Legal Issues
Comparing Virtual and Real-World Economies
Real Money Transactions
The Business Model Influence on MMOGs
Concluding Remarks

Economic Forces in Virtual Worlds
Most so-called massively multiplayer online games harbor some notion of a working virtual economy. These in-game economies have increasingly begun to "leak out" of their virtual boundaries into the real world. Today a growing player base participates regularly in the trade of virtual items for real cash, resulting in annual exchanges of millions of real-world dollars. To be successful, game developers must consider business models and trade paradigms in addition to actual game content. New massively multiplayer games provide a medium in which economies can be reinvented from scratch. Can newly invented virtual economies really exist alongside the long-standing economies of the real world? Could your next big investment be a down payment on a piece of virtual property? How will virtual online games affect our perception of virtual worlds as game developers and players increasingly mix business with pleasure?

Then God said, "Let there be light"
One thing to remember: virtual worlds are virtual worlds. People design them. People implement them. People maintain them. This observation seems straightforward; however, many people who play these games experience the "Genesis effect". Rather than concern themselves with how a virtual world works, players just live in it.
Whenever discussing virtual content, there are two sources to consider. Game developers view virtual content as digital content, a means by which to earn real dollars from players. Some of those dollars help maintain the game, for instance, by funding the introduction of new content. The rest of those dollars comprise paychecks. Conversely, players attach sentimental value to virtual content. Players of virtual games find that, the next time they log on, the game remembered everything they did and everything they owned. Players begin to believe in this system, just as people in the real world believe that the real world will be there tomorrow. Thus, to fully understand the driving forces behind changing virtual economies, we must consider contributions from two sources: the believers, and, well, the gods of creation.

The Line Between Virtual and Real-World Economies
Here we compare the basic principles of virtual game economies to those of real-world economies. Historically, in-game economies are not new at all. For example, many single-player games use currency as some measure of game progress. Typically, single-player games must be played through to completion in a linear fashion. Any relations with a single-player game economy are largely static. On the other hand, a MMOG world that supports thousands of players will tend to ebb and flow as the players do. The players affect the game's economy, much as real-world citizens affect real-world economies.

Just how valuable is that virtual sword?
Virtual items form the backbone of a virtual economy, and the range of virtual items is surprisingly diverse. The World of Warcraft Item Database contains virtual swords, virtual clothes, and virtual animals that a character can mount. The game also has an extensive repertoire of collectible "natural resources" that ranges from cloth to alchemical ingredients to iron ore. The game also supports crafts; for instance, blacksmiths can forge new weapons out of raw iron. The wide range of resources and the ability to combine those resources into end products provides a framework for economic incentive. It is then up to the players to collect, create, and distribute virtual products.
Most MMOG economies employ the economic principle of scarcity, which means that the net desire for a resource outweighs its availability. Many MMOGs include items that enhance game character abilities. For example, a World of Warcraft character lucky enough to own an Infinity Blade enjoys the benefit of increased stamina. Most attribute-enhancing items are earned by completing various game quests. Relatively few players acquire hard-to-get items, and hence these items will be scarce in the game world and therefore valuable. Few players covet items that are available to everyone, so these more common items have comparably little value. This notion of scarcity exists in the real world, for example, in the value of diamonds. If everybody owned a diamond ring, diamonds would be a lot more common and would fall in value.
Of course, game developers have direct control over the scarcity of virtual game items. As creators of a game's digital content, developers incur no cost by making any item rare or common. Precious metals, for instance, could be made a rare find during a trip through some Dark Mines. Conversely, precious metals could be made common if the world were invaded by evil metal golems. Needless to say, no government in the real world can as easily affect the value of diamonds by generating thousands of them at a time; and it is impossible to change the fact that diamonds are harvested from diamond mines. The advantage of owning a virtual world is the ability to create any item at all, and in any amount. Thus, although scarcity is a very real factor for players in virtual game economies, it is nonetheless an artifact of the game.
In virtual worlds, item values are much more subject to fluctuation. As Dr. Richard Bartle points out in Pitfalls of Virtual Property, even the physics of virtual worlds are subject to change. If a character owns an elite pair of boots that grants a speed boost, it may be exceedingly valuable in a vast virtual world where traveling is a must. Suppose the developers introduce magic carpets into the world. Suddenly, flying is the new in, and speed boots begin to rapidly depreciate. In worlds that evolve rapidly and dramatically, players have no guarantee that their elite set of items will retain its worth. At least in the real world you can rest assured that your car won’t go out of style within the week. Real-world economies tend to be stable compared to their virtual cousins.

How much money was that?
Another major similarity between virtual and real economies is the use of currency. Most MMOGs integrate some form of raw currency that exhibits many of the properties of real currency. For instance, precious metals such as gold and silver form the currency system in World of Warcraft. These items represent a measure of value, since they are routinely traded for virtual items like weapons or armor. Also, gold and silver retain their in-game value over time, and thus they are effective means of storing value. These are essential properties of the U.S. dollar or any other real-world currency, so it is not surprising that virtual economies have inherited such characteristics.
Game currencies even experience inflation from time to time. After all, creating a huge surplus of gold and silver is just as easy (i.e. free) as duplicating a "rare" virtual sword. Yet many developers ignore the potentially harmful effects of inflation on game environments. For instance, Linden Labs, creator of Second Life, regularly supplies its users with a weekly allowance in the form of Linden Dollars ($LD). Players can earn additional $LD by paying real dollars to Linden Labs. The number of circulating $LD has been rising for some time, and whether the game economy can support perpetual growth is a question of concern. What happens if Second Life hits a depression? Can players buy out, or are they stuck with bundles of worthless virtual cash? According to this FAQ from Second Life, Linden Labs reserves the right to redeem those $LD. Most governments give better guarantees for the value of hard-earned cash.
Thus, although virtual economies exhibit many of the characteristics of real economies, they lack the sense of stability that real economies carry. Of course, the concept of a virtual economy is still in its infancy, especially when compared to real-world economies that have existed for ages. We should expect there to be a few kinks in any virtual economic system. We must also remember who's backing a virtual economic system: not a government, but a game company. Should game companies be liable for players' economic losses? Is it even possible to turn a virtual currency into a fiat currency?

Doing business.
So far we've seen how game developers fuel the economic system - and control it - by supply virtual content as items and currency. Players influence the system as well. Aside from participating in trade, players employ strategies of their own to gain economic advantage. This active participation on behalf of the player supports the notion that virtual economies are at least partially owned by the players.
Guild formation is a common theme in many MMOGs. Whether game developers integrate guilds directly or not, players tend to band together in attempts to gain an in-game economic advantage. Virtual guilds arise when the game's market mechanism fails to support players in an efficient way. For example, weaker characters may have trouble obtaining weapons at a rate that matches their gains in experience. These characters may join a guild that offers weapons at lower-than-market price. As new guild members, characters must harvest iron for advanced guild members who require it to forge more powerful armor. In return for iron, advanced guild members hand down weapons. If scavenging iron beats acquiring the gold needed to purchase weapons, weaker characters join the guild. Similarly, successful characters join the guild in order to meet their increasing needs for raw iron. Collectively, guild members avoid the standard ways of acquiring resources.
Real-world guilds are better known as companies. For various reasons, companies find it advantageous to manage a subset of transactions internally, rather than through the market. MMOG guild formation is a striking example of the similarity between virtual and real economies. Whether by design or evolution, players have recognized the importance of trade as well as the very real fact that the common market is not always the best way to conduct commerce.

Real Money Transactions
So, your virtual elf owns a fancy virtual wardrobe, a mighty virtual sword, and quite a bit of virtual money. Compared to the average game character, your character dresses well and fights great. As a fairly fanatical (read typical) World of Warcraft gamer, you are quite attached to your character. One day a fellow gamer offers to buy your character for $2,000. What would you do?
Real money transactions, or RMTs, are the trading of real money for virtual items. RMTs bridge the gap between what is virtual and what is real economically. The amount of money generated by RMTs today is staggering. Sony's Station Exchange, a website that governs RMTs for the game EverQuest, saw $180,000 in transactions in the first thirty days of operation. PlaySpan, a new company that plans to offer RMT services to multiple MMOG companies, recently received $6.5 million in venture funding. The RMT market as a whole is estimated at $900 million. These numbers have attracted the rest of the world to virtual economies. Yet RMTs remain a controversial issue for virtual economies. What, exactly, is being sold? Do game developers deserve a cut? Does the government deserve a cut? One thing is clear: RMTs provide a whole new perspective on virtual economies.

Hey mister, can you spare an avatar?
MMOGs are not meant to end. If you find yourself done with a MMOG, how likely are you to stick around? Game developers want to hook players and keep them playing. To that end, a popular strategy among MMOGs is the leveling system. Basically, characters gain experience and abilities (often summarized by an overall "level") by fighting monsters and completing quests in the game. This leveling, which to an outsider might seem like the incrementing of arbitrary numbers, is a true measure of achievement for players. Game developers make leveling a lengthy process, and players keep playing.
Unfortunately (or not), the real world calls, and many players don't have enough time to level their characters sufficiently. The solution is to convert real money into game hours by purchasing other players' items or characters. Suddenly, virtual currency is exchangeable in the real world. If a virtual sword can be worth $200 in the real world, then the virtual gold needed to buy that sword can be worth $200 as well. Players demand virtual resources to enhance their gaming experience, and other players invest real time to supply those virtual items. Thus, RMTs are born.

Doing [real] business.
For people who believe in virtual economics, RMTs provide additional incentive to play games. The majority of RMTs consist of trading real dollars for virtual dollars or items on sites like eBay; however, many players have gotten creative. Anshe Chung Studios is a "virtual estate" business in Second Life. Ms. Chung is virtual, too, but the amount of money her business has generated is purportedly millions of real dollars. This is because Linden Labs buys back their Linden Dollars ($LD) at a rate that hovers around $270 LD for every $1 USD. Ms. Chung snaps up virtual land sold by Linden Labs, divides it up, and sells it to other players for profit. Popularly known as the "land baroness", Ms. Chung is an iconic figure for virtual investors who hope to gain from strategic game playing.
Can you make money playing games? That depends. Some people insist that Ms. Chung is at the top of what sounds like a Ponzi Scheme: the promise of high returns for a small investment. The majority of players in Second Life are on the bottom tier, earning considerably fewer $LD for each real dollar they invest. An exerpt from H. Randolph's article on the subject reads:
"I had an interesting conversation with someone...who spends her days [working in Second Life]...The distressing part is what this single mom said later, the same thing one will hear over and over from Second Life residents...to her amazement, she'd already made over $50,000 LD after only a month (about $185 USD)..."
Remember that Linden Labs controls $LD. Assuming you can make millions in the game, there's no stopping Linden Labs from capping the amount of real dollars they're willing to offer you. Linden Labs directly controls how many $LD are in the game at any time, and therefore the exchange rate is artificially controlled.

Players aren't the only players.
A few people like Anshe Chung have made it big by playing games. This caused a surge of interest in virtual economies. Several people began to consider the feasibility of virtual investments. Among private investors, one 22 year-old gamer placed a winning bid of $26,500 USD for a piece of virtual estate in MindArk's Entropia Universe. He considered it an investment, to be earned back by reselling land to other players in need of housing plots. More recently, a movie director paid $100,000 for a virtual space station in the same game:

"'I actually paid a deposit on a condo in South Beach (Miami),' he said. But 'the hurricanes were coming. The first one came, and I got scared, so I pulled out of it. I lost confidence in the American economy and I felt there was more opportunity right now in a virtual economy.'"

Presumably there are no natural disasters in virtual outer space. MindArk's End User Liscence Agreement includes disclaimers about changes to Entropia Universe and specifically limits liability "to no more than the initial amount transferred by [the player]". Apparently, uncertainties in virgin virtual territory do not phase investors.
The volume of RMTs has attracted the attention of governments. The United Kingdom recently passed the Gambling Act of 2005 under which MMOGs may constitute as gambling. In many virtual games, players defeat monsters, which may drop valuable items with varying probability. These games fit the description found in part 1 section 6 of the act for "games of chance". Game companies may soon find themselves applying for licenses with the Gambling Commission.
In China, RMTs became so pervasive that store vendors began accepting QQ coins, the currency of the online game Tencent QQ. The government eventually had to stop opening internet cafes in order to slow the growth of the QQ economy. Apparently, QQ coins threatened the value of the Chinese Yuan.

Can I get a receipt?
RMTs swept the game industry by surprise, but it wasn't long before game developers recognized their potential loss in revenue that can result when virtual economies escape to the real world. In fact, game developers responded much faster than governments, which still lag in addressing the issues posed by RMTs. For lack of government rules and regulations, game companies began taking RMTs into their own hands.
As mentioned, most MMOGs are time-consuming by design. What happens when game subscribers no longer have to spend hundreds of hours earning their virtual treasures? With items and avatars available for purchase, game companies that charge a fixed rate for play lose profits when players become prematurely saturated. Furthermore, RMTs tend to increase maintenance costs for MMOGs. When players get cheated in RMTs, they complain to the game developers. When a low-level character obliterates a team of moderately skilled characters (how'd he get that Axe of Annihilation?), players complain to the game developers. In short, the secondary RMT market can easily overturn an otherwise carefully maintained balance of gameplay, and game companies are expected to pick up the pieces.
Who has the right to sell those virtual items? Shouldn't game developers get a cut when players slap price tags on a game's virtual content? Initial attempts to ban RMTs were major failures. Blizzard and Sony banned the sale of virtual characters, requesting that eBay and Yahoo delist auctions related to virtual content. Despite this move against RMTs, several other auction sites sprang up. One such company, called ItemBay, began the practice of dealing exclusively in virtual wares. ItemBay was also one of the first sites to negotiate relationships with smaller game companies regarding virtual sales. Several dozen companies have since followed suit. The RMT market, though a byproduct of the MMOG market, proved too large to be silenced.
Sony finally conceded to the presence of RMTs when it launched Station Exchange, a website system that diverts RMT traffic for Sony games back into Sony territory. Sony's launching of Station Exchange marks the beginning of the acceptance phase of game companies that initially resisted RMTs. It also demonstrates the more general strategy that game developers have to consider, namely, how to keep games attractive to players. The compelling nature of virtual economies allowed them to escape into the real world. To make RMTs compatible with their carefully designed games, companies have to seriously consider how trading will be represented in their games and what payment schemes fit best with the gargantuan RMT market.

The Business Model Influence on MMOGs
MMOGs are complicated, multi-million dollar projects. A company must make a game with enough content to sustain tens of thousands of players over the course of months or years, during which players must continually invest their time and money. The mammoths of the MMOG industry - Blizzard with World of Warcraft and Sony with EverQuest II - rely on a constant influx of cash in the form of monthly player subscriptions. Recently, there has been increased experimentation with an alternative pricing model, under which games are "free to play". A reasonable attempt to draw customers away from the dominating monthly subscription titles, this strategy may have deleterious effects on gaming as a whole.

Free games that charge money.
Hundreds of new MMOGs come out every year, and particularly in Korea there has been a sharp increase in the number of games that advertise "free play". Blizzard's World of Warcraft, by far the most successful MMOG, boasts at least 10 million players. Blizzard and other market giants charge players via a subscription-based model. Players committed to a monthly fee are unlikely to experiment with new games - unless those games are free. In order to compete with Blizzard, other game companies advertise their worlds as open to anybody, free of charge.
Of course, MMOGs are very expensive, and all must generate cash somehow. Hence, "free play" almost always means "pay for content". Whereas part of the game world may be available for free, the majority of features require players to deposit real cash. A variety of strategies exist for distributing virtual content on a pay-per-use basis. Linden Labs allows its players to roam the world of Second Life for free. Players who wish to contribute to the world's virtual content must purchase virtual estate to do so, and these players are automatically enrolled in a land tax payment scheme. Sulake, maker of the "free" game Habbo Hotel, claims a monopoly on the sale of in-game virtual items. The only way players can obtain new virtual items is by paying cash to Sulake. This method in particular exemplifies how some companies reduce the negative impacts of RMTs. Sulake reaps the advantages of RMTs by controlling the tap.

You get what you pay for.
In order to draw customers away from larger games, designers of free-to-play games have employed a hit-or-miss strategy that negatively affects player experience. The results for free-to-play games are reductions in game longevity and quality.
We mentioned potential problems with RMTs in the previous section; in particular, players who purchase premium content work their way through games faster. On the other hand, players attracted to a game exclusively for its free content may soon become bored with the limited set of free features. To combat the rate at which players lose interest, developers must constantly churn out new items, both free and purchasable, to satisfy both sets of impatient players. The resulting game context is likely to be split between these two item sets. If the balance in gameplay suffers, players may opt out.
Additionally, the quality of free-to-play games may suffer over time. Developers of free games have less power to regulate player behavior. If developers ban unfriendly players, nothing stops those players from creating another free user account. Tech support in free games is likely to be underdeveloped. Subscription-based games have a real incentive to keep all players happy, since more players equals more money. In contrast, free-to-play games lack the incentive to keep players happy; keeping satisfaction high among players who don't pay might not be worth the effort. Unfortunately, players who choose not to pay for game services may be less inclined to adhere to game atmosphere or game rules. Players who prefer to cooperate may feel less inclined to report other members for misconduct. If a game is free, and not fun, players will likely move to the next free game. The hit-or-miss strategy of game developers inadvertently becomes a hit-or-miss strategy for players, where players migrate from game to game in search of a chance to have fun.

A community divide.
One of the most fascinating properties of MMOGs is the sheer size of their populations. Tens, sometimes hundreds of thousands of players interact in an entirely virtual world. Yet free games pose a threat to that community by spreading users across multiple games. In the long run, this may negatively impact the development of virtual communities.
Players of free MMOGs have already begun to divide themselves into the categories insinuated by free-to-play games: players who pay, and players who don't. Depending on which type of player you are, virtual gaming experiences differ. Players who cannot afford content may sense unfairness, since players who purchase content may have a noticeable advantage. Players who are rich in the real world may have distinct advantages in virtual worlds dominated by purchasable content. In essence, reality is allowed to persist in the virtual domain in a way that it should not. On the other hand, players who purchase content may have less fun compared to players who immerse themselves in the game and "work" to improve their characters.
Perhaps most importantly, the immersive quality offered in free MMOGs is low. The pay-for-content aspect forces players to enter a cycle of monetary dilemmas, in which they must constantly decide whether to pay or not. Item trading in pay-for-content games is dominated by the game itself. That is, players pay money to the game and receive items from the game. In contrast, players in subscription-based models engage exclusively with other players. In this way, the subscription-based models allow dynamic economies to form and adapt to forces created by players. Players of pay-for-content games less often play the fantasy adventure role and instead are forced to play as consumers in a marketplace that resembles the real world.

Concluding Remarks
Many people see virtual worlds as next generation communication technology. In the case of MMOGs, virtual worlds have proven to be attractive and even addictive media in which large communities form and thrive. As people frequent virtual worlds more often, these worlds may or may not converge with our experiences from reality. Do virtual worlds really extend possibilities beyond imagination, or will they evolve into suburbia plus McDonalds and Starbucks? Will virtual economies turn the next generation of game players into successful entrepreneurs? Will real-world businesses open shop in virtual worlds without dominating the atmosphere? Can virtual worlds hope to retain their allure if their inhabitants must compete in virtual markets?