Sunday, January 8, 2012

History of the Virtual Trade

It all started not so long ago, when one geek sold his MUD account to the other. Today, virtual economies are much larger than those of many countries – in 2010 people worldwide spent $7 billion real dollars buying pixels of various shapes and sizes. That’s more than GDP of Mongolia, Malta or Haiti.  And some of those pixels are really expensive. Anonimous paid $635,000 dollars for the virtual night club on a virtual planet in massively multiplayer Entropia Universe game.
There are professional pixel-investors, shady pixel brokers, there are sweatshops of people farming pixels in various games, there are players who devote their whole lives to having more pixels of certain shape and color than anyone else in the world. We have gone on a pixel feeding frenzy. New economies are popping out left and right, and virtual currencies of several imaginary worlds are easier to exchange for a dollar than those of many African countries.
Selling thin air for a hefty price sounds like a good business plan – no wonder more and more developers embrace it. Even Facebook really wants to get into the virtual goods trade with its own alternative currency. Of course, some pursue “money for nothing” schemes too aggressively. Just recently, Apple was accused of selling bushels of virtual Smurfberries to kids without their parents’ consent, for $100 a pop. Hundreds of companies churn out simple, addictive games, that rely on inducing the in-game purchases. Parenthood is difficult in the digital age – if your kid says he saved you $500, he probably means he just bought $1000 worth of Tap Zoo animals at 50% discount.
No wonder that the virtual goods revenue jumped up 245% in last three years. It shows no sign of slowing, overcoming new real world economies each month. It is speculated that at some point in our lifetime virtual GDP will overcome the real world GDP of our planet.

Pricing the nonexistent
To many of us, an idea of selling items that don’t represent anything in the real world seems strange (635,000 for a space station? Come on!). But every economic revolution caused similar shock and disbelief. When in 1660 Bank of Sweden introduced the first western banknote, people couldn’t comprehend that a piece of paper could have the same value as a shiny golden coin. Banknotes, originated in debt papers, suffered many teething problems like inflation bubbles and panic-driven crashes. In fact, the early Swedish banknotes failed in 1664 because their holders got scared and wanted to exchange all at the same time.
But as we approached the modern age, it became clear that value of most items is completely subjective and that demand, not the actual manufacturing cost, is the main price driver. Gold, art, collectibles – many things are valuable only because others agree they are. Smurfberries and Farmville seeds are not that different. They are just small pieces of code and pixels, but players want them badly enough to give them a tangible monetary value.
The virtual frontier
Ok, enough with the history. When did the pixel trade begin? It is said, that the first sale of a virtual property happened in 1993, when Global Network Navigator sold a spot on its website to a very first clickable internet add.  But what about an in-game trade? The persistent virtual worlds started in 1978, when Roy Trubshaw programmed world’s first Multi-User Dungeon. His game gave birth to a whole genre of D&D style computer adventures that allowed several players to brave a maze filled with ASCII monsters and traps. People were prepared to pay through the nose to do that. The Internet MUD launched on Compuserve in 1987 charged players $12.50 per hour, and it never suffered from a shortage of users.
By mid-90’s there were first records of real world transactions between players who sold experienced in-game avatars. It was a huge precedent but it probably didn’t feel remarkable to the people involved. To most, those crazy geeks paid for the pixels. But in fact, they were just buying time and convenience. They were paying for a service.
Soon, graphical MUDs started to appear, an ugly and clunky cousins of today’s MMO’s. First was the Habitat in 1985, but what really gave this genere a kick was Meridian 59. It gathered 25.000 players in the public beta stage – a huge leap from the early multiplayer games.

Rise of the MMO’s
In 1997, Ultima Online was released, a first big scale MMO game with a huge virtual world and a large population of players and Non Player Characters alike. Almost immediately a black market trade emerged, even though Origin, the game creators, claimed they own all player avatars, gold or possessions – and that selling them was illegal. Amazed eBay users noticed first virtual item auctions. People were selling everything, from weapons and armor, to fully equipped characters. Soon, mainstream media picked up on the topic. Pixel trade came into the spotlights for the very first time.
Another prolific game joined the ranks in 1999 – EverQuest Online. Norrath, the setting of EverQuest, was also the first virtual world to be explored and described by a professional economist. You can find a rare account of those early days here. According to his calculations, people of Norrath were quite rich, on average earning $3.42 per hour in exchangeable virtual currency. Game creators tried to kill the black market, and in 2001 they forced eBay to stop listing EQ items. Vendors simply moved to other platforms.
Media were shocked again when in 2002 Edward Castronova calculated, that Norrath was the 77th richest country in the world, sitting somewhere between Russia and Bulgaria. Then, a second part of the game introduced functionalities that blended real world and virtual economies together. By typing a “/pizza” command in the command line, players were brought to the online checkout of their local Pizza Hut.

The age of microtransactions
Shortly after, some developers understood that in-game trading might be more profitable than the game itself. If people wanted to buy virtual goods, and every MMO gave birth to a thriving black market, why not sell the in-game items directly? Iron Realms Entertainment was the first company to do that, in their Achaea game. They began a microtransaction trend that paved the way for today’s Farmville, Smurf Village and Tap Zoo.
Then, Project Entropia developed by Swedish company Mindark, went even further. Their game’s currency could be exchanged for a real world cash – both ways, on a fixed price. Players were able to “load” their character with money, and then buy or sell in-game items or property. The trade was not only legal, it was fully endorsed by the game’s creators, who also earned by providing paid goods and acting as a bank for player deposits.  Probably that’s why it was also the first game to create a significant real-world wealth. In 2005, John “Neverdie” Jacobs bought a popular space station, the Asteroid Space Resort, for just $100,000 dollars. He later renamed it “Club Neverdie”, and flogged for $635,000 in 2010. That’s a net gain of 535%. A lot by investment standards. You could probably earn the same smuggling cocaine or trading the conflict diamonds, but reselling pixels seems a much safer career.
The virtual economies boomed. New worlds were growing – Second Life came in 2003, and managed to lure many virtual property investors and real world companies that wanted to create a virtual in-game branches. Over the years, Second Life build up a crazy $600 million GDP economy. It’s currency, Linden Dollar, has an official exchange course like any real world currency. Second Life also brought first cases of real people employed to work in the virtual worlds, either as marketers, designers or advisors.
In 2004, virtual worlds kicked into overdrive. World of Warcraft arrived and quickly became a titan of the MMO’s, growing at a stunning rate. Today, 12 million people call Azeroth their home, and WoW’s currency became so desirable that in many third world countries local enterpreneurs created sweatshops full of workers engaging in virtual gold farming. It is estimated that in China alone there are 100.000 professional, full-time gold farmers – slaves of virtual worlds, meant only to provide rich western players with goods of all sorts.

The $400 dollar dung
In the beginning, most items sold in virtual realities were supposed to make player more powerful, or his life – easier. People sold armor, magic trinkets. But then, various Korean games started to sell also the vanity items – things that didn’t increase your capabilities, only made you look cooler (well, to other players at least). In Maple Story, boots of one color might be many times more expensive that differently colored versions, based only on rarity. But here’s the fun fact. Pixels don’t even have to look nice to be expensive. Because, you see, one of the most expensive items in Ultima Online is a piece of horse crap, that does pretty much nothing.
Horse dung is a small item that used to lie around the stables in the game world. The thing is, horses did not produce it, it was a static prop that did not respawn if someone picked it up or moved it. Shortly, dungs became one of the rarest items in a game, a unique set of pixels, that even the most powerful character couldn’t obtain. Unless, of course, he was willing to pay. Not so long ago, they were priced at around 500 million of in-game gold pieces. That amount could be exchanged for roughly $400. Suddenly, Apple’s Smurfberry cart seems like a good deal – at least you can do something with it.

Virtual laws for virtual realms?
As you can imagine, the virtual trade led to a cascade of legal problems. First up are the taxes. After all,  gains from virtual items sold in the virtual world should be subject to taxation, just like any other source of income. So far it’s not a big issue – companies that sell in-game items pay the tax anyway, while exchange between two players remains mostly illegal and thus untaxed. But tax-related issues will increase if more developers follow the path of Entropia Universe or Second Life and legalize the in-game trade. Just imagine: if a guy from Finland buys a magic sword from a Scott, and a game is hosted in the US, then who, where and how pays the tax?
Also, if we acknowledge that virtual items are our legal possession, then every act against them becomes a real crime. Right now, hacking someone’s account is simply a breach of the game policy. But in the future it might become a criminal act, with exactly the same penalties as a real-world burglary. But what legal system would have jurisdiction in case where the thief, the victim, and the crime scene are all in different parts of the world?
Then, a server downtime can actually become a loss of income. Game developers and ISP’s would be prone to lawsuits from players who lost real money due to technical difficulties of the service. And what happens if a developer discontinues a game in which people legally obtained goods and properties? We might soon learn, as many first generation MMO’s slowly become obsolete. If Second Life creators pull the plug, will virtual property holders fight for compensation?
One thing is certain, during our lives virtual economy will become one of the most important topics in both politics and business. It is very probable, than in just a couple of decades most of things produced and sold by humans will be located in various virtual realities. A virtual legal systems and virtual countries might follow soon after…

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