Friday, June 22, 2007

Commoditization of Virtual Currencies

An entry on Daniel Terdiman's CNET News blog reports that Brock Pierce, the head of IGE, the leading marketer of virtual goods and currency, feels that virtual currencies are increasingly a commodity product. As a result, profit margins are shrinking as gamers discriminate among suppliers by price alone. It sounds like much of the commoditization push comes from China:

In fact, [Pierce] said, as Chinese competitors get more and more sophisticated, they are also willing to accept less and less profit margin. And that means, "they're perfectly happy to accept $20,000 in profit on $2 million of revenue."
Perhaps because of this economic shift, Pierce himself is planning to leave IGE.

From a purely economic point of view, there is no reason to find this development surprising. A quantity of Everquest platinum sold by IGE is identical in all respects to the same quantity sold by another vendor. The only difference, perhaps, is the reputation of the vendor: a small no-name outfit is more likely to be scam rip-off than a large well-established business.

The real question moving forward (as Terdiman notes) is how the game operators react to the increasingly off-shore nature of the secondary markets. It's much harder to threaten a firm in China with legal action than a firm in the U.S. So how do they respond to users of their virtual worlds, when such ventures are willing to accept 1% gross profit margins? Do game operators prefer the U.S.-/European-based gold farmer to the Chinese/Vietnamese/etc gold farmer? More generally, at what point does a game operator decide demand for currency is too pervasive and they are letting the gold farmer take money out of their pocket? At which point does it make sense, either from a profit or a control perspective, to simply create their own regulated market, much like SOE did with