There’s an interesting article up on BusinessWeek.com about commercial uses of World of Warcraft to foster innovation in the business environments. It’s written by John Hagel and John Seely Brown, co-chairmen of the Center for Edge Innovation at Deloitte Touche Tohmatsus.

Hagel and Brown argue that conventional training programs run by corporations suffer from an inherent limitation in that they focus on transferring knowledge rather than teaching trainees to think. They recommend that businesses consider adopting games, specifically World of Warcraft (WoW). The main benefit of WoW is that advancement is contingent on innovative problem solving:

The degree of complexity and challenge increases dramatically as you advance across levels, and the number of experience points needed in order to advance also increases sharply with each level. Yet the number of hours required to get there actually decreases. Experienced players become adept at leveraging the resources available in and around WoW to learn faster and advance faster even as the challenges become more difficult. In contrast to the diminishing returns to learning that we often encounter in business, players in WoW appear to have joined an environment where there are increasing returns to learning.

An additional benefit to WoW is the engaging (and addictive) gameplay. Once a players starts into WoW, the game becomes a self-motivating experience, in which players want to achieve that next level of achievement. Sooner or latter, this desire to play encourages players to collaborate with others in the game.

Talk about incentives in a business context, and the discussion quickly falls back to cash. With minor exceptions, cash is not an incentive to play WoW, so the designers focused on intrinsic motivations. Players get widespread recognition as they master new skills and successfully address each new challenge. As the game advances, players learn to collaborate and participate in "guilds"—teams of players who must work together to innovate in their game play and achieve the next level of performance. As relationships and trust develop within these teams, everyone is motivated to innovate by the desire not to let the team down.

The benefits to businesses go beyond imparting an ability to think innovatively or encouraging collaboration, but shaping minds to deal with new and unexpected events. This seems a particularly beneficial trait to have in a fast-moving, competitive business environment.

Rather than viewing the unanticipated as a threat, gamers learn to welcome unexpected events as an opportunity to innovate, tinker, experiment, and, in the process, learn even more. They also learn to welcome collaboration as an opportunity to learn faster by focusing on a set of individual strengths while being exposed to the diverse perspectives and experiences of those with complementary strengths. At the end of the day, this is the most powerful contribution of WoW. This disposition creates an amplifying effect throughout the game. Players seek out other players who share this point of view, and they end up performing better than players who bring more conventional ideas to the game.

Of course, Deloitte is hardly the first business to recognize the benefits of using video game virtual worlds to instruct their employees. A Spring 2008 survey by the Entertainment Software Association found that 78% of businesses and non-profits plan to utilize video game-based training in the next five years. Seriosity has been studying the potential business applications of games like World of Warcraft for years, even writing about the topic in an article in the Harvard Business Review. In 2007, Seriosity prepared a report for IBM – Leadership in Games and at Work: Implications for the Enterprise of Massively Multiplayer Online Role-playing Games – that explored how games could be used to foster leadership in business settings.

IRS Looks at Virtual Worlds

The IRS office of the National Taxpayer Advocate released on 1/7/09 its 2008 Annual Report to Congress. The report identifies tax issues related to virtual worlds as a "Most Serious Problem" and features a 13-page section entitled "The IRS Should Proactively Address Emerging Issues Such as Those Arising from 'Virtual Worlds'"(starting on page 214 of volume 1). The chief concern for the IRS is summarized as follows:

Economic activities associated with virtual worlds may present an emerging area of noncompliance, in part, because the IRS has not issued guidance about whether and how taxpayers should report such activities.

More specifically:

If the tax experts at the IRS cannot figure out what the rules are or should be, unsophisticated taxpayers who participate in the virtual economy have little hope of doing so. The IRS could at least make an administrative pronouncement about how taxpayers should treat these transactions in the interim as it studies the issue and the state law rules evolve. So when counting income for tax purposes, should virtual currency be discounted to reflect that risk?

The report notes the significant economic value of many items and avatars in virtual worlds, even observing that some of the limitations set forth in TOS and EULA contracts "may not be enforceable under state law." The problem, according to the National Taxpayer Advocate, ultimately boils down to economic activity:

The economic activity in virtual worlds is significant.…In other words, by participating in these worlds, a significant number of people are creating real economic income. Where there is economic income, there is likely to be tax due from someone.

The report states that one of the biggest obstacles to introducing taxes to virtual worlds is the issue of valuation:

While valuing in-world transactions conducted in virtual currency would be burdensome, especially in light of the small dollar amounts typically involved, valuing in-world trades of other types of virtual property might be nearly impossible. For example, how would we value a trade of virtual armor for a virtual sword or the income from picking up a virtual sword?

The report also raises a sticky issue that has intrigued me for a while now, and that is the ability of virtual world operators to arbitrarily terminate an account and confiscate its holdings. Although people often talk about their accounts in World of Warcraft or Entropia like they were regular financial possessions, in the real world banks can’t simply decide to confiscate your checking and savings accounts. In the realm of taxation, it would seem to me that this risk permeates all virtual world accounts and diminishes the value of any obtained assets. In certain real world situations, such as divorce proceedings, civil litigation and the federal estate tax, it is common to apply discounts to the market value of assets when another party has ultimate control over that asset or there is a lack of marketability. While not intended to cover virtual assets, there are obvious similarities. The National Taxpayer Advocate’s report picks up on this issue:

Some virtual property is not transferable under the TOS. Moreover, all virtual property is arguably subject to forfeiture at the discretion of the virtual world operator. The virtual world operator could cancel the taxpayer’s account, shut down the virtual world, or change the world in a way that eliminates the value of the virtual item. Thus, a taxpayer may wonder if such contingencies make the in-world acquisition and sale or exchange of virtual property nontaxable.

I think one of the most remarkable aspects of the NTA’s report is what it does not embrace: the much-discussed distinction between game worlds like World of Warcraft and non-game worlds like Second Life. The NTA report goes into some detail describing structured and unstructured worlds, specifically referencing World of Warcraft and Second Life. However, the report’s analysis and recommendations appear devoid of any reference to the type of world. Gold and armor in World of Warcraft is just as much a taxable item as selling virtual homes and t-shirts are in Second Life. Personally, I do not find the lack of distinction surprising, because it’s always seemed silly to me to try to categorize economic value based on intent or some contrived definition of a “game world” (I previously blogged on this here). Economic value is what it is, and whether you got through selling virtual armor or virtual homes is irrelevant. However, this distinction seems to be awfully important to some observers and researchers addressing issues of virtual worlds and taxation (for instance, see here and here). While certainly not final, I suspect the mindset embraced by the NTA regarding this aspect of virtual worlds will carry over to other divisions of the IRS as well.