In a Virtual World Economy, User-Generated Content Prices Are Controlled by the Company, Not the Market (Comment of the Week)

Really interesting conversation on the problem of virtual currency in virtual economies last week kicked off by "Kyz", who explained how difficult it was for them to reliably run a successful business in a virtual world. Replying to the idea that the value of their content is decided by the market, Kyz goes deeper into the analysis:

That's true to an extent and there are parallels between virtual and real life markets. But there's more to it than just market demand and pricing.

For instance, my SL experience put an extra layer of cost into the mix. Linden Dollars are a product or were, to Linden Lab. The currency wasn't just added to the company as a convenience for users, it was acquired by Linden Lab from someone that discovered that virtual money was itself a product that could be profitable directly or indirectly.

The last part isn't quite accurate but the full story enhances Kyz's argument: Linden Lab reportedly made an offer to the user-made Gaming Open Market, which circa 2004/2005 was a popular platform for the community, then in late 2005, officially productized the Linden Dollar through the launch of the LindeX.

"I mean, I get it," Kyz goes on. "And if I ran a virtual world, creating an extra revenue stream from currency is something I wouldn't lightly ignore." But for content creators like Kyz trying to monetize on the platform, this led to additional hurdles and regulations:

[A]s a creator, I was hit with arbitrary limits on how much I could take out, dependent upon approval, and extra fees. I had virtual money taken out of my account because it there might have been fraud somewhere in the chain. Things you don't really deal with in real life. You don't pay for someone else's fraud or request permission for your own earnings.

So you've already got central authority there and central planning as Linden Lab (or whatever company) sets a value of a single unit of currency. That single unit, especially priced well below a single unit of real life currency sets the stage for the entire market. The lowest price for an item is going to be well below a penny USD. Perception of the markets value starts at that single unit. [Emphasis mine. - WJA]

But company policy also controls the market. Linden Lab to its credit kept the ratio stable, which is good. On the other hand, the company also controls the sink as well as the source. I don't have sinks in other areas of business and not in RL as such.

And then there might be policy, such as when Linden Lab was debating with customers as to whether or not allow free products or products below a certain price on Linden Lab's marketplace (the Kingdon days). [I.E. Mark Kingdon, Linden Lab CEO from 2008-2010 -- WJA] Or that adding more fees by introducing mesh uploads might force users to increase their costs to cover the upload fees, etc.

The company that controls the currency does kind of set the value. An article of clothing might go for a higher or lower average in one world or another. I might be able to sell a virtual house on one market for a drastically different average price on another market.

Now of course I don't expect to sell a virtual house for the same price as a real life house, but there is a point where real life currency provides a consistent baseline for labor that virtual currency doesn't.

Speaking of virtual houses, the Unity Asset Store has dozens if not hundreds of high quality 3D mesh houses selling for less than $5. (That's USD, since the Asset Store is run with real cash.) Which brings us back to the larger question: Does virtual currency just give more power to the platform owner at the expense of creators on the platform?

Comments

[Michely Dos Santos]

Great article, all designers must to have open this discursion,

[lkosov]

I'm not convinced the "real world" value of the virtual currency is particularly significant, at least so long as it's within a certain range of constraints. People in virtual communities aren't buying commodities, or consumables; *everything* is discretionary spending. And Kaz's complaint that a virtual currency "priced well below a single unit of real life currency sets the stage for the entire market" seems extremely narrow-minded. So a Linden's worth half a penny; we could just as easily say it's worth three kopeks, or five Won, or nearly a hundred Vietnamese Dong.

My other virtual world experiences are with Sansar (before it became a music thing) and Twinity, and in both of those prices are/were extremely similar to those in SL. Clothes, accessories, and typical furniture are all mostly in the 1.5-3 USD range--low enough to qualify as impulse purchases for many people, I presume. Sure, vehicles and bodies and heads and skins are frequently more, but do most people buy those on impulse?

I genuinely don't get the argument that LL "control" user-generated pricing. How? By... keeping the Linden price extremely stable? I must have missed the part where uncertainty and currency speculation were vital elements to a healthy virtual economy.

Using a virtual currency lets (virtual) merchants compete (in one sense, albeit an important one) on a level playing field. There's one price for an item, and everyone pays it. (Not counting group discounts, etc.) If someone wants to use psychological pricing, or (perhaps more usefully) price their stuff to fall within the L$101-500 range the marketplace lets you filter on, they can do that, and it's in effect for everyone. Sure the real-world price may vary depending on exchange rates to local currency, but AFAIK that's unavoidable.

You could price a piece of clothing at L$498, or price it at, what, 98p, 98c, 98 Eurocent, 98 Rubles, 98 Yen? There is precedent, most notably in ebook publishing, where different countries have kind of standardized price points. But the justification for that usually comes down to "different market conditions", which isn't quite so credible in a virtual global market. And it seems that would most likely immediately murder the market for anything resellable (ebooks aren't), since cross-region arbitrage would immediately become lucrative. (At current exchange values you could in this scenario hypothetically buy clothing in the US at 0.98 USD, then re-sell it with a UK price of 83p, under-cutting the merchant's price for Brits by ~15% and making about a 15% profit for the reseller.)

[Kyz]

Thanks for the correction about the early Lindex. I thought for some reason it was an acquisition. The history of SL is pretty rich, which makes it a good example of virtual worlds in general.

Also true about the price of houses on Unity, but also a good example of a company controlling the market. Unity changed the minimum a ways back so that $4.99 is the least you can sell something for. Free is still allowed.

A good balance I think, especially for countries that are poorer than the U.S. where for the price of a computer and electricity. After the 30% to Unity, a minimum sale is going to earn you $3.50 USD.

Compare that to the lowest price on SL market being 1 Linden Dollar.