Virtual Goods, Scams, Investigative Reporting And The Media

from the all-in-one-package dept

For many years, we've been quite skeptical of any business model in virtual worlds/social networks that rely on "buying virtual goods." That's because these are all based on artificial scarcities, and as we all know (hopefully, by now), relying on artificial scarcities for a business model is incredibly risky, especially once people realize the scarcities are artificial. And yet, over the past few years, a number of businesses have been built on this very premise. In fact, Silicon Valley is crawling these days with businesses built on selling virtual goods, and if you talk to many VCs about it, you'll quickly note that they're positively giddy over the fact that people are paying for this stuff. What they don't seem to realize is that it's unlikely to last.

In the last couple weeks, Mike Arrington, over at TechCrunch, did an amazing job calling attention to the widely known, but rarely discussed in polite company, dark underbelly to most of those business models: quite a large part of their revenue is based on scammy offers that effectively trick unsophisticated purchasers (often kids) into signing up for expensive subscriptions to things they don't want. I was at an investor "roundtable" a couple months ago, which was mostly bankers in suits, and they were laughing about just how gullible people are on these things, and it's great to see TechCrunch exposing them, and pushing the worst abusers to clean up their act. Of course, even when some, like Zynga, claim to be cleaning up their act, Arrington was able to dig up a video where Zynga's CEO proudly talked about the scammy tactics he used -- and then noted that these same scammy tactics showed right back up on Zynga, after the company promised they were gone. Those who use these kinds of tactics may find that while they "bring revenue now," it may be short-lived. Companies that focus on such abusive tactics live to regret it (just ask RealNetworks).

But, the really amazing thing, as pointed out by Dan Lyons/Fake Steve Jobs, in an amazingly un-Fake-Steve-Jobs-like rant, is to compare the series of writeups by Arrington with the love letter to Zynga and other "virtual goods" companies in the NY Times, which came out after most of Arrington's posts, and makes no mention of them at all. As Lyons/FSJ notes:

So: they walked into this shit-storm and somehow, by some miracle, managed not to notice the fecal matter flying all around them. It's like covering a football game that took place in the middle of the blizzard and neglecting to mention the weather.

Now, maybe they did all the reporting before Arrington's stuff broke. In which case they should have gone back and updated their info. Or maybe, just maybe, Zynga's PR people teed up a Times story as a kind of rebuttal to what Arrington was reporting. Either way, that's what ended up happening: Zynga used the Times to deflect the bad shit flying at them from Arrington. They need good press because they're hoping to cash out by going public next year. That story in the Times will be worth millions. Many millions.

Meanwhile, Arrington, still digging, blasted again on Saturday night, reporting that sleazy ads had popped up again on Zynga, despite promises that they would be taken down.

Um, New York Times? If you guys are still wondering why people are dropping their subscriptions and getting their news from blogs instead of you -- this is why.

After which, Lyons/FSJ notes:

And to all those people who go around wringing their hands and saying what are we going to do when the "real newspapers" all die and we have to get our news from Gawker and HuffPo and TechCrunch? Friends, I think we're going to be just fine.... What really cracks me up is how often I still hear people say that bloggers are mere "aggregators" and the "real journalism" gets done at places like the Times. Because time after time, blogs are simply beating the shit out of the newspapers. They're the ones who still dare to go for the throat, while their counterparts at big newspapers just keep reaching for the shrimp cocktail.

Of course, there's just a bit of irony in noting that Dan Lyons wrote one of the quintessential blog bashing articles four years ago, when he was writing for Forbes, at one point suggesting that blogger "journalists" were no different than notorious (NY Times) maker-up-of-stories, Jayson Blair. Nice to see he's coming around to recognizing things perhaps aren't so bad in the blog world.

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Linden Lab Sued Over Copied Virtual Goods

from the dmca,-anyone? dept

Way back in 2003, when Linden Lab announced that individuals owned the real world copyright on virtual trinkets they made in the game, we noted that this was a bad idea that would lead to problems. It was, in effect, taking bad real world laws and bringing them into a virtual world. It was even worse, because it was taking real world laws that were designed for a world of scarcity, and bringing them into a world of abundance -- and effectively allowing the laws to reach from the real world into the virtual world. That's a recipe for trouble.

And, indeed, a few years back there were lawsuits over "copied" products, though the main one we know of ended with both sides dropping the case. However, a new lawsuit has been filed, but this time, Linden Lab itself is a target, and the guy suing is claiming both copyright and trademark infringement. It's the same basic story. A guy creates virtual things (in this case, "sex toys") in Second Life, others copy them, and he's pissed off, so he sues. But he's suing Linden Lab, perhaps because it's better to sue a company that actually has money.

But legally, it seems like a huge longshot. The copyright claim should get tossed out pretty quickly due to DMCA safe harbors. The guy filing the lawsuit claims they don't apply "because it is aware of the rampant infringement of Alderman's copyrights and trademarks, and hasn't take proactive steps to prevent that piracy." Unless there's specific evidence of Linden Lab being informed of a particular infringement that Second Life ignored, it's hard to see how this isn't protected by the safe harbor. The trademark claim isn't covered by safe harbors (which is a problem...), but it's difficult to see how anyone could claim that Linden Lab is the one violating anyone's trademark here. Yet again... someone who can't handle the fact that digital goods are copyable feels he needs to lash out and sue everyone, rather than adapt.

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A Few Extra Virtual Maps Isn't A Real Reason To Buy A Video Game

from the it's-about-the-scarcity dept

There's definitely been an ongoing battle in the video game world from some executives complaining about used game sales for console games (there's been a bit of confusion in the past tying this to video game DRM -- which is more focused on PC games). We noted that EA was among those concerned, but was hoping to give people more reasons to buy new, rather than second hand. However, some folks in the comments complained about the methods EA was using, and that's worth a further discussion, especially as other examples are being shown. Reader DEF points out that another video game company, Epic, is trying to encourage original purchases by giving buyers a free voucher for certain in-game items, such as special maps. Such vouchers would only work for the initial buyer, thus, in theory increasing the value of the initial purchase.

There are a couple of problems with this approach. While I do think it's better to come up with "reasons to buy" rather than trying to sue people or pass laws requiring a cut of the secondhand market, this approach may get it backwards. Effectively, they're selling "infinite goods" rather than scarce goods, and that seems likely to backfire, for a few reasons. First, it actually diminishes the value of the game. One aspect that buyers take into account is the resale market. An active second hand market increases how much people are willing to pay for the original product, because they recognize that they can sell it later.

Second, when the focus is on charging for infinite goods (or only promising them to those who buy first hand copies), the incentives get risky. Suddenly, gaming companies are put in a position of choosing what "virtual" items are allowed in the game for first hand buyers vs. second hand buyers, and that leads them to make bad decisions in locking up important aspects of a game, frustrating potential buyers.

Plenty of games have shown that money can be made in charging for the service (a scarce good) of connecting and accessing an online world or community. If video game makers focused on that, then the entire issue of the second hand market wouldn't be such an issue. In that case, they'd want to get the actual games distributed as widely as possible, with as many features enabled as possible, to make the idea of playing in the online environment even more appealing.

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Dutch Kids Convicted For Stealing Virtual Magic Amulet

from the are-you-kidding-me? dept

It's been over five years ago since we pointed out how silly the world would be if we started bringing real world justice into virtual worlds. It sets up a ridiculous situation, since the way any virtual world works is based on how it's programmed. If there's a problem with an action, it should be up to whoever controls the game to fix the problem, rather than the real world police. If you start setting a precedent where the "theft" of a virtual item in a video game is considered theft, then how do you deal with online worlds where theft is a part of the game? If the game allows it, then it should be a part of the game.

Even with plenty of people warning about how ridiculous it would be for police to get involved in searching for a stolen magic sword, it seems that hasn't stopped people from going to the police. In the past, the lawsuits have usually been for other crimes besides theft, though. We had one for illegal computer access, after a woman logged into a boyfriend's account and deleted his virtual objects. In another case, someone was charged with copyright infringement for "copying" weapons.

However, now we have a case of an actual theft charge in the Netherlands. Two kids have been convicted of theft of a (I kid you not) "virtual amulet and a virtual mask" in the game Runescape. The details are pretty scarce, but apparently the two kids "coerced" another kid to hand over the items, and to the court that's as good as theft:

"These virtual goods are goods (under Dutch law), so this is theft."

I have to admit I don't know much about Runescape, but a quick look at the website mentions that it can involve "fights to the death." Does that mean we'll soon have murder charges stemming from the game? Update: Some folks in the comments have helpfully filled in some of the details that were lacking from the original article. The two kids in this case apparently beat up and threatened at knifepoint (in real life) the other kid in order to get him to give them the virtual amulet. As others in the comments point out, it sounds like they should have been charged with assault and battery, but still not theft.

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Bad Ideas: Trying To Build A Marketplace Of Virtual Goods

from the let-me-explain-some-basic-economics... dept

I've seen a few company lately trying to build marketplaces around the idea of selling virtual goods, and the latest one, Live Gamer, gets a big writeup in the Wall Street Journal over its plans to build a marketplace for virtual goods and characters from online worlds. This is hardly a new idea, as there's been significant trade in these types of goods either on company approved sites or more informally through sites like eBay. However, it seems quite dangerous to base an entire business on this concept. The economics of virtual goods gets screwed up very easily once you realize that there are no truly limited resources within virtual goods. Sooner or later people figure out how to copy virtual goods, just like they've learned to copy music and movies -- and suddenly the idea of charging directly for those goods becomes a lot more difficult. It's just basic economics. The VC firms betting on this new concept seem to believe that the company (or the various gaming companies) will somehow be able to hold off this economic reality, but that seems incredibly risky. The entire market is based on an economic model based on false scarcity, and that seems quite dangerous. It may work temporarily, but there's a big reality called "infinite supply" that's likely to make any such model come crashing down eventually.

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