2011