The Alphaville Herald

Off the Grid with Walker Spaight: Making the Virtual Market

by Alphaville Herald on 10/05/05 at 3:02 pm

Fed chairman Alan Greenspan ponders the Linden-dollar exchange rate

With Linden Lab still considering hiring a virtual Alan Greenspan to manage Second Life‘s economy (as Philip mentioned in a Town hall meeting some time ago), we got to thinking: If game companies hate the trade in virtual items and currency so much, instead of trying to co-opt the market or simply stamp it out (as most TOS’s do), why not simply take a more active role in the market and trade for their own accounts, acting to a certain extent as a stabilizing influence, in much the same way as the Federal Reserve?

(The following is reprinted from Walkerings.)

First, some background. The buying and selling of virtual goods that exist only within the “reality” of an online game has become a contentious phenomenon. Many players and game companies hold that the practice gives an unfair advantage to gamers with deeper pockets. Game companies are no doubt also concerned that there’s a potential revenue source they’re missing out on, though they rarely if ever admit to this worry.

There’s no doubt that the market is booming. “The sale of virtual goods in massively multiplayer online role-playing games has exploded,” writes GameSpot’s Tom Leupold in a recent article.

Leupold cites Anthony Sukow, CEO of eBay tracking company Advanced Economic Research Systems, who estimates that the top eBay seller of World of Warcraft gold took in $44,000 a month in revenue in the first two months of this year.

Leupold also cites Sony Online Entertainment spokesman Chris Kramer, who pegs the market for the sale of virtual items at $200 million.

I recently spoke with IGE’s Steve Salyer, who repeated to me his estimate that the market is closer to $900 million than $200 million. As president of the leading broker for such sales, Salyer has an interest in making the market sound as big and attractive as possible. But he’s also in touch with game companies and virtual merchants around the world, and probably has a better sense of what’s out there than most.

SOE, it will be remembered, recently moved to take a piece of this market with its new Station Exchange service, which will let players on a small number of EverQuest II servers conduct their virtual business through Sony’s interface–and give Sony a small transaction fee in the process, of course.

This service seems designed to fail. It’s only being offered on what sounds like a limited number of new servers, and players who wish to switch to an exchange-enabled server will be able to do so at no cost. While this might help create a ghetto for virtual merchants, the majority of their customers are probably not interested in giving up whatever community they’ve built on their current servers, just for the right to give Sony a piece of their payments on the exchange-enabled ones.

(If were paranoid, I’d speculate on whether Sony’s trying to lure all the virtual merchants to the new servers just so they can get a better sense of who and how many there are.)

So what about this idea? What if, instead of trying to co-opt the market or simply stamp it out (as most TOS’s do), game companies simply took a more active role in the market, trading for their own accounts and acting to a certain extent as a stabilizing influence, in much the same way as the Federal Reserve?

I see a couple of advantages to this approach:

First off, game companies get to make an honest buck in the markets, just as traders do on Wall Street. With a limited universe of games and goods, getting a profitable handle on things shouldn’t be very hard for companies who are sitting on far more capital than the average MMOG merchant.

Secondly, companies could engage in market-related interventions in much the same fashion as the U.S. Treasury or Federal Reserve. Imagine a scenario in which a flood of World of Warcraft gold hit the market, depressing prices. In order to keep gold prices at a level at which in-world items aren’t ridiculously cheap, Electronic Arts might want to step into the market to support the virtual currency. As gold prices recover, players again have to turn to in-game activities to earn their swords and spells. The added advantage here is that every game account, high-level weapon or piece of gold that EA buys is one less that’s contributing to the out-of-balance playing field.

For game companies, the problem with market interventions would be that they’d have to dish out cold hard cash to fund such purchases. But by tracking demand and perhaps creating a limited number of items for sale in the market, a company could either profit or mitigate their costs, and could also have an impact on what items are available for sale, thus limiting the adverse effect on the would-be level playing field.

Becoming a Fed-like market manager also has implications about transparency, but that’s a subject for another post.

So where does that all leave us? It doesn’t seem like game companies are going to be able to stamp out virtual commerce. Sony’s Kramer estimates that up to one-quarter of players engage in some type of virtual commerce (buying or selling). To enforce a TOS that forbids it would be to turn away paying customers. What companies will have to do instead is embrace the market and either offer a robust and level playing field in terms of trading in virtual items, or else enter the existing markets by trading for their own accounts. I imagine what they’ll end up doing is both.

It seems to me that if MMOGs continue to grow as they have been in recent years, or even if they top out at around the current level, something like this will eventually have to be put into place. Who knows, perhaps there’s already a roomful of EA day traders somewhere Off the Grid.