Bad Ideas: Trying To Build A Marketplace Of Virtual Goods

from the let-me-explain-some-basic-economics... dept

Tue, Dec 18th 2007 2:09am — Mike Masnick

I've seen a few company lately trying to build marketplaces around the idea of selling virtual goods, and the latest one, Live Gamer, gets a big writeup in the Wall Street Journal over its plans to build a marketplace for virtual goods and characters from online worlds. This is hardly a new idea, as there's been significant trade in these types of goods either on company approved sites or more informally through sites like eBay. However, it seems quite dangerous to base an entire business on this concept. The economics of virtual goods gets screwed up very easily once you realize that there are no truly limited resources within virtual goods. Sooner or later people figure out how to copy virtual goods, just like they've learned to copy music and movies -- and suddenly the idea of charging directly for those goods becomes a lot more difficult. It's just basic economics. The VC firms betting on this new concept seem to believe that the company (or the various gaming companies) will somehow be able to hold off this economic reality, but that seems incredibly risky. The entire market is based on an economic model based on false scarcity, and that seems quite dangerous. It may work temporarily, but there's a big reality called "infinite supply" that's likely to make any such model come crashing down eventually.

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Filed Under: economics, marketplace, virtual goods
Companies: live gamer

19 Comments

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Kevin, 18 Dec 2007 @ 3:25am

Agreed
As someone who has played a number of virtual world games, the only thing that is for certain is that the virtual economy eventually crashes because:

a. Someone discovers a bug that allows to to clone/dupe items/resources in game and sell them for money.

b. Because there is no scarcity, over time the "markets" become flooded to the point where even the items/resources that were supposed to be the most "rare" are common.

Not to mention that in most cases, the game companies are quite adamant in their ToS that the company owns all of the data in the game, not the players.
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dorpus, 18 Dec 2007 @ 4:12am

Economics of Irrationality
But then, why do people spend hundreds of dollars on handbags that look exactly the same as $5 handbags at Walmart? $300 on sunglasses that look exactly like $10 ones? Seriously, I was at a xmas party last week, and my gf's $5 handbag was on the same table as a prep bitch's handbag, which she had told everybody cost a fortune. In the dim room, they looked exactly the same. People pay to buy status symbols.
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Gunnar, 18 Dec 2007 @ 4:41am

Well, as far as the handbag goes, it means that either you're a guy who can't tell handbags apart (like me) or the prep's handbag is old enough that somebody made a knock-off.

But the fashion industry is driven by knockoffs, because Wal-Mart selling a bag that looks like a Prada one forces Prada to come up with a new bag.

And I've rarely found cheap sunglasses that look decent. And the knockoff Oakleys I bought in New York while in high school lasted about two weeks before the paint started to peel. The lenses scratched easily too. Knockoff quality is usually suspect. Those sunglasses usually come with a warranty.

You usually get what you pay for, and everything that costs money looks irrational to people who don't care about it.
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Elohssa, 18 Dec 2007 @ 5:23am

Re:
The inverse being that some things are irrational, and yet some people still care about them, and pay.
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Wolfger, 18 Dec 2007 @ 5:29am

Re:
You bought lousy knockoff Oakleys ;-) My $10 knock-offs lasted a good year before the "paint" started to peel off. But it's all good. I'm harsh on sunglasses... they rarely live for a year regardless of price paid for them. Or I lose them.
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Derek (profile), 18 Dec 2007 @ 5:44am

Re: Economics of Irrationality
It is not the same. With digital goods, you get a 100% perfect replica. The handbag may look the same in a well lit room, but it is not the same. If you offered your GF the choice between a real bag and a fake one, the cost being the same, which one would she choose? Probably the real one because she knows it's better quality, maybe comes with a warranty, etc...
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Just Me, 18 Dec 2007 @ 5:56am

Virtual Goods
I think the biggest risk involved in such a thing is the volatility in the gamer space to begin with. Sure you can make a lot of money today trading WoW gear/gold/toons etc but how long will that fan base be there?
You will constantly have to be jumping from game to game - like the gamers themselves - as the next big thing becomes popular.

This seems fine fo the eBayers of the world but to a company that seems like it might cause a lot of overhead having to re-hash your business every 6 months.

WoW aside; how long does a "virtual economy" stay strong?
Not nearly as many people play Diablo2 or Ultima Online as they used to - are they still popular enough to be profitable?

Just seems like a whole lot of risk there.

One thing I must give props for is Blizzard's efforts to keep their economy in check. A lot of the things in the game have a cost associated in an effort to keep inflation down.
So far it's been quite successful.
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not the virtual goods, 18 Dec 2007 @ 6:03am

You are buying time/effort
I am a recovering game addict (4 years of EverCrack and 3 of World of Warcraft) so I know a little bit how these virtual goods markets work.

You aren't really paying for the virtual good, rather you are paying for the time/effort it took to acquire the good. Everything in these games is accessible to everyone willing to put the time into obtaining them. Play long enough, gather enough like minded folks to play along with you and you can get any item in these games.

So what you really buying in the virtual market is labor hours and that isn't an infinite good.

I'm wondering how these guys intend to get around the game makers EULA. Nearly all of them restrict or forbid trading of goods/money outside the context of the game.
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dorpus, 18 Dec 2007 @ 7:17am

Re:
To the contrary, my gf has spent a lot of money on designer brands before -- but they turned out to be made of the same shoddy material as the Wal-mart goods, and fell apart in two weeks. While designer brands spend a lot of money on advertising an upscale image, the reality is that they are made in the exact same factory in China, with only a different logo glued on.

p.s. Wal-mart goods are hit or miss, some have lasted a long time.
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Anonymous Coward, 18 Dec 2007 @ 7:19am

Mike your are correct but the ppl trying to sell virtual goods usually count on some sort of branding.

now the key here is to be able to differentiate your "original product" which is obviously not a piece of cake
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Brad, 18 Dec 2007 @ 8:59am

You know what this whole thing comes down to? Whatever you're selling is only worth what somebody will pay you for it. This is why classic cars get sold on Barrett-Jackson for tens or hundreds of thousands of dollars, sometimes even millions, even though the cars cost less than $5000 when they were new. The cars honestly are not worth that much, but people seem to love putting a price on things like being respected or envied for having a cool car or a rare car, and so on.

This translates over to virtual online goods too. As long as people desire things, they will pay money for them, regardless of whether they actually have anything tangible to show for their expenditures. This is because people are stupid and, being stupid, buy things that offer no long-term benefit, but instead please them for but a moment's time.
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Numpsi, 18 Dec 2007 @ 9:26am

Here is my humble opinion on the matter and I might be completely wrong:

A agree with one post above, one of the most important things you buy is the time you save by not being forced to run around and kill stupid and boring monsters. You cant imagine how bad it is to run around and kill hundreds of them just to earn enough money to get the next cool item.

Additionally, I just do not see how items are going to lose their rarity. Game comanies keep a close eye on the money and item supply of the worlds they create. Its almost like managing a real economy and they use damn sophistictaed statistic and game-balancing software (monte carlo simulation anyone?). If they discover that people are suddenly able to copy items for free and within seconds they will try to fix that and ban those wo created them and take the items away from those who obviously took them (of course they cant catch all). And this has already been done in MMOGs (eg. Asherons Call).

But honestly, to catch the "evildoers" is the least of their problems. If copying ever happens, you can see the games going down. What is there to do in 95% of the available MMOGs if you are not able to be better than someone else by looking cooler and getting rarer items than him? Dont you think there is a reason why people come back even if they have reached the maximum level of their characters (a hint: it has to do with being unique and possessing things few other people possess) other than just meeting friends online? Of course you can log on and chat and run around like a fool with your friends. But what are you talking about if not the newest loot (=items dropped by monsters) or new armor introduced into the world?

The biggest risks for new virtual item trading platforms I see are:

1. unclear legislation (China took the lead in favor of virtual marketplaces by deciding that items belong to the players)
2. Ebay abandoning their policy of banning item trading and entering the market
3. Game companies opening their own marketplaces to generate aditional revenues (already done in China)
4. Game companies coming up with a system that "really" hinders item trading and selling outside the game - no idea how they will ever do that flawlessly (they did this a little by adding "honor points" to WOW which you need to get certain items, so buying gold online and then just buying the items doesnt work for all of them anymore).

Please feel free to instill some knowledge into my head ;).
Cheers
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Colg, 18 Dec 2007 @ 9:50am

"Not the virtual goods" is at least partially correct.

While the Items do represent time and effort the thrust of the article seems to be that Virtual Characters and items can be copied:

"there are no truly limited resources within virtual goods."

Second life not withstanding, I have only seen Item duping occur in one game in the past 10 years. SWG followed with a mass banning and corrected the security flaw. At the time there was a lot of talk about how the economy's on the servers in question were ruined, but they corrected themselves in relatively short order.

while The goods in question are only numbers stored on a hard drive somewhere, the deciding factor is the control the gaming company has over the environment. To draw a real life parallel:

Diamonds are not rare geologically speaking, yet they are the most concentrated form of wealth on the planet. Why?
1. The diamond cartels have control of the supply.
2. The very successful advertising campaign that created a demand.

I think the biggest obstacle a company that buys and sells virtual goods and characters faces is the stigma associated with having purchased them. Core gamers tend to view these types of businesses and their customers with contempt often to the point that those that are perceived to be farmers (those that play only to obtain items and virtual currency to sell) and their customers are often ostracized.
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Numpsi, 18 Dec 2007 @ 10:12am

@colg:

concerning the "farming" perception you mentioned, I think thats one of the good things about marketplaces (I speak about marketplaces I mean P2P marketplaces where players sell to players like on Ebay). Those transparent (and up to 30% cheaper, cause they dont have to pay the farmers) places to buy gold and items might be accepted easily and benefit both parties of the transaction.
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A girl who buys designer bags and plays games, 18 Dec 2007 @ 10:48am

You can always tell
There is an easy way to tell the girl with the knock off bag vs. the real one: Look at the rest of what she is wearing. Is she wearing a cheesy Forever 21 outfit? Is her jewelry from Claires? Fake bag. (granted guys usually don't care about the fake vs. real bag debate, but handbags are bought for other women not for men)

THE POINT: You can also tell a fake with players who buy virtual goods online. Play against, or with, them for 30 seconds and tell me you can't spot the fake.

There will always be wannabes and a market catering to them. Doesn't mean this particular business model will succeed, but there is a market there.
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Niner, 18 Dec 2007 @ 10:56am

Risks of Virtual Goods
From a first-hand experience: I worked for a company that allowed members to create and sell virtual goods. There were a handful of developers who were responsible for a majority of the items in the catalog. So much so, that when one of them decided to drastically lower their prices the whole economy nearly fell apart.

Imagine if Ford decided to start selling all of their cars at 50% off. That would tend to alter customer's idea of the value of cars in general. Other car makers would have no choice but to lower their prices as well. A similar thing happened in this case, only the other developers could not lower their prices unless they wanted to violate the TOS. This developer was able to lower her prices by taking advantage of a bug in the system that wasn't caught until those items had been selling at huge discounts for a few days.

The company I worked for had to make a tough decision. On the one hand, they had to honor their commitment to keeping the economy running fairly so smaller developers could also participate. On the other hand, this developer contributed a huge amount of revenue to the company via a 'tax' for every item of theirs that sold. That developer went so far as to threaten to pull all of their items from the catalog which would've crippled the economy even worse. To go back to the car maker analogy: Imagine if Ford made all of the frames that other manufactuers used to build their cars but then they decided to stop making frames.

So, faced with this tough decision the company attempted to appease both sides which left no one happy. The developer felt that it wasn't her fault there was a bug in the system that allowed her to lower her prices so she shouldn't have been punished. The other, smaller developers felt that the company had given this developer a slap on the wrist for what amounted to lost revenue on their part.

In the end, a lot of the best developers stopped creating virtual goods for this company while the one big developer who broke the rules continued to prosper - minus her biggest competition.
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chris (profile), 18 Dec 2007 @ 11:36am

what about the games terms of service?
most online games have clauses in their TOS that preclude ebaying of items and accounts. what happens when devs start using your market place to find accounts to ban?

nothing says "stay the hell away from our market" like a high profile mass banning.
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Numpsi, 18 Dec 2007 @ 12:03pm

I dont know how easy it is to get to the corresponding game account if you only know his marketplace alias. This might only be a problem if you sell a specific character but its quite a pain to check all the character descriptions and match them with characters stored in the game database.
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Technofear (profile), 19 Dec 2007 @ 12:00am

Duping
@Colg

Most game companies do not advertise the exploits. Many ban accounts even mentioning them.

WOW had a gold dupe bug.
Turbine's games have all suffered from a dupe bugs, (search utube for examples).

Point being that there was no (real) money in creating these items, compared to the time and cost.

Will this new site create the incentive to hack these games?
What kind of effect will that have on the players?
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