I’m writing this at Shanghai Oriental Riverside Hotel, where the first ever Game Developers’ Conference China has just ended. By all accounts the event was a success: there were over 2000 visitors at the exhibition and some 800 attendees at the conference. The exhibition part was largely about outsourcing, recruitment and training, but also showcased neat Asian titles like the phenomenally popular online dancing game Audition. All the big Chinee MMO companies were present, as well as EA, Ubisoft, CCP and others.

For me GDC China was particularly interesting because of the emphasis on online gaming typical of China. I was able to contrast the more theoretical musings of State of Play V last week with practical insights from game developers. For example, there were discussions on how to make Chinese titles palatable to the Western audience and vice versa; World of Warcraft’s big success here shows that it’s possible. This is a practical approach to “bridging the East and West” that SoP V called for but didn’t yet deliver so much.

My own talk was about real-money trade of virtual assets and the value drivers behind it. As games and community services are increasingly moving towards virtual asset sales as a revenue model, they need to think about what makes assets desirable in a given context. I also talked about “virtual asset business ecosystems” a bit, suggesting that developers not be jealous of other people making money off their platform, if at the same time it increases the total value of the system (e.g. Tencent QQ, IRC-Galleria and Second Life). The audience was great and I got some valuable feedback as well.

MMO folks also talked about security, which is becoming more and more important as game operators turn into virtual banks. “Account Protection Green Alliance” is some sort of Chinese industry group that promotes standards in MMO security technology.

Mobile gaming was another emphasis area, with a large presence from Nokia and a talk by Petri Talala of Futuremark about future mobile 3D, among others.

In the outsourcing track, Fang Zhou of Niko Partners told us that junior testers in China earn about 2000 RMB per month (about 200€) and artists 4000 RMB per month (400€). Professionals with six or more years of experience can make 12000-14000 RMB per month (1200-1400€). This is one East-West gap that the Chinese are working hard to bridge.

At some point during the discussion described in the previous post, Joshua Fairfield wanted to contest the status value of high-level characters by arguing that there is no correlation between the the level of a character and the skill of the player. Be that as it may, I think he eventually conceded that there may still be status value, if for no other reason than that the player has spent a lot of time leveling, and is thus a member of what Joshua called “time aristocracy” (which I think is an excellent term by the way).

We can question the status value from our own standpoints (“they are just kids with too much time”), but it is nevertheless real for some MMORPG players and may be worth protecting by operators that wish to cater to that segment. To explore this point a little further, I thought I would re-post a comment I left in a Terra Nova discussion long time ago.

A perspective from economic sociology

In any given pre-modern society where consumer goods were very scarce, there was a strong link between consumption and identity. A person with a sword is certainly a member of the warrior class. The one with the crown is the king. This way, you could read a person’s social identity from their possessions.

However, as societies became more affluent, it became possible for masses of people to obtain goods previously available to a few only. For example, you no longer had to be a lord to be able to afford a purple coat. This threatened the ability of goods to establish identity.

The higher classes stood to lose if identities were to be “evened out”. As a solution, in many societies (e.g. Romans, Tudor English, Tokugawa Japanese) the higher classes tried to enact and enforce sumptuary laws, rules that determine what each social class or group is allowed to consume: e.g. color and material of clothes, food served at banquets, neighbourhood to live in.

This story can be read as analogous to the rise of RMT in MMORPGs. Before RMT, you could read something about a player (playtime at the very least) from the possessions of her avatar. But when anyone can obtain anything using RMT, this link breaks down. Players who are afraid of losing the means of establishing their high level social identity are thus calling for sumptuary laws (forbidding RMT). The question is, should operators oblige them?

We can try to look for insights from what happened in real consumer societies. Sumptuary laws didn’t last. Some things remain exclusive (very expensive goods, rare goods, hand-made goods etc), but mass-produced commodities are the norm and choice is almost limitless. So what happens to social identity when anyone can have the purple coat?

One way of seeing it is that we move from the possession of scarce goods to the possession of scarce information as the means of establishing identity. You can choose any good you want, but in order to send out the right message, you have to choose the right one. Commodities thus become signs, and fashion is born. Taste classifies the classifier, is Bourdieu’s famous quote.

Who determines which goods/signals are the right ones? One way to see it is that it’s part of a kind of class struggle. Higher classes seek to differentiate themselves from others by adopting new symbols, and others seek to de-differentiate themselves from the higher classes by imitating their symbols. In order to maintain the distance, higher classes must constantly adopt new symbols and devalue old ones, leading to fashion cycles (Simmel).

Others may also attempt to subvert the leading position of the higher classes by offering their own set of symbols as a preferred alternative (Featherstone). This leads to fragmentation: there is no single fashion, but multiple fashions. Social identity is no longer a point on a rather one-dimensional axis (high class-low class), but an area in a multi-dimensional matrix. This corresponds with contemporary notions of diversity and egalitarianism as the preferred alternative to class society.

Can we draw some insights from this to MMORPG RMT? Well it’s a stretch, but I’ll indulge myself a bit. Identity and status will not disappear even if everything is up for sale. Strong social pecking orders and factions emerge in virtual worlds like Habbo Hotel despite the fact that almost everything can be bought there by anyone. Habbo resembles contemporary consumer society in this sense.

But what if you really want to have a game that resembles (and I use this word in the loosest possible sense) a pre-modern class society? What if a simple hierarchy established by possessions (e.g. levels) is what you would like?

Even in market capitalism not everything is for sale. Markets are still socially conditioned, just not so much as they used to be. Within a group of six people playing a tabletop RPG, it is typical to observe a social norm that forbids players from engaging in RMT, even if trading would be economically feasible. Nothing says MMORPGs can’t forbid RMT as well if that’s what the operator wants.

But in an MMORPG with thousands of players, it seems that such norms are difficult to enforce — incentives to trade are strong and the norms weak. Prudent developers design their games in such a way that RMT doesn’t break them. I think it’s also worth thinking about how you could actually embrace RMT. Even if purple coats are no longer privileged (at least not this season), contemporary society can still be a lot of fun.

I am not intensely interested in MMORPG secondary markets that exist despite the operator’s wishes, and I certainly don’t have any agenda of legitimising them. But after the last SoP V workshops yesterday there was a rather lively coffee table debate on RMT in MMORPGs that resulted in a neatly economistic re-telling of that story. I’ll try to convey the tale without misrepresenting the particpants too much.

Already during one of the panels Joshua Fairfield reminded us of the positive aspect of RMT: trade creates welfare gains (“Every time you stop someone from trading, God kills a kitten”, as he politely put it). Richard Bartle obviously wouldn’t have any of that and brought up the negative aspects, centering on the violation of the achievement hierarchy associated with character levels.

As far as I know, whatever negative effects RMT has on other players can be modeled as a negative externality (as Castronova originally did). The net welfare gain from RMT is then the welfare gain from trading minus the externality. The result is often believed to be negative.

So far the usual story. But an important point that came up in the discussion is that both of these variables are a function of some measure of the prevalence of RMT in the game (the negative externality might also be a function of simply how visible RMT is).

In conditions of high prevalence/visibility, the negative externalities are usually assumed to be greater than any possible trade gains. But in lower degrees of prevalence, trade gains may well be greater than the externalities. A point where a marginal increase in prevalence results in more negative externalities than trade gains is the efficient level of RMT (Figure 1) (i.e. Pareto optimal, given a few assumptions). Where this point is depends on the preferences of the player base.

Can we link this neat construction with reality in any way? MMORPG operators have an interest in pleasing their customers. Assuming efficient pricing, player aggregate welfare correlates with the operator’s revenues. Joshua and others pointed out that MMORPG operators are not doing everything in their power to stop RMT. For example, they are not commonly banning players for buying, only for selling. A certain level of RMT is tolerated as long as it does not become too overt. This could indicate that there is indeed an above-zero efficient level of RMT towards which operators are gravitating.

A special case, a game where the efficient level of RMT is zero, I will call a “Bartle world” (Figure 2) (the term was used in the discussion to connote a slightly different concept, a world where the prevalence of RMT is zero). Joshua asked, do Bartle worlds exist at all?

If you enforced a ban on RMT with such zeal that every single trader would get caught and have their limbs removed (as per EULA), wouldn’t you be left with a player base that consist of 100% RMT haters, thus creating a Bartle world?

I think it was Dominic Zou who pointed out that it’s not like there are two populations out there, RMT lovers and RMT haters. Instead, people act with various degrees of schizophrenia, applying a different standard to themselves and to others. Gains are reaped by traders and costs borne by others. The same person can simultaneously both appreciate the gains and resent the costs.

Therefore, even if you were able to build a world with zero RMT, that might not be the efficient level of RMT. The player base might still be better off with a teensy bit of RMT. This is not to say that Bartle worlds are impossible, just that they seem unlikely.

Does this mean that designers should not attempt to build MMORPGs with zero RMT? Not necessarily. Operator’s costs like the cost of customer service time spent on RMT fraud and the cost of enforcing an RMT ban were not considered. The most important factor not included in the model was revealed by Richard Bartle when he said, “RMT is not part of the message I want to convey” or something to that effect. If you are creating a work of art instead of a commercial product, economic performance may not be a design criterion.

You may also be interested in a paper by Jun-Sok Huhh from last year that uses the same economic concepts of externalities and welfare in a completely different model involving RMT.

I’m writing this at Singapore’s Marina Mandarin Hotel, where the State of Play V conference has just finished. In all aspects the conference managed to exceeded my high expectations. There were several interesting panels with some new and suprising speakers, new ideas and even some critical analysis. I got to meet many people whom I’ve previously known only virtually, and make lots of great new acquaintances. The conference organising was top quality and the food perhaps the best of any conference I’ve been to.

Personally, I was thrilled that the conference was held in Singapore. It’s my first time to the island country since 2004, when I finished a one-year IT law course at the National University of Singapore. Even my professor from that time, Daniel Seng, was in attendance. But before the conference, lots of people were asking, “why Singapore?”

One of the main themes of the conference was connecting East and West, and Singapore is not a bad location geographically. HiPiHi had a strong presence but I didn’t see anyone from the Chinese or Korean MMOG giants. There were some interesting non-industry people (including judge Unggi Yoon from Korea and professor Hiroshi Yamaguchi from Japan) and a bunch of Westerners with one leg in East Asia (Ken Brady, Guntram Graef, Alexander Markowetz and myself). Singaporeans were strongly represented. I think it’s a good start and I was happy to hear organiser Aaron Delwiche describe this as the beginning of a long engagement as opposed to a hit-and-run operation.

It also turns out that the Singapore government is investing in virtual worlds, both in terms of encouraging game companies to set up camp in Singapore as well as buying land in Second Life and trying to figure out if something useful could be done with it. Representatives from the Infocomm Development Authority and other agencies seemed to know reasonably well what they are doing. In a panel on regulation, Charles Lim Aeng Cheng from the Attorney-General’s Chambers’ law reform division left a particularly good impression by actively bringing into discussion challenging topics like dealing with adult content.

I’ll write another post soon about some takeaways from the conference. Meanwhile, check out Thomas Malaby’s post on discussions regarding brands in the first panel.

The Ludvig von Mises institute, an advocate for the Austrian line of economic thought, recently published an article in which Matthew Beller analyzes the Second Life (SL) economy. I’m happy to see such work done on virtual economies, and published on a forum that I suppose also some mainstream economists read.

There are also some other analyses of the SL economy available. Randolph Harrison has previously written an article that’s somewhat related to the Beller’s article, both of them dealing with Linden Lab’s tendency to intervene in the “foreign exchange” markets of Linden Dollars, the internal currency of SL.

Beller analyzes the supply of L$, and notes that there’s a considerable amount of L$ created by Linden Lab without economic production or flow of real wealth into the SL economy. The author calls this the L$ budget deficit. Such budget deficit occurs when the weekly L$ stipends, handed out by Linden Lab to the premium members (or residents) of SL, exceed Linden Lab’s revenues. On the aggregate, 33 % of the current L$ supply has been created by running such budget deficits in the last year and a half.

Beller argues that this shows that Linden Lab has been inflating the L$ supply, and gives two possible future scenarios, both of which will lead into a slump of some sort:

1. Linden Lab will stop running significant deficits, which results in less L$ available to spend, which in turn results in slowing economic activity.
2. Linden Lab will continue running budget deficits until the residents will recognize the L$ frailty and there will be a “crack-up boom”, in this case a run away from L$ and for the US$. In this scenario, if Linden Lab wishes to maintain their peg on L$/US$, they would basically have to have considerable US$ reserves to be able to stop L$ from depreciating.

There’s a parallel here to Randolph Harrison’s blog posts about half a year ago. In the post, Harrison condemned Linden Lab’s exchange rate interventions. Though the main arguments in his post have to do with other issues, he also notes that Linden Lab have been constantly selling L$, maintaining their peg on the currency – where maintaining the peg has also meant collecting seigniorage.

According to his analysis, Linden Lab will have to start buying back L$ in the future. Using the time series of L$ purchased per user, which has had a declining trend, the author concludes that in order to maintain Linden Lab as a net seller of L$, the growth of the user base of has to reach rates that are, basically, impossible to reach.

There are two scenarios here, both dealing with the interventionist policies in SL, and both leading to similar consequences. As I see it, the first of the scenarios is laid on the idea that a L$ backed up by a US$ transaction will not in any way dilute the value of all L$ in circulation, whereas the L$ created without a US$ transaction will. To follow author’s logic, a reader should make the assumption that the continuing process of injecting non-US$-backed L$ in the economy will, at some point, inevitably lead into the users wanting to get rid of their L$ holdings.

In the second scenario, I figure the assumptions (or observations) behind the conclusions are the following:

• The producers of virtual items, and providers of services, desire, on the aggregate, cash their revenues out of SL – that is, they produce to make real-world profits
• The amount of spending in SL is decreasing compared to the desire to cash out
• The number of new users, assumed to spend on the aggregate, will have to grow unrealistically fast in order to maintain the demand of L$ above the supply

I think there’s good material in both of the analyses: they’re among the few transparent and analytical approaches to virtual economies I’ve seen so far. Both are quite pessimistic regarding the outcomes of currency intervention carried out by Linden Lab. If L$ starts to depreciate, according to one of the scenarios presented here or otherwise, I believe that Linden Lab will not start buying back L$ on a large scale – so an escalation to a major depreciation may actually take place quite easily.