Xbox Live 360.com. Games and Games.

A colleague and fellow Dallas IGDA board member, Myke Sanders, recently forwarded me a data analysis he did on the habits of players who purchase gold from gold farmers. It's a really fascinating bit of data, one that may give developers some revised perspective on how to combat the gold farming issue while continuing to avoid micro-transactions, implementing real money auctions, and/or monetizing the currency. While this isn't an overly legal issue, I still wanted to take an opportunity to comment on the findings. The full piece is available here (PDF).

Myke notes two specific spikes on each graph: There were spikes at single and highly repetitive (12) transactions within the 90 day window of the study. There was also a large spike of people making high value transactions. I would be interested to see a correlated data set of these two, but based on Myke's analysis, there were basically two groups of people: those buying a huge amount of gold once in 90 days, and those who bought almost weekly but for a much smaller sum. He reasons that the first group might be making purchases for a single, say, epic mount or piece of equipment while others might be buying to supply a weekly raid. He goes on to theorize that a loan system might satisfy the former while non-transferable buffs that are a better alternative to disposable equipment might satisfy the latter.

In general, I would tend to agree. It's almost surprising there hasn't been a 'Bank of WarCraft' to date, though I would have to say that it would need to be operated by Blizzard rather than by players (i.e. virtual loan sharks). Of course, Blizzard may need to employ an economist to at least design the system such that we don't end up with an financial meltdown in Azeroth. It would be very easy to over saturate the market with a virtual currency, which would lead to inflation and thereby throw off the balance of the game between the bank and random drops. It would also be interesting if you could actually earn interest on gold deposits. Another alternative might be a virtual credit market, but that gets even more complex. I guess the real questions is whether players want their virtual world to mimic the real world more or not.

The solution for the second group tends to be a little more complex, as it would take likely a pretty good revision to the overall mechanics of the game to get the kinds of buffs being proposed, or at least a major change to the game as it's currently available. Granted, this is not impossible, but I imagine the sudden change in strategy might not go over well with many players (a la the New Game Enhancements in Star Wars Galaxies) and may be better suited as an approach for developers of future games.

As a side note, it will be interesting to see if developers take advantage of the wide latitude granted by the Glider decision in order to go after gold farmers in a similar manner. The recent DMCA applications won't apply, but it is a similar inducement to break the EULA/TOS of most games.

I certainly hope that this will be the first of many studies into actual buying habits of those who utilize the services of gold farmers and even virtual commodity salespeople. While there has been plenty of anecdotal evidence over the years, only actual data like this will provide enough information to actually combat the problem, if your game is designed to avoid such outside monetary influences, by changing certain game design elements to be more in line with the way people want to play. Similarly, if you're looking to start a game that encourages monetization of one sort or another, this is likely a good source of information for your design decisions as well.

This week's LGJ revisits the always popular topic of taxing virtual worlds.

Read on!

In the most recent LGJ, I apply law to the allegations discrimination against World of Warcraft players.

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This week's LGJ focuses on the potential problems associated with virtual currency, and what might drive the government to regulate it.

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This week's Law of the Game on Joystiq tackles virtual world taxes.

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On this week's Law of the Game on Joystiq, MMO theft.

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A point I brought up in my 2005 paper, which was recently touched on by Symantec according to an article, is the possibility for money laundering through MMO games. The idea is simple enough: push money through virtual transactions to lose the connection to crime. According to the report:

"... a criminal enterprise could open several thousand MMOG accounts. Each could be used to trade with other players in the purchase or sale of in-game assets, the funds from which would ultimately be withdrawn from the accounts. Since thousands of accounts may engage in millions of transactions, each with small profits or losses, it would be difficult to trace the true source of the funds when they are withdrawn. These transactions can be conducted worldwide without the oversight that typically accompanies international bank remittances. In fact, in February 2007, China's central bank and finance ministries called upon companies to stop trading QQ coins and virtual currencies, presumably to curb the unregulated exchange of currency."

I estimate that Symantec's solution to the problem is with greater security and client verification. However, a more simplistic approach would be taxation on virtual revenue, even if the concept is opposed by players. Think of it this way: Right now, income from sales in MMO games is supposed to be reported as ordinary income. Many people neglect to do this whatsoever. If, instead, there was automatic reporting to the IRS (or other country's tax agency, based on the residence of the player) of income derived from MMO sales, then the tax agency would know to expect payment from said individuals. Moreover, it ties a person to the MMO account, eliminating the possibility of spreading one person over 100 accounts and going unnoticed. Of course, this would have to be based on a cash out value, as has been suggested before by both myself and Bryan Camp. In any event, the process of losing money in the transaction generally makes different things less appealing as money laundering vehicles, and thus virtual taxation could be one answer to the problem.


[Via Kotaku]

An interesting piece was recently posted on Virtually Blind by Israeli attorney Jonathan J. Klinger. The crux of his argument was:

For example, earlier this year, Michael Carlton, CEO of online sportsbook Victor Chandler, was arrested in Israel. An Israeli court asserted jurisdiction over Carlton, a foreign citizen, and stated that as long as a portion of the illegal activity (here, gambling) occurred in Israel, there is no need for universal jurisdiction, and the website operator is subjected to the Israeli law (State v. Carlton, Hebrew decision). The court stated that it was in Victor Chandler’s responsibility to bar all communication from Israel since the activity they offer is illegal for Israeli citizens to participate in.

Using the same rationale, any employee of Blizzard or Linden Lab could be subjected to the Israeli penal code, as they are allowing illegal conduct (under Israeli law) to take place on their servers. Blizzard could face harsher liability as it distributes World of Warcraft actively in Israel, while Second Life is only available for download.

The only solution to these legal problems is to separate players according to countries, or even states (as some state laws in the US differ regarding pornography and violence). Any other solution may cause a conflict of laws, and subject the industry to liability twice: the first is the constitutional tort, where legal expression is barred though there is no local legal reason to bar it (e.g. ageplay in the U.S.) and the second is potential criminal prosecution by another state which may prosecute company leaders for user actions that are actually legal in the home country of the company.

I, however, do not agree. Moreover, I believe the precedent set by Isreal should be looked at with disdain by the legal community. Take note here that I'm departing from an actual analysis, which the above quote limits itself to, and moving into theoretical alternatives that would generally be beneficial to all those involved.

I want to begin with a meta-theoretical statement. The purpose of virtual worlds is to bring people together. As such, the solution that either people must be divided on geographical lines or game providers must be subjected to liability is a pure frustration of purpose. Of course, the concept of making a "virtual world" an actual nation is equally blasphemous. In fact, it seems at though negative consequences could easily result from creating "independent nations" within nations that exist on servers. So, what solutions are available to the problem? Clearly the social conscience of a person in Texas cannot be made to match a person in Isreal or Japan or France. That idea is equally impracticable, and in the same vein, the pipedream of creating "universal rules" to govern the internet is impracticable. Moreover, the idea that we allow complete free speech to govern our online worlds only gives rise to the most deplorable of content, as child predators would take refuge under the "free speech" of the digital world. There is also the final consideration that, ultimately, the server space is private property. The Grid belongs to Linden. Azeroth (all of the various iterations on the various servers) belongs to Blizzard.

So where does this leave possible solutions? Governing in-world conduct being left to the worlds owners, how should jurisdiction be handled? I think it is time for a paradigm shift an analyzing jurisdictional elements with virtual worlds. Put simply: Server location dictates jurisdiction. While this idea won't bode will with the "minimum contacts" proponents out there, the theory does have a logical base. Ultimately, the activity occurs on the server, not at the user end. I can click buttons all day long on my personal computer, but without the server end, there is no net effect. As such, the server is the critical component. This is the basis for a client-server model, and this is, in my opinion, how it should be treated under the law. This provides the maximum certainty for the developer.

This, of course, leaves the issue of performing an activity illegal in one country on a server located in another. Ultimately, issues like these will have to be resolved by the governments, rather than putting the developer in the line of fire or forcing the defeat of the purpose of virtual worlds. So, for example, if a 3rd world nation hosts "Child Porn: The Game," it will be up to the international community to pressure that country to abolish the game. (Moreover, with something as pernicious as child pornography, local governments could likely track subscriptions and users in order to find offenses in the local countries. I can't say I favor invasion of privacy, but I also can't say I oppose using any means necessary to remove dangerous predators from the streets.) On the other hand, with something as hotly debated as online gambling, rather than leaving the user and developer in difficult and awkward positions, it would have to be resolved between nations. Ultimately, either the moralists would win, or the simple positive economics would. In either case, the burden is on the government, or indirectly on society as a whole, rather than punishing the developer or the user based on what are largely ambiguous lines.

Will this paradigm shift happen? It seems doubtful given the overwhelming analysis of jurisdiction to the contrary. However, I think that we have reached a time in which the old analysis need to be seriously re-examined based on the dramatically different world and virtual worlds that technology has created.

[Via Virtually Blind]

Following in the footsteps of Microsoft, Blizzard unveiled their own "Machinima Rules" late last week. The approach taken by these rules, however, is the complete opposite of Microsoft's approach in my opinion.

First and foremost, their primary concern (like Microsoft's) is that the use isn't commercial. Rather than going the strictly non-profit route, Blizzard essentially gives the stamp of approval to the method that Rooster Teeth made popular (even though Rooster Teeth has no Blizzard-derived machinima at this time). Specifically, there has to be a free version of the video available, even if there is a pay version with, say, better download speed or, I assume, in higher resolution. There's also no restriction on donations.

Second, there is no restrictions on elements of the game. You're either allowed to make your movie or not. So, the sound effects and background music appear to be fair game.

Third, Blizzard has placed a pretty harsh, but simple, content restriction that all movies keep within the "T (Teen)" or "PG-13" type content level. (Blizzard specifically cites "T," but it seems relatively safe to assume that that equates to a PG-13 rating.) While this is much stricter than Microsoft's restriction, it's also a fairly established bright line. According to the ESRB, "Titles rated T (Teen) have content that may be suitable for ages 13 and older. Titles in this category may contain violence, suggestive themes, crude humor, minimal blood, simulated gambling, and/or infrequent use of strong language."

Fourth, Blizzard explicitly allows the use of movies in various contests, but a license is required. However, it seems that as long as the content rules have been followed, a license should come with little resistance.

Fifth, educational use is specifically allowed. I find this comforting, but many people would argue that "fair use" would allow educational use regardless. "Fair use" can be read narrowly or broadly, and I think the clarification here does a lot of good in that regard.

Sixth, they place a 10 second restriction on sponsor inclusion. This seems to go toward the "no commercial use" ends more than anything, and I expect few will have a real problem with this restriction.

Finally, they make no mention of a commercial license per se, but do give a specific contact e-mail address for questions.

With Microsoft and Blizzard on board, I am left to wonder how long before other companies follow suit. I also wonder if Microsoft may follow some of Blizzard's leads in the revisions of their rules which are supposedly being drafted. In any case, this is generally good news for the various WoW machinimators out there.

[Via WOWInsider, Machinima for Dummies]

An editorial on China View has some rather harsh words for the online gaming industry in China, specifically for those in the "black market" of virtual goods. The sibling to the gold farming issue in China is the theft and resale of virtual goods.

The article brings up a number of interesting points, but also seems to confuse the "virtual theft" concept with the "gold farming" one, although both issues have been met with cries for regulation, along with the already regulated "underage gaming" issue in China.

The editorial, however, leaves me with mixed feelings. On the one hand, it is always positive to see people outside the gaming establishment finally realize and accept that these virtual goods, be they land in Second Life or an Infinity Blade in World of Warcraft, do have a "value." Moreover, the idea of protecting players from theft is definitely a positive one. On the other hand, the idea of additional government regulations never seems to be the most appropriate approach. While this could be in China rather than the US, I still can't help but feel the regulations are inappropriate.

The major difficulty would be the near impossibility of government alone policing those systems, but on the flip side, the game providers lack any real enforcement tools if and when they can track virtual wrongdoings. The logical outcome would be a necessity for cooperation between government and game providers, but I think the mandates should come from the game providers, not the government. After all, the government does not seem to, on a basic level, understand these games. This would only lead to ineffective legislation that would breed resentment in the gaming community or lead to a downward trend in the games overall.

Regardless of your stance on game regulation, the wisdom of self regulation is evident in many industries, from law to medicine. In this case, where a real crime is involved, similar cooperation has worked for other industries. Of course, only time will tell if any actual regulation is attempted, but given the trend to monetize virtual worlds, some sort of "law enforcement" is almost inevitable.

[Via GamePolitics]

Back in late April I finished an article titled A Tale of Two Worlds: New U.S. Gambling Laws and the MMORPG. That article has been published in the now available August edition of the Gaming Law Review. I must admit that some of the substantive MMORPG analysis is a bit simplistic (mostly in defining the volume of real money transactions as they relate to World of Warcraft), in part due to to audience considerations, but the legal analysis is quite thorough. While my SSRN revisions are still under review, the paper is available to those who may have access to the journal through academia or other means.

For those interested, here is the reference information:

Abstract

Full Citation:
Mark Methenitis. Gaming Law Review. 2007, 11(4): 436-439. doi:10.1089/glr.2007.11404.

Gaming Law Review, Volume 11, Number 4


[UPDATE: Just to clarify, the simplification was in the following regard: I assumed, for the purpose of the paper, that Blizzard's ban on real money transactions was completely effective, rather than just mostly effective. The concept of the "black market" complicated the comparison to a high degree and would have easily doubled the length of the paper. It also plays to a greater assumption that Blizzard will, in all likelyhood, continue to crack down and may eventually wholly eliminate real money transactions, even those on the "black market" type level.]

The Escapist is reporting on this suit, in which a World of Warcraft player is suing IGE. For those unfamiliar, IGE is a major seller of in game gold for a number of high profile games.

The suit essentially alleges that through their business activities, IGE is diluting the player experience. These allegations are made through a combination of consumer protection laws and interference with the contract of a third party.

The claim is in one way novel and in another way analogous to many other consumer protection claims. However, it will still stand to face the noticeable issue that Blizzard has elected not to pursue legal action in this matter. Arguably, Blizzard, as the purveyor of World of Warcraft, is in the better position to pursue IGE for selling gold as violations of the Terms of Service and License Agreement.

The outcome of this could also be critical to the virtual world, as it may clearly define who really has the power to sue over in-game activities, the game company or the player.

Out in the grand expanses of the world wide web, there are really two competing models of IP licensing in the MMO world. The first is followed by the vast majority of games, including the ever-popular World of Warcraft. The other is a more recent development employed by Second Life. After explaining these two in brief, I would like to propose an alternative "middle ground" which could significantly alter the MMO landscape. This IP model is accompanied by a brief discussion of a relevant business model which is closely related.

The World of Warcraft Model

I term this the "World of Warcraft" model, but it historically begins more in the Ultima Online age. The model is basically as follows: The developer provides all content, which is licensed to the user. The user has, basically, no rights under this model. In short, no matter what it took for you to get that Blackfury, the item is merely "on loan" to you from the developer. You can never truly own it. This model is the most popular because it protects the assets of the developer, specifically all the intellectual property that went into the game you're playing. After years of development, most developers don't want to chance anyone walking away with even part of their intellectual property.

The Second Life Model

The Second Life model is much different. In short, the developer provides the basics of the world, but it is up to the user to fill in the rest. The upshot to this model is the user owns their IP. The downside, on the other hand, is that to get a truly enveloping storyline like WoW, it takes a user developing one, not to mention the play mechanics to accompany it. For those seeking profit, this model is ideal. For those looking for an adventure, elsewhere would probably be a better choice.

An Alternative?

So, where does that leave the player? If they want an adventure, the WoW model is the choice, but they never truly have any interest in what they've accomplished. On the flip side, the SL model gives unlimited ownership, but no pre-written storyline to speak of. The alternative rests in an argument eBayers made for years while selling vitrual goods they did not truly own.

The alternative boils down to drafting a license in such a manner that the player does not own the item he has acquired, rather his effort to acquire it salable. In terms of drafting, there are two likely ways to create this system:
1. Establish a license that acknowledges player effort and allows the sale of player "effort" vis a vis the sale of items.
2. Draft the license in such a way that each individual game property is granted based on a license that is transferable only between players.

Of course, to continue to exert proper intellectual property controls over these licenses, the developer would have to implement something else. Specifically, an integrated real money auction system. Let's be perfectly honest: People are willing to pay money for characters and items in MMORPGs. Moreover, while the eBay ban has slowed the market, it has by no means shut it down. So, what is a developer to do? Police the market at a high cost?

The alternative here, of course, is to create your own auction. The business model is simple enough: Allow players to list, buy and sell items and characters. Provide for integrated exchange tools in the game. Use an online payment system to automate the process. Put in feedback. Then charge a transaction fee and you're making an even bigger profit off your MMO monster than your were before. While the coding may be difficult, the reward could be enormous. And such a system would not further entangle your development company with the IRS, in case that was a concern. (Players would be on their own to report MMO profits to Uncle Sam, unless a regulatory change moves all MMO income from ordinary income to gambling winnings.)

Conclusion

In short, it is not beyond the realm of possibility for a developer to legitimize real money trades in games where they wish to retain the majority of the rights to the IP. It would take a concerted effort and more work than the creation of a typical MMO, but the potential profit from such a system seems limitless. Of course, a new, carefully drafted license as noted above would be an absolute must to be sure that the developer's rights are protected.

[Update: It would seem Joystiq is reading my mind today. In fact, Sony's StationExchange operates on a similar model to what I've suggested here. Check back in the near future for a more in-depth analysis of the Sony model.]

1UP recently posted this article, which originally ran in Games for Windows magazine this month. Taxing virtual economies has been something I've looked into since 2005, and based on the current state of the World (of Warcraft), residents of Azeroth do not need to worry about the IRS auditing them because of the two Darkstone Claymores you found, or the Plated Abomination Ribcage you're wearing.

The article's basic premise is largely correct: Taxable income, as defined by the IRS, includes pretty much everything. This can include income from the sale of intangible property. However, even ignoring the ownership issues presented in the article, the present reality poses a more significant sticking point for the IRS. Specifically, the goods in Azeroth have no actual value. As most players remember, the eBay market for World of Warcraft goods ground to an absolute halt in the wake of a major crackdown. As a result, there is no longer an approximate exchange rate of World of Warcraft gold to US dollars, which further means that items have no value in US dollars, at least not one that is easily determined. Moreover, the market is essentially gone. The occasional friend gives friend $20 for a Spiteblade is not a frequent enough occurrence for the IRS to take notice or care about what is, all in all, now a negligible amount of income.

The closest allegory is a company dealing in its own intellectual property. For this example, let us say a company owns a trademark. Ordinarily, income from the sale of that trademark would be taxable, and changes in the value are reported in taxes (not as income, but the finer points of intellectual property valuation and taxation are a lengthy discussion). However, the company has a freely alienable piece of intellectual property. A player does not. The player is limited to trade their item in the constraints of the game for other property in the game.

This stands in stark contrast to the state of affairs in Second Life, which I will be addressing in an upcoming article. This also stands in contrast to the former state of affairs in the World, when eBay fueled a real world economy for virtual goods. There was a significant argument for taxing virtual goods when they were transferable for real money, and undoubtedly the volume of those transactions raised the eyebrows of at least a few agents of the IRS.

In any event, the likelihood of the IRS opening an Azeroth office seems remote at best, as there is no real world value for them to be taxing because of the basic lack of transferability for actual, taxable income. This will likely remain the case so long as Azeroth remains an economy independent of the US dollar. Should the situation begin to return to the eBay marketplace that dominated until just recently, or should a Second Life approach be taken in, say, World of Warcraft II or World of Starcraft, then the IRS may begin to pay new attention to the resale value of your Nerubian Slavemaker.

I've noticed the comments about the upcoming MMORPG content. While I don't have any of the new content ready yet, other than my second post, I thought I would take the time to re-link an old paper I wrote about MMORPG gambling. You can read the paper here.

I re-posted the paper on GoogleDocs since my TTU posting will expire in the not too distant future. That paper has been referenced many times, according to my most recent searches, including Wikipedia, Kotaku, Answers.com, and other scholarly papers posted online. A quick google search will generate quite a few results.

One note on the content of the paper: it is officially out of date. Because of changes to eBay policy on the sale of virtual goods and the passage of the Unlawful Internet Gambling Enforcement Act of 2006, a some of the current analysis no longer applies, other than in the theoretical sense. I've written an update, but due to some potential publication restrictions, I cannot post the update at this time. Perhaps it will make an appearance here in the future.