Second Life (Part V)

This is the last in a five-part series on social networks and their increasing impact on the business world. In order to explore some of the issues, I've focused on Second Life, a MMOG created by Linden Lab of San Francisco. Of course, Second Life is not the only MMOG, nor is it even the largest.

The Boston Globe interviewed analyst Bruce Sterling Woodcock in June, 2006. At that time, he estimated that "about 12 million people pay monthly subscription fees" to MMOGs. One game, World of Warcraft, dominates about half that market with 6.5 million players, including more than 3 million Chinese. (Money.com)

In this post, I'd like to take a look forward at the future of these MMOGs.

Second Life led the way in allowing user-created content. Back on November 14, 2003, five months after it debuted on the Internet, SL surprised the gaming community with an announcement:

Second Life will allow "users to retain the intellectual property rights for anything they create within the game. If users build a house, create a character, program a cool script, or write an adventure, those graphics/concepts/programs will belong to the user and not the service provider--even if they are used for personal profit later on.

The announcement, made today at New York Law School's 'State of Play' conference, is a marked departure from the end-user license agreements of most MMOGs. Most of today's games retain whole ownership and openly combat users attempting to profit in real-world dollars from the service." (GameSpy.com)

Although, at that time, SL's decision flew in the face of the accepted principles of the gaming industry, it proved to be inspired. Since then, Second Life has thrived. Its success has led other MMOGs to follow the same route in permitting players to buy and sell objects from the game in the real world.

This has created a whole new set of issues. Money.com reported on July 28, 2006 that "In China . . . hordes of 'gold farmers' earn a living by selling the fruits of their WoW [World of Warcraft] labors to time-strapped players in the United States. Industrywide, the out-of-game MMOG economy has grown to $200 million--from zero just a few years ago . . . In other words, the Metaverse is finally open for business."

And the world is taking notice.

The U.S. Congress certainly has.

The thriving economy created by Second Life has caught the eye of several Congressmen. SL residents are earning income and making profits in the virtual world that can translate into dollars in the real world. Should these be taxed? And, if so, what implications will this have for the casual gamer? Or the international gamer?

On October 15th, the Reuters bureau in Second Life (Yes, Reuters has set up a news bureau inside SL) reported:

Booming virtual economies in online worlds such as Second Life and World of Warcraft have drawn the attention of a U.S. congressional committee, which is investigating how virtual assets and incomes should be taxed.

“Right now we’re at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,” said Dan Miller, senior economist for the Joint Economic Committee. “You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there’s no mechanism by which you’re taxed on this
stuff,” he said.

Virtual land owners inside SL already pay a monthly land use fee to Linden Lab, which might be likened to property taxes. The cost for purchasing a sim (65,536 meters of land) is US$1,675 while the user fee is US$295 per month to maintain that property.

As I've already explained, real world corporations are taking social networks like Second Life seriously. Dell, Nissan and others are setting up locations in the virtual world in order to market to the residents. Those corporations are going to deduct their business expenses involved in operating in the virtual world. The minute they raise that issue, taxation of income earned and capital gains is sure to follow.

This is not a simple issue. If Congress wants to tax income in the virtual world, virtual employers will have to issue Wage and Tax Statements (W-2 forms). To tax capital gains, a system would have to be set up to provide an annual valuation for a resident's assets in the virtual world.

At the same time, virtual marketing is a trend that anyone with goods or services to sell should be paying attention to. Imagine setting up a storefront in cyberspace to market your goods.

What's next for the future of MMOGs? Philip Rosedale of Second Life made a prediction back in 2003 at the State of Play conference:

"Longer term, I think interface technologies that allow really interacting with others and touching the world you are immersed in, will bring BIG changes in the way we experience these things. The various technologies that can rapidly acquire facial expressions from an inexpensive camera are probably a nearer term example of that future. Imagine how much easier and fun it would be to communicate in a world where, just for example, something as simple as the movement of your character's eyebrows could follow those of your own!"

In the short term, insuring law and order, preventing copyright infringement and policing fraud are sure to be issues MMOG executives will have to address in their virtual worlds.

Last week, I listened to a NPR broadcast in which MMOG executives discussed the difficulties of monitoring players determined to exploit their systems. The gold farmers of China were mentioned as were the people who use automated computer programs to play and earn money/rewards. One anonymous player admitted he had fifty computers running in his apartment, earning him money/rewards 24/7--even while he was busy at work during the day in real life.

One MMOG executive described how his company is trying to trap players who "cheat" the system. They began emailing players whom they suspected of using computer programs. When the system indicated the player was online, the MMOG would send photos of various colors and demand that the "player" identify those colors. Since computers have difficulty with this task, this strategy worked for a while. However, now players are having their computers page them when the MMOG makes contact. The computer responds, "Hold on a minute. I'm on the phone" while paging the player. The player immediately logs on--sometimes from a remote location--and answers the MMOG's questions.

As you can see, this amounts to another game-within-the-game where MMOGs try to stay ahead of their users. There will always be a new ploy, a new hacker or a new scam artist.

I hope you've found this subject as interesting as I did. I look forward to seeing how virtual reality and real life collide in the future.