The Alphaville Herald

Second Life High Roller Gam(bl)ing – part 2

by Alphaville Herald on 23/09/09 at 10:48 pm

Linden Lab earning millions on virtual gambling – all over again?

by Father Jones, investigative reporter

Has Linden Lab really moved beyond the gambling businesses – a major part Second Life economy before the 2007 gambling ban? With Zyngo parlors publishing odds for auto-play games it is hard to believe online gambling has been replaced by games of skill. A look at the history of gambling in Second Life shows how the Lab has benefited – perhaps accidentally – from lax enforcement of real life gambling laws. In part two of the Herald's gam(bl)ing series, we look at how the metaverse arrived at this wonderfully ambiguous situation

Blueline Gaming's weekly "contest": L$500000 ($1747 USD) paid to top 5 scorers

Linden Lab CEO Mark Kingdon’s shining vision for the future of virtual worlds – and Second Life in particular – is that of a virtual home for people all over the world, spanning entertainment, to business, to real life company conferences and marketing – all tied together with exciting new immersive media. But the recent past and present are at odds with this wholesome vision, as some believe a lax approach to intellectual property rights, cybersex, and gambling fuel demand for the Linden’s virtual land and in-world L$ currency. Is the Lab turning a blind eye to high stakes gambling to help grow their bottom line?

The history of online gambling in  Second Life

Linden Lab itself introduced gambling into its world by creating the first open source scripts for simple slot machines. It did not take long for Second Life residents to make their own slot machines and the first low roller casinos popped up. In the beginning it all looked pretty innocent. Playing on a slot for  L$ 1 a game to win up to L$ 30 (about $0.10 USD) was more a matter of having fun and role playing than it was a matter of making money and cashing out to a real life bank account. But things changed between 2005 and 2007.  

The million dollar mistake…

Driven by player demand, online casinos became popular in Second Life despite the murky legality of these games. Linden Lab’s headquarters are located in San Francisco, California, where gambling is strictly regulated by law, and many players reside in counties with tight regulation of gambling.

But with Philip Linden proclaiming, "I'm not building a game; I'm building a country" the illusion that Second Life was a world somehow beyond real life laws grew, and residents of Second Life flocked to casinos, bought L$s, and tested their luck. More and more casinos appeared as resident entreprenuers and scripters started to earn a serious money on the production of casino games – and the virtual gam(bl)ing industry in Second Life came to life. It is estimated that in the two years between 2005 and late 2007, Linden Lab indirectly earned millions of USD from the in-world gambling industry for land fees, currency exchange, and advertising.

This all changed when the Unlawful Internet Gambling Enforcement Act of 2006 targeted financial institutions transacting in online wagers and proceeds. Although though this law has been challenged, it was upheld earlier this month – an action that places the high stakes gam(bl)ing parlors of Second Life in  peril, assuming some sort of enforcement action is in the cards.

In late 2007, when the UIGEA law took effect, Linden Lab implemented a ‘gambling ban’ in-world under pressure from financial institutions. As a result, almost all virtual casinos closed, many virtual islands  rented land from LL for huge casinos disappeared, and residents stopped buying Linden Dollars for gambling. Linden Lab's Second Life players endured a drop of a total several million USD in the in-world economy from this action – a loss that can be seen in the Linden Lab website’s financial reports. It took a year for the Second Life economy to recover from the gambling ban: 

Linden Lab (November 12, 2008): “By breaking $100M for the first time since Q2 2007, the Second Life economy has now fully recovered from the restriction placed on games of chance in Second Life in mid-2007.”

…caused by an unregulated gam(bl)ingindustry

The gambling ban did not just occur just because of some smart worker at a financial company noticed what was going on in Second Life. The ban was helped along by complaints from Second Life residents who had been scammed by other residents with dubious casinos and manipulated games.

Smart scripters earned hundreds of thousands of USD making games that were programmed to scam people. In the real world, those kind of problems are solved by regulations and inspections, but in Second Life there were no regulations at all. Without regulation, some casino owners and game makers started to compete by underhanded means. Dirty tricks were used such as creating new games, selling them to the competition, then emptying the owners’ account by using hidden communications with the game to always ‘win’.

Linden Lab should have been aware that these scams were getting out of hand – they received hundreds of abuse reports. But they only took care of individual reports and avoided any sort of regulations to give this gam(bl)ing industry a bit more transparency before the UIGEA. The impact of the gambling ban implemented Q3 of 2007 is clear. Compared to Q1 and Q2 of 2007, the gambling ban caused a total drop of 102 million USD in resident-to-resident transactions. This suggests as much as 20 million USD were wagered every month in this unregulated gaming industry.

[... to be continued in part 3...]