Liveblogging the Virtual Goods Summit: Making Virtual Economies Work

Once you have users, how do you make them want to buy your stuff? Is that even a legitimate questions? And if there weren't enough complications in talking about virtual economies with legitimate users, there's an entire black and gray market waiting just around the bend. Representatives from Entropia, Affinity Media (IGE), Areae, and K2 Networks talk about how to regulate your virtual economy and fill it up.

Making Virtual Economies Work: What Does it Take to Get it Right?
    Whether it's the virtual or physical world, successful economies don't happen by accident. What does it take to build and foster a thriving virtual economy? What lessons can we learn from folks who are on the forefront of tackling these issues? We'll explore what it takes to get a virtual economy right by tapping into the collective expertise of our audience and panelists.
» Joshua Hong, K2 Networks
» Brock Pierce, Affinity Media (IGE)
» Raphael Koster, Areae
» John Bates, Entropia Universe
» Mark Wallace, 3pointD (moderator)

Bates: Entropia Universe is a lot like a small country And we run it that way. We’re unique in that we have a real cash economy that is backed 10 to one to the US dollar. You can come to MindArk and get real money back. You can come and play for free forever. A lot of people do that and build up their accounts for a long time until they can buy a gun or armor or whatever. You do that by following animals around and picking up dung. Or sweat. The sweat has special properties that allow people to do things like teleport, and there’s a big market for sweat. At the other end, there are people who come in, we’ve got the CEO from a successful software company who plays a lot, he’s got a lot of money, so he bought the best of everything. Because he didn’t have skills, he had a tough time using them, but you can buy skill implants from other people. We actually have a team of economists working all the time to keep things balanced and fair.

Pierce: We’re not a developer and publisher. We approach the market differently. We have a platform where users of MMOs can come for information. On the other side, we have exchange platforms where users are able to buy, sell, and exchange the awards they’ve accumulated while playing. Historically, IGE, and we’ve sold that business, was a proprietary market builder. You could monetize your time spent playing.

Hong: We’re an online game publisher, but we focus on service. We focus on Asia, and we usually publish and operate some of the successful online content to the US. I was inspired by some of the successful Korean companies, like Nexon. We make money by selling items. We are free to play, so any gamers can download the game for free and play as long as they want. We sell enhancements, not too differently from Nexon, but we perfected the concept for Western gamers. We also put less emphasis on games themselves and more on gamers. There’s a big difference we emphasize. Gamers come because games are fun, but they stick around because of unique social experiences available. It’s fairly simple concept, and it’s similar to Korean.

Koster: I think I’m the panel’s designated gadfly. I am a virtual worlds designer. I can’t tell you anything about what I’m doing now, except for we’re bringing together the virtues of VWs and the Web, but I have written and thought about everything from the technical to legal sides of VWs, so I’ll be the economy.

Wallace: We hear often that these economies are fairly similar to real world economies. Is that true, or are there important differences.

Bates: Both. If you drew a Venn Diagram of reality and then one of VR, it would be inside reality. Reality encompasses VR. There is so much that is the same, particularly with our company because you can cash out so people take it seriously. But the real difference is that people created this. If people wanted to, they could tweak something in the game and create an advantage for some group. It’s up to the creators. But what we’ve seen in the other panels is that the creators are spending a lot of time trying to keep these similar to real economies to create real value.

Koster: The overlap in the venn diagram is in human psychology, and everything else is different. There’s no subsistence. Most of your money goes to daily use items in the real world. We don’t ask you to do that in the VW or else your avatar crumbles and dies. We used to, but it’s kind of a discarded model. There are a lot of differences in how we structure the economies to provide incentives for people to give us money and that leads to very bizarre behavior. For example, almost all VW economies are inflationary because we’re creating new things to give to players, and we don’t see the cyclical inflation and downturn that you see in the real world. So a real-world economist would get it wrong.

Wallace: The questions of utility are different in the virtual space. One of the interesting things to me is how you create the desire for virtual goods. This goes in part to the questions earlier of decorative and functional goods. Some items you want because they advance your social position and others advance the narrative you write for yourself. How do you keep that in mind? Joshua you mentioned something like that. You’re designing for a different sort of scarcity than is in the real world. How do you speak to the need of people for narrative and entertainment.


Bates: If I may, I think it’s useful to draw a distinction between functional and decorative items, but on a larger level the decorative is functional. The reason the Internet and VWs are interesting and collaborative is that there are people to work with. All items are functional. In Entropia, you can buy a powerful gun or a picture painted by a user, and when someone comes over and says “Wow, I love your painting.” That’s functional.

Hong: I principally deal with hardcore gamers that spend 3-4 hours a day minimum. They’ll give up their girlfriends or education, so their utilities are different. For us, you cannot think of your VW in this separate independent sense. The VW has all the aspects of the real economy with inflation, etc., so you have to somehow create events in the game that take those occurrences out to keep the pricepoint the same. As a developer, I have to work to make sure that gamers still put the hours in, to keep their inventory from being less.

Publishers have greater control. We control the primary market so to speak. IGE is the secondary market. They’re connected. From the publisher’s standpoint, I have to go to IGE and look at the pricepoint and then think about how much money I want to print or items I want to inject into the game. And when you design events or items, you have to think whether it makes sense. Gamers are not dumb. Most that are meant to paying are 25-32. They have girlfriends and kids, so when they’re playing, they’re making a conscious choice.

Koster: I have a tradition that I have to say to the moderator at least once that their question is silly. You asked how do you make people want stuff. How did you pick that color of shirt instead of another on the rack? Scarcity is not the only thing that determines demand. In UO and Rare early on, some were very rare. There were others like true black dye that just looked badass when you murdered your neighbor. People want stuff for all kinds of reasons, self-image, achievement, any number of reasons. Asking how do you make people want stuff is the wrong question. They’ll come wanting stuff. It’s what stuff do they want in the context of this world, how do I make it attractive, can they get it anywhere else.

You quickly get to practical questions like do I allow resale. And most worlds don’t. IT’s called a faucet economy, where you spawn stuff and it goes straight down the drain and out. Most worlds have no sink. It goes into the players’ hands and then they can never get rid of it. You question is it tradeable, how much can they carry, and that’s how you drive people.

Bates: One of the ways we make money is that most items you buy from other players. As you use items, they decay. When you shoot your gun, you have to go repair it as it wears down. That’s where we make money. We have a number of virtual items worth quite a bit of money, upwards of $25k. When someone gets that, they’re reluctant to use it, but that’s tying up a bit of liquid cash. We just auctioned off banking licenses, and they’ll take this item and give you a loan on up to half that money so you can go back out and put some of that value back into the world. It’s another iteration of the sink and the drain.

Wallace: These aren’t actual banks. They’re individuals, right?

Bates: They’re both. We have at least one real-world bank and then some other people, in game gamers, Neverdie and Anshe Chung. We also havea bank, I believe out of Russia [Laughter]. Moneta.ru. And one other that didn’t want to be identified by anything but their avatar name.

Walalce: Is there any legal authority that governs what they can do?

Bates: Entropia is very secure. When you give them this item, they’ll put it into lockup. And when you give them back this money, you get it back.

Koster: I hope you have awesome business insurance.

Wallace: It’s interesting to look at the regulations of the real world and virtual worlds. And we’re just about to see that in the States with Congress looking at whether they can tax it. And it’s developed in the Far East.

Pierce: I see Korea as the mecca of the space, and there are regulations where the government has just concluded that these practicals are acceptable, but they can be regulated. It cam from pachinko parlors where you could play for prizes and convert those to money, which circumvents gambling laws, and then governments said you couldn’t convert game awards for real dollars. That was a problem for us, so we had to spend a lot of time lobbying and meeting with cabinet members to make sure the net wasn’t cast so wide. Now it only applies to cgames of chance instead of games of skill, and it prevents dupes, macros, or bots. There’s up to a five-year sentence now if you’re caught doing any of those things.

Koster: Google Sea Story Scandal. It was a huge political scandal that’s worth following here in the US. We’re facing interesting legislation about online gambling. There’s a lot of really strange and interesting legal stuff swirling around this space now. I think we’re going to see Western governments dealing with digital assett ownership. I hate that phrase, because it can fall under data privacy laws. There’s a question of uploaded content and who owns what. That’s spilling over into general impact cases of EULAs—you need to watch the Bragg v. Linden case—and there’s a question of whether since the public uses that like a hat, so it should be treated like an object.

My business insurance question was not facetious. Some very smart people think we’ll have to assume fiduciary responsibilities on the level of a bank, which would kill the industry dead. It’s very much unsettled and, by and large, outside of Korea, governments don’t get it.

Wallace: Let’s stay on that legal question, you brought up the case of Bragg suing Linden because he alleges that they illegally confiscated his land. There haven’t been any dispositions, but there have been interesting rulings. One about the TOS, has been ruled a contract of adhesion that may not carry as much weight as Linden may have hoped. IS that a sea change we’ll see?

Koster: The particulars of this case have a bunch of characteristics that make it not a general precedent .The judge said the case could not be arbitration, but it happened because the arbitration was in CA and there are no other people operating in the US that do the same thing. It’s a contract of adhesion in CA, not anywhere else. That said, it’s going to go to trial, and then it’s in the hand of juries who don’t know about all that or give a damn. It has potential and has pointed out key things. Don’t bury your arbitration clause in the footers.

Pierce: The arbitration venue played a role too, that it was in the San Francisco Chamber of Commerce where the filing fee is $3500.

Koster: The contract of adhesion says the two parties aren’t coming to the table as equals. If you’re that unfair, the law says the weaker guy can break the contract.


Wallace: What are the tools you want to build in in that case to guard against fraud or protect transactions.

Pierece: Fraud in the secondary market is rampant. On eBay, secondary sales were resulting in 10 percent fraud at one point I think. Someone in Russia could login through a proxy to a server in the US and make a purchase with a stolen card, turn around and resell it on the secondary market, and sell it for 75 percent in the matter of minutes. Organized crime is involved, and it’s anonymous. We had to build very sophisticated systems to guard against it. We bought products like IOVation that takes a screen capture of your computer and hardware so we can see if one person is making 15 purchases with 15 different cards from the same computer. That complicates things for the scammers.

Hong: Also fraud on the partner side is rampant. If you intend to get into the item sales, you must have a specific function in the business that focuses on handling fraud. One reason there is so much entanglement is that there is a lot of stuff here. Money laundering is a big problem. There are organizations who will find a way to launder their illegally sourced cash into something else and then get it back.

The typical game company is not equipped to handle it. I absolutely hate hackers, btu I have to love them somteims because some gamers are hackers. And it is a legitimate profession in some countries who are out their making our lives very tough.

Pierce: And for us,  in the secondary market, we lose omney when we sell a fraudulent item.

Koster: I described this years ago at a social policy conference. And they said, well it’s not  drug money, but it is terrorist money. The government will get interested. You need to serialize everything. You need to be able to trace the path of a coin and see where it came from. Being able to detect duplicate numbers is important because a huge amount of the problem is dupe bugs. It’s not always hacking the server, sometimes it’s finding an exploit. What we call the designer screwing up. It’s unintended minting of infinite money. Most bugs have arisen from copying from one server to another and then crashing the server where it’s not copied and removed. Tracking at least lets you find the source.

In terms of identifying when it’s happening is difficult. The easiest way is to monitor the value on secondary sites. If it falls rapidly, you have a bug. The players will not tell you. They may delay telling you for months. And then the question is how you handle it. It may get cashed out and then innocent people have bad data. In SWG, we had to freeze the accounts of a lot of innocent people because they had duped coins.

Bates: What Raph says is very true. Entropia, from day one, has made it clear we’re backing the Peds with US dollars. For higher level players, we have a smart card and a reader that allows you to protect the account with an extra level of login. We also have not just microtransactions but nanotransactions, every bit of decay, every cent. IF that’s in your plan, think about it from the beginning.

Wallace: Do you know how many PEDs are in circulation?

Bates: We do over a million dollars of circulation every day. So over the year we had a profit of 8 million.

Wallace: At Entropia HQ, do you know how many are in circulation?

Bates: They may, but I don’t know.

Wallace: It’s interesting since you back the currency. Do you keep the money on hand in case there’s a run on the bank?

Bates: It’s very much like a bank. They have that money on reserve, and it’s a public company in Sweden, so everything is very open.

Pierce: It’s worth noting the incentive. The size of the  secondary market is something like 2 billion dollars this calendar year.

Audience: Do you see companies like Sony or perhaps WoW moving towards that 2 Billion Dollar market, or does it go against their philosophy?

Pierece: Sony is doing it to some extent today. They have the Station Exchange that is live for two Everquest servers allowing players to buy and sell characters. Publishers viewed this market as a problem historically, but I think that view has changed and is changing. Publishers are viewing the market as making the game accessible. There are a lot of benefits that accrue from the secondary market, and now they’re trying to figure out how to work with it. I think Blizzard is the furthest away from embracing the market. Everyone else is figuring out how to involve themselves.

Hong: There are a number of different models. If you look at the more advanced markets like South Korea, the publishers generally don’t want to be involved because they see it as a tainted business. Like Nissan doesn’t want to be involved with used cars usually. Whereas in the West, there are some very innovative companies trying to be involved and honor the EULA and work with the publisher while taking a proper safeguard in a separate way to regulate things.  They all have a slightly different approach, more peer to peer while Korea is more eBay. Going forward, someone will make a ton of money in the secondary economy, just like some used car salesmen are making a ton of money.

Audience: So how do you deal in a model where virtual and physical economies meld? I’m thinking of card trading games or clothing where there are limited editions.

Hong: It’s already happening, maybe not in the hardcore MMO sector, but with Webkinz, there’s a total juxtaposition in both. I’d love to do something like that. But there’s just got to be a way.

Koster: Webkinz is the hottest toy of this past Christmas. It’s like Beanie Babies, but the toe tag is a login to the virtual world. I’d expect to see this coming from the product companies, where the VW is a retention device. I think that’s a trend we’ll see like crazy. I think in two years from now, we’ll see 50+ toy-based worlds on the market.

Bates: We do it the other way. When you buy a limited-edition painting, you can also get the physical painting sent to you in the real world, or you can have clothes sent to you. That’s been very successful as well.

Audience: A lot of the problems you have brought up are rampant in competitive games. Do you think they’re persistent in games like Neopets?

Koster: My lead programmer in SOE was banned from Neopets for writing a bot to generate 30k neo coins over the weekend. So absolutely.

Bates: It’s a new place to explore what it means to be human, but we’re still human. All those things come with you, but they get a new twist.

Audience: From the geeky perspective, when you’re talking about millions and billions of transactions, I’m imagining you need tremendous computing power just to do the auditing. How do you balance that?

Koster: You don’t. [laughter] That’s why we need to go to the bank level of security. It’s okay to wait at the ATM, it’s not okay to wait for the gold to drop from the Orc. So the audit tools won’t be as good as banks inside of games.

Hong: Our industry needs to step up. There aren’t enough tools out there. It’s a different challenge, and there’s not even enough people out there with the proper experience. I’m waiting for the ecosystem to mature, but it’s such a nascent sector, that it’s just not always there.

Susan Wu: Raph, you mentioned a lot of the lawsuits out there around SL that affect all VWs. What are you guys doing proactively as you build these worlds to think about future jurisdiction?

Koster: I’ll start with something that will probably bring down the whole room. If you’re selling a pretty picture on the screen in a user-generated world, it’s not a viable model. In SL, users  rose up demanding in-world DRM for items they made. I think we need to be like the way the Web works. These issues are getting sort out on the Web side, with more openness and transportability of data. That’s an interesting comparison to the way the item sales work now with a walled garden approach. Most legal liabilities arise because you are a walled garden who claims ownership and possession. If it’s the Web model, that starts to go away. The IP questions fall away. You’re just acting as a container, and the user maintains the IP. To a degree the client/server model is what gets us into the legal hot water. But that’s the challenging thing because that’s where the money is. Make it work a little more like the Web and less like Prodigy.

Joey Seiler
www.VirtualWorldsNews.com
joey (at) showinitiative.com
(512) 535-8650
skype: joey.seiler.vwnews