A few developments seem like natural shifts in the nature of virtual worlds and their economies but leave me perplexed about the future. I’m not an economist and don’t really know the first thing about it other than what I’ve picked up in bits and pieces with my initial framework provided by Edward Castranova who helped me to understand the reason for the biases, misunderstandings, and flaws in virtual world economies.

First, the developments.

Metaplace allows selling of goods using Web services bridge

As posted this past week in reply to my comments on Metaplace, Raph Koster points out that the economy of Metaplace will have full transportability to the “real” economy. Metabucks will be used to simplify the flow of transactions within Metaplace worlds – this will make it easier to understand the cost of goods when users may be operating in dozens of different currencies. Says Mr. Koster:

OK, first example. You make a world, want to charge people for stuff. You don’t have any tech or connections or knowledge on how to do that. For you, you can use the Metaplace currency and script objects will do all the heavy lifting for you. Stuff can be listed on our marketplace, etc. We get a transaction fee.

Second example. You want to charge dollars directly. You use a script module that handles a web service bridge to Paypal or a third party that handles billing and transaction verification. Our cut = zero.

Twinity Economy Explicitly Allows Trade Outside System
Second, comes a sneak peek at Twinity by our colleagues at Metaversed.

By the sounds of it, Twinity is building a virtual world using real geographies. Whether this business model could survive the much discussed possible development of a virtual overlay on Google Earth remains to be seen.

Metaversed points out:

Where it gets interesting, is in their plans to farm out much of the user to user transactions to a third, as yet undisclosed party. The system will provide a double escrow utility for users to trade objects and property and services with real money. Primary markets, such as initial property sales will be made using a synthetic currency similar to the Linden Dollar or Entropian PED. Metaversum say they want to allow a more realistic cash flow, letting users trade with each other outside of the system as well as in it. The primary economy (synthetic currency) will come online during the initial beta, in 3 months or so, the secondary economy will follow that.

(Sidebar: I wonder why the currency is called synthetic. I may buy coffee and a newspaper with cash, but most of the way I spend money is online (paying bills) or using a debit card – I never see the “real” cash).

Second Life Changes to Search Open Economy Outwards
Linden recently launched its preview of a new search engine for Second Life.

Search in SL is a mess. The new onRez viewer didn’t help things – users would have a heck of a time drilling down when it returns “all” in its returns. Aside from using a Google search appliance (NOT a partnership, they’re quick to point out) to help create some sort of return based on relevancy, Linden also makes the following comment:

Be aware that the new search results will be available to the public, once it’s released, anyone with a web browser can view them from the Second Life website. The search results may also be picked up by other external search engines such as Yahoo and Google, although we are not explicitly asking search engines to crawl them at this time. It’s important to remember that this information is not tied to your real life identity and is the same information that anybody could see with a free Second Life account.

Now – this strikes me as opening the economy out even more. I’m a lousy SL business person – I’m sure that the new search engine will be a boon for some and a disaster for others. It’s unclear (to me anyways) how traffic, location, object tags and other factors will impact search return results. Business set up entirely based on traffic as the driver of new business may now need to start spamming the WIKIs in order to get a link out to their club or shopping mall. If it uses the Google search appliance, and the searches are accessible through Yahoo or Google, will the number of SLURL links on the Web in general start to impact search relevance?

Stop Calling them Virtual Economies

But the real point about the SL search change is that previously the wall around virtual worlds (or the membrane as Castranova would call it) was fairly firm. What we seem to be looking at is an evaporation of the membrane around virtual economies:

- External search engines will be able to crawl SL and you may soon just as easily be able to find a location in SL through Google or Yahoo as you can through the in world search box. This would imply that linkages to a SLURL page on the Web in general may be as critical as traffic inside the world. An industry of object taggers could emerge. Optimizing search will soon not only include optimizing traffic but also optimizing search results in Yahoo or buying keywords in Google.

- In Metaplace, you’ll be able to conduct transactions in the currency of your choice. You might elect to buy Metabucks or, visiting someone’s world you might decide to subscribe or buy using Euros to pay through PayPal a developer who cashes them out in US Dollars.

Sidebar: This is where I’m still fuzzy – will PayPal then be obliged to judge the legality of the transaction as Raph says Metaplace will need to do when cashing out Metabucks? Why is cashing out Metabucks different from shipping Euros to a Brazilian through PayPal? Will PayPal need to start verifying that virtual objects are real? I’m ignorant on this stuff so it’s a question not a criticism.

- Twinity sounds like it’s following a similar model to Second Life and Metaplace – transactions are transactions, and there are a lot of ways to conduct transactions in this day and age. PayPal, credit card, etc.

And if a transaction is a transaction – hmmmm….then that means that an OBJECT is an OBJECT.

And it means that the economies that used to be fairly contained within virtual worlds will now bleed out into the “real” economy.

Shadow Economies
One of the great shadow numbers in Second Life right now is the shadow economy that occurs OUTSIDE of SL. I call it a shadow not because there’s anything illegal about it, but because we don’t really know what it looks like (although I admit my browsing on this is just that – yet I haven’t read a post anywhere alluding to a study of this outside economy).

Example: the CSI New York sim…I suppose the private island sales would have made it into the Linden economic stats, but what about the efforts, value and cost of the objects on those islands? How much did NBC invest in the CSI sim? I’m guessing in the millions when you tag on the Machima for the actual episode, consulting fees, the builds themselves, the Web site, user tracking, etc.

How much currency changes hands on SLE? How much currency is bought using currency traders (when you first join, in particular, there are trading caps. If you wanna load up on Lindens you need to go to outside parties entirely, usually the same people who farm in World of Warcraft or Everquest).

Economic Implications?
Castranova’s lesson to me in economics was twofold: one, don’t think of virtual objects as any less real than, well, real objects. People value them, sell them, and pay for them, thus they are as real as the laptop I’m using.

And two, virtual economies can be constructed to protect the space within the membrane. He argues that a combination of using Artificial Intelligence (non-player characters) and control of the flow of objects into the world allows developers to control for MUDflation. In World of Warcraft, for example, this is partly controlled because many of the higher value items are “no transfer”. But the rest of the economy can spiral out of control if objects don’t deteriorate. If vendors didnt exist to buy back iron ore, or you couldn’t turn it into swords, then there would be a glut of iron ore as more and more players mine for it…unlike the real world, there is little perishability in a virtual world unless its built in. By having levers to control the flow of goods and currencies, platform owners are able to protect the risks and rewards within the worlds for the benefit of gameplay and the escape that gameplay offers (a refuge from the cold, cruel world, he might say).

OK, so…the membrane is disappearing entirely in ‘LifeSims’ like SL and the soon to come Metaplace and Twinity. It was always easy enough to move money and objects around, but now you won’t need to move money in and out of a world, you’ll be able to bypass that layer of transaction entirely in the currency of your choice. Second, it used to be you needed to ENTER a world, to visit a store, to go and LOOK at a virtual house, in order to search for the items you wanted. Third-party “e-commerce” sites made some of this easier, but they were mirrors of the synthetic worlds not integrated into them to the degree that might happen once Google starts crawling the object tags and place names in SL.

Does any of this matter? Well, again, I’m not an economist. Raph argued that the Metabuck was a convenient exchange mechanism, much as the Twinity “synthetic currency” will partly facilitate transactions, with users also able to use other third parties to move goods and currency around. But Linden has pegged its currency to the US Dollar (strangely, there has been very little fluctuation in this exchange rate in spite the weakening of the USD). This means that Linden may or may not be adjusting the SL economy to some degree. In a world where there’s no decay, the effects of MUDflation are surely being felt by someone who, say, sold clothes a year ago versus today. Linden can make partial adjustments for that by feeding the Linden.

But what happens as the economy shifts off world? The implications for the change in search extend beyond how search results are returned – they imply an opening up of how we think about how virtual objects can be accessed – we no longer need to pass through the doors of the garden to get inside and see what’s on offer.

So two things happen – one, a great deal of a virtual economy might end up outside the hands of the world builder. Linden can fluctuate the currency supply because people need Lindens to buy stuff, because of their membership tier, etc. But as objects become increasingly commodified and MUDflation increases, and more importantly as the value of transactions outside of the platform increase as a proportion, it seems unclear to me how we’ll know what stuff is WORTH – the exchange rate will be artificial, we won’t know the true value of the economy, and we won’t be able to make business decisions and will start pigeon-holing “real world” ROI models into economies that are anything but usual.

It will be very intriguing to see how businesses and virtual worlds react when we’re hit with a collapsing virtual economy. We may very well turn to platform owners and say “how could you let this happen” only to realize they took their hands off the levers long ago.

A Move to Media-Verticle from World-Horizons
Just as intriguing are the social implications for the opening up of virtual economies.

It strikes me that as the walls come tumbling down, as the membrane disappears, the concept of synthetic worlds is changing – the worlds (in particular the ‘non game’ worlds) are less contained. I’ve talked before about how I think the spaces within worlds are increasingly turning into islands – literally or otherwise. This concept of real estate is fascinating for a number of reasons – culturally, socially, legally, etc.

With Metaplace, the islands are explicit – there’s no “mainland”. Users build their own self contained islands and access each other through Web applications, Web sites and shared marketplaces (perhaps much like capital cities in Wow?) The membrane of each individual world will be as permeable, I suppose, as an individual makes it – um, and I assume these will be individuals highly skilled at world building and virtual economies.

With Twinity, their premise is mainland only – you won’t be able to add buildings, so you’ll be basically buying real estate. Each building will be its own ’store’, living space. By buying into the Twinity experience, you’ll be buying into the idea that they are creating a large, life-like island and you’re gonna be a renter. Think of Twinity as the eBay of virtual worlds – sure, you can sell objects, but having an eBay storefront shows you mean business.

Second Life is increasingly an island-driven economy. I find it hard to imagine that mainland parcels, unless really well developed, will find their way into the Google radar as easily as a well constructed chain of islands with appropriate SLURL linkages off of privately-developed Web sites.

It seems to me that the future of these worlds, as the economy opens up and the boundaries come down, are becoming verticle aross media rather than horizontal across worlds. What I mean by this is that much like the Web, people will aggregate around areas of interest, which will then flow up and down rather than across virtual spaces.

Let’s say you have, say, an interest in architecture, a sexual fetish or roleplay preference, or a profession. Virtual worlds were places where you could meet others with a similar interest – social spaces, groups, in-world messaging, clubs, and builds all allowed you to connect up with these people. Because the membrane still existed (to a greater or lesser degree depending), your interactions with your peers and within the group tended to run across boundaries within virtual worlds.

You needed to GO shopping and not sit in your virtual home surfing SLExchange. You wanted to congregate in social spaces to keep in touch with your peers, share landmarks, give them an object, or to build something together. As interoperability increases (again, see Raph’s comments on the ability to port external objects into Metaplace) it increasingly means we don’t even need to ENTER worlds to build in them.

So interests will go vertical – instead of moving from sim to sim within a world, you’re now far more likely to move from a blog, to your Facebook profile (with its avatar plug-in), to a marketplace, to a currency trader, and then back in world to attend an event with friends (a symposium, an RP activity, etc).

This isn’t new – in the gaming world fan sites, conferences etc. were the early verticals. In those cases, however, the “islands” that they were vertical into were entire worlds with rules and rewards that made it a virtue to get out of your house on occassion. Those islands also benefited from platform owners who, while sometimes godlike and inscrutable, protected the economy and kept restrictions in place to protect the membrane.

Castranova has advocated for the protection of the “play space” in virtual worlds, including quite recently.

Thinking about the implications of economies opening up, it’s clear that the protections that we might assume we enjoy are disappearing (if their disappearance hasn’t already happened). With a game, you could once be pretty much assured that there were enough hands on the lever that the only thing that would “kill” a world was an exodus of players. Your personal economy could be slammed if the platform owners nerfed a resource, but at least you knew where the change was coming from.

Linden will be no more able in 3-4 years (ah, a lifetime from now, I know, good luck) to control its currency than it seems it can control latency. As visitors to these synthetic worlds it’s incumbent on us to understand the nature of the flow of goods, ideas and currency related to these places where we can find so much joy, emotion, experience, and, sure, frustration.

But I also think its incumbent on us to not just hope that the membrane will remain faintly intact but to instead continue a wider dialogue about how to facilitate meaning, interaction, community and creativity across the borders, not just in them.

If Castranova is losing the argument, world by world, for a protection of virtual economies then it becomes more and more important to not just figure out how to protect the “play” that occurs within those worlds (an increasingly difficult task) but to think of ways to bring the ‘play’ out into that place from which we’re supposedly all running – real life.