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Web of Lies

The Seedy, Startling World of Virtual Economies

The call came a couple months back. On the other end of the phone was Kipp Shives, a personal acquaintance, wanting to talk about his acquisition, for around $6,000, of a virtual shopping mall located in the online game Project Entropia.

As he spoke with excitement about the marketing and income possibilities this presented, I tried to get my head around the idea that Shives had just spent thousands of dollars on property that exists only in a computer game. As I listened, it also sparked a memory of a friend of mine, one of the country's leading microbiologists, recently telling me that through his obsessive playing of the online game Diablo II, he had roughly $3,000 to $4,000 worth of equipment and items he could sell online at any time.

This fired my imagination. Here were two wildly different types of people -- a former cook and an internationally respected doctor -- spending enormous man-hours in fantasy worlds, effectively checked out from reality, each spending and accumulating significant amounts of real-world wealth. Something was happening here beyond just geeks playing make-believe to compensate for depressing social lives. Serious market forces were at work, and I knew I had to learn more.

Diving in head first, the world I found was more surprising than I could have imagined, from 300-computer gaming sweatshops in China to a gaming industry struggling to come to grips with the economic monster it has unleashed.

Welcome to the frontier world of Massively Multiplayer Online Role Playing Games (MMORPGs), where the law is light years behind the technology and the battle between millions of hackers and hardcore gamers and the companies whose products they exploit for cash is fought by the hour. It is a seedy world peopled by remorseless opportunists, virtual organized crime and outlaw gamers and programmers -- all eager to cash in on a worldwide economy boasting bigger profits than Hollywood and an estimated economic output, at $29 billion, larger than the GDP of Sri Lanka.

The Rise of Virtual Economies

MMORPGs, in their current incarnation, have been around in force since the early 1990s, with such titles as Ultima Online and EverQuest creating a robust market for those looking to take the complexity of Dungeons & Dragons-type games to the Internet.

In these games, players control virtual characters, sometimes called avatars or toons, and typically seek to build their characters through acquiring experience, leading to more skills available, and gather treasure, including weapons, armor, spells and magical items. As characters increase in levels, they become more powerful, their gold more plentiful and their weapons more deadly. The lure of moving these games to the Internet is obvious: Rather than three dudes throwing dice and checking charts alone in a basement -- not to mention the hassle of physically getting people together to play -- you can play by yourself in a world populated by thousands, if not millions.

As titles such as EverQuest, Dark Age of Camelot and World of Warcraft grew in popularity worldwide, a demand was created for in-game resources that individuals began to fill on their own by auctioning their high-level items on sites such as eBay for profit. The reasoning is simple: If Player A doesn't have as much free time to spend on the game as Player B and yet wants to play with the kinds of high-level items only obtained through extensive "grinding" (the repetitious performing of game tasks to obtain treasure and experience), there exists a real-world demand for those goods. And as happens in all free-market economies, with enough buyers and sellers, agreed-upon values emerge and a thriving market evolves.

Economist Edward Castronova, associate professor of telecommunications at Indiana University and the country's leading authority on virtual economies, has been studying the rise of these economies since 2001. His 2005 book, Synthetic Worlds: The Business and Culture of Online Games, was the first to formally address the peculiar economics of emerging gaming universes. Castronova says this market works a lot like Monopoly.

"Suppose you have four people playing and you're getting toward the end of the game," Castronova says. "In an effort to win, one player offers another $5 [in real money] for Boardwalk and buys it.

"Normally that's considered bad form when you're playing with friends, but that's basically what's happening in these games. The amount of time it would take someone to earn the items they want becomes a commodity as much as the items themselves that people are willing to pay for."

With more and more popular titles being introduced to the gaming market and more and more online players -- Blizzard Entertainment's World of Warcraft alone boasts 8 million subscribers, and the worldwide number of gamers is estimated at 100 million -- online cottage industries have sprung from the woodwork to turn profits in this unchecked economy, offering specialty auction and trading sites geared toward MMORPG gamers.

The problem is that all these transactions are illegal, breaking companies' carefully worded End User License Agreements (EULAs) that stipulate all items and characters in the games are their property and cannot be sold or traded. And cracking down on these illegal real-money-trade (RMT) markets -- recently estimated by the independent Virtual Economy Research Network at $2.09 billion per year -- is extremely difficult, if not impossible, because of the nature of the third-party sites that offer such services and the sheer volume of individual illicit traffic.

Companies such as Blizzard have asked eBay not to list items from games it produces (such as the World of Warcraft, Diablo and StarCraft franchises), but as fast as eBay monitors can strike a single listing, three more emerge. A search of eBay last week listed 1,022 items in the "Internet Games" category, ranging from high-level characters -- some going for as much as $2,000 -- to all manner of in-game goods and currencies. And that's just eBay.

Numerous other third-party sites, most of them based in China, offer more opportunities for trading and buying without the indirect supervision of the gaming companies, an industry that, according to official figures, made $10 billion last year compared to Hollywood's $9.5 billion.

Some services, such as game4power.com, promise 10-minute delivery of in-game gold. (More on this process later.) This site acts as a market for Chinese World of Warcraft gold farms, given away by the pidgin English used on the site -- "Thank every customer that supports us all the time, and now we decide to bring more cheapest gold to every one of you" -- as well as by a notice of their being temporarily closed recently for a popular Chinese festival. "Gold farms" are gaming sweatshops where workers are paid next to nothing to spend 12- and 18-hour shifts farming the games for gold to then turn around and sell. With some shops operating as many as 300 computers, it's volume that makes this enterprise profitable.

"There's no way by yourself you could earn enough money farming gold to make it worth your while," says Eric Brown, 34, an environmental specialist who spent years as a "hardcore" gamer and who used to spend about $100 a week on World of Warcraft gold. "The return on your investment is like, nil. I figured it out once -- if I sold my character for $500, for the amount of hours it took to get him to the elite level meant I would have earned about 3 cents per hour, which is a joke.

"That's why the only ones making money at it are overseas and in China, where they can pay their employees 30 cents an hour and have them work ridiculous shifts. You can't do that here."

Given their remote and nebulous nature, gaming companies have an extremely difficult task in trying to shut down such farming sites as game4power, ige.com, playerauctions.com, wowmine.com, igoldc.com and more (to get an idea of the economic scope of this activity, a Google search for "WoW gold" returns approximately 8.5 million hits). Some sites even track day-by-day market fluctuations of WoW gold, allowing the savvy shopper essentially to day-trade for bargains and turn a profit without even having to play the game itself.

Embracing the Virtual Economy

Some companies, such as Sony Online Entertainment, have embraced this auction activity, attempting to control it by establishing in-game auction houses in its popular EverQuest and Star Wars Galaxies titles. Speaking to popular gaming Web site gamespot.com, Sony Online Entertainment spokesperson Chris Kramer rationalized his company's approach.

"The market is huge. There is no way that our company can be 100 percent successful at shutting down this activity," Kramer said. "We've watched the secondary market skyrocket, even though it's officially against the rules. We can no longer ignore it."

As of this past Sunday, WoW gold was trading at .006 gold piece per U.S. dollar, according to eyeonmogs.com, a site that searches other sites to compare prices and allows users to link to the best deal. Another, less-utilized service is "leveling-up." Let's say you don't want to spend the countless hours it takes to get your characters to a level where you can enjoy the premium content. You can hire sites such as power-leveling.com, powerlevelingspecialists.com and coolingame.com to do it for you. On coolingame.com, you can take your WoW mage (a spell-casting character) from levels 1 to 38 for just $69.99. You pay for the service, and 120 hours later, your mage is returned to you ready to kick some ass. On power-leveling.com, you can even speculate on game-currency futures from 11 different titles.

Other MMORPGs such as Second Life, The Sims Online and Project Entropia have embraced the economies of their worlds. Unlike the games above that center on fantasy/science fiction adventuring and questing, these new virtual realities are just that: virtual universes wherein players walk around, interact with others and can purchase and sell items using the individual game's currency. There are no points scored, no levels to achieve, no winners or losers.

Instead, in San Francisco-based Linden Labs' Second Life, players create the world themselves rather than explore a prefabricated universe using Linden Dollars that can be changed into U.S. currency (trading at about L$270 to $1 U.S. as of February). Inside the world, real-world companies have established online presences and sell virtual replicas of their real goods. Players may buy and sell real estate, with one Chinese player, known by the avatar of Anshe Chung, claiming to have become the first player to make a million dollars in the sale of purely virtual real estate.

Project Entropia took Second Life's model to its logical economic conclusion. In Entropia, players buy in-game currency, called Project Entropia Dollars (PEDs), and use it to purchase clothes, items and gear. (In Entropia, there is a part of the game where you can kill other monsters and players.) Also like Second Life, one gamer, Jon Jacobs, has claimed to have made a million dollars from his property dealings. Jacobs set a Guinness World Record in 2004 when he spent $100,000 on an asteroid circling the game world that he used to establish a virtual nightclub. He later spent $90,000 on a virtual banking license. (Anshe Chung purchased another in an expansion move into Project Entropia.) Last year, Jacobs spent $10,000 for a single virtual egg in the game. In an interview after the purchase, Jacobs noted that the ridiculousness of the situation was not lost on him, but that he considered it a sound investment.

These investments have paid off for Chung, Jacobs and others -- organizers of even lower-level gold farms claim six-figure incomes. That's the allure for someone like Shives, who purchased the online mall "Port Atlantis" in Project Entropia.

Shives says that when he took over the 36-shop mall, it was earning him between $5 and $10 a day, mostly from fees. Now, that figure is approximately $20. Shives says he expects that to grow to between $50 and $100 in the coming months, and "should it produce $350 to $700 a week, Entropia will be my [full-time] job." With a stated turnover of $1 million daily and company revenues from 2006 showing a turnover of $360 million in-game, Entropia's Swedish-based parent company Mind Ark is embracing its virtual entrepreneurs, including providing a real-world ATM card you can use to withdraw funds from your game account at any time.

Clearly, this is economic activity on a global scale. But with so much of the activity taking places on the fringes of the Internet, the possibilities of scams and abuse are rampant. Enter, if you will, the dark side of online gaming.

Virtual Scams and Real Crime

The first problem with buying online gold is that you're giving suspicious entities your credit-card number for payment. Then, once you've paid, you have to go online and meet up with the person giving you the gold in-game. Needless to say, this is a procedure rife with fraud possibilities on both sides.

"I've never had a problem getting gold I purchased, but I have to admit I did defraud some of the companies selling it," confesses Eric Brown, the former hardcore gamer. "I scammed IGE and wowmine by either saying I never got the gold from them, which I already had, or claim[ing] I'd need the gold really fast, get it and cancel the original order.

"Sometimes things went to PayPal disputes, but that was all right with me. The bottom line is that there was no way for them to prove I never got the gold, and since the activity is illegal to start with and they're a third party, they have no means of pursuing it legally.

"I had to use different credit-card numbers and e-mail addresses so they couldn't flag me -- they're not idiots, either, and they can track IP addresses -- but I'd pop around enough to cover my tracks. I know that's pretty crappy morally, but there it is."

Leveling-up also can be tricky. To create a character online, you have to open an account, with most game systems charging around $15 per month to play after you purchase the initial $35-50 game software. To level-up, you give that account, password and all, to the company doing the leveling. This is another instance in which it is possible for them to get your credit-card number. Also, if you have any other characters in the same account (each account can hold a number of characters), they also have access to them and could take any valuable items from them if they wished.

Circumstances such as these have led to virtual and real crime. In China, one player had lent another a powerful sword in the game The Legend of Mir 3. The player with the sword then went on to sell it on eBay for $870. After getting no help from authorities because of the lack of laws on the books, the lending player stabbed and killed the selling player in real life, at which point the police did take action, sentencing the murderer to life in prison.

Other illegal activities include the use of "bots" (robots) and "mods" (modifications), which are macro programs that you can download from the Internet that allow your character to perform routine tasks without your having to do so manually. Sites such as mmoedge.com, freegamecam.com, warcraftbot.com, xunleashed.com and more provide free bots to download. At sites such as wowui.incgamers.com and wowmatric.com you can download mods, which perform more complex tasks than bots (such as engaging monsters, picking up treasure, etc.). Many players use them to track prices at in-game auction houses, alerting them to when a good deal is ripe for the picking.

Again, the trouble is that bots and mods are illegal. The gold-farming sweat shops in China and in Europe employ bots and mods on a huge scale, with a single worker often manning five or six computers at once. To prevent this, GMs (Game Masters/Monitors, employees of the game's distributor) try to monitor which accounts have been online for months at a time or appear to be executing typical bot or mod functions. When they find one, they can flag, delete and/or ban the account and cardholder. Still, even with the best efforts possible, there's just too many to catch with any degree of efficiency.

"The hardcore gamers and farmers are a smart group -- not in-shape physically, but very intelligent," says ex-gamer Brown. "And so are the people at places like Blizzard.

"A particular scam will work for a while, but then it'll get figured out and new ones emerge. So it's a constant back-and-forth where you're pushing the envelopes of the economy to make money and at the same time avoid getting caught."

And virtual crimes in these games don't stop there -- many have noted how easy it would be for organized crime or terrorist cells to launder money through online currency sites.

The key to establishing legal guidelines is to recognize that games should be treated as corporations, according to Castronova.

"You have hackers who can get onto game servers and databases and steal items, and yet there's no way to prosecute them," says Castronova, who has worked with Harvard Law School about the legal ramifications of synthetic economies. "I think you have to take the rules of the game and call them law. We need the same laws we have for corporations, which are nothing tangible, either. They're just a fictional entity representing stockholders' interests. Certainly some games would be treated differently from other games, but in the long run the law needs to recognize these online communities as an extension of the real world."

The federal government has taken notice. Congress' Joint Economic Committee last year launched a study of the interactions in virtual economies to determine whether transactions that spill over into the real world are taxable.

"Clearly, virtual economies represent an area where technology has outpaced the law," says a statement issued by the committee upon taking up the subject in October.

The committee's finished report, scheduled for release later this month, could have global ramifications on online economics if taxation is allowed.

In the meantime, there literally is no end in sight to the growth potential of an industry that, in barely 10 years, already is pushing the limits of international law and free-market economics to their breaking point.

Ron Aiken is a staff writer for the Free Times of Columbia, S.C., where this story first ran.

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