The Virtual Goods Economy

David Wagner, Managing Editor | 2/18/2011 | 22 comments

David Wagner
Hey folks, today’s topic is going to be an experiment. I’m calling it the “Geekend” post. See, I’m a geek. I play video games. I like sci-fi. I like all things in the nerd kingdom. And hey, IT folks are known to be geeks, too. And I know from various posts that at least some of you guys proudly fly the geek banner.

So, every Friday afternoon, I’m going to talk about stuff I love --gadgets, games, movies, and the people who make them -- and I’m not going to worry about the enterprise. Just once a week. One post, for a little bit of fun so we can enter the weekend on a high note.

Today, I want to talk about a fabulous real estate venture. It is a world class resort with 17 out-of-this-world exclusive retailers, a fabulous club called Stahlsteiner’s which boasts a major star following, and expansive grounds with some of the most exotic plant life you’ll ever see. Every Saturday the resort sells out its famous shows, and visitors can even book special hunting expeditions. The amazing thing is that this resort can be had for $330,000. Not bad for a resort, huh? What if I told you this resort was in a space station orbiting the planet Calypso? What would you pay, now?

In case you haven’t figured it out yet, the resort is in a virtual world. It is the Crystal Palace Space Station (pictured below) in the game Entropia Universe. And it sold in 2010 for $330,000 real US dollars, a world record for virtual goods. Would you pay six figures for a piece of digital real estate?

Before you answer, let me tell you that the selling of virtual stuff for real money is a $2 billion a year industry. And Buzz “Erik” Lightyear, the owner of the Crystal Palace Spacestation is sure he is going to make his money back by selling virtual tickets to shows, goods in the virtual shop, and from hunting fees.

And this isn’t an isolated case. From simple Facebook games like Farmville to fantasy massive multiplayer games like World of Warcraft, virtual markets (sometimes sanctioned and sometimes illegal in the game universe) are popping up to help people buy the stuff they want most in the game without having to go get it the hard way. And some people are making a profession out of collecting and selling virtual swag. What are people buying? This chart breaks it down.

But what they are really buying mostly is convenience. They want the +10 Slaying Sword of Super Magic but they don’t want to go to the trouble of killing the Great Many-eyed Gorgon of Blinding Death to get it. Or they are buying status. They want the coolest space in Second Life or another virtual world but they don’t want to build it themselves.

The thing is, we can’t sneeze at these virtual economies because they actually show us a lot about the real economy in microcosm. They have inflation, supply and demand, consumers, producers, and everything else. And some games have even collapsed because they got the money wrong. It was either too hard or too easy to get what people wanted in the game. We learn a lot from these economies, especially the ones who successfully adapt to problems as they go.

But heck, this is the geekend post. I don’t want to talk about what we learn. I want to talk about whether it seems fair to buy this stuff. Personally, I play games so I can earn the +10 Slaying Sword of Super Magic, not so I can buy it in cash to use it on some measly little wandering giant rat and watch how easy it is to kill something. The achievement is what I’m after. I honestly wonder who the person is that pays real money for fake stuff. Especially fake stuff that can be copied again and again with some simple lines of code. And yet clearly, other people feel differently to the tune of $2 billion per year.

What do you think? Thumbs up or down on the virtual goods economy? Would you spend real money on fake stuff? Have you done it? Anyone ever consider (like me) whether they could make a living selling fake stuff online? Anyone ever succeed at it? It’s OK to tell us. We’re all geeks here.

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zeppy   The Virtual Goods Economy   2/21/2011 2:12:20 PM
Re: Problem with the virtual world
Great points, @Taimoor. In theory, I don't have a problem with buying virtual goods with actual money, with the assumption that I'll be getting *something* of value to me for my cash: saved time, slicker online toys, a better online experience, etc. But the idea of paying 6 figures for a virtual resort, that could be easily replicated seems pretty crazy and risky to me.
Ivan Schneider   The Virtual Goods Economy   2/20/2011 2:02:38 AM
It depends...
"Thumbs up" to the extent you're paying for creativity and social signaling. Buying your own virtual space station seems to be a version of interior design. Whether real-world or virtual, the general idea is to make your living environment more pleasant while signaling to others your taste -- and in many cases, your wealth. You can buy a simple rug at Target for a couple hundred bucks, or you can buy an antique Persian rug for the price of a luxury car. You can paint the walls yourself, or hire a designer. If you live a good part of your life online, and you socialize with people online, it's only natural that you'll want to improve your living environment and your social signaling ability in the online universe to the same extent or greater than you do online. 

Rugs are probably not the best analogy because there's no such thing (afaik) as an "antique" virtual good in cyberspace. It's hard enough to come up with scarcity, and so asking for generational significance is a big long shot. Do you think that the virtual space station will become an heirloom? Only if it's valued by future generations as such, and I wouldn't bet my money on that outcome given the speed at which technology goes obsolete, and the relative easy of replication and improvement of a virtual environment versus the one-of-a-kind, timeless nature of a heirloom rug.    

"Thumbs down" if you consider online gaming as a contest of strategy, tactics, speed or skill. Would you want to play chess against someone who could buy new pieces at will? Come to think of it, that would be kinda interesting. Or not.. the point is that the gamemakers have to strike a balance between the revenues they can generate from allowing people to spend real money in the game, and the revenues they'll lose from people who get frustrated by having to go up against opponents laden with the most expensive gear. If you had to play paintball with a pop gun while everyone else in the field carried shoulder-mounted rockets and machine guns, you'd probably walk away quickly.  Unless -- and this is how it's done, no? -- the people with popguns play in the kiddie forest, while the heavily-armed play in a separate area going after the big monsters. 

Have fun, I gotta get back to my writing, which is kind of a game in itself... rolling a +10 footnote against a gelatinous deadline....

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Taimoor Zubair   The Virtual Goods Economy   2/19/2011 5:58:54 PM
Problem with the virtual world
If I buy a resort in the real world, I might have to pay more or less the same amount of money to buy/build another one. Also, there is no way that someone can steal this resort from me and build an exact copy of it for himself. Enter the virtual world, and all of this becomes possible! Would someone really want to pay such huge sums of money for an item which can be stolen and replicated by someone else for free?
Rowan   The Virtual Goods Economy   2/19/2011 12:29:32 AM
Re: Am I missing something here?
It's possible to make money creating characters and finding items/gold to sell, but it's against the laws of the game, so it's always a kind of niche activity. Do it wrong, and you could get banned, which kind of ruins the profit margin. However, there are people who can and will do it happily, enough to make a living off of it.

We always pay money for virtual goods. In fact, the American dollar is a virtual good in and of itself - it is attached to nothing save a promise from the government. Or there's the whole stock market, which is basically a form of gambling on believing that something will succeed or fail, and depending on how many other people also believe that it succeeds or fails, you get more or less money. Compared to that, my Frozen Shadoweave Leggings seem downright real.

Or then there's all that "cloud" stuff for consumers. If you pay for Netflix Instant or Hulu Plus and stream a movie, you're paying for a virtual good. Actually, come to think of it, going to a movie theater is pretty virtual.
jastro   The Virtual Goods Economy   2/18/2011 7:02:08 PM
Thumbs Up on the Virtual Goods Economy
Absolutely thumbs up on the virtual good economy! Why not? People paid for "telephone communication" which was communication they couldn't see. People pay for amusement parks and fantasy lands - get your wand and become someone else. Stocks are traded by the millisecond and wealth appears and disappears without us every seeing it. The virtual economy has big implications not only for commerce, but for education. We should all be thinking of ideas. And getting the money right is a prime requirement and spot-on observation.
Sara Peters   The Virtual Goods Economy   2/18/2011 2:41:49 PM
Re: Am I missing something here?
@Nicky48  Yeah, I can't say that I understand it myself. Wish I were one of those people with too much time and money.  :)
David Wagner   The Virtual Goods Economy   2/18/2011 1:48:47 PM
Re: Am I missing something here?
or are they out to make real money here? In which case - i need to get playing....

@Nicky48- Like any other economy there are people who are spending money and people making money. You can make a real life living doing something called "gold farming." The number one thing people purchase in virtual games is virtual currency (often virtual gold) so they have the flexibility to buy what they want.  Many of these worlds actually have real life currency exchange rates.

Some companies employ gamers to "farm gold" by doing tedious tasks in the game repeatedly to earn gold that is sold in various markets in and out of the game.

For this to work, of course, you have to have people with real money willing to pay for the gold.

Like any other economy, you have to position yourself well to make money, but you can. The only real difference between virtual economies and real ones is that the money has to come in from outside to make it work. Though, I suppose that can be said about some developing economies as well.
Nicky48   The Virtual Goods Economy   2/18/2011 1:13:01 PM
Re: Am I missing something here?
@David - it still seems strange - kind of defeats the object of playing, or are they out to make real money here? In which case - i need to get playing....
David Wagner   The Virtual Goods Economy   2/18/2011 1:09:59 PM
Re: Am I missing something here?
@nicky48- they indeed have too much money. Time, however, is one of the things people claim they don't have when they pay for virtual stuff. They want to "enjoy the game" without having to put in the time.

In other words, they want to go around the game world womping everything in sight without having to try hard to do it.

Granted, there are other reasons to do this. The virtual property that is purchased in Second Life or Entropia Universe are actually considered investments. These worlds have robust virtual economies around not only the exchange of goods of paid experiences of various types (shows, staged combat, etc).

In fact, there was a point when Reuters ran a news division inside Second Life. They sold and distributed a Second-Life only newspaper and had beat reporters and everything like they do in real life. They closed it in 2009 after 2 years for variously reported reasons.

It is more than just buying swords and characters, but that is a major aspect of it.
Nicky48   The Virtual Goods Economy   2/18/2011 1:01:11 PM
Re: Am I missing something here?
@Sara - then people must have too much time and too much money on their hands.
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