Real profit in a virtual world
- Article 6 of 7
- iSight, April 2006
Massively multiplayer gaming services (MMGS) and other online games are fast becoming a part of many people’s leisure time. World of Warcraft, the most popular, has an estimated 3.5 million players paying nearly $15 per month each just in subscription fees. Other games are garnering lesser but equally impressive interest. While earlier games were content merely to let players fight and talk with each other, the latest generation allows for more varied behaviour, including trade.
Where’s there’s trade, there’s economics and these games are already crating a new branch of academic study called ‘virtual economics’. As well as its own internal laws that differ wildly from real-word economics, virtual economics has many effects that can be measured in the real world. Some players are able to generate enough real-world revenue through their online interactions that they can work exclusively in these virtual worlds. And a whole range of ancillary industries are starting to grow up around online games as well, with many generating significant real-world revenue.
MMGS started life in the 70 and 80s as MUDs (multi-user dungeons). These typically used ‘Dungeons and Dragons’-style role-playing rules to create virtual realities for players. The degree of interaction was limited by both technology and bandwidth, with most MUDs played using text-based terminal emulators that connected to university computing systems. The spread of the Internet from academia and government to consumers during the 90s gave far greater numbers of people access to these games. The advent of unmetered, uncapped affordable consumer broadband allowed the potential audience to increase even further, with the Far East and its more advanced networking infrastructures making it the first region to really embrace online gaming. In particular, the low latency and speed of broadband allowed games to provide an unprecedented degree of interaction with relatively high quality graphics that the improved hardware of personal computers has been able to offer. But it’s the playability and enjoyability of the games that ultimately have been responsible for their increasing success.
There are many different types of online interactive games that generate revenue for their owners. The most obvious are gambling sites such as Pacific Poker. These allow consumers who would never dream of going near a casino the chance to play against a computer or with players around the world. An estimated 2000 sites offer such services and are set to bring in $14.5 billion in revenue in 2006, mostly from US players. Next are role-playing games such as World of Warcraft and EverQuest that are the direct descendants of MUDs. These have generally settled on a subscription model, rather than a pay-as-you-go model for payment. Most usually require the purchase of an accompanying PC or console to provide the necessary software on the client device for the game.
But there are other models. Habbo Hotel from Finnish company Sulake is free and requires no additional software. The players, typically 13-18 years old, interact in an online hotel – rather than a role-playing game, they are merely using virtual versions of themselves to interact, something know as a social synthetic world (SSW). But they are also able to host parties in rooms in the hotel. To buy items for the party requires ‘Habbo coins’, which need to be purchased in the real-world by credit card or SMS message. Each month, 4.4 million unique users visit the Habbo hotel site, generating revenues for Sulake of €15 million in 2005, which places Sulake is eighth on the Deloitte Technology Fast 500 EMEA list of companies by growth rate.
“As many as 43 percent of US computer and videogame players play online games every week. Habbo Hotel's strength lies in its easy access; you only need an internet connection and a browser to play,” says CEO Timo Soininen. “In addition to that Habbo Hotel does not require a fixed, pre-paid monthly fee as most massively multiplayer online games do. This is an important competitive advantage for us in the US market.”
The “add-ons” for MMGS are also a way for companies – either the companies hosting the games or third-parties – to generate revenues. Real-world trade of in-game items, such as swords, gold, potions, or even whole characters, is flourishing in online marketplaces such as eBay. In 2004, Edward Castronova, associate professor of telecommunications at Indiana University Bloomington, calculated the GNP per capita of EverQuest as $2,000, comparable to that of Namibia, and far higher than that of India or China. In fact, by ‘working’ in the game to generate virtual wealth and then selling the results for real money, it is possible to generate about $3.50 per hour. Companies in China pay thousands of people, known as “farmers”, to play MMGS all day, and then profit from selling the in-game goods they generate to other players for real money.
Land and other in-game property has been sold for huge sums: one Project Entropia player paid $26,500 for an island in the game's virtual world in 2004, and has already made his money back by selling hunting and mining rights to other players. Trade in virtual items is now worth more than $100 million each year.
But businesses can make money through other means as well. Linden Lab’s Second Life, another SSW, was designed almost from the beginning to have its own economy. It offers the most examples of profit opportunities from virtual realities. In the game, much as with other games, players can perform informal transactions or set up shops that can sell both goods and services using “Linden Dollars”. But unlike many other games’ currencies, Linden Dollars are convertible to US Dollars (and vice versa) at various “Currency Exchanges” and “ATMs” within the game as well as through third-party web sites. This makes it far easier for individuals and companies to translate game success into real-world profit. In fact, this year is likely to see between $50 million and $100 million of transactions take place using Linden Dollars.
Many of the services in Second Life are game-specific, but not all. Second Life requires no monthly subscription fee for the basic service, but if users want to set up shop they have to pay ‘land-maintenance’ charges to Linden Lab – one of the main sources of income for the privately owned company. In turn, those ‘land owners’ can charge rent to other players who want to use part of their property.
However, some services are peculiar to the game itself, ‘avatar’ design being one of the most popular: in graphics-intensive games, each player’s online persona or avatar is very much a representative of that player and many gamers spend considerable time on enhancing the look of their characters. Good avatar designers can therefore garner considerable custom and real-world profit through their work and it’s now almost impossible for a Second Life player to play the game without coming across virtual clothes designers, “hairdressers” and similar boutiques either in the “Marketplace” or throughout the game’s landscape.
Says one such developer, ‘Munchflower Zaius’, “I began selling avatar skins to make extra money and it’s become my sole income – and now, it’s more than enough money to support me and my two kids.”
Surprisingly, however, some companies are also offering their Second Life services to corporations as well as consumers. Rivers Run Red, a UK company, became the world’s first design and brand agency to establish a virtual presence. It now uses Second Life for content testing: CEO Justin Bovington, CEO of Rivers Run Red, uploads products (usually clothes) into stores in Second Life, and then monitors how people buy, accessorise and use them. He occasionally organises in-game focus groups around the designs, and claims that the reactions he gets from Second Life players are as useful as those for which he pays regular focus groups $30,000. The core attraction is instant market feedback at any time.
Bovington is also taking his company into the business of managing access for clients. Rivers has just opened a Second Life store for Mrs Jones, a designer who is interested in testing prospective designs by uploading them into her own virtual store and seeing how they sell. “I’m as excited about synthetic worlds as I was about the Internet,” Bovington says.
Linden Lab also gives other companies the opportunity to partner with it so they can present simulations of their real-world content and applications to players. The Electric Sheep Company puts together custom games for organisations that want to use Second Life for training and education. It now runs SLBoutique, an ecommerce site that sells the now-traditional avatar customisations, but more novelly sells real-world computer hardware for Linden Dollars. And it has helped host “mixed reality” events: simultaneous real-world and online events where players who attend the event can log on to meet online attendees.
It’s likely that opportunities for real-world profit from gaming is going to increase. This may be through the use of traditional business models adapted to the online world, with Phillip Torrone, associate editor of MAKE magazine, predicting that real-world credit cards will soon come personalised with owners’ online avatars and with Linden Dollars and other online currencies in place of loyalty schemes.
However, with all the main games console manufacturers offering Internet connectivity in their devices, online gaming is set to become a mainstream gaming activity. With that, virtual worlds are set only to become greater and more complex sources of income for real-world companies, whether they make the game or simply use it as a new venue for their services.
Are virtual economies the same as real economies?
Virtual economies have significant differences with real economies. For example,
- 1) Economics argues that no wise government will try to control prices. In a virtual economy, however, the government can effortlessly peg many prices at any value. Since the goods are digital, they can be created and destroyed without cost. Hence price ceilings create no excess demand, and price floors no excess supply. It may make sense to control some prices.
- 2) Economics assumes that work causes disutility. In a virtual economy, however, it is lack of work that causes disutility. Regardless of earnings and loot rates, people who play games must have something to do or they will be bored. If a game structure limits their ability to be meaningfully engaged in some mission, quest, or activity, they will be unhappy.
- 3) Economics believes that economic growth is always good. In a virtual economy, however, increases in per-capita wealth – which make it easier to accomplish various quests and missions – will lower the challenge level of the game, potentially making it a less interesting puzzle.
Source: Edward Castronova