Beyond Gold Farming: The Economics Of Virtual Worlds (Lecture Notes)

Introduction
The Speaker And The Setting

(Note: The narrative below is based on the lecture given by Lenny Raymond on the economies and economics of MMOs and virtual worlds (See the links above for more on the back-story). I am using Lenny's outline and my own notes taken at the time of the lecture, augmented with comments and notes from the audience. In short, the clever and insightful stuff is Lenny's and the mistakes are all mine...)

Massively Multiplayer Online Games (MMOs) In General

All MMOs share a few key characteristics. They are all online, they are all multiplayer and the players all share the same "world". More importantly, they are all "persistent" in that the world continues to exist and players continue to interact even when a player leaves. Moreover, changes that the player made while in the game will persist, to one degree or another, until the next time the player logs-in.

Beyond these bare minimums, there are a number of variations. MMO's can be text based, 2D or 3D. Likewise, they can be free, subscription based or funded through the sale of in-game items. One of the technical aspects of these games that has significant implications for the nature of the economy is whether they are "unified" or "sharded". Unified MMOs are run from a single server while sharded MMOs replicate the same world to run on multiple servers.

• For example, Eve Online’s primary gameplay is economic, and it is insanely deep. This works in very large part because their markets are not only deep but also liquid and transparent, which, in turn, is because all of their several hundred thousand players are in the same world space.

• World of Warcraft's (WoW's) economies don't work as well because there are only 5,000 or so people on any shard, so the market just isn't big enough to have a truly robust economy. This is OK for WoW as the economic aspect of it is incidental to the gameplay for most players and the market imperfections might even make it more fun for some players (for a more detailed discussion of unified vs. sharded MMO's see "Thoughts On A Sharded Existence").

Historically, modern MMOs trace their existence back to games like the 1970's Multi-User Dungeons (MUD), which were primarily text-based and to the early 3D game, Meridian 59 (1995). Everquest, released in 1999, surprised people with its popularity and encouraged other developers to pursue similar projects.

MMOs, The Business

Today there are about 200 MMOs in existence and another 200 in production (Editor's Note: I have written about the growth of virtual worlds before here).

Annual revenues for MMO's are approximately 2.5 billion US dollars (Editor's Note: Over one billion of this goes to World Of Warcraft alone) and have been growing at about 25% per year. There are approximately 30 million players in the major, western subscription model MMOs alone.

(Editor's Note: The actual numbers are very difficult to get at. The fundamental problem is definitional. For example, Second Life is massive and online but there are not really “players” there as it is not considered a game. Should it count?

Do virtual worlds such as Neopets and Habbo Hotel, both aimed at the 10-13 age group, both with strong gaming themes embedded in them and both, according to Kzero, having more than 30 million users apiece count as well?

Finally, what counts as a player/subscriber? Someone who takes a trial or free account, sets up a character, plays the game once and never goes back? Someone who pays a subscription but only occasionally plays the game? A single player who has multiple accounts? For more on this debate see Measuring MMOs.)

In-Game Economies

It is not really necessary for an MMO or virtual world to have an economy at all. Economies in MMOs exist to provide entertainment, not to organize productive activity – the goods and services produced/distributed/consumed in an MMO could be created by the game operators, so activity doesn’t need to be organized along economic lines. Therefore, the sole reason the economies exist is because they are fun. This is very important in that much real world economic activity is not fun at all, and MMO economies therefore need to diverge from real world economic principles in important ways.

Economies are part of the metagame, or the more complex and persistent, generally social, overlay of derived gameplay based on atomic game mechanics. For example, a chess match is an exercise of an atomic game mechanic between two players, but a tournament and the international ranking system are examples of the chess metagame.

• This seems to mean two things. First, economies are superstructural in that they provide a key series of motivations and other aspects of the game but the mechanics of these interactions are often wholly or partially opaque to the player. Secondly, the economics of the game are the easiest part of the game to transfer to the real world. The virtual currency, QQ Coins, for example, were, until recently, usable as cash in certain parts of China.

Economies not only help provide goals for players (by giving them a way in which they can acquire items that help them play the game at higher levels) but also allow for customization. Being able to trade items for in-game currency and then use that currency to purchase new items is an important part of most games. Likewise, in-game economies provide an incentive to raise skills in certain areas for many of the same reasons.

In-game economies also provide another way of facilitating social interaction. Players have to interact to find the source of a desired in-game resource or service and have to barter or even auction items in order to get the most for items they wish to sell (Note: I have run into a number of players who consider the "free market" aspects of these games to be the most interesting part of them).

Economies also help the game designers effectively ration highly desirable items. Without some way to limit the production and distribution of the game's most sought-after items, pretty soon every player would have the item, negating its value. Economies also help measure player achievement and provide feedback to the designers about which aspects of the game are "worth it" or not.

Economies also allow the game designers to "pay" the players to be "content" for other players. If a player creates an item in a game and then sells it to another player, both players have gotten something from the experience. The designer, in turn, had to create a system to facilitate the creation and sale of the item – no small task – but once done, it is done for good. Players create the content from that point forward.

Finally, economies allow for behavior tuning. For example, creating economic incentives can help create an environment such that higher level characters will choose to move from lower level areas to higher level areas. Likewise, economic disincentives can limit the amount of "subversive" activity in which players engage.

MMO Economies In Action

(Note: For this section of the lecture, Lenny used examples from World Of Warcraft, where the lecture was being held. All of the screen shots below are taken from that game or WoW inspired websites. some of the images were generated during the event and some taken afterwards or from sites online.)

Most MMOs have some sort of automated "vendor" system where players can buy consumables (such as food or ammunition) or other items and can sell excess items for the in-game currency. The screen shot below, from Gameguidesonline.com, shows a typical vendor selling a variety of items at a number of different prices in WoW. Depending on the game, these prices may be standard or vary from vendor to vendor (creating the opportunity for the player to engage in trade). These transactions are typically between the player and the game.

Player to player transactions are often also allowed, however, and typically take place in a special place such as the Auction House in WoW. The screen shot below shows the market in Greater Healing Potions complete with the availability and price of each item. Players can either bid for the item (auction style) or simply pay the buyout price (if any). Each item is treated as a commodity (no Greater Healing Potion is any different than any other Greater Healing Potion) so the market is very sensitive to price and is a good example of traditional economic notions of supply and demand.



Hidden by its simplicity, however, are a number of ways to take advantage of this largely unregulated market to a player's advantage. One of the easiest ways is to "corner the market" in a particularly desirable item for a period of time, thereby creating a pent-up demand for the item, and then putting your supply of the item back on the market at greatly inflated prices.

Another common tactic is to search for items that are selling well below their historical norms, buy them and then re-list them at higher prices in much a same way a value investor looks for underpriced stocks. Historical pricing data is available for WoW through a surprisingly large number of sources including WoWEcon, a site that contains historical data on all items across multiple servers. The size and scope of the market also allows players to engage in market timing experiments, buying products at a time when they are inexpensive and then releasing them back into the market when the going price is higher.

This historical pricing data can also reveal evidence of market manipulation. The WoWEcon chart below, for example, shows the sale of a unit of "Refreshing Spring Water", a very inexpensive item available through multiple vendors, for more than 1000 gold pieces. Such a transaction likely has an out of game component to it as well.



Finally, WoW, and many other MMOs have in-game email systems and "banks" where players or Guilds can store goods and money. These services allow players to communicate and to transfer items and in-game currency to each other (and when a single person has multiple characters in the game, to themselves as well) efficiently. The Guild Bank, within large, sophisticated guilds in WoW, allows for players to specialize in certain skills to the benefit of the other players in the Guild, for example.

The Dark Side

As mentioned in an earlier post, most people think of gold farming, or the practice of using individuals in poor or developing countries to harvest in-game currency for sale, for real money, to wealthier players, when they think of the "dark side" of MMOs. Currently, it is estimated that there are 100,000 people making a living selling in game currencies for real-world money. Worth approximately 1.5 billion US dollars, the business is concentrated in Asia where there is both a good telecoms infrastructure and low labor costs.

In some cases, such as with the Vanuatu-based IGE and WoW, this activity is considered a violation of the EULA, and can, if discovered, get an account banned. In other cases, such as with Live Gamer, the trading activity is not only approved but encouraged by the game designers.

While these economies are small in comparison to real-world economies, there has been at least one documented case of large scale money laundering and it is likely that other crimes, such as tax evasion, are taking place on a modest scale within the confines of at least some MMOs today. As a result, regulators are beginning to take an interest in these transactions. Knee-jerk solutions, such as banning all such transactions, are likely to simply drive the game companies to domicile themselves in more user-friendly jurisdictions.

The Future

Several trends seem to be playing themselves out with respect to economies in MMOs and virtual worlds. The first suggests that there will be a time in the not too distant future when an MMO or virtual world currency will be seen (and taxed and regulated) as a real currency. Right now, the scale of these currencies is not large enough to be of real interest to regulators or tax officials. This is all beginning to change.

Ultima Online, an early popular MMO, peaked with a subscriber base of about 250,000; Everquest, the next "big thing" in MMOs, peaked with a base of about 450,000. WoW is the current front runner and boasts 11.5 million subscribers (Editor's Note: More than the entire populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, New Hampshire, Maine and Idaho combined) and does not yet appear to have peaked. These trends are likely to continue given the current popularity of virtual worlds and MMOs with today's pre-teens. It becomes fairly easy to imagine a virtual world with 100 million or more subscribers in the next 5-10 years and a virtual economy that is almost impossible to ignore.

More importantly, the first jurisdiction to come up with a coherent set of rules and regulations regarding virtual currencies is likely to become the domicile for many such currencies. Such a system would not necessarily have to be tilted unduly in favor of the game operator. Rather, it is likely that such a system would have to balance its recognition of the peculiarities of virtual currencies with the need for these same currencies to be trusted beyond the narrow confines of the MMO or virtual world.

(Again, thanks to Lenny for giving his time so generously and to all of the students who helped put this together).
Tomorrow -- Lessons Learned