The Effects of Secondary Markets on Primary Innovation in MMOGs

Over the past decade, the popularity of Massively Multiplayer Online Games (MMOGs) has led to an incredible amount of development by major game producers. With revenues in the billions of dollars each year, over $1.7B for Blizzard/Vivendi’s World of Warcraft alone (Boyer), this industry has grown to include hundreds of titles.  These numbers have game producers hurrying to figure out the best way to capitalize on this fast growing source of revenue. As with other high growth markets, secondary markets have developed to satisfy the needs of customers in the primary market that either can’t or won’t be met by primary market makers. Not surprisingly, a market this large, approximately $1B (Brightman), has attracted the attention of entrepreneurs looking for opportunities to support or supplement the primary activities in these markets with products and services that enhance the gamers’ experience.

There are many different forms of secondary markets in the gaming world, some legitimate and legal, and others which have been deemed by game developers to be illegitimate, or even illegal. An example of legitimate secondary market is the host of gaming magazines and websites that offer strategies, content guides, and communities where gamers exchange ideas. An illegitimate market is generally defined as one where people exchange real world currency for characters (avatars), items, or in game currency in ways that violate the Terms of Service defined by the game developers. I will examine how the nature, and implicit goals of a game, affects its interactions with secondary markets. Further, I will argue that the “illegitimate” markets have had a direct impact on primary innovation, shaping current and future game design very quickly to account for these markets’ impact on the value of in-game assets.

I will focus primarily on Vivendi’s The World of Warcraft (WoW) and use Linden Research’s Second Life (SL) as an example of a vastly different approach. In order to effectively explain the impact, and resulting strategies of the game developers, I will detail how value is created and measured in MMOGs , a brief history of secondary markets in MMOGs, their current revenue models and legal concerns, the vastly different responses from Vivendi and Linden Research, the role and impact of secondary markets on design innovations WoW and SL and , finally, my prediction of the impact these markets will have on future game development.

 How Value is Created and Measured in MMOGs

In order to understand the secondary markets that grew up around MMOGs, it is important to look at how value is created and measured in the primary market, the virtual world of the MMOG. The adage “Time is money” is certainly apropos in this case. The games are designed to require increasing amounts of time for higher and higher levels of success. From the point of view of the game companies, this makes sense for many reasons. The primary reason is that in their business model, time does in fact equal money. They, almost universally, charge a monthly subscription fee with WoW costing approximately $15/mo and SL’s monthly charge dependent on what you own in game. Ultimately, game developers are incented by their pricing scheme to find ways to get players to continue to pay their subscriptions. There are several tactics employed in game and community design that help to accomplish this. All of them are in some way designed to play off of one of the player’s intrinsic motivations. Manninen and Kujanpää argue that these motivations fall into three categories: Achievment, Social, Immersion.

(Manninen and Kujanpää 28)

If this is the way that a player measures value, then it can be argued that products and services provided by secondary markets can threaten the game designers’ ability to control the player’s understanding of these values.

Achievement, Social, and Immersion Values in Action

In all of the major MMOGs the player is represented by an avatar. This functional component of game design has a direct impact on the player’s interaction with the game world and their perception of value. Because the avatar is the player’s “physical” presence in the game world, avatars are judged in much the same way that people are judged upon meeting at a gathering of peers. The appearance and/or property of the avatar, therefore, is the equivalent of the first impression gotten when seeing a well dressed person step out of a BMW versus a person in an ill fitting clothes sitting against a building. Human beings are culturally programmed to make this kind of split second analysis. Therefore, property gained through the most challenging game content is distinct in appearance, and ownership of this property along with the social knowledge of its origins provide the same types of implicit knowledge employed when judging the person on the sidewalk or the person getting out of the BMW. Frequently, this property is actually “worn” by the avatar. In other words, the game designers have provided all the same visual and social queues that make our instant evaluations of one another possible.

In WoW, game designers have ensured that there is a formidable time commitment, hundreds of hours in my own experience, associated with acquiring the most sought-after rewards. To keep players motivated, a ladder of achievement has been implemented through shorter term goals that can be attained by a solitary player in few hours.

Completing quests or missions, slaying beasts, crafting artifacts, or harvesting minerals gain experience points that, at times, result in leveling up…In this manner the character advances periodically towards [a] chosen direction. (Manninen and Kujanpää 26)

 

Giving players a sense of accomplishment is a necessity for maintaining interest in continuing to compete with one another.  A cornerstone of the achievement value of a character, or avatar, is that “players get satisfaction from advancing, competing, and being self sufficient in the game. Players enjoy becoming better in achieving the chosen objectives and excelling over each other.” The emotional content should be familiar to anyone who has competed for a raise, or a corner office, or wanted to buy an object of status (a famous piece of art). As a result, the player is able to define the value of this relative success, of winning the completion between herself and her fellow players, in terms of real world assets, time and money.

It is at this intersection between the virtual and real valuation that the immersion value of the character and the game become critically important. It is also where secondary markets tend to play the biggest role. The immersive qualities of a game give the player a sense of separation from reality. In that sense, achievements within the game can be said to have value in and of themselves. If immersion is among the key values of game design, when secondary market makers allow gamers to purchase in-game assets with real world currency it can create a disruption in the perceived value of those assets. In other words, if I can buy something that I see on another character in the game world for US$200 the immersion value of that achievement is immediately diminished. If it is widely understood that it is possible to buy that achievement, the social and achievement value of that reward also become diminished. One could argue that the achievement value changes from “you have to be a dedicated player to achieve that” to “you need a lot of extra cash to get that”. From the perspective of garnering recurring revenue, this kind of change in thinking can be very dangerous because the goal is to have players avoid thinking about the opportunity cost of spending their time in the game, and in turn, increase the intrinsic value of each achievement.

 

Secondary Markets: their Business Models and Legal Issues

The earliest secondary markets were started by players as a way to exchange goods and services within the game. These early transactions were easily abused and fraud was rampant. It is exactly because of this fraud that people started founding companies to help to legitimize the process of exchanging these digital assets and provide some assurances to buyers and sellers. The need and initial solution, as is so often the case, was identified by the consumers. (Brightman)

In addition to offering market-making services, these companies began to create sought after assets by hiring people to play the games and obtain them through the normal course of play. They would then re-sell these assets to the market. The simplest example of this is in-game currency. Every major MMOG has some form of currency. In the case of WoW, it is simply gold, silver, and copper (100 copper = 1 silver, 100 silver = 1g). On their websites, customers would purchase 100 – 10000 gold packages, to be delivered in game, by paying up front in real world currency. Employees of these asset resellers would then spend hours a day doing activities in-game that would reward them with gold. Once they had gathered enough gold, they would deliver the gold to the requesting person’s avatar. As of the writing of this paper the approximate exchange rate of USD for gold in WoW is 3.6 cents per gold.

In addition to asset exchanges companies began offering leveling services. In this case, the consumer would pay the company to play her account and progress her avatar through quests and activities.  This service is very ala carte, allowing customers to choose exactly how much they want to company to do for them. As a point of reference, however, the current rate for taking an avatar from creation (Level 1) to maximum level (Level 70) is approximately US$280 and will delivered in about 23 days. From experience, this takes approximately 12days of play time. That is it takes about 288 hours of time spent in the game. That works out to about US$1 per hour for the person actually doing the work. They only guarantee a certain amount of in-game currency on the character, thus giving them the ability to use the account to acquire in-game currency for resale at the same time they are actually performing the tasks to level up the character. Still, it is clear that this isn’t a job that can provide a reasonable standard of living in most western countries. Many of these companies hire from, or have offices in, Southeast Asia. The arbitrage on the labor is a factor critical to the success of these markets. There would be almost no way to sustain them without substantially raising prices, and thus making their offering less attractive.

Based on the business model description, the role of these markets for WoW is relatively clear. The market serves to either support the player’s achievement through the purchasing of in-game currency (which is used to purchase other in-game assets), or to circumvent the time commitment required to have a highly progressed avatar or other achievement. From the consumer perspective, however, this represents a familiar paradigm. In a capitalist society, the ability to use wealth to increase one’s chance of success is nothing new.

There are certainly examples of this in other competitive environments. Think of the billions of dollars a year spent on performance enhancing drugs. Professional sports players are continuously in the news for using supplements and drugs that push the limits of what is considered legal. The goal is to achieve the best possible performance available with the constraint being legality. The Terms of Service for WoW clearly state that any of the content created through play is the property of Blizzard. Essentially, you are renting your account from them. Because you don’t own it, or the things that you create with it, you don’t have the legal right to resell it. As a result, the activity of the resellers can be defined as being in violation of the terms of service and, therefore, illegal. This claim over ownership is under scrutiny, however. There have been few cases brought before courts, but one such case in Korea was decided in favor of the player claiming that the work put into creating the avatar was the deciding factor when determining ownership. (MMORPG.com)

In stark contrast to this approach, Linden Research legitimized the secondary market for in game currency by announcing an exchange rate between USD Linden bucks. They even went so far as to allow game currency to be withdrawn from special ATMs. A currency trading market developed around the game. Initially, the secondary market drew people to the game and network effects worked to bolster a rapid growth in popularity. As more real capital was put into the market, concerns grew over the risk of investment, and a consortium was put together to confer on potential regulations to protect investors. Weeks after the consortium concluded that these regulations were merited, the market collapsed on evidence of corruption/distortion of the currency exchange. (Bloomfield) While Second Life was, admittedly, a very different type of game, people played it to feel like Donald Trump whereas people are more likely to play Warcraft to feel like Genghis Khan, the ocean of difference in the way that they approached the role of secondary markets is noteworthy.

It is here that the discourse on the role of the Secondary markets becomes heated. The nature of the argument is not a discussion on whether there is legitimate demand for the products in the secondary markets. Instead game developers are concerned that the provision of those services should be the responsibility, and income, of the primary market maker. In other words, it is clear to the game companies that the secondary markets are filling a real demand. This recognition is at the core of the difference between Linden and Blizzard’s approach to dealing with them. Linden’s strategy was to create and control the secondary market, whereas Blizzard focused, after failing with other strategies, to re-engineer the game itself to force the secondary markets into obsolescence

Innovating in response to secondary markets

 If we return to the assumption that the goal of MMOG developers is to attract the maximum number new customers while retaining as many recurring subscription payments as possible, secondary markets become a double edged blade. While they help new entrants jump ahead in terms of achievement, thus reducing barriers to entry, the widespread knowledge that it is possible to circumvent the system of achievements in that way deteriorates the long term value of game play. A balance must be struck, therefore, in order to make it possible for new entrants into the market to be able to make measurable progress while still allowing long time subscribers’ achievements to be meaningful. Understanding what motivates people to play (and pay) has informed Blizzard’s response to this challenge.

As mentioned earlier, most major MMOGs have made it clear in their Terms of Service agreement that profiting in any way from activities performed in-game is a violation. Blizzard, along with many other developers, first reaction was to attempt to enforce that agreement. By tracking activities, patterns of behavior, and encouraging the “good citizens” to report infractions, a concerted effort was made to ban (permanently disable) as many accounts as possible that were found to violate the terms of that agreement. It is worth noting that these are mostly paid accounts, which signals Blizzard’s unease at the potential impact of the services they were providing if they were willing to forgo the revenue that they represented. (MMORPG.com) Interestingly, the companies providing these verboten services found it profitable enough to continue creating accounts despite the banning. When it became known that Blizzard had flagged particular types of activities as suspicious, companies providing these services adapted everything from where they gathered gold in-game to the delivery mechanism used. As a result, this type of enforcement becomes a treadmill, and Blizzard found itself, after banning tens of thousands of accounts, with crops of new accounts created every day and very little slow-down in delivery of the activities it was looking to curtail. As a player, it was abundantly clear that they had missed the point. The real deficiency wasn’t that they couldn’t identify and ban the accounts associated with these services, it was that the game design failed to do everything possible to minimize the value of these services. It wasn’t until eight months ago, coinciding with the major release of new content, that Blizzard began to innovatively strike at the heart of the secondary market.

The first change was that gold became significantly easier to acquire in the game. Previously it would take an hour to earn anywhere from 50-100 gold in the game. After the change was implemented, one could easily make 150-200g in the same amount of time. Simultaneously, they altered the importance of gold in gaining powerful rewards from game content. Existing rewards, had their gold costs reduced, and new rewards could be purchased through collecting items from within the world that could not be traded to another character. This meant that for some of the most valuable rewards available, there was no way to use gold to acquire them. There was a good deal of inflation in the short term on goods sold on the legitimate in-game markets. Over time, however, few people, just as in life, are industrious enough to earn at that rate, and as a result inflation leveled out. There are still some achievements which require a large in-game currency investment, but they are few represent a very small percentage of the highly valued achievements available to players. This change had the effect of reassuring established players that their achievements wouldn’t be devalued because someone could buy their way into them, thus increasing the achievement value and social value of their progress.

The second game design change they made was to reduce the level of effort required to make progress from the earliest levels. As discussed earlier, players level up their characters through a series of activities, called quests, which yield experience points. To gain a new level, players must gain a set number of points. Blizzard scaled this back in two ways; first, it increased the amount of experience gained from activities in-game by 30%. This has the effect of encouraging people to complete quests as a primary method of leveling up. These quests are frequently accompanied by a rich story line and completing them increases the immersion value of the game experience. Second, it decreased the amount of experience necessary to achieve subsequent levels by 30%. This has the effect of explicitly speeding the leveling process and reducing the barriers to entry for new players.

These innovations in game design work together to bolster the achievement, social, and immersion value of the game content for both experienced and novice players. By addressing the actual deficiencies in game design, as opposed to trying to fight or control the secondary market, Blizzard was able to further its goal of reducing the impact of the secondary market on the value of in-game achievements while simultaneously reducing the primary factors that drove people to use those markets in the first place.

The long term impact of secondary markets on MMOGs

In the case of MMOGs, secondary markets tend to appear at the intersection of a consumer need with a game deficiency. While it may not be in a game developer’s best interest to own or embrace a secondary market, some level of tolerance is going to be necessary for helping to maintain a healthy gaming community. In one sense, as secondary markets develop they help to highlight the areas of game or game community that represent the most immediate pain points to subscribers. Moreover, these are problems that consumers simultaneously frustrated enough with and invested enough in to spend hard currency to resolve. With this understanding, it is possible for game developers to effectively outsource this analysis to secondary market makers. The challenge will be to ensure that the response and associated changes to game design are timely and effective because consumers have made it clear that they won’t suffer a problem that can be solved, no matter who provides the solution.

 

 

Works Cited

Boyer, Brandon. Vivendi Q3 Sales Up 19%, WoW Userbase Hits 9.3m. 14 November 2007. 24 November 2007 <http://www.gamasutra.com/php-bin/news_index.php?story=16250>.

Brightman, James. 10 May 2005. 27 October 2007 <http://www.gamedaily.com/articles/features/ige-president-on-the-emerging-secondary-market-for-mmos/67765/>.

Manninen, Tony and Tomi Kujanpää. “The Value of Virtual Assets – The Role of Game Characters in MMOGs.” Int. Journal of Business Science and Applied Management (2007): 21-33.

MMORPG.com. Special Debate: The Secondary Market and MMORPGs. 06 December 2006. 24 November 2007 <http://www.mmorpg.com/showFeature.cfm?B=&LOADFEATURE=1017&bhcp=1>.