Virtual Real Estate: Building on an Imaginary Foundation

No less true today than it has been since the notion of private property became one of the main pillars of Western society, investing in real estate is one of the most popular means of amassing wealth. Now, a new breed of “virtual” real estate investors and developers is emerging.

Massively multiplayer online role-playing games (MMORPGs) and virtual worlds, such as Second Life, “EVE Online,” Habbo, MapleStory and “World of Warcraft” are the next step in “network intermediated” social and economic interactions.

Combining the community aspect of social networks with the fantasy of gaming, they are attracting hordes of participants from the world over. Their operators have latched firmly on to the idea of enabling participants to create, buy and sell a wide range of virtual property — from real estate to digital representations of trademarked brand-name merchandise. Secondary markets for virtual property have even emerged as game players buy and sell virtual property on eBay and other sites.

All that promise comes with a caveat, however: Investing in virtual real estate is inherently a more risky proposition than investing in real property. Moreover, a comparison of real world and virtual real estate investors and their motivations would likely reveal some fundamental differences.

Virtual Games, Real Money

Second Life avatar Anshe Chung and her creator Ailin Graef made headlines worldwide and grabbed the cover of BusinessWeek in late 2006, highlighting the real world moneymaking opportunities virtual worlds can present. Anshe claimed and was promoted as Second Life’s first real world millionaire, a fortune earned mainly by broking virtual land.

Media coverage of so-called “real money trading” (RMT) in virtual economies followed in esteemed publications including The Economist and the Financial Times. A university professor researching virtual economies estimated that US$1 billion changed hands in the RMT market in 2005 and that it would grow to more than $7 billion by 2009. The bulk of Second Life’s virtual business transactions appears to be virtual land speculation, recounts Randolph Harrison on Capitalism 2.0.

Graef and her husband now own and run Anshe Chung Studios, a virtual reality-MMORPG design studio based in Wuhan, China. Her avatar’s beginnings are rather humble and somewhat infamous, however: Like many other avatars, she started out earning real world money by turning virtual tricks as a Second Life prostitute.

More fundamentally, the concept of investing in “virtual property” — broadly defined to include contractually agreed possession of any distinctly defined digitally rendered object whose software and code resides on the servers of a third-party “virtual world” provider — stretches the definitions of their original, real-world counterparts. It also poses fundamental questions and thorny problems not only for buyers, sellers and systems operators, but also for lawyers and government agencies as well.

Who Makes the Rules?

“Let’s start with the terminology. ‘Virtual property’ is a bit of an oxymoron. We may call it ‘property,’ but it lacks the many of the attributes that we associate with real property,” pointed out Eric Goldman, assistant professor at Santa Clara University School of Law and director of the High Tech Law Institute.

The primary difference lies in the fact that virtual properties only exist as long as the virtual world provider provides them. “If the provider goes out of business and unplugs the servers, poof! The virtual property vanishes. Real property, in contrast, is not so dependent on a single company’s financial well-being — even if some service provider goes dark, the property is still there,” Goldman told LinuxInsider.

A second difference — and risk for the virtual property investor — is that even if a provider continues operating, they typically reserve the right to rescind and delete transactions and properties at any time and at their discretion. “In some cases, this might be legally actionable by the property owner — such as if the provider is breaking a promise it made to the property owner,” Goldman explained. “However, in many cases, a virtual property owner agrees to a contract — the EULA (End User Licensing Agreement) that gives the provider significant discretion to terminate the owner’s account — and, in so doing, eliminate all of the owner’s ‘property’ rights.

“Therefore, unlike real property, virtual property is principally governed by a contract between the provider and the property owner, and the discretion given to the provider in the contract makes ownership of virtual property a much more speculative proposition than owning real property,” he concluded.

Virtual Currencies

Exchanging real world currency for virtual pseudo-currencies should be another focal point for virtual-world property investors. Buying a virtual pseudo-currency, such as Second Life’s Linden Dollar, is rife with hazards that experienced real world financial markets investors would quickly recognize. For example, the supply — and hence real-world value — of the Linden Dollar is left in the hands of Second Life’s owner and operator, Linden Lab.

Compounding the risk and exposure to loss participants open themselves up to, Second Life’s Terms of Service Agreement denies users any financial or legal claim to their Linden Dollars. As stated in the Sections 3.3 and 5.3 of the agreement, “L$ are a consumable entertainment product which can revoked or deleted at any time without reason.”

Following the path paved by mobile phone services, online micro payments are the key enabling e-commerce technology for virtual economies. Virtual Linden Dollars are created and distributed to players as they use their credit cards and PayPal accounts to exchange real world dollars for Linden Dollars via Second Life and third-party currency exchanges.

“Multiply all these micro-payments among Linden’s claim of millions of customers, tens of thousands of which are online at any given time, and Second Life supposedly represents a very real economy generating hundreds of thousands of real dollars of commerce, daily. Linden self-reports an astonishing L$314,101,463 were earned in December 2006. That’s US$1,163,338 of value by Linden’s average ‘exchange rate’ of SLL/USD,” Harrison calculated.

Games, Merchandising and the Law

The “newness” of virtual world property investing and corresponding lack of an independent legal framework only highlight the fact they are typically constructed as games rather than platforms for financial transactions, explained Vili Lehdonvirta, a Helsinki Institute for Information Technology visiting researcher at Tokyo’s Waseda University.

“Same applies to the companies running the platforms. This increases risk. Of course, most virtual worlds do not even aspire to be financial platforms and targets of investment. Even those that do — for example, Second Life and to some extent Entropia Universe — have in fact built their EULAs in such a way that they could take away your investment and disclaim all liability,” Lehdonvirta said.

For all the hype virtual property investing is as yet relatively small-scale.

“The investment opportunities that do exist are still too small to attract institutional investors: There simply aren’t enough valuable assets in a virtual world to facilitate pouring in tens of millions of dollars with an expectation of profit. I would guess that people who do invest in virtual worlds are mostly individuals who invest in their own Second Life business,” Lehdonvirta told LinuxInsider.

That’s changing, however. Habbo, which provides a virtual world for teens, in late January announced a licensing agreement with Paramount Pictures Digital Entertainment to create virtual goods based on titles including “The Spiderwick Chronicles,” “Beowulf” and “Mean Girls.” The first of its kind, the deal gives Habbo merchandising rights for all three properties throughout the U.S. and Canada.

Habbo has communities up and running in 31 countries on five continents. Some 8 million unique users worldwide visit Habbo each month, and they’ve created some 86 million Habbo characters.

“Many of our movie properties naturally lend themselves to unique and innovative opportunities in the traditional, digital and virtual worlds,” said Alex Carloss, executive vice president and general manager of worldwide digital distribution for Paramount Pictures Digital Entertainment. “This agreement allows us to access Habbo’s exceptional virtual community and built-in audience base where users can extend and enhance the film experience with a suite of themed-virtual goods.”

It’s Only a Game

The lines between business and recreational game playing, as well as between the real and virtual worlds are blurring as virtual worlds grow, though the main motivation for most remains entertainment, Lehdonvirta believes. “When we are talking about virtual worlds, then the core purpose is of course entertainment, social life and so on. Then there is of course a lot of talk about using virtual worlds as a collaboration platform.

“If we consider virtual economies, which we understand as systems where scarce virtual assets are produced, traded and consumed and which may exist inside a virtual world or some completely different online service, then there have of course been many proposals to use them as quasi-experimental platforms for research. This could be, [for example,] empirical research in microeconomics or testing the effect of legal rules. So far, however, I have seen very few actual results in this area. Our research group has recently started to do this with data from EVE Online, so maybe we will see some new results by the end of year.”

Fun, excitement and the thrill of participating in something pioneering rather than making money is what attracts most players to virtual worlds to date, Lehdonvirta continued. “Many of them could surely make more money in other trades. I believe that as more and more aspects of human life are increasingly mediated by computer networks, the significance of virtual property of a variety of kinds will continue to increase. Social interaction in particular is increasingly computer mediated, and commodity consumption is a very social phenomenon — think fashion.”

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