Why a virtual scam might be the most important technology story of 2005.
The Escapist, December 27, 2005
As we all know by now (and the rest of the world is rapidly learning), the imaginary currencies that are earned, spent and traded in massively multiplayer online games and other virtual worlds are anything but virtual, themselves. While no government authority stands behind them to insure their value, a seal of approval isn’t needed for a currency to become “real.” A World of Warcraft gold piece is worth as much as you can get for it on the market – about $0.10 at the moment. The U.S. dollar derives its value in exactly the same way.
The people who inhabit virtual worlds have long realized this. Out-of-world sales of gold and other virtual items have been going on since the early days of text-based “multi-user dungeons” and other online spaces, in the late 1970s. And “real-money trade,” as it’s commonly known, can be an emotional issue, generating harsh conflicts between players who feel it’s just part of the landscape and those who feel it ruins the integrity of their games, and between game companies and those who engage in the practice.
But as The Escapist looks back at 2005, it seems virtual worlds have reached a new level of sophistication and complexity where commerce and economics are concerned. In Second Life—a world in which real-money trade has the explicit stamp of approval of Linden Lab, the company behind the world—an avatar named Anshe Chung gained worldwide renown this year for her clever (and profitable) play of Second Life’s real-estate market. It has reportedly garnered her hundreds of thousands of dollars worth of SL currency—which is, of course, freely convertible to hundreds of thousands of dollars in cold, hard cash.
But even in SL, trade in the virtual currency known as the Linden dollar has generated controversy. For more than a year, a web site called GamingOpenMarket.com, created and managed by Second Life residents, was the most trusted exchange for buying and selling Linden dollars. Residents listed their L$ buy and sell orders there, and received payments in the world, or through PayPal. But when Linden Lab opened its own currency exchange to compete with GOM, that era ended. Unwilling to go head to head with the company that was printing the money itself (and who can blame them?), GOM closed up shop.
GOM built a service that Second Life’s residents trusted and used. Despite there being nothing wrong with it, Linden Lab pulled the rug out from under the venture, rather than supporting it. The excuse the company gave bespoke an alarming lack of confidence in the residents of its virtual world. “We want to ensure that new residents have easy access to additional L$ without having to take yet another leap of trust to sign up and give payment information to a third party,” said Linden Lab economic czar Lawrence Linden. But residents had already taken that leap of trust with GOM, and been rewarded. What Lawrence Linden’s statement essentially boiled down to was Linden Lab telling its residents not to trust each other. The company didn’t seem to trust them, itself.
It remains to be seen what economic strides (if any) can be made in such an atmosphere. But in virtual worlds where trust and responsibility are placed on the shoulders of residents, 2005 proved remarkable things are possible. For my money (virtual or otherwise), the biggest story of the year in virtual economics took place deep in outer space, surrounded by the harsh player vs. player realities of an MMOG known as EVE Online.
EVE lets its players run wild through a single, non-sharded virtual world that sometimes sees more than 19,000 people logged on at the same time. Most of the time, those “pod pilots,” as they’re often known, are shooting not at computer-controlled enemies, but at each other. Of the more than 5,000 interlinked star systems that make up the EVE galaxy, only about one-quarter of them are patrolled by non-player-character police who will shoot down any PvPers in the vicinity. The other three-quarters are known as “alliance space,” a vast and lawless region where groups of player corporations known as alliances vie for control over vast tracts of space, destroying each other’s starships on a daily basis, fighting for dominance over space stations, star systems, moons and important travel routes.
With the game’s most valuable resources located in the dangerous reaches of alliance space, EVE hardly seems an encouraging place to launch a business. But in October, two enterprising pod pilots did just that, transplanting a real-life business structure into the virtual world in an unprecedented fashion. The remarkable thing is, no game mechanic allowed them to accomplish it. Instead, it was made possible by one of the rarest resources of virtual worlds: trust.
Count TaSessine and Serenity Steele are the heads of an alliance known as the Interstellar Starbase Syndicate. Twelve hundred pilots strong, ISS is unusual among the EVE alliances located in lawless space in that it’s a “carebear” organization, for the most part—i.e., its pilots are more interested in mining, hauling ore, and manufacturing ships and ship components than they are in popping other players’ pods and claiming sovereignty over star systems (though ISS does have a combat wing). Still, ISS located its business in the heart of one of EVE’s most dangerous regions. So far, it’s been a success.
Their business plan is an ingenious one: Rather than engage in the wars that rage through alliance space, ISS has chosen to take a neutral stance, building a huge player-operated structure known as an “outpost” that provides repair, refitting and marketing services to all comers. In a star system known simply as KDF-GY, ISS has established a little Switzerland in space, where pilots of rival corps and alliances can dock to do business, sell loot and kit out their battlecruisers for the next engagement. And according to Martin Wiinholt and Shayne Smart, the 30-something players behind Count TaSessine and Serenity Steele, respectively, business is good.
But business is good only because it’s not actually ISS that owns the outpost. An ISS corp operates the outpost (and technically, within the game’s mechanics, owns it), but real ownership has been vested with the pilots of EVE, through what has become the first publicly owned company in the game.
Via an in-game initial public offering in October, ISS sold 3,600 shares in the outpost, at a price of 10 million InterStellar Kredits each, or about $2.25 a share at prevailing eBay prices. That’s a whopping $8,100 in ISK to support a business that earns money through EVE’s game mechanics, charging pilots for services such as docking and factory rentals, spaceship repair and the clones that must be kept at the ready, should a pilot’s life-support pod get popped by an enemy. Players and investors don’t seem to mind that the company is entirely virtual; shares in the outpost now trade for anywhere from 16 to 20 million ISK each. For many investors, ISS has already doubled their money.
Getting the outpost up and running, though, wasn’t easy. To protect against hostile pilots, the entire operation was carried out under a shroud of secrecy. Construction was begun during the weekend of the EVE fanfest and at an hour when the galaxy’s server cluster is commonly at its lowest ebb of population. On October 24, two weeks after the IPO had been completed, the outpost went into operation.
Taking the ISS outpost public through a sale of shares was not just an efficient way to raise money, though; it was also a way to insure that the outpost itself would remain unmolested. The outpost is not a for-profit business thirsty for pilots’ money, but a publicly owned corporation that pays its operating margins back to shareholders. The ISS business plan projected enough traffic for investors to see a monthly dividend of about 470,000 ISK per share, a return of about 4.7 percent on the IPO price. After two months, dividends are running at about 4.3 percent – not bad for a company doing business in the middle of a war zone.
When the IPO closed, almost 100 different players from various corporations had bought shares. ISS also made pre-IPO deals for many of the major player corps that surround KDF-GY to establish an office in the outpost that would give them access to more services there. All of this was done to give pilots ownership, both real and figurative, in the venture. You’re less likely to train your battleship’s railguns on an outpost that’s not only providing you with services, but actually earning you money, after all.
Despite—or perhaps because of—the fact that no real-world money is changing hands here, Interstellar Starbase Syndicate’s outpost IPO is the most important economic event to have happened in a virtual world in 2005. Second Life has seen similar investment schemes pop up, but never one that was backed by an in-world business. Anshe Chung’s real-estate operation has been a smashing success, as have other residents’ businesses, but the viability of those ventures is due to the business acumen of their proprietors, not to the collective investment decisions of 100 or more of the world’s residents.
The fact is, no other venture in any virtual world has come as close as ISS’s to bringing the real thing into cyberspace. The interesting question is, what made an operation like this possible in EVE?
EVE’s software and overall design provide the basic conditions under which ISS is able to operate. The resources found in the world of EVE (i.e., the ships, modules and commodities, etc., that are used in everyday gameplay) range from Civilian Gatling Railguns that cost a piddling 1,000 ISK each on up to 36 billion ISK outposts and enormous ships that reach similarly ridiculous levels of expense. But they are distributed in a different manner than in most MMOGs. In World of Warcraft, for example, everyone at the same level has access to more or less the same range of loot. You could solo all of Azeroth and the only thing you would miss would be killing a few boss dragons that require a raid group.
In EVE, by contrast, most of the game is closed off to the pilots who choose to fly solo. Just taking a tour through alliance space can be a fatal mistake, unless you’re in the company of corp-mates you trust—and who can fight well enough to defend themselves against pirates and hostile alliances. And the most high-end stuff in the game (those 36 billion ISK outposts, for instance), as well as a great deal of content that is almost as formidable, is nearly impossible for a single pilot to construct, maintain, operate or even afford.
Because you can’t go very far alone in EVE, social interaction takes on an important role in the galaxy. The benefits of belonging to a corporation or alliance are very real: You can do things, go places and get stuff you wouldn’t otherwise be able to, to a greater degree than in most other games. Trust and cooperation are a valuable resource. Without it, very little would be possible.
That trust works in a couple of different ways. Though EVE’s software is what makes a neutral outpost a viable idea, there is no game mechanic to support an IPO. Investors in the project are taking a risk; ISS could simply walk away with the cash, as has happened before.
Trading shares in the secondary market is another risky venture; they cannot be placed in the interface trade window, but have to be swapped in a two-part transaction: I give you my shares, and I trust you to send me the money. To get around this, ISS has enlisted a third-party corp to hold shares in escrow for buyers and sellers. But then, there’s the question of whether you can trust the bankers. There’s no game mechanic for it, but in this case, pod pilots seem to trust each other, nonetheless.
Just as important is the fact that CCP Games, the Icelandic company behind EVE Online, trusts its players. Cons and scams are an expected and accepted part of gameplay in the EVE galaxy, according to the game’s FAQ. While that might at first seem like a reason to trust no one, it also indicates that CCP is providing one of the most important resources of all in an MMOG: freedom. Without that, ISS might never have attempted its venture in the first place, and the virtual world might never have seen what is an important example of top-to-bottom emergent social gameplay. The fact CCP does not step in to muck about with such player ventures is what allows them to thrive.
When Linden Lab opened the currency exchange that put GOM out of business, on the other hand, the widespread reaction among residents was that perhaps it wasn’t even worth trying anything new. By simply looking on as ISS gets going, CCP has told its players they are free to try what they like. There is no better quality in a virtual world than that.
And EVE’s players are not stopping at just one outpost. ISS is currently considering doing the whole thing over again, but this time in an even more contested part of the galaxy. The KDF-GY outpost has brought new pilots to alliance space, pilots who might never have considered leaving the protection of the NPC cops. Now, ISS sees the opportunity to spark a similar economic development in an area that’s not yet securely under any one alliance’s control. If their venture succeeds, it could change the face of the metaverse, not just in EVE, but wherever avatars look on and trust that yes, these things are possible.