L00t Chase

Black market sales of virtual world items have been the bane of many MMORPGs, particularly World of Warcraft. A report on a session at the Game Developers Conference 2008 posted at MTV Multiplayer by Tracey John offers some fresh perspectives on the practice. The session, entitled “Learning to Love Virtual Item Sales,” featured Andy Schneider of Live Gamer and Steve Goldstein of Ping0. John reports the following from the session:

for games that don’t offer real-money transactions, like “World of Warcraft” for example, websites like IGE and ItemBay have transformed illicit virtual item sales into a billion-dollar business— over $1.8 billion according to analysts’ estimates given in the session— and game publishers aren’t getting a cent.

The key point here is that there exists a huge profit opportunity, one which is currently being exploited by the black market. And as much as game companies may be committed to staying true to their opposition to the commercialization of games (well, beyond the fact that they charge $15/mo to play), the fact remains that game companies want to maximize profit. Leaving money on the table for sites like IGE to take does not make economic sense.

In addition to hurting revenues, black market trading increases support costs. According to John’s post, Schneider noted that before Sony’s Station Exchange, 40% of customer service was due to “virtual item sales resolution.” Since Station Exchange went live, such costs have fallen 30%.

It is true that many gamers are vehemently opposed dollar-for-gold or similar exchanges. Yet some sound reasons in favor of such sales have been put forward, such as to help a newcomer catch up to his high-level friends or to aid a time-constrained player reach new content. One solution to this dilemma is for game operators to designate some worlds as open to real-world exchanges. Operators already do this for PvP and PvE already, so this would simply allow some players to opt to play in an environment where they could participate in a sanctioned auction site, such as Sony’s Station Exchange/Live Gamer operation.

I expect that economics will trump other considerations. Even the hardcore purists might come to embrace an arrangement like one described above – the players who currently (or want to) engage in black-market trading would tend to migrate to Station Exchange-type worlds, leaving the purists in a, well, more purist world.

(Note: Sony recently announced that Live Gamer would take over the role now played by Station Exchange.)

Update: For another account of this Worlds in Motion session, see this post on Virtual Worlds News.

WoW Growth

Blizzard recently trumpeted hitting the 10 million subscriber mark for World of Warcraft, a milestone which helped push Blizzard's revenue for 2007 to a record high $1.2 billion.
However, WoW does not release detailed subscriber information (like Linden Lab does for Second Life). Instead, Blizzard periodically puts out press releases announcing a new milestone in the WoW subscriber base. Fortunately, it is possible to take these irregular press releases and compile a rough timeline of the growth in WoW subscribers (thanks to the Wayback Machine). The graph above (click on it for a larger version) displays such information from WoW’s inception in November 2004 to January 2008. I’m also including a table of data that includes some sparse geographic detail.

	Global	North		Asia
	Total	America	Europe	Total	China
11/23/04	0.0
1/10/05	0.6
3/17/05	1.5	0.8	0.5
6/14/05	2.0
7/20/05	3.5				1.5
8/29/05	4.0	1.0
10/28/05	4.5
12/19/05	5.0
1/19/06	5.5		1.0
2/28/06	6.0
11/9/06	7.5
1/11/07	8.0	2.0	1.5		3.5
3/7/07	8.5
7/24/07	9.0
12/2/07	9.3
1/22/08	10.0	2.5	2.0	5.5

The data suggest a slowing rate of player acquisition. Although WoW doesn’t give exact year-over-year changes, it has released subscriber figures in January of 2005 to 2008. This allows us to roughly estimate how WoW grew over a three year period. In 2005, the number of WoW accounts went from 600,000 to 5.5 million. That’s a change of more than 800% or 4.9 million players, averaging about 410,000 additions per month. In 2006, growth slowed by almost one-half, to 2.5 million (210,000 per month). Finally, in 2007 the number of WoW subscribers grew by just 2 million, dropping to 170,000 new players per month.

				Average
	Total	Annual Change		Gain per
	Subscribers	Million	Percent	Month
1/10/05	0.6
1/19/06	5.5	4.9	817%	410,000
1/11/07	8.0	2.5	45%	210,000
1/22/08	10.0	2.0	25%	170,000

Of course, adding even 2 million users in a single year still puts WoW in a category all its own. Many MMORPGs struggle to reach 100,000 or 200,000 total users. Nor are there any other games that appear to be in position to pose any sort of seriour threat to WoW. Indeed, the data I’ve seen indicates that WoW stands alone atop the mountain, with no one else even close. Still, though, these numbers suggest that the sheen of invulverability surrounding WoW might perhaps be wearing off. Is WoW approaching its market saturation point? Do the string of new MMOs on the market collectively constitute a competitor for WoW that are peeling off potential customers?

Blizzard defines its subscriber count thusly:

World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees' territories are defined along the same rules.

They Keep Growing, and Growing...

Although there is no overall census of the size of virtual worlds, two of the heavyweights recently released new numbers. First, World of Warcraft has now reached the 10 million mark. That’s an impressive milestone for a game that went live in November 2004. More than half (5.5 million) of those users are from Asia; 2.5 are based in North American and 2 million in Europe. That is a large number of subscribers. However, it pays to read the fine print:

World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees' territories are defined along the same rules.

So, in theory the 10 million figure, for the most part, includes only paying players, though not necessarily monthly subscribers. Large differences exist between the Chinese market and the Western market for WoW. In the West, players pay $15 per month for a subscription. In China, players pay on an hourly rate, and generate only 15% of the revenue of their Western counterparts. In other words, it’s a lot easier to boost the number of players when hourly fees can fall as low as 4 cents an hour.

Now onto the other release, the December and year end statistics for Second Life. Second Life has, undoubtedly, grown tremendously in a short period of time. According to Linden Lab, there are roughly 12 million resident registrations. While Linden Lab acknowledges that there are many users with multiple registrations (I have two myself) as well as many users who sign up but never again visit. According to stats on the Second Life website (updated through 1/26/08),

Residents Logged-In During Last 7 Days	326,881
Residents Logged-In During Last 14 Days	479,927
Residents Logged-In During Last 30 Days	748,301
Residents Logged-In During Last 60 Days	1,192,166
Total Residents	12,156,494

However, outside skeptics, like Clay Shirky, question the validity of such population statistics.

An alternative measure of user activity is hours spent in world. Second Life also releases monthly data which provides a good deal of demographic and geographical detail. The latest release, posted to their Economy Blog, covers December 2007. In December, users logged 25.6 million hours in Second Life. That is a an impressive statistic when compared to December 2003, when users hours totalled less than 80,000. While a small number of heavy users can influence this figure, it does provide a better metric of growth in the virtual world than user registrations. The graph linked below shows how hours spent in Second Life ha grown over the past years. The second graph looks only at the past two years: January 2006 to December 2007. It still shows strong growth, but by excluding the earlier years it provides a more balanced look at Second Life expansion. As can be seen, there was actually a significant decrease in hours used in November 2007, and hours logged in December were lower than those logged in October. (Sorry for the poor image quality. The blue line indicates user hours; red is user registrations.)

Second Life Population: Sept. 2003 to Dec. 2007

Second Life Population: Jan. 2006 to Dec. 2007

The bottom line is that growth in these two heavyweights remains strong. In light of the amount of amount of venture capital financing streaming into virtual worlds (15 firms received $425 million last quarter), it looks like the prognosis for virtual worlds remains strong.

Bye Bye Banks

Linden Lab made headlines recently by announcing a ban on banks in Second Life that lacked government certification, effective Jan. 22, 2008. This move was brought on, according to the announcement itself, by the collapse of Ginko Financial and the existence of virtual banks offering "unsustainably high interest rates" of up to 60% APR. Investors reportedly lost $750,000 when Ginko went under.

What Linden Lab did was to, in effect, pass off the business of bank regulation to real world governments. Rather than developing their own standards and rules, or allowing such standards to develop organically in-world, Linden Lab passed the buck, claiming "Linden Lab isn’t, and can’t start acting as, a banking regulator."

There are a couple of important observations to make, one relating to the big picture of virtual world regulation and the other to one aspect of this ban. First, the big picture. Virtual worlds have, heretofore, existed without significant government regulation and oversight. While actual crimes, like fraud in the case of Ginko, should be prosecuted by law enforcement, this lack of regulation is, IMHO, a good thing. By stepping forward and imposing their own regulation (albeit by simply adopting existing governmental regulations), Linden Lab is demonstrating the capacity for self-governance and self-regulation. My own sense of things is that regulatory bureaucracies tend to want expand their scope of oversight. Regulation is, after all, their raison d'être. If there is a vacuum, they will move to fill it. Whether you like the specifics of this particular ban/regulation, at least it shows that virtual worlds are capable of and willing to fill the regulatory vacuum themselves.

A second point worth making is that the Linden Lab policy does not specify which government certification must be met. According to the policy:

We will not apply this [ban] to companies who submit a registration statement, charter, or other applicable license from a governing regulatory authority, or who are merely conducting marketing or education, but not accepting payments. (emphasis added)

Thus, a bank could choose to incorporate in a country that has lax financial standards, such as some African or Asian nations. That is, merely requiring government certification in no way guarantees that strong, consumer- and investor-friendly regulations apply. Investors still need to be on guard against the same type of fraud that brought down Ginko. In fact, one could argue that in some ways, things are now worse, since investors might (erroneously) assume that this ban means all functioning banks in Second Life are well-regulated since they meet a government's standard for operation.

Second Life Skullduggery

Daniel Terdiman of CNET points out an interesting story on a San Jose Mercury News blog. According to the blog post, there is “a flaw in Second Life virtual world that allows them to strip a user’s character of all of its in-world money.” The security hole lies not directly in Second Life code, but in Apple’s QuickTime, software which allows video playback. In Second Life, users can embed video into their avatars or their property – video that other users view using QuickTime. QuickTime, in turn, has a flaw that can be exploited to allow the unwitting transfer of Linden dollars from the target avatar to the thief.

In a statement issued Nov. 30, Linden Lab warned users about this problem with QuickTime, and said “At this time we advise that you disable streaming video playback in the Second Life viewer except when you are attending a known and trusted venue.” While it appears that no one has taken advantage of this exploit, Linden Lab added “We are able to track attacks, and rest assured, if we discover a malicious stream, we will vigorously pursue the attacker. This will include account termination and legal action if appropriate, as well as the appropriate assistance for affected Residents.”

From a policy perspective, the existence of such a simple means to steal Linden dollars raises some interesting questions. For example, if someone has their Linden dollars stolen, should the real world police get involved? If so, is there a threshold below which the police won’t pursue action? One Linden dollar (equal to about 37 cents) certainly wouldn’t precipitate action, but what about L$1,000 ? Moreover, can a local police or sheriff’s department investigate and prosecute such a crime when the various parties may stretch across multiple states and/or nations? Does that mean that the FBI has to get involved?

It seems to me that the best solution to this security problem, at this point, is to let Linden Lab police its own world. Linden Lab can track down the perps and identify suspicious activity with far greater effectiveness and ease than traditional law enforement. Perhaps the better role for law enforcement is to pursue systematic schemes to steal L$ on a widespread basis. The jurisdictional question does seem to raise to problems, however. If the server where the “crime” occurred is in California, and the victim is in Texas, but the organized theft operation is in France (or Malaysia or Cyprus…), then which law enforcement agency has the leverage and reach to catch the criminals and provide restitution to the victim?

Aside from the public policy questions, this issue reinforces the key point that virtual worlds involve real economic value. As such they need appropriate security safeguards. As Charles Miller of Independent Security Evaluators, who along with Dino Dai Zovi discovered the exploit, said. “Banks clearly try to make their operations secure. Game companies haven’t thought about it the same way. They need to think more about security.”

UPDATE 12/14/07: Via Virtual Worlds News, it appears that Apple has now released a patch, but that Linden Lab has yet to implement the change in Second Life. Thus, we almost have a fix in place.

Second Life Forum with Metanomics

I recently had the pleasure of taking part in an event put on by Rob Bloomfield of Cornell's Johnson School of Management and Metanomics. The purpose of the forum was for me to answer questions from an audience of 70+ Second Life residents, moderated by Bloomfield.

For my part, it was a good, productive discussion. Questions covered a wide range of territory. Taxes were an obvious concern, but participants also asked about regulation and the form and likelihood of intervention by the federal government. I was impressed by the quality of the questions and the discussion that took place by chat in the background. By far my favorite comment from the chat log was by Dizzy Banjo: "yay geeks in congress :D"

You can read more in this Reuters article. Video of the event is available online if anyone is interested. Jim Rapp of Cyberstrategies.us has posted some photos (including the one used here).

Bragg Lawsuit No More

Reuters has reported that Second Life has reached an out-of-court settlement over the lawsuit brought by Mark Bragg. The terms of the deal were not disclosed. While this settlement was self-evidently in the interest of both parties, it still leaves unresolved key questions pertaining to virtual worlds. If the case had gone to trial, then it is possible we would have obtained the first clear legal opinions on issues involving property rights and the applicability of terms of service (TOS) agreements. As I previously blogged, the court in this case had already handed down a significant ruling against the enforceability of a clause of the Linden Lab TOS. If the Linden Lab had suffered a defeat with respect to its TOS or regarding property rights in Second Life, it could have had a major impact on the future treatment of virtual worlds on tax and rights issues. Looks like we'll have to wait for another lawsuit, Congressional legislation or IRS ruling.