[MUD-Dev] MEDIA: MMOs: It's the Economy, Stupid

[J C Lawrence]

http://overanalyzed.com/portal.php?topic_id=19

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MMOs: It's the Economy, Stupid
by Greg Cato

Let me preface this by saying that I personally approach MMOs in a
different way than most people. While most play for personal enjoyment,
I come to them looking to make money. Obviously, while I do still enjoy
the time I spend playing the games, I'm much more interested in crossing
the boundary and selling my expertise and services in game for real life
money. For those of you unaware, there exists quite a large economy
(~$800 million per annum) of people buying and selling things for online
games. The large majority of the volume of these transactions takes
place via buying and selling liquid assets, ie currency.

Background

Some of you may know at one time I tried my hand as a professional
day-trader. And while I feel that was a fine way to make a living, it
became tedious to me for two main reasons: Firstly, using the money you
pay the rent with on the stock market makes you very nervous, rightly
so. This nervousness makes you second guess and generally make poor
decisions. You can step back a bit and tell yourself that second
guessing is only going to hurt yourself, but in the end I was not able
to sufficiently detach myself from that emotional response. The result
being every transaction held too much weight, and took an emotional
toll. The second reason day-trading became too much for me was that,
while there were obviously predictable forces at play, being able to
capitalize on them proved to be difficult due to the thousands of other
people trying to capitalize on those same forces. The first and most
important lesson I learned while day-trading is that people do stupid
things, ex: a stock that's got fabulous 1,2, and 5-year expectations,
but had a CEO step down will take a short-term hit. The corollary to
that most important lesson is that while stupid things happen, it's much
harder to predict stupidity than intelligence. This, over time, was the
most costly factor in what day-trading losses I had (for the record, I
did come out of the whole thing up). But it left a bitter taste in your
mouth knowing there was less predictability than there should be,
because people make poor decisions -- or at least decisions for
different reasons.

EVE: Currency Trading

Approximately a year ago I started currency trading in EVE: Online. I
had previously sold a few items here and there, as far back as Diablo II
in 2001, but this was the first time I had been both a buyer and
seller. I would buy currency low and sell it high, and the turn-around
was fast enough that speculation didn't really become a factor (ie
currency wasn't held long enough that valuation changes were
impactful). Looking back, the currency pricing was relatively stable,
even over a six month period. All of the things that I found distasteful
with day-trading had disappeared or become actual positive
factors. Currency was easy come, easy go. I never sold anything at a
loss. People were more than willing to pay more for immediacy, discount
for waiting, and under-value poorly presented goods. It was as much
about the service as it was about the product. More than that, the
market was relatively small: there are a few bigger volume traders, like
IGE, Player Auctions, etc. and decent number of small volume traders,
like myself. Overall, the market was much more forgiving.

The one true downfall of EVE trading for me had nothing to do with any
of the market factors. The downfall was PayPal. PayPal will retract
payments made if they were reported as 'fraudulent', up to three months
after the payment is made. What this means is that I make a transaction,
for up to three months you have the option of getting out of paying by
simply calling up your credit card company and saying you didn't make
the payment. When the transaction involved a physically shipped good to
a verified customer address, the seller can get the money back; but
otherwise you're SOL. Obviously, selling virtual currency is not
covered. The end result being a handful of fraudulent transactions wiped
out about 90% of my profit. The same thing has happened to GMO a few
months ago, forcing them to shut down all trading except for Second Life
(which has anti-fraud measures in place). The end result of all this is
that I stopped trading because fraud was too prevalent and made the
practicality of making a living off of it impossible.

So what to do

It should be noted that MMOs themselves could get involved in the
process and eliminate the fraud, but since most frown upon real-life
trading, they turn a blind eye. The interesting thing is that the big
traders like IGE still deal with fraud on a day to day basis, but since
their margins are huge, I would assume they can simply afford to just
suck up the losses. Something a smaller fish like myself just can't do.

It should also be noted that if you're a professional trader in one of
these games, you can also be a player. As such, in addition to buying
currency, I could also generate currency in game. After I realized that
I could no longer realistically be a lone currency trader in EVE, I
considered selling to a bigger seller -- at about 30% the price of what
I was previously selling at. I was willing to do that, but the problem
was that EVE is not an especially fun game, so the prospect of playing a
game that isn't enjoyable for not all that much money didn't turn out to
be a keeper.

Enter: World of Warcraft

With the coming of WoW, I looked again at my options. WoW is a fun game,
and I certainly didn't mind the thought of selling off my gold. In the
betas, Blizzard had stated that while they didn't especially like
EBaying, they weren't going to do anything about it. So retail started
and I went about busy-beaver like knowing that the currency market would
start high and plummet like a rock until it (theoretically)
stabilized. The first week I had two successful auctions, for 1 gold
each, for those counting.

Then something funny happened. My auctions started to be delisted. EBay
has a program called VeRO which is their division to handle a company's
complaint of IP/copyright infringement. EBay, and I can't really fault
them for this, defaults to companies to police their IP. So if something
is infringing, they tell ebay about it and the listing is removed. I had
been told that the Entertainment Software Association (ESA) was the
entity responsible for the complaints on my auctions (two at the
time). A quick web surf shows that Vivendi (who bought out Sierra and
Blizzard a few years back) is in fact a member. For those of you not
aware, the ESA sponsors E3, and is mostly just the legal/lobbying body
for some game companies. They are very pro-DMCA.

Anyway, the thing is, selling in-game items for real world profit is not
IP or copyright infringement. The worst I've heard is that it
constitutes misuse, which isn't a penalty but is instead used as a
defense. While Blizzard has said that they "believe it is illegal", in
my view this amounts to nothing more than bullying (and bluffing, at
that). I can respect that they want to keep their economy controlled,
but this is not the best way to do it, and could bite them in the ass if
someone actually takes them to court and proves that it is legal.

Legally, the analogy I like to use is this: If you go into Kinkos and
rent a computer, they do not own what you produce. The same is true, in
my mind, for MMOs: The player pays for the ability to produce something
using the game's systems and servers. To claim that the player has no
rights and no ownership over any in-game results of production strikes
me as inherently flawed. But I'm no lawyer, so we'll just have to wait
and see.

On a side note, shutting down the ebay auctions limits the extent, but
mostly just pushes more business to the large suppliers like IGE. We'll
see how successful Blizzard is at stemming the tide. My impression of
the currency market is that there were lots of suppliers and very few
buyers.

Comparrisons

If you keep up to date on the pro and con arguments for sale of online
items, it sounds quite a lot like a broken record. There will be the
people against it, who will cite Lineage II as why it's a terrible
thing, not realizing that L2 is a game that is designed for large
numbers of dedicated people doing very uninteresting, repetitive actions
to gain footing. That the players are mostly asian is no real suprise --
remember the first Lineage. Then there will be the people who will argue
that outside sales are a good thing, people who realize that grinding
for the sake of grinding isn't fun. City of Heroes would typically be
bandied about as a game where external sales didn't really impact the
game.

World of Warcraft falls towards the CoH side of the spectrum. There are
a large number of measures to make external sales less appealing. The
first, and by far the most intriguing measure, is that the game is
actually fun to play. People don't necessarily need to buy anything,
because the grind isn't so grind-y (and yes, it certainly still exists,
just in a different form).

There are then a host of other very effective measures taken, found
items can either be equipped or traded, not both. This ensures that
items once used are discarded and don't re-enter the economy. Another
measure is the limited impact of items on characters; stats boosts
provide only small percentage increases in skills. Along the same lines,
most items are very similar, with small differences from item to item;
there is relatively minor incentive to upgrade from a 'free' quest item
to an auction-bought item. Item level restrictions also help, and are
fairly strict.

But perhaps the most important of these secondary measures is that for
most of the game items are plentiful, but money is not. While playing,
you find that you typically have just enough crafting materials, good
armor and weapons, and just enough money to buy your skills.

WoW: How the Economy Balances

To this point, I have been fairly careful to describe WoW as mostly
balanced. This is because it is, up until you get to the higher levels
where it becomes unbalanced. At the heart of this issue is that the
sources of income start to outstrip the money sinks, and after you hit
level 60, sources greatly outstrip the meager money sinks. Let's look at
a quick breakdown:

				 Image

  (EdNote: rendered as text.  The left most column is the key to the
  lower two segments of the middle column)

  +------------------+---------------------+
  | One-Time sources | One-Time Sinks      |
  +------------------+---------------------+
  | Quest Rewards    | Trade Skill Recipes |
  |                  | Mounts              |
  |                  | Bank Slots          +------------+
  |                  | Guild Creation      | Non-combat |
  |                  +---------------------+------------+
  |                  | Class Skills        | Combat     |
  +------------------+---------------------+------------+

  +-------------------+--------------------------+
  | Recurring Sources | Recurring Sinks          |
  +-------------------+--------------------------+
  | Selling Loot      | Transportation           |
  |                   | Auction House Fees       |
  |                   | Trade Skill Materials    +------------+
  |                   | Guild Creation           | Non-combat |
  |                   +--------------------------+------------+
  |                   | Talent Point Respecs     | Combat     |
  |                   | Food/Drink               +------------+
  |                   | Class-Specifc Costs      |
  |                   |   (reagents, durability, |
  |                   |   ammo etc)              |
  |                   | Death Penalties          |
  +-------------------+--------------------------+

Looking at this, we see fairly quickly that there are really only two
sources of currency in the game, both tightly controlled; really no
surprise.

The non-combat one-time sinks are rather optional for the player. Most
people do take production trade skills, so that's likely to be a fairly
reliable sink, and most people will take a mount if they have enough
money, but the rest are fairly small and un-important. The recent
addition of the elite mount (for 900 gold) shows that the economy can
get radically unbalanced late game, but realistically, a single fixed
cost is no way to patch it.

Buying class skills always seemed a bit odd to me, there are certain
skills you buy once, and then there are skills that you need to buy
repeatedly (upgrades). Odd because some skills auto-upgrade without
charging, for example just about every caster has a spell that has an
effect that doesn't change, but the mana costs increase every level. It
would seem to me that a skill upgrading every level would be preferable
from a gameplay POV, but let's take a look at the economic
impact. Obviously, since the player buys skills on a regular basis, the
cost is half-way between one-time and recurring. But since skills
purchases are limited and do eventually stop, they should firmly be
categorized as one-time. For most of the early game, levels 1-40 or so,
skill costs will be the prime costs a character will see. After 40, they
become minor costs at best.

The reason is that the prices given for vendoring loot starts to
skyrocket around level 35. Single items start selling for multiple gold,
as do stacks of vendor trash. In my view, this is the key and
fundamental downfall of the late game and will get worse and worse as
time goes on. Class skills, which previously had been relatively
expensive, become near trivial. Using class skills as a main money sink
works well initially, but falls behind late game, largely negating the
benefit of charging for skill upgrades.

If we look at the recurring sinks that are supposed to balance out the
increased money flow, we see that none of them can even come close to
keeping pace. Talent respecs do increase each time, but cap at 50g. And
really, few people are likely to ever respec enough times to reach that
cap. The recently introduced class-specific costs initially did
compensate, but have been toned down and merely make a dent in the
runaway money problem. The other costs are so small, they're not worth
discussing really.

So how do you balance out a constantly growing money source? Honestly,
it's not necessary to make the fix painful to the player. There are two
main things that can be done: decrease the sources, or increase the
sinks. Limiting the amount vendors pay for items is a no-brainer, and
would be relatively painless; not to mention relatively invisible to the
player. Increasing the sinks is much more difficult, and potentially
painful. You can add new sinks, like player housing, or you can increase
current sinks. As a player, obviously one would prefer to have new
options given to you instead of new limitations imposed on you. Hence
the uproar over durability and reagents, and the clamor for things like
housing.

What is clear, however, is that the economy is currently not going in a
good direction. This is a problem that existed in Beta and was never
substantially addressed. It hasn't yet become an issue most players are
concerned about because there are a relatively small number of players
at the top who see where the scale tips. If the system is not fixed,
within a month, I would not be surprised to see widespread inflation
take hold. To be blunt, this is what will make the game un-fun, given
time.

So Where Does this Leave Us?

What I have tried to demonstrate here is simple: that an unbalanced,
easily exploitable economy is the key factor that leads to a MMO's
economic ruin. SWG has very interesting reports on their economic
well-being put out by their developers. For all the game's flaws, they
know very well how their economy runs and if it's out of balance. WoW,
on the other hand, seems to be at least aware of the problem, but still
has not yet taken enough steps to fix it.

People may complain that EBay is the chief cause of a MMO's economic
collapse, but any hard look at the matter shows that not to be the
case. These are very controlled economies that live or die by the
decisions of the developers, and no one else. Pursuing red herrings like
shutting down EBay auctions, while good for publicity and player morale
in the short term, do not address fundamental imbalances in the economy.

Conclusion

This is, and will be, an on-going issue. As long as MMOs have economies
and as long as people play them, the issues of balance and real-life
sale of virtual property will exist. Terra Nova has some more
intelligent discussion on the issue as well, if perhaps a bit
unfocused. One of the writers there suggested the wonderful idea of
servers that real-life trading is allowed and servers where it is
not. While this would most likely not happen, it would be fascinating to
see if there in fact was a discernable economic impact, or change to the
culture of the game.

I personally believe that the next big thing in MMOs will be tighter
integration of real-life cash with in-game property. Game like Second
Life, Roma Victor, and Project Entropia are just a few that are paving
the way. And while each has significant flaws, I believe the first to
get it right (or more realistically, right enough) will be the first to
break into the mass market.

Companies like IGE will likely exist for quite some time. I personally
am very interested to see how the legal situation plays out, if it plays
out. The impacts of a legal victory for either side could change the
landscape overnight, and hence both sides have been very cautious. But,
in my view, the more people who play these games and the more time that
is spent on them, it becomes harder and harder for a company to claim
that they own everything a player does in-game. We'll have to wait and
see, I suppose.

I look forward to talking about this more. Despite the length of this
piece, there's still much, much more to talk about. As such, please feel
free to add your comments.
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The inflation section:

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Posted: Yesterday at 2:51 pm
by Greg Cato

In response to the lawyer's point on EULAs (and hopefully to settle the
issue). The WoW EULA does not address sale of virtual items or
services. There is no breach of contract, even if you consider the EULA
to be a valid contract.

In related news, I just received an email from EBay notifying me that
they do not require VeRO members to respond to the inquiries of people
who have auctions de-listed. Not really a surprise, but interesting.

MMO economies will never be perfectly balanced. The nature of character
advancement and item rarity dictate that imbalances will always exist
with some goods. Good game design dictates that rare, sought-after items
should require effort to attain. Characters with more trading power
(read: wealth) will almost always have the edge and make acquisitions
trivial. Exceptions such as items that Bind on Pickup in WoW dictate
that player/character skill or dedication trump straight wealth.

When game currency is traded in real life, it just means that players
have alternate avenues for generating wealth/advancement. Ultima Online
integrated a very interesting policy a while back where you could buy
characters that already had substantial stat advancement. Obviously, if
online currency sales flourish, there are going to be people who farm;
producing additional currency and items. This will have an impact on
game valuations. But so does normal player activity.

If a stable economy is a goal for a MMO, widespread wealth should be its
chief concern. Let's think about how the player auction system works in
a game like WoW, assuming we're talking about relatively common items
initially (supply and demand are balanced). In an auction, value and
price are determined relative to player desire and character wealth
respectively. If a character has excessive wealth, the price paid will
likely be greater than its fair market price. If the same thing happens
many times over, inflation takes hold and prices for goods rise. In
situations where the auction is for a rare or unique item of great value
(where demand greatly outstrips supply), the limiting factor for the
price is total player wealth.

In both cases, if player wealth (or more specifically, disposable
income) is low, inflation is kept under check and price is going to tend
to be more reflective of the item's value. Additionally, if wealth is
concentrated in a small percentage of the population, inflation effects
are mitigated, but scarcity still drives price.

What keeps most inflation in check if wealth is widely distributed is
reduced value, which is what has so far been keeping WoW prices
relatively stable. For example, light leather loses value the higher the
player levels, and so a player with more wealth is less likely to
partake in that segment of market transactions. Hence, relatively little
inflationary pressure.

Where WoW will most likely fail in keeping inflation down is in the
transfer of money from high level players to lower level players. If,
for example, I have a level 60 character with a worth of 500g, and I
start a new character and transfer 50g to it, that new character has
greatly disproportionate wealth and disposable income, for little cost
to the player. Remember that inflation is most prevalent when large
numbers of people have large amounts of wealth. One or two people won't
make a huge difference, but since the design of WoW greatly encourages
alts, it is likely that inflation will be a significant issue relatively
soon.

It should also be noted that real-world currency purchases have the same
effect, except that the cost to the player is different. Depending on
the person's real life income, it could be more or less costly to them
to purchase currency than to play a character to a high level and
transfer currency. Along the same lines, guilds and other player
organizations have the same effect. Higher level players routinely gift
lower level players items of little value to them, but high value to the
recipient.

To summarize, unbalanced player trading and gifting of any kind leads to
inflation. If you want to address inflation, you have to address wealth
and disposable income as a whole. As long as there exist players that
have excess wealth and methods of transferring wealth, it doesn't matter
if an exchange was paid for externally or not; it all has the same
effect - inflation.
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