TITLE OF PAPER: The Future of Cyberspace Economics PRESENTED BY: Edward Castronova CONFERENCE: O'Reilly Emerging Technology Conference DATE: 10 February 2004 LOCATION: Westin Horton Plaza, San Diego, USA. Plaza room. ---------------------------------------------------------------------- REAL-TIME NOTES / ANNOTATIONS OF THE PAPER: {If you've contributed, add your name, e-mail & URL at the bottom} Wants us to think about video games as a new form of communications technology - a distruptive form of communications technology. SYNTHETIC WORLDS What has happened in the last few years since 1997 has become a lot better. They're no longer text-based things, now you're playing what looks like a 1st-person shooter / virtual reality environment with us all existing in the same place at the same time. This appears to have been a critical leap and has generated a massive increase in usage, gone from being a fringe phenomenon to being a significant social activity - especially in Asia... 10-20 million users in 2003 * compare: attended basketball game, 21 million (US) * played basketball, 27 million (US) * This makes it actually useful and plausible to start subjecting it to economic analysis. Predictions of strong growth 10 years out * Basis: broadband and game industry * Don't know how much growth there will be in the next ten years - mainly because there is enormous supply-side growth from companies looking to capitalise on an emerging trend. The game MYST started a MMORPG, but then collapsed through lack of interest. Interesting spillages ("Spillage"-- In game environments, trading has become prevalent. Can exchange goods, currency has been developed.) * eBay * In a text-based environment, this is cumbersome. Need to constantly announce "magic hat for sale" until someone hears you and purchases the item. So the situation emerges: why use a cumbersome market when you can use ebay? And the trade has taken off since then. * Policy movements * This creates problems of course - because of the effects of governance and the influence of the real-world. If a server goes down and the goods vanish, and - for example - a person might lose a $1200 suit of armor, then there are legitimate issues of accountability and the law has started to get involved. In Korea, this has already gone to the courts; someone "stole" an item from a player, and it was worth the equivalent of $1200. Judge agreed, and the service had to pay the player the market value of the item. * Retreats from 'reality' Started to realise that there were interesting things going on - larger things than initially thought. Realised that when people like DARPA were coming in. ECONOMIC INDICATORS (Based on Ebay trade analysis; category 1645 in ebay) Asked himself "wouldn't it be interesting if someone did an economic analysis of this economy, much like is done by the World Bank on developing nations. Applied a "shadow pricing" analysis technique. * Annual GDP per capita: $2,000 (EverQuest) * The Annual productive GDP per capita is higher than in China. * Annual volume of eBay trade: $20 million (all anglo-Eurpoean except Everquest) * Has a category for these things specifically - even a category for Magic Wands; * This probably only accounts for around 40% (or is it doesn't include 40% - anyone know?) as Everquest is not included. They tried to remove themselves from this kind of trade. You can't win a war against free markets. Kill the market in one context, it pops up in another. Asian games aren't included either, as they have their own local trading markets which he thinks are probably bigger than the US eBay trade. * Annual volume of in-world trade a large multiple of eBay trade * A guess: $50m of out-world trade, times 20 = $1 billion of in-world trade * The $1 billion here is a rough estimation of the trade of play-money going on within the game if it were monetised. * Compare: Basketball shoes $834 million (US), Spectator sport $13.6 billion (US) Varying issues from within the industry about whether this kind of trade should occur or not. Some people don't like the idea that the high character next to them was bought, but on the other hand people are time-starved and may wish to circumvent or speed up some parts of their online experience... THE VIRTUAL ECONOMY * Synthetic scarcity. Misery is fun! (huh?) "Scarcity sucks." You have to make tradeoffs. Every time you choose something, you lose something else. Worlds that let you haven everything for free are *boring*. Scarcity is necessary for fun. (cf Orkut invitations?) (This is why Blogshares was fun, too.) [This is the stuff I'm interesting in reintroducing to online environments - different KINDS of scarcity for things like e-mail, social engagements, user names on online communities and the like... They don't have to match with offline scarcities of course - if they did, then there would be no point being online, but some kinds of inline scarcity might fix problems that currently exist TEC] "Scarcity is fun. Who knew?" * Users create all goods, including money * Grotesque inequality, but based on time investments alone * Rich and powerful people in the virtual world aren't the rich and powerful people in the real world. Powerful people in the real world don't have the *time* to do this. (But it's being *outsourced* now!) * MUDflation - rising prices at the high end, falling prices at the low end; overall increase in real wealth per capita * People can create money in the games, resulting in inflation. * Intense player interest in markets, prices and trading * The economy is an important part of the world. [So here's another question - are there trading elements to online communities and online economies that could help people organise real-life stuff better. cf. Ender's Game - TEC] * Urban locations appear at trade nodes THE VIRTUAL ECONOMY (Cont) * Out-world trade is between time-holders and money-holders * Frequent dupes, hacks, macros, exploits * No: taxation, storage fees, transportation costs, depreciation, insurance, finance. * Dangerous markets often quashed (no Drop items) * Evolution in favor of fluid markets (vendors) * Risk-less worlds and lawless worlds generally unpopular INFERENCE: A FUN ECONOMY HAS ... * Self-employment * Securely manageable risk * Observable, guaranteed formulas for building capital and wealth * No skill bottleneceks - with enough time, you eventually reach any goal * Relative income positions, inequality related to time only. [Shit we missed some stuff] [Table 1: A graph showing results of a questionnaire about whether EverQuest players visit Norrath frequently or are visitors/residents. Too quick to note :( ] [Table 2: Population characteristics, showing percentages of people who are single, educated to different levels, average ages, etc.] [Sideline: Interesting question from Cory, basically the question about the difference between the legal situation online and the legal situation off. After all a game works on the basis of entertainment, creating drama and fantasy, whereas real-life does not. Treating people badly and performing illegal actions online should be fine, but what does it mean when the financial situation blurs dramatically.] [Table 3: Norrath Characteristics. Showing things like how many hours players spend in the game, and characterstics of their avatars.] [Question about whether players are ditching other entertainment sources, cable, film etc. Hollywood wondering where their young audiences are going, and gaming companies knowing they're off playing Madden and in online worlds.] Q. HOW BIG WILL THESE PLACES REALLY BE? * Theory 1: Fun * Theory 2: Economics of communication * Avatar communication is more effective than other kinds. With avatars you can walk around and see the people you're communicating with. Avatar meetings are cheaper than real world meetings (!?). * What are the main competitors to avatar-to-avatar communication? Videoconferencing doesn't allow you to inspect in 3dimensional space. * Theory 3: Economics of Play * Piaget and co. place our drive to play a little above hunger and sex. Create something to exercise that drive and people will go there in high numbers. * Theory 4: Economics of Post-Industrial Cultural Decline * For how many people would living in a fantasy world be a legitimate and valuable and more pleasant experience than their actual reality? We get to go to cool conferences, but for many people being, say, a powerful wizard would be a great alternative. * There's a company in Hong Kong who employ people to make gold pieces in online worlds to make real world money. Supposedly bought out a competitior for $10 million. IMPLCIATIONS OF GROWTH * For the earth economy: negative * labour supply and consumption migrate online * central statistical offices measure only a decline in earth-based activity * "Where is everyone?" * Evidence * Lower Earth wages for intense EverQuest users * Asset value changes in response to world vs. world competition IMPLICATIONS THAT MATTER * From the standpoint of individual well being, the decline of Country X's GDP is not, in itself, indicative of a problem. * Much well-being is not material * GDP is not consumption * A country is not a person * To ask about well-being is to ask about the status of individual people, regadless of the locus of their economic activity EQUITY EFFECTS OF CHOICE * If all people just had to accept the color of the car they were given, they would attain a certain level of well-being * If you allowed them to choose color, they would attain a higher level of well-being * And those who switch colors raise their well-being while those who don't switch sstay at the same level of well-being * Hence: Choice of color reduces the disparity in well-being across people ( Claims we can undo inequality through technology, but that begs the question of how skills create inequities--those with strong verbal skills do better in text-based environments. Those with good strategy skills do well in virual environments. ) The existence of this avatar system does increase the well-being of the participants. CONCLUSIONS * Synthetic worlds will probably occupy more of our time * Many current trade and revenue streams will be diverted * Avatars raise average material well-being (even though the Central Statistical Office won't notice that) * Prospecft: A dramatic decline in inequality; mental and physical skills and handicaps removed from the equation ---------------------------------------------------------------------- REFERENCES: {as documents / sites are referenced add them below} http://terranova.blogs.com slate article on castranova's work http://slate.msn.com/id/2078053/ Original paper: Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier Abstract: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=294828 PDF: http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID294828_code020114590.pdf?abstractid=294828 ---------------------------------------------------------------------- CONTRIBUTORS: {add your name, e-mail address and URL below} Phil Gyford phil (at) gyford.com http://www.gyford.com/ Elizabeth Lawley ell (at) mamamusings.net http://mamamusings.net/ Tom (at) plasticbag.org / plasticbag.org ---------------------------------------------------------------------- E-MAIL BOUNCEBACK: {add your e-mail address separated by commas} ell (at) mamamusings.net, tom (at) plasticbag.org, phil (at) gyford.com ---------------------------------------------------------------------- NOTES ON / KEY TO THIS TEMPLATE: A headline (like a field in a database) will be CAPITALISED - This differentiates from the text that follows A variable that you can change will be surrounded by _underscores_ - Spaces in variables are also replaced with under_scores - This allows people to select the whole variable with a simple double-click A tool-tip is lower case and surrounded by {curly brackets} - These supply helpful contextual information. ---------------------------------------------------------------------- Copyright shared between all the participants unless otherwise stated.