Congressional Hearing on Virtual Worlds

There will be a hearing on virtual worlds on Tuesday, April 1 at 9:30 a.m. (no, this isn’t a joke). The topic of the hearing is “Online Virtual Worlds: Applications and Avatars in a User-Generated Medium” and it will be chaired by U.S. Representative Ed Markey (D-Mass.). There will be a webcast online (see here). The hearing is being held by the Telecommunications & the Internet Subcommittee (of which Markey is chairman), which is one of six subcommittees under the powerful Energy & Commerce Committee. This will be the first Congressional hearing on virtual worlds.

The hearing has been described to me as primarily an effort to exhibit the features and applications of virtual worlds, as well as to introduce the concepts behind virtual worlds to Members of Congress not yet familiar with them. The hearing will focus specifically on Second Life.

There are four witnesses scheduled:

1. Philip Rosedale, Founder and CEO of Linden Lab, the company that owns and runs Second Life.
2. Colin Parris, vice president for digital convergence at IBM Research (as well as a keynote speaker at Virtual Worlds 2007), will discuss IBM's efforts in and use of Second Life, such as here and here.
   
3. Susan Tenby, Online Community Manager for TechSoup, will explore the potential of Second Life for nonprofits and charities.
4. Larry Johnson, CEO of the New Media Consortium, will address educational opportunities in Second Life.

Virtual Worlds Conferences Next Week

Next week are the Virtual Worlds Conference and Virtual Law Conference, held in New York City. The two conferences are hosted by the same organization and run concurrently, so I expect to attend sessions in each. They run April 3 and 4 at the Jacob Javits Center. By the latest count, there will be 950 attendees and 519 companies represented. I will be there, as will a great many people with academic and business interests. The 2007 conference was an informative event, and I expect this year’s to be more so. Here is the unified schedule for the conferences.

I will be speaking on the panel “Legal Issues in Virtual Property” on Thursday, April 3, 4:00 - 5:00 pm. I’m not sure how a non-lawyer ended up on that particular panel, but it will be good so be sure to check it out.

MTV Busts a Move

Virtual World News offers this tidbit: MTV has named Christina Glorioso to be VP of sales and marketing partnerships for program enterprises. This is a newly created position whose duties include "maximizing opportunities for the various projects developed under the program enterprises group, including virtual worlds, 'Rock Band' and other videogames" (via Billboard). In other words, part of her duties will be to promote the MTV brand in virtual worlds, presumably by purchasing ad space and sponsoring virtual events. It wouldn't surprise me if she were also to sell ad space in the gamut of virtual worlds run by MTV Networks.

This is an interesting development, as it is another piece of evidence that shows that corporate America takes the profit potential of virtual worlds seriously. Granted, the user base for virtual worlds is pretty similar to the target audience for MTV. Still, someone is thinking that enough eyeballs pass through virtual worlds to warrant a new VP position.

It will be interesting to see which, if any, other corporations follow MTV's path. There are certainly a number of Fortune 1000 firms that would seem to benefit from more aggressive marketing in virtual worlds.

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.