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

Monday, June 4, 2007

The Courts Weigh In

In what could have very significant implications for virtual worlds, there was an important ruling last week on the enforceability of the contracts governing virtual world usage. Last year, Second Life user Mark Bragg sued Linden Lab over the cancellation of his Second Life account. Linden Lab argued that Bragg had violated the terms of service (TOS) agreement for Second Life. Linden Lab charged that Bragg had found a way to buy land in Second Life at below market prices and so terminated his account. Unfortunately for Bragg, he lost the thousands of dollars of land he had purchased.

The Pennsylvania court entertaining Bragg's lawsuit ruled on May 30 that Linden Lab's TOS was not enforceable, according to a Reuters story. The 46-page ruling is available as a PDF here. Specifically, the court found the requirement of arbitration for dispute resolution to be unreasonable:

In effect, the TOS provide Linden with a variety of one-sided remedies to resolve disputes, while forcing its customers to arbitrate any disputes with Linden. This is precisely what occurred here. When a dispute arose, Linden exercised its option to use self-help by freezing Bragg’s account, retaining funds that Linden alone determined were subject to dispute, and then telling Bragg that he could resolve the dispute by initiating a costly arbitration process. The TOS expressly authorized Linden to engage in such unilateral conduct. [p.34]
The court summarized its opinion thusly:
Taken together, the lack of mutuality, the costs of arbitration, the forum selection clause, and the confidentiality provision that Linden unilaterally imposes through the TOS demonstrate that the arbitration clause is not designed to provide Second Life participants an effective means of resolving disputes with Linden. Rather, it is a one-sided means which tilts unfairly, in almost all situations, in Linden’s favor. [p.41]
And concluded:
Finding that the arbitration clause is procedurally and substantively unconscionable, the Court will refuse to enforce it. [p.42]
I expect this ruling has enormous implications for virtual worlds. As the first judicial ruling on the enforceability of TOSs (or alternatively, EULAs), all future suits will likely turn to this one for precedence.