• Ramin Shokrizade, a level 0 monster with 107 posts — 3 months, 2 weeks ago:

    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.

  • Avatar ImageLailokken, a level 7 monster with 26 posts — 3 months, 2 weeks ago:

    Heya Ramin, great post!

    I would agree with your Rule #1 based on current industry practices and trends. I do however, see the possibility of this rule eventually reversing itself, but it will take a revolutionary idea and change in the mindset of MMO designers and developers.

    I absolutely positively agree whole-heartedly with your Rule #2. I believe this analysis is spot on, and is a necessary ingredient for any game designer who wants a viable virtual economy with assets that actually have value. I do believe defending virtual currencies/assets is possible, but not currently given the systems and ideals that are industry standards.

    I believe the reason these early attempts are not reaching the desired level of expectation by the developers is because the games are being designed from a “What is good for us” (as the developers) vs. “What is good for us” (as the player base).

    I think there is a ‘next logical step’ to achieve the goal you speak of, but I don’t believe the publishers/developers will take that step. 1, because they don’t feel they have to, and 2, because it’s more of a “What is good for us” (as the player base) type design. Personally, I don’t believe they’ll ever take that step on their own. I believe it will take an Indie/Crowd sourced effort to make this next-gen game. At that point you will probably see the big developers either buy them out or make a ‘better’ version (because they have the bucks to do so).

    Again.. great post. Do you have your own site.. I’d love to read your other stuff.

    -Lailokken

  • Avatar ImageRamin Shokrizade, a level 0 monster with 107 posts — 3 months, 2 weeks ago:

    Lailokken, I have almost 30 papers/articles here on the Games for Change section of Gameful, and I also comment regularly on the LinkedIn Game Developer and Social Game Developer groups. You can find out more about me on LinkedIn of course.

    The idea with currency-centric monetization models is that instead of trying to get 100% of the sale of a virtual good, which likely will be a very small percent of a player’s total economic activity in a game, instead tap a small % of every economic transaction in a game. Basically like real world governments do. In virtual space the rules of economics are often upside down from in “real space” so how this ends up looking in virtual space is counter-intuitive.

    Note also that virtual goods are typically sold only once (to the buyer) and if you can tap all economic activity, you can charge for an item many times as it changes hands. This method also prevents developers from setting up “pay to win” situation and actually has the opposite effect as the biggest players pay the largest share of the total tapped revenue.

    Again, these systems take years to develop so it is not something I recommend someone get out of bed one day and say “hey let’s try this in our current game!” :)

  • Avatar Imageandrew charles, a level 0 monster with 1 posts — 3 months, 1 week ago:

    Its fun to play if all the rules are followed….

    hot shot trucking

  • Avatar ImageRamin Shokrizade, a level 0 monster with 107 posts — 3 months, 1 week ago:

    I have a pest infestation.

  • Avatar ImageMelanie, a level 0 monster with 2 posts — 3 months, 1 week ago:

    Ramin, thanks so much for this site; I’ve found plenty of useful information here. I have a question related to this post– with Facebook’s recent announcement that they are getting rid of FB credits, app developers will soon be forced to use their virtual currencies. How do you think monetization will be impacted by the transition from a microtransaction system to one that sells virtual currencies? Any tips on how to make the transition without losing conversion or revenue?

  • Avatar ImageRamin Shokrizade, a level 0 monster with 107 posts — 3 months, 1 week ago:

    Melanie, thanks for the heads up, this story apparently broke quietly while I was in mid-flight to England to help a studio and I missed it. The wording to me seems a bit ambiguous, but if I understand it correctly players will be able to book a game’s virtual currency directly with their local currency through the Facebook interface. I can imagine some nuances here that could get complicated, but for now, until I learn more, let’s just say this will mean that you may have up to ten local real currency price points for conversion to the local virtual currency.

    Presumably this means that the consumer will have to buy currency in “bigger chunks” and then the actual use of that currency will no longer include Facebook in the loop. This would greatly reduce the number of transactions involving Facebook, though I wonder if that traffic was getting expensive enough for them to motivate this change. If a consumer has to buy more currency than they immediately needed, this might force and entice consumers to spend more.

    Psychologically, this means that your new customer has to make a deliberate investment in your product before they can spend, where before they could have just tapped their existing reserve of FCs. This will raise the barrier to “first spend” and lower conversion rates platform-wide. It will also raise the amount spent per paying user. It almost feels like they are trying to make whales out of people that normally would not have fallen into that category.

    Okay where I am going next is going to get super complex. Now Facebook is basically a 3rd party “gold seller” much like IGE, and is engaging in institutional RMT3 activity. But this is RMT3 that in many cases is stacked on top of RMT1. Further, Facebook is now much closer to being a financial institution engaged in currency exchange.

    Let us say that I launch a product on Facebook for PC, and on the Apple Store for iOS, but that I allow you to access the SAME SERVER and SAME ACCOUNT from either device. Now I have a choice when I want to exchange my local currency for my virtual currency of choice: Pay the financial institution called “Apple” for this currency exchange or pay the financial institution called “Facebook” for this exchange.

    Either way I have paid a fee (typically 30%) for this exchange, but this exchange is now a financial product. If both Apple and Facebook charge the exact same fee, there is no competition, but now both financial institutions have engaged in price fixing for a financial product, for anti-competitive purpose. This would seem to me to be a violation of US (and other nations’) law, though this is not my area of expertise.

    Conversely, if Apple charged 25% for this service and Facebook charged 30%, they would clearly not be in collusion, but then people would go to Apple to make this transaction. This type of competition is the way the system is supposed to work in the absence of price fixing. I would imagine this would be raising red flags somewhere for regulators.

    Okay now let me make this even more complicated. Let’s say I now put out my product for FB, iOS, and Android, which is a very likely scenario. What if FB takes a 30% cut, Apple takes a 30% cut, and Google takes a 20% cut? There would be this huge vacuum as consumers (and developers) abandoned FB and iOS. As taught to me by my econ professor Dr. Bandyopadhyay, the more likely result is collusion within an oligopoly, which by definition becomes a cartel: http://en.wikipedia.org/wiki/Oligopoly

    This tends to lead to interesting discussions of price leadership as the other two players follow the pricing lead of whoever is considered dominant that week. As a consumer this probably is an invisible process to most. To developers, this becomes a serious squeeze where they get shaked down no matter where they put their store. This begs the possibly obvious question of whether a 4th player could come in and undercut the oligopoly?

    I try to stay out of finance, since my specialty is virtual economics not finance, but here they seem to be overlapping enough that I am forced to get involved.

  • Avatar ImageRamin Shokrizade, a level 0 monster with 107 posts — 3 months, 1 week ago:

    I want to add that for small/early developers, paying that 30% might be desirable as it saves them a lot of billing infrastructure. As companies get bigger, there is going to be a lot of incentive for them to take another approach: Set up their own billing on their own website where they do not have to pay the 30% cut. If they offer a 10% discount (still saving 20%) vs FB/iOS/Android then they can independently undercut the Oligopoly. I would imagine that the Oligopoly would react to try to prevent this, but again I would imagine this could put them in legal jeopardy. The trade in virtual currencies is huge money, especially if a cartel is maintained so I am very interested in seeing how this turns out.

  • Avatar ImageMelanie, a level 0 monster with 2 posts — 3 months ago:

    Thank you for your response, Ramin. I’m particularly interested in your third paragraph– what if an app offered two payment options: 1) direct microtransactions using the virtual currency, and 2) purchasing bundles of the currency to then be used in-game. So when you go to purchase an item, if you have enough of that virtual currency the transaction will go through. But if you do not have enough of that virtual currency, you have the option of either purchasing that exact amount, or purchasing one of various currency bundles offered at a discount. Could that be a way of remedying the lower CVR, while still giving “whales” the option to purchase as much as they’d like?

  • Avatar ImageRamin Shokrizade, a level 0 monster with 107 posts — 3 months ago:

    Melanie, I suppose so, but I suspect that Facebook will not permit this. Instead they will dictate the size of virtual currency purchases. If not, then basically they might get even more transaction traffic than they did before, which would defeat the purpose of unloading this activity.

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