Online Extra: Virtual Worlds, Virtual Economies

An economist talks about how online games can blur the line between fantasy and reality

When economist Edward Castronova wrote his first paper in 2001 about the economies of online games, he did it mostly as a joke. But even by then, he realized that in online virtual-world games such as Sony Entertainment's EverQuest, people were creating new economies that were as good as real to millions of participants. His studies eventually drove him to write an entire book about the subject, Synthetic Worlds: The Business and Culture of Online Games, published last year.

Castronova, now associate professor of telecommunications at Indiana University, says the growth of online games, from the No. 1 World of Warcraft to Linden Lab's open-ended virtual world, Second Life, has happened even faster than he predicted in his book. He spoke recently with BusinessWeek's Silicon Valley bureau chief, Robert D. Hof, about why they're becoming so popular, as well as the real-world implications of entire new economies sprouting inside online games. Here are excerpts of their conversation.

What did you think of the virtual-world economy of EverQuest and other online games when you first saw it?

I thought it was a fake economy. I found out that it really didn't feel fake at all. When I saw how it connected to the real economy, as you can see clearly in Second Life with its translation of Linden dollars into real dollars, and then you imagine how big this phenomenon could get, it started to have real-world macroeconomic implications.

I thought a study of the video game economy would be an illustration of the deeper lesson -- the subjectivity of value in economics. In econ, there is no difference between reality and fantasy.

Were you surprised at the explosion of virtual economies?

For people born after 1985, there isn't any such thing as virtual reality. There's just another way that you talk to people. This business of having characters and buying and selling stuff for gold pieces -- it's very natural.

These products like Second Life, and the way that World of Warcraft broke out, have just shocked the hell out of me. I thought the big impact might take until maybe 2010.

What accounts for Second Life's growth?

The inflection point for Second Life was this meeting in April, 2003, with me and [journalist] Julian Dibbell and Larry Lessig [the Stanford University law professor and author] and a couple of venture capitalists like Jed Smith and Mitch Kapor. They were basically talking about the idea of user-created content. What we told them was that ownership, and the ability to liquidate the value of your virtual holdings, would in theory spark economic development. If you let people capture the value of what they create, they're going to create a lot more.

So we told them to change their model from one of taxation and share-the-wealth to: "You pay us for the land, you can build whatever you want on the land, you can charge people Linden dollars to do things on your land, and you can take those Linden dollars and turn them into real dollars. And if you build something that's cool, you make money off it and we will too."

So what's the deal with the growth at World of Warcraft, which doesn't do that?

World of Warcraft, in terms of its structure, isn't different from the older games. But they threw writers at the product. There are just so many story lines that are interesting. You just spend all of your time going from one quest to another. Plus the art direction makes it a very pleasant experience to be in. It's the difference between the Mustang and the Edsel.

Do you see those as the two business models for virtual worlds, or are there other models as well?

If you're not in the position to be making that content yourself, like in World of Warcraft, you're thinking of a user-content model like Second Life. A hybrid would be something like Guild Wars, which is a game that doesn't have a lot of pre-made content in it and relies on player vs. player combat to do most of the entertaining.

Microtransactions is another possibility. The Xbox 360 model is apparently to get a bunch of people together and get them into a marketplace facilitated by the console. It comes as part of the product, instead of the current games where a lot of the commerce is basically leeched by third parties.

Given the surprising growth of online games and virtual worlds, what will be the impact on entertainment, or even society?

There's going to be a policy debate a lot sooner than I realized. The focus seems to be on single-player violence, but I don't think it'll be too long before they focus on this idea of toxic immersion -- the idea that people spend too much time in fantasy worlds.

Will the critique have an impact on games and the industry?

Every time there's another politician who doesn't know anything about it, who doesn't the play the games all the way through but just stands up and says all video games should be regulated, that creates a problem for me. That's like saying that everything that's on a moving picture image is bad.

Right now my job is talking to people and trying to peel away the dragon skin, and look at the underlying social networks and markets that are forming and then express [those] insights.

So who is inviting you to talk to them, and what's their interest?

There's this cadre of 20-something and low 30-something workers who keep talking to higher-ups. Every company, if they're smart, will give younger people an open-portfolio job and just say, investigate what's out there.

Best Buy (BBY ) started exploring the opportunities for Best Buy to make a game like this, maybe sell product through a game like this, or set up their own affiliate fan site with respect to the game. They didn't go forward with that, but they're keeping an eye on these virtual world technologies. There's a broadening understanding of the uses of this technology for business applications both by blue-chip companies and by startups.

How far along are virtual worlds in terms of reaching a mass audience?

Every single gaming company and gaming platform is going online now. Actually, I keep wanting this not to happen so fast.


I like the games that you can escape into. The concept that it's becoming a global commercial phenomenon, that's intimidating to me.

What do you mean?

I like the body. I was watching a ballet recently. I was crying because I was thinking the bodies are so beautiful, and we're losing the body. I'm just afraid of losing the body.

At the same time, I love playing these games. Also, I have a kid. I also think, well, I should introduce him to these worlds at an early age so it's very natural for us when I'm older to go hang out together no matter where he lives.

As if that's not enough, do you have other concerns about online games?

I'm also concerned that this commercial impulse could swallow up the separateness of these places. I would hate to see all that lost because of unregulated profit-seeking.

I would like there to be some kind of provision, like a wilderness preserve sort of law, for these places. We would need to have a law saying that if you promise you will seal off this world so people can't money-launder with it and can't liquidate the returns, we won't come in and tax all the transactions, and we won't subject you to child labor laws.

Second Life seems to be embracing commercialization, though.

That's part of its core plan. This is where I would set Second Life apart. This is unique technology here. It would be really bad for Second Life to be closed off from the real economy. It's a big part of its raison d'être, to be an economic space that is well-integrated into the real economy. That's different from a fantasy world.

I think there should be a line between Second Life and World of Warcraft, and my concern is that judges and legislatures will draw a line that puts both in the same group.

What's the appeal of Second Life, in your view?

It's an infinitely scalable content creator's dream. It's an extension of the land mass of the Earth. As long as somebody wants land to build on, Second Life will make land. If you're into creating content -- whether it's a building or a logo, anything -- it's just a dream space. That's what explains how it's growing.

I think the question is the ratio of content creators to content consumers, and keeping that healthy. You want to have enough creation, but you also need to have consumption. You need to have creation that people consume for the world to be lively.

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