Transportable Avatars and Economic Concerns

The idea of developing transportable avatars – avatars that will be able to move both within and between different virtual worlds – has been raised in popular and academic forums for years. However, to date it appears that relatively little progress has been made on this front. While there are likely technical issues with developing such a large and complex project, it is also possible that some of the issues holding back this endeavor are likely to be economic in nature as companies seek not only to establish technical standards, but economic ones as well.

The Possibility of Transportable Avatars

Certainly some of the limits in developing transportable avatars are practical and technical. Given that virtual worlds are coded in different ways and based on different platforms and engines, the ability to move avatars from one world to another is currently restricted. This difficulty is further exacerbated by the fact that while some worlds are based on the world wide web, others run on their own Internet-based application programs. As a result, standards have to be created (and first of all agreed upon) that would work to universalize avatars and their paths through virtual environments.

Despite the potential issues with developing technical standards, it is also likely that some of these limits are financial, especially if there is a possibility that transportable avatars would be able to move between social worlds and game environments, and could possibly take their virtual assets with them. For companies that profit from their virtual economies, preventing the transport of avatars between virtual worlds can also mean protecting their economies and, perhaps more importantly, protecting revenue.

Virtual Economies in Social and Game Worlds

Perhaps one of the more interesting elements of transportable avatars is the fact that Linden Lab, the developers of one of the biggest virtual social worlds, was reported by Businessweek to be involved in the development of transportable avatars. Linden Lab profits from in-world land and from selling Lindens to residents, both which may prove to be an issue with respect to transportable avatars. The first issue facing the company is whether residents would necessarily want to maintain land within Second Life if their avatar could be moved around between different worlds. The second issue is that if residents were able to purchase currency in another economy (and possibly one that is subject to inflation and devaluation), such as is common within the closed worlds of video games, then move it Second Life, Linden Lab could lose money while the resident could profit.

Beyond social worlds, issues also arise around the possibility of transportable video game avatars. In order to have value to players, video games require structure in order to ensure that the game is attractively challenging. This structure also ensures that gameplay is fair, which makes challenges meaningful as well as making competition possible, since participants are provided a standardized way to judge their achievements relative to other players.

In order to ensure equality, many games close their internal economies to offline influences. While these restrictions can be broken, the intent is at least partially to ensure that players remain equal in their interactions, and are not advantaged over one another. However, the possibility of buying virtual currency for a game world in an environment where these practices are acceptable, then taking it back to the game in question stands to put players who elect to move money in this way – as well as have the money to spend on virtual currencies – in an advantageous position within the game.

Perhaps even more serious, at least from an economic perspective, is the possibility that avatars could generate virtual currency through a game and then move to a world in which these currencies could be exchanged for offline money. In many games riches are easy to obtain through the completion of quests and the sale of “loot” left behind when monsters are killed. Under this system, it could be possible for players to quickly generate a wealth of virtual currency to be moved and then traded for offline money, effective generating money for nothing.

Moving Forward

While it is possible that the development of transportable avatars will happen in ways that are, as of yet, unanticipated and even unexpected, the structures of virtual worlds, avatars, and economies as they currently exist are not necessarily amenable to these changes. Although these issues are not insurmountable, they do present a number of concerns around the development of transportable avatars that will need to be answered prior to the widespread development and availability of these virtual entities.

Given the possible issues with avatars, assets, and currencies moving within and between drastically different virtual worlds, there remains a need to consider not only the technical implications of such a project, but also the economic ramifications. Certainly some of these issues, such as the possibility of generating money for nothing, are of such great economic consequence that they would not make it past even the earliest stages of development. However, they are issues worth considering both if transportable avatars are a possibility in the future, both in terms of their development and their potential effects on virtual as well as offline economies.

EVE Online's 3rd Quarterly Economic Newsletter published

This came out a while ago already, but I missed it until now. CCP Games’ Lead Economist Dr. Eyjo writes:

The 3rd Quarterly Economic Newsletter for EVE Online is now available. This issue has the standard economic indicator of population, ships flown in space, price level reports and market snapshots. The specific topic this time around is the latest news on “Unholy Rage,” the Anti-RMT operation that has been ongoing for several months now.

The EVE economy is doing well with constant growth throughout 2009. As we see in this issue, the biggest changes to the economy have come either from operations against Real Money Traders in EVE or due to game design changes.

Deflation of Virtual Currencies, 2004-2009

I’ve published online a spreadsheet of data on the US dollar values of virtual currencies from eight different games, tracked over time from 2004 to 2009. And a Google Motion Chart also for those who like to look at pretty pictures (though this tends to draw attention to the two outliers more than the main deflationary trend).

To be found at:

Richard Heeks
Centre for Development Informatics
University of Manchester, UK

What Would John Nash Think of Second Life?

The gold standard of MMORPG combatThe gold standard of MMORPG combatSince the 1950s, game theory has been one of the basic ingredients of economic models. Nash’s Nobel-winning mathematical discovery, nowadays known as the Nash equilibrium, opened up a myriad of ways to formally analyze situations where a number of agents try to fare as well as they can in a situation where their interests might be in conflict. Applications range from explaining specialization of animal species to predicting negotiation results between trade unions and industry representatives.

One does not need to be an expert on the workings of virtual environments to notice that most of them seem to thrive on conflict: players are encouraged to fight each other on blood covered battlefields, outbid one another in virtual markets and build alliances, guilds or corporations to get the upper hand on their adversaries. Thus, it is slightly surprising to notice that both game theorists’ interest in virtual worlds as well as virtual world developers’ interest in game theory seem to be nearly nonexistent. In this post I will first try to explain why I think that empirical game theorists and game theoretically oriented econometricians should pay more attention to these hang-outs. After that I will attempt fit myself into a developer’s skin and sketch how understanding game theory might help in designing more enjoyable virtual environments.

Aggregate level theories often have aggregated complexity

There has been much talk about how virtual worlds could serve as living laboratories for economists and other social scientists. In my understanding, however, none of the top 20 economic journals have published any econometric work where economic theory would have been tested using data from a virtual world. There are two reasons why I think that testing game theoretic results might be a good way to break the ice.

First, economic theory resembles physics in the way how it is constructed. One first picks a set of assumptions and then derives results from those assumptions. After that one tries to test these results with empirical experiments. However, controlling the assumptions is much more difficult when the research subjects are people instead of physical particles. Generally, the higher the level of aggregation in the theory one tries to test, the more assumptions there are that need to be controlled. In my understanding, this is one of the core problems of the papers published so far, where researchers have studied economic questions using data from virtual worlds – they all try to test some relatively macro level results, such as the curvature of the demand function or the quantity theory of money. Both of these theories require almost the whole machinery of microeconomics to be fixed to be convincingly tested: consumer preferences must not change, new products should not be added into the product space during the data collection period, relative prices and production conditions should stay constant and so on.

Controlling these variables is of course easier in virtual worlds than in the real world since the worlds operate on computer servers which can practically log all the actions of an avatar. However, none of the few papers I have read do much to counter the so-called missing variable bias, which may arise if some of the ceteris paribus assumptions of a model are not actually controlled. It is altogether surprising to see that the first steps have been taken with theories that remain always difficult to test – however good the data. A caricatured analogy from physics would be that a researcher would decide that a data collected from a rock concert is the best tool for testing theory on wave interference. Though this can probably be done, there are also easier starting points. The pogoing of the lead guitarist can, for example, be used to test Newton’s theory of gravity or the law of motion – and the number of possibly interfering variables will be much smaller than in the wave example.

In contrast to the macro level theory discussed above, game theoretic results are usually derived from only a few core assumptions. They are closer to the fundamentals of economic theory and thus easier to test than the macroeconomic phenomena. Many of the game theoretic results are also used to derive the macroeconomic results. Thus, if we are unable to verify even these low-level results, then any empirical testing of theorems that build on them will be highly contestable.

Second, game theory is often especially difficult to convincingly test in the real world, but the data from virtual worlds seems to be very fitting for this purpose. Macro level data on the real world phenomena is relatively abundant and of good quality compared to, say, people’s behavior in auctions or oligopoly firms’ production and pricing decisions. Both of the latter are usually explained using game theory. For more abstract games, such as the repeated Prisoners’ Dilemma, data on players’ behavior has to be collected by the researchers. The standard way to empirically study such things is to hire thirty undergrads and then organize an experiment where the students play against each other. Such experiments usually suffer from multiple possible biases. Most notably, it is hard to argue how the small sample of undergrads would represent even the student population – not to speak of the players in the actual application field of the theory. Another problem is that the students have to be rewarded for playing the game well, so that one can be sure that the students rank the possible outcomes of the game in the same way as they are ranked in the theoretical model. Ensuring that the rewards are adequate to make the students take the game seriously may become very expensive – especially if one wants to use a convincingly large population of players and play multiple rounds of the game.

As one of the main motivations for people to play online games is to compete with others, virtual worlds are already full of recurrent situations which could be modeled game theoretically. Because of the comprehensive nature of the data, the few core assumptions of these models should be relatively easy to control. Especially the auction houses found in many MMORPGs seem like a perfect source of data for many different game theoretic experiments. Evidently, they can be extremely fruitful for testing results from auction theory and mechanism design. Using a slightly more sophisticated analysis, that data could also be used to study the production decisions of players with an ability to produce relatively scarce items, i.e. to verify oligopoly and monopoly theory. However, the game theoretic use of data from the virtual worlds need not be limited to these fairly obvious scenarios. The competitive nature of virtual worlds breeds a multitude of small subgames that may carry interesting empirical information. Researchers interested in games resembling the Prisoner’s Dilemma, for example, might want to study players’ decisions whether to engage in player vs. player combat or not. In many situations, my personal experience is that players would be better off not fighting, but still one engages the other pre-emptively, as the attacker often has some sort of a first mover advantage compared to the defender. Both end up suffering on the average.

Though the player sample in these situations may still suffer from not being truly randomly taken from the general population, it is definitely more heterogenic compared to the thirty undergrads used in real world experiments. Also, the sample sizes can be thousands of times bigger than in conventional experiments. It is still of course contestable whether the in-game rewards incentivize the players to exercise sufficient effort so that their actions would be comparable to any real-world phenomena. However, if one could show that a game theoretic model works in a virtual world, then it would be quite convincing an argument that in such real-world situations where incentives are even stronger, people should show at least the same amount of rational effort.

Being strategically entertaining

As I mentioned above, many of the entertainment elements of MMORPGs and other virtual worlds build on competition between the players of the game or the inhabitants of the world. When designing these competitive elements, creative use of game theory might help in making this competition more diverse and enjoyable. Nowadays the most popular design pattern seems to be some kind of an elaborate version of rock, paper and scissors. In practice this means that, for example, the character classes or skills of the characters are designed so that every class is strictly weaker than at least one of the other classes but still clearly stronger than at least one of the others. This results in a situation where the competition between the players remains interesting, since no one can beat everybody but everybody can beat somebody.

Though rock, paper and scissors is a good and tried model, it quickly starts to repeat itself. Good knowledge of game theory might help in designing schemes where the gaming dynamic varies from that of the rock, paper and scissors and thus add to the diversity of the world. Actually, the structure where no one is a sure winner is achieved by a multitude of other classic game theoretic structures, and only the imagination of the developer should be limiting their use. The game can be made interesting using very simple means and without increasing the complexity of the game to a level where learning the ropes becomes too big a burden. Game theorists have developed “board games”, such as So Long Sucker or Hex, which are so simple that a three-year-old can understand the rules, but which still remain extremely challenging and entertaining to play. Learning from these examples could be a key to finding alternatives to the rhythmical bashing of the number keys which has become the standard way how MMORPGs are played.

Another reason why virtual world developers might be interested in game theory is that it can be used to design the rules and game mechanics in a way that results in less unwanted or malicious behavior. From a business perspective, the developer wants to create an environment which people find so enjoyable that they are willing to pay for it. As the worlds are complex and competitive environments, it is more a rule than an exception that some players always find a way to abuse the game mechanics in ways that benefit them but harm the great majority of users. When these situations emerge, one can usually identify and repair the mechanics in a way that stops the abuse. This can often be done without any knowledge of game theory. However, better understanding of strategic behavior could help in designing the mechanics so that the detrimental behavior is impossible in the first place. If such broken mechanics emerge despite all the careful planning, there often exists multiple ways to solve these problems. However, the solutions may have different effects on the game-play. Game theory, and mechanism design in particular, could also be used for finding the optimal way to repair the broken mechanic.

Let me give you an example from World of Warcraft. This example might seem a bit too obvious but I wanted to keep it as simple as possible. A part of the competition between players takes place in what is called Battlegrounds (or bgs). In bgs, two teams of 15-40 players battle each other in varying settings. The teams are allocated in such a way that players of approximately the same level are teamed up to fight others in the same level bracket. This way, the designer tries to keep the fights interesting for both, high and low level characters. However, some time ago a trend called twinking became popular among some of the players. It meant that an owner of a high level character would start a low level character. Then he would use his high level character’s money and some help from his high level friends to equip the low level character with as good gear as possible. Then he would take his steroid-pumped midget to the bgs with predictable consequences. The high level player’s low level character had an unfair advantage compared to those who had just started playing the game. This alienated the new players from especially the player vs. player content. The game developer then tried to solve this problem by making the characters collect experience also from the bgs. This meant that the twink could not stay in the low level bracket for a very long time, because he would eventually level up from all the experience gains. As the level of a character also dictates the level of the gear which he can use, the twink’s carefully chosen gear would soon be too weak to make a difference in the higher level brackets.

Obviously, this was not the first best solution to the problem. Now the new players were better off, but the time invested in the twinks was lost and so was the new and entertaining way of fighting with the low level characters. The developer ultimately understood this and introduced a new mechanic where the player can choose whether his character accumulates experience in the bgs. Then the players who choose not to take accumulate experience are teamed with and put against other twinks. This way the twinks have an incentive to reveal their type and they can then be separated from the more casual players. Thus, an ok solution was ultimately found through trial and error. The situation, however, resembles the so called screening and signaling games where a principal tries to separate different types of agents by offering them choices which are designed so that it should be optimal for each agent to choose the option that was meant for her/him. Thinking the example using the signaling framework might yield even better separating solutions. Especially so, as many twinks still choose the easy way and play their bgs among the normal players.

Gambling and econometrics in the new issue of Journal of Virtual Worlds Research

Journal of Virtual Worlds Research, an online outlet for virtual worlds -related “think pieces” and scholarly papers, has published its sixth issue, titled Technology, Economy and Standards. Below is my selection of economy related papers from the issue, with comments.

Payback of Mining Activities Within Entropia Universe

Markus Falk, Daniel M Besemann, James Michael Bosson

In subscription-based virtual worlds the fee a user pays for participation is clear. However, in worlds in which the provider’s revenue is generated via transactions made by users using a real in-world currency, lack of transparency in the underlying mechanisms can make it difficult for a user to gauge the service fee being paid. This paper studies the payback of mining activities within the virtual world Entropia Universe, with an aim to determine the cost of participation in this activity for the user. Entropia Universe developer MindArk estimates the normal service fee for an active user averages at $1 per hour. We compare our findings to this figure and observe how transactions between players can affect a user’s returns. A statistical approach is employed, based on a large number of data points acquired by two Entropia Universe avatars. A theoretical mining-returns model is also created, consistent with our data sets, and is used to make predictions about general cost and profitability for Entropia Universe miners. These methods could be used to analyse the economy of other activities in Entropia Universe, and possibly activities other virtual worlds.

My comments:

This paper nicely summarises the Entropia Universe economy, which is described as a game of chance played against the house. A level of skill is required to maximise one’s chances of winning, but in the long run, the house always wins. Since Entropia’s virtual currency is redeemable for real money, it is essentially gambling. Blackjack seems to be the the closest comparison that comes to my mind.

The empirical part of the paper is a curious effort of reverse engineering the loot probability distribution set by the game’s programmers. It represents a sort of natural science of virtual spaces: meticulously executed, but of dubious scientific value, because no new knowledge is created (the programmers know the loot distribution, even if they won’t tell). The paper would have been tremendously improved if the authors could have shown what useful or interesting implications flow from this loot distribution table. For example, the results might have been linked to behavioural psychology, gambling studies or business model research. I hope the “Journal of Virtual Worlds Research” does not stand for “journal of research on how the laws of nature work in virtual spaces”.

Still, this is one of the better papers of the issue. For me, the most interesting parts are the (unsourced) descriptions of Entropia Universe’s players’ own conceptualisations of the activity they are engaging in, and of the approximately $1 per hour which they are paying for it.

Measuring Aggregate Production in a Virtual Economy Using Log Data

Tuukka Lehtiniemi

Virtual worlds typically contain systems of resource allocation, production, and consumption, which are often called virtual economies. The operator of a virtual world clearly has an incentive to monitor the virtual economy, and users and outside observers would benefit from e.g. temporal or cross-economy comparisons. Standard methodology of computing macroeconomic aggregates for virtual economies would allow this kind of analysis, but such method is currently unavailable. This study fills this gap by employing the concepts of national accounting and unique log data from a virtual world. In particular, the focus is on virtual economies where the production of new virtual goods takes place as the users expend inputs to produce predetermined outputs along predetermined production paths. The major MMOGs fall into this category. Previous attempts on measuring the aggregate production of a virtual economy have been based on non-standard method and externally collected data. In virtual economies the operator can collect extensive data automatically, a characteristic feature that should be reflected in any standard accounting scheme. Macroeconomic aggregates for a national economy are computed using the UN System of National Accounts (SNA). It is a standard accounting system, and its probably most quoted outcome is the gross domestic product. The most relevant borderline in SNA lies between the national economy and the rest of the world: domestic production is included, whereas foreign production is not. SNA cannot be directly used in a virtual economy, as the concepts of “domestic” and “foreign” are not applicable. In this study, the concepts and methods of SNA are transferred to a virtual economy context. The relevant distinction in a virtual economy is made between production by the users and the creation of goods by the virtual world code. Application of the concepts of SNA and flow chart analysis result in an aggregate measure called the Gross User Product (GUP), which measures the value of the aggregate output of production activities – of both goods and services – by the users of a virtual economy. In the empirical part of this study, the potential of GUP is demonstrated by measuring it for the virtual economy of EVE Online based on extensive log data collected by the operator. Temporal comparisons are performed after purging the GUP values from the effect of significant deflation using a chained Fischer index. A 50% real growth per user is observed for the first half of the year 2007. The composition of GUP has remained rather stable during this period of significant growth. The concept of GUP is general, and it can be used for quantifying virtual economies other than that in EVE Online on the macro level.

My comments:

This paper is one of fruits of HIIT’s research collaboration with CCP Games. In my opinion, Castronova et al. would do well to read this papers’ criticism of the notion of calculating GDPs for virtual economies.

Machine Ethics for Gambling in the Metaverse: an “EthiCasino”

Anna Vartapetiance Salmasi, Lee Gillam

Abstract— Online gambling produces a substantial turnover. Unfortunately for potential virtual world gamblers and gambling organizations alike, US law had forced the closure of gambling in the Second Life virtual world. However, an Open Grid Protocol could lead to the provision of off-shore gambling in this virtual world. Aside from legal issues, online gambling generally gives rise to ethical issues relating to prevention of harm. We considered the combined legal and ethical issues, and have proposed and begun to construct and evaluate a system with computational oversight: an ethical advisor. The system is grounded in recent research into Machine Ethics, which may offer insights into other legal and ethical matters, and provides a framework for responsible gambling in our EthiCasino (ethical virtual casino) in Second Life.

The Genesis of the Virtual Goods Model

Guest post by Matt Mihaly on how the virtual goods sales model was born.

Matt Mihaly is a CEO and Creative Director of Sparkplay Media and Chairman (formerly founder, CEO, and Creative Director at Iron Realms Entertainment.

The virtual goods/microtransactions model dominates Asia and is
now far and away the most popular business model for online games in
the West with the meteoric rise in popularity of games on Facebook
and MySpace. Twelve years ago, in ’97, I pioneered this model
at the company I had founded two years earlier – Iron Realms
Entertainment – out of pure necessity. This is the brief
history of how the virtual goods model, and soon thereafter the dual
currency model, came to be.

In 1995 when I started developing Iron Realms’ first MUD –
Achaea, Dreams of Divine Lands – my plan had been to charge for
the game the same way that most online games of the day did –
by the hour/minute. Bandwidth costs had historically been quite high
and it made sense to charge players based on their activity. In 1996,
however, AOL went from charging for each minute of use to charging a
flat, monthly rate for its services, including, at the scale of the
time, popular MUDs like Gemstone from developer Simutronics. This
certainly put the kibosh on my plans as once AOL went to unlimited
use consumers stopped accepting hourly models, at least in the US.

Achaea opened to the public in September 1997, and based on what
players were telling us there was no way we were going to be able to
charge a mandatory subscription and retain many of them. We just
didn’t have anything at that point to get a good deal of
players to take out a credit card and subscribe. No big IP, no money
for marketing, and frankly the game was pretty rough at launch. I
believed in a “get it out there and iterate” approach,
but there hadn’t been enough iteration/polish added to convince
players to pay a mandatory fee to play.

What I did instead was decide that I’d run Achaea for free,
which is the norm in the MUD world since 99%+ of MUDs are run as
hobbies, and sell a virtual currency called ‘credits’.
Players would use those credits to buy ‘lessons’ in-game,
which are used to acquire new abilities – everything from creating
voodoo dolls of other players to mastering the use of religious
shrines as combat weapons. Lessons were also gained by leveling up,
but it wasn’t possible to max out your potential without buying
credits. Interestingly, almost all of our abilities in Iron Realms
are focused entirely on PvP. The great majority don’t even work
on NPCs and involve, by mainstream MMO standards at least, some
pretty strange mechanics. Agoraphobia (panics you when indoors),
asthma (stops you smoking pipes, which are used to cure certain
ailments), epilepsy, implanting subliminal suggestions, secreting
dozens of poisons into your serpentine fangs, all the way to the
familiar swordplay, martial arts, magic, and so on.

Optimizing pricing

This model proved reasonably popular but we were constantly
getting requests from some of our most dedicated players, asking to
purchase virtual items or services beyond the lessons. For instance,
players were asking us to custom-code special houses for them with
one-of-a-kind features like a butler that would circulate serving
drinks, or to create pets with unique behaviors such as a koala that
would hang out in trees and drop down on those passing by, startling

I decided to try an experiment and held an in-game real-time
auction in which we sold a range of custom services/items like the
aforementioned dwelling. To my great surprise, players started
bidding up the items from $25 or so to hundreds of dollars. In the
space of an afternoon the auction brought in around $5,000 –
more than the game had made the previous month. I was the only
full-time person at that point so $5k went a long ways.

Thereafter, we held repeated auctions of custom items but that
quickly became untenable. Creating new functionality (in text MUDs,
cosmetic things are worth a lot less than they are in a graphical
environment generally speaking) becomes problematic on a
player-by-player basis even in MUDs with their very low populations
as compared to graphical MMOs. As a result, we stopped running
auctions and started selling the items within in-game shops for
credits, which is the model all the Iron Realms games maintain to
this day.

The range of items we sell is pretty large. Most are, frankly,
expensive by MMO standards, but it’s how we can afford to
operate and continuously add new content and systems to our games on
a tiny audience – less than 10,000 active players between all four
Iron Realms MUDs, though well over a million registrations….showing
the futility of using registrations as a meaningful metric. Achaea
sells, for instance, a Logosian Broadsword (better than all but the
very best player-crafted broadswords) for 1600 credits –
approximately $480. A Torc of Telepathy that gives you a couple of
offensive telepathic powers goes for 800 credits – about $250. A
magical Box of Chocolates goes for 200 credits – about $65 – and will
generate 18 or so types of chocolate gifts. A Cane of Quickening lets
you walk with a broken leg – breaking limbs is an important
combat mechanic in Achaea – and goes for about $100, while
increasing your friends limit by 5 costs around $8.

As far as the logic of pricing items goes, it’s not
particularly complicated though I’m sure that someone with
serious retail experience could price our virtual goods more
efficiently than we do. In essence, we use a rough calculation that
takes into account whether an item is mainly functional or mainly
cosmetic, and what the magnitude of its effect is. In the case of
cosmetic items, we look at how impressive the cosmetic effect is and
price accordingly. In the case of functional items we look at whether
the item is mainly about convenience or whether it increases a
player’s power over NPCs or, especially, other players. The
greater the effect on PvP, the more expensive the item is. Our games
are very PvP-focused and it’s crucial not to sell items that
will by themselves unbalance PvP to the point that having that item
means you just win a fight without having to employ any skill.

The dual currency model

Even with the introduction of the virtual items that players had
been clamoring for, there were still problems. At that time in 1998,
players couldn’t transfer credits to each other. There were
frequent requests to be able to gift credits, which we’d
occasionally assist with manually, but there was no way to transfer
credits to another player on your own. I can’t remember now why
I didn’t allow it. We hadn’t had serious fraud problems
yet at that point, and I can’t think of any other rationale
that would make sense.

What I did was create the first virtual currency exchange. This
allowed players to trade credits, which were purchased for real
money, for gold earned by playing the game in a sanctioned, in-game
environment. The gold price/credit fluctuated in real-time based
purely on player-driven supply and demand. It’s now referred to
as the ‘dual-currency model’. Overnight, Achaea’s
revenue almost doubled. Suddenly, the untapped demand of the
non-paying players was able to be satisfied via paying players.

In effect, everyone won. Player A who has money but not enough
time can purchase credits from Iron Realms, giving Iron Realms what
it needs – real money. Player A can put those credits on the
credit exchange at whatever price in gold she wants and wait until
someone buys them at that price, or can put them for sale at a price
slightly below the current market price and sell them almost
immediately. The player buying the credits (Player B) spends gold to
get the credits, as he has more time than money. Player A receives
gold – the product of time – which is what she wants, while
player B receives credits – the product of money spent with the game
operator – which is what he wants. Player A, Player B, and the
operator have all received what they want. It’s a win-win-win

Of course, it’s not as if all players feel this win-win-win
situation is how some players view it. We never really had issues
with it at Iron Realms because the business model self-selects for
players who like it, but from almost day 1 there was a lot of
criticism of the model. People claim it breaks the magic circle, that
it diminishes non-buyer’s achievements and that’s it just
feels unfair. I disagree with most of the complaints but that’s
not really relevant. The player perceives what the player perceives,
and it’s not very easy to change that perception. Just as the
subscription model selects for people who are willing to pay
subscriptions, so does the free-to-play w/ virtual goods model select
for people who like playing games for free. It shouldn’t be a
surprise to anyone that far, far more people are interested in
playing games for free than are in paying subscriptions, though that
doesn’t speak to the value of an individual player to a
publisher. At Iron Realms, we average more than $15/month/player but
in most free-to-play games, the average player is worth less revenue
than a player in a $15/month subscription model is.

Compared to the volume of early complaints over the virtual goods
model however, there was almost no dissent whatsoever over the
introduction of the dual-currency model. It was met with almost
universal praise from our players. This should be expected though,
because with the dual-currency model there are no losers –
everybody wins by getting what he/she/they want, from publisher to
paid currency seller to those who buy the paid currency with gold.

The single most important piece of advice I’d give about
running the virtual goods model is that selling near-guaranteed
victory is a bad idea, with how bad determined partially by who your
audience is. It works better in Asia (see ZT Online) than it does in
the US, and tends to work better with a less connected audience than
more connected, such as in the Mafia or Farmville-type games on

Similarly, if you’re going to use the dual-currency model
the most important thing you can do is ensure that you’ve got a
range of desirable things that can only be purchased by your
purchased currency and another range via your earned currency. You
need players to want both types of currency, else there’s no
reason for one side of the gold/credit exchange to trade.

That is, in a nutshell, the genesis of the virtual
goods/microtransaction model. Today, of course, there are many
companies that have employed the model to much greater effect than I
have and it’s great to see the big success stories out there
from Habbo to Tencent to the social games currently eating up
everyone’s free time on Facebook. I don’t think the
‘traditional’ (if something that’s only about 12
years old can be called traditional) subscription model is going to
disappear, but I do think it will increasingly be something
attractive only to very hardcore gamers, who are a distinct minority
of the worldwide gaming audience.

Matt Mihaly is a CEO and Creative Director of Sparkplay Media and Chairman (formerly founder, CEO, and Creative Director at Iron Realms Entertainment. He is known for pioneering the sale of virtual assets in online games.