Virtual Currencies and Money Machines
by Ramin Shokrizade
6/9/2012
In my first decade (1999 to 2009) of studying, manipulating, building, and researching virtual economies I learned two very important lessons:
Rule 1: The sale of virtual currencies is MUCH more lucrative than the sale of virtual goods, as IGE demonstrated decisively during this period.
Rule 2: The ability to monetize a virtual asset is dependent on its perceived value, which is subject to volatility. Generally its value goes down as it becomes more accessible, leading to a loss of EQUITY. As your ability to monetize is linked directly to this equity, defending your virtual assets from anything that would threaten that equity is paramount.
Back in 2005 I was told by all industry leaders that I talked to that defending virtual currencies was impossible, and I refused to believe it. Thus the industry came to the conclusion that following Rule 2 was impossible and instead focused on the sale of virtual goods and microtransactions. I went the other direction and demonstrated that defending virtual currency equity was possible (via my “Sustainable Virtual Economies and Business Models” paper in 2009). Further, since I was operating in the belief that you needed Rule 2 to take advantage of Rule 1, I went the path of creating currency-centric monetization models, whereas the rest of the industry went the path of making goods-centric monetization models.
Making a new currency is a very complex endeavor. Defending it’s equity is an even more complex endeavor. The consequences of not maintaining currency equity can be seen as they play out in Europe with the Euro. This failure in design could cost them a trillion or more dollars, and a similar failure in the design of a large-scale virtual world currency could lead to the loss of value in the order of billions of dollars.
Regular followers of my articles will recall that I made the point of how easy it is to lose equity by holding a “Star Wars Economy Deathwatch” late last year. Starting with the first day of retail, I tracked the real world value of Star Wars currency and demonstrated that it dropped 97% in the first 30 days. Generally I expect the equity loss to be about 90% in the first month, so while this may have been an unusually graphic (pardon the pun) example of virtual economy equity loss, this is fairly typical of virtual economies designed without the help of a virtual economist (essentially all titles).
Imagine that you created a large scale economy in your game and you wanted to tap a percentage of this activity to create a sustained flow of revenue. For the purposes of this discussion let us say that what you are trying to make is a Money Machine. The longer you can sustain this, the more money the Machine puts out. The difference between this and a virtual goods based microtransaction store is that in the Money Machine you are attempting to get a piece of ALL economic activity in the game, and there is no incentive for participants to find shelter.
I bring this point up now for a reason. Just this month you can see clear evidence that two major players in the industry are attempting to make Money Machines. Both are attempting to get a slice of the bigger pie without first understanding the pie or how to cut it. The first is Blizzard Entertainment with their Diablo 3 Real Money Auction House (RMAH), scheduled to launch in a few days. The second is Arena.net’s Guild Wars 2, scheduled to launch near the end of the year. I already have articles and threads dedicated to each of these titles on LinkedIn (Game Developers group) and on my Gameful blog. Both studios seem to be aware of Rule 1, even if just intuitively, and are seeking ways to tap into all of that so far untapped revenue potential.
The Diablo 3 RMAH is interesting in that Blizzard is attempting to bypass needing to create a new virtual currency by just using “real” currencies. This simplifies the process since here they don’t have to know how to create or defend a new currency, and any and all losses are born by the consumer since all Blizzard is doing is creating something like “Ebay” in their game. I already did an in-depth analysis of the weaknesses of this approach seven months ago, you can read it here:http://gameful.org/groups/games-for-change/forum/topic/smedleys-dre... The most obvious problem with this approach is that without following Rule 2, it is unsustainable. Forcing players to be online at all times to mitigate hacks is not sufficient to meet the requirements of Rule 2.
The path that Guild Wars 2 is taking to make a Money Machine is very different. Here they are making their own currency, which I anticipate will be quite valuable initially due to high customer demand for the product and seemingly tight control of the money supply. The problem with their model is that they intend to sell game currency directly to players (RMT1) which inflates the money supply and drives down equity, in apparent ignorance of Rule 2. They could improve this approach by only taxing player trades without tampering with the money supply (RMT2 taxation), but all of the obvious ways to do this invite formation of grey market activity, which drives down equity and breaks Rule 2 anyways. Their underlying virtual economy still has major issues at this time, but I don’t want to belabor that since they still have some time to go before product launch and there is the possibility these could be improved in that time.
My objective here is not to discount the innovative efforts of these fine companies. If they are even partially successful they should see significant improvements in monetization over current industry standard models. What I am attempting to convince readers of here is that the quest to build Money Machines is a worthy one, and that even if these early attempts falter, this should not discourage future attempts at achieving the goal. Even if the first Money Machine takes 10 more years to build, the ROI could be mind boggling. Like any job, you need the right tools for the right job and so when you want to get a cut of the pie a good starting point is to understand that pie and how to cut it. I offer up Rules 1 and 2 as a good starting point.
