Click into the world of social online gaming and, these days, you're almost certain to encounter much more than avatars, demons, and battlefields. As growing throngs of players dive into these environmentsin games as diverse as FarmVille, Mafia Wars, World of Warcraft, and Second Lifethey're often buying and selling virtual goods using virtual currencies.
It's a multibillion-dollar trend. According to market research firm In-Stat, the demand for virtual goods hit $7.3 billion in 2010, up from $2.1 billion in 2007. Moreover, In-Stat predicts the figure will reach $14 billion by 2014. Another consulting firm, Magid and Associates, reports that the percentage of Web users trading virtual goods will grow from about 13% to 21% through 2011.
Virtual goods also accounted for the vast majority of social-gaming revenues last year, with 60% of total revenues, more than lead generation offers (26%) and advertising (14%), according to eMarketer.com.
"It's clear that people are willing to pay real money for all sorts of virtual goods," explains Vili Lehdonvirta, researcher at the Helsinki Institute for Information Technology and visiting scholar at the University of Tokyo. "As in the physical world, objects take on meaning based on perceived status, scarceness, and emotional value." In today's gaming universe, coveted items include homes, weapons, space stations, and, yes, horse manure.
Yet behind the façade of glitzy interfaces and alluring virtual objects lies a medium that's driving changes in the way governments, researchers, legal experts, and the public think about goodsand in the way people behave. Although virtual goods and virtual currencies aren't going to overtake their physical counterparts, they are making a mark on society and affecting everything from culture to business to government.
"The casual game sector is growing enormously," observes Edward Castronova, associate professor of telecommunications at Indiana University. "It's not just your teenager in his mom's basement fragging monsters all night. It's everyone else. These games fill little holes in the daywhile people wait for a bus or phone call." Virtual economies, he says, are global and real. They're forcing marketers, tax collectors, and others to reevaluate their thinking and adapt to a rapidly shifting landscape.
It would be unwise to dismiss social gaming with virtual goods as a fluke or passing fad. Although the buying and selling of objects within games has existed in one form or another since the late 1990s, social gaming has exploded in popularity during the last couple of years.
In-Stat industry analyst Vahid Dejwakh says that four main factors have contributed to this new virtual world order: the emergence of gaming on social networking sites such as Facebook; the rise of smartphones as casual gaming platforms; the fact that virtual goods gaming models increasingly allow people to play for free; and the availability of gaming platforms to all segments of society. "Today's social games are simple to learn, but they are usually complicated to master," he says.
A slew of companies have established a virtual toehold on the social gaming market. Among them are Slide (purchased by Google for $182 million last August), which has tens of millions of users and offers games such as SuperPoke! and FunWall on Facebook; Blizzard Entertainment, which claims more than 12 million players for World of Warcraft; and Zynga, which earns more than $600 million in annual revenue through diversions like FarmVille, Treasure Isle, Mafia Wars, and Live Poker. In fact, Zynga now has more than 225 million people visiting its sites every month.
These social games are ushering in changes that increasingly reverberate through the physical and virtual worlds. Not only is society using the Internet in new ways, but the definition of ownership and what constitutes a possession is evolving. "People feel a sense of material value for objects they own online," says Lehdonvirta. "As a result, designers are consciously introducing objects to see how they can influence behavior."
Yet, Lehdonvirta and others believe that it's a mistake to view online and offline worlds as distinctly separate. "Virtual objects are very real, and they're always intertwined with the physical world. They are entirely material in the sense that they're stored on magnetic disks and presented to users as photos that hit their eyes," says Lehdonvirta. "We see them as things, just as we see physical objects as things." This fact, along with basic supply-and-demand economics, have spurred players to spend anywhere from several hundred to several thousand U.S. dollars for items such as horse manure in Ultima Online and houses in Second Life.
"Designers are consciously introducing objects to see how they can influence behavior," says Vili Lehdonvirta.
Even seemingly mundane items command attention in these virtual games. For example, in Habbo Hotel it's possible to purchase any number of trophies that all look identical. However, a virtual trophy that the game publisher awarded to a famous user has many times the value of a trophy with no history. The key to the value is that it's possible to click on the trophy and view its ownership history.
Likewise, in MapleStory, different colored boots are available at various prices. While only players fully understand this systemthat certain colored pixels are more valuable than otherseveryone agrees to play by a set of rules. In reality, Lehdonvirta says, this is no different from the physical world where paper money and objects have no intrinsic value. "We all simply buy into a system and abide by it," he notes.
Although thinking and behavior in social games largely mirrors the physical world, this doesn't mean that social games with virtual goods aren't changing thingsand introducing new issues and challenges. For example, in China, an instant messaging and game publisher, Tencent Inc., introduced a virtual currency called Q coins, which wound up being used in the physical world, as well as in Tencent games and other virtual sites. In some cases, Q coins were reportedly used for gambling and pornography.
These virtual currenciescreated by game publishers primarily for the purpose of making micro-transactions feasible and controlling the environments within their gamesare growing in use and stature. With Q coins being increasingly exchanged for real yuan, the basic money unit in China, Chinese banking officials and government agencies have become concerned about virtual money challenging the renminbi's legitimacy. "It's a gray area that governments and regulatory bodies are taking a hard look at," says Andrew Schneider, president and cofounder of Live Gamers, a company that develops and manages virtual currencies for gaming companies. "The last thing a sovereign government wants is a shadow currency that could have real-world economic implications."
Government officials, along with scholars and legal experts, are attempting to sort through a tangle of issues, including what constitutes revenue, what happens to unclaimed property, whether it's possible to pass items on to next of kin, and what tax implications exist. "Although a framework for how to deal with these issues already exists in the physical world," Schneider says, "how they are applied to the virtual world remains somewhat murky."
It's hardly an abstract point. A number of people playing Second Life have earned hundreds of thousands of U.S. dollars selling real estate or providing services within the game. One German couple, operating as the avatar known as Anshe Chung, became real-world millionaires in 2006 and has since opened a virtual studio with 80 employees to develop virtual environments within games such as Second Life. Others have bought and sold virtual goods on eBay and other sitessometimes for thousands of dollars. Meanwhile, businesses have sprung upmostly in Chinaaround developing characters and building environments for those who prefer to pay rather than play.
Theodore Seto, professor of law at Loyola Law School, says any virtual transaction is potentially taxable in most countries. "Whenever you receive value in exchange for other value, you have a taxable exchange," he says. However, like frequent flyer miles, hotel points, and other closed currencies, tax authorities haven't figured out what to do about virtual earnings. In certain instances, when an individual withdraws funds from a game (some games allow this, some don't) or pays someone to develop a character, the transaction is typically subject to taxation.
"The last thing a sovereign government wants is a shadow currency that could have real-world economic implications," notes Andrew Schneider.
These virtual economies are spilling over into the business world. Not only have gaming companies popped up, many of them thriving off virtual economies, but conventional businesses increasingly view environments, such as Gaia Online, Habbo, and Facebook games, as ideal places to market their products and services. Among the brick and mortar companies advertising online are Coca-Cola, Wells Fargo, and Starwood Hotels. What's more, charity is becoming part of the picture. Zynga's Sweet Seeds initiative, for example, recently raised more than $1 million for Haitian children.
One interesting matter is how virtual goods and virtual currencies will evolve and adapt. Facebook, which boasts more than 500 million users, offers Facebook Credits that span more than 200 games and applications. Other companies are also introducing mega-currencies that span several games. This approach boosts spending and creates greater "stickiness." A person who becomes bored with one game can sell the virtual goods and take her or his loot to another game. A few companies, including Tapjoy, Gambit, and Trial-Pay, have introduced exchanges that enable consumers to convert Amazon Mechanical Turk jobs into virtual currencies.
In fact, Lehdonvirta and others believe it's possible to use virtual goods and money within games to affect social change in areas as diverse as diet, health care, and CO2 emissions. Lehdonvirta and researchers in Japan have already created prototype games that have demonstrated the viability of such a concept. "Virtual objects influence behavior in a similar way to material objects," he says. "The virtuality of objects is not as important as the meanings that people attach to them."
As for virtual economies, Schneider believes they will have a significant impact in the future. "But it's important to recognize that they are largely artificial economies that a game publisher controls," he says. "You can examine all the economic theory you likesome principles apply and others do notbut it's important to recognize that, at the end of the day, a game publisher has almost total control of its economy."
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