Property Rights in Virtual Economies

A friend in school brought up a game called Second Life to me yesterday. I'd read an article about it in business week a few months ago, but haven't had a chance to try it out yet. The basic premise of the game is that players in a virtual world have ownership rights to the property and IP that they create in the game. The company backs this policy by supporting an exchange rate between virtual in-game currency and US dollars. This enables players to "cash out" when they quit the game, and also to run businesses selling virtual real estate. (Pretend Estate?)

So what exactly is "virtual" about all of this? Second-Life land plots have rents and a fairly liquid selling market if Business Week is to be believed. Since the US dollar isn't backed by gold (needless to say), in my eyes a video game currency is just as "real" a currency. This has all sorts of interesting implications. Whereas in the past a "theme park buck" was mainly a way to get you to overpay for services, here a company actually has the ability to *Print Money* (again, antiquated verbiage) backed by nothing more than their user experience and IP.

Some interesting business models that derive from this phenomenon:

1. "Free" MMORPG

Currently, games like World of Warcraft make their money by charging a monthly subscription fee. The company leaves a ton of consumer surplus value on the table in this scenario. People are paying to maintain access to an investment that they have made in virtual objects. In Warcraft, this investment can amount to hundreds or thousands of US Dollars in gear and experience, not to mention the value to the player of their in-game social network. Think about it: The player pays $19 monthly to have access to goods and services that they value at *more* than $2,000. How could the company claim more of this value?

Consider a MMORPG that is free for players to play. The company creates and controls a market for the in-game value that these players create. The value of controlling that market, of embracing the market forces created by your user base, is far greater than the value to be gained from subscription fees (I can't imagine that most consumers would be willing to pay $100/mo to play warcraft)

2. Non-Game Currencies

What if Google created the Google Dollar? What about the Microsoft Franc? Current thinking in military strategy and popular social science describes the declining power of "the state" compared with non-state actors. (Al Quaeda to over-use an example)What if companies begin to supplant the role of the state in issuing and backing currencies?

3. Hedge Funds and Market-Making Opportunities

What if you had a hedge fund that specialized in trading virtual (game) assets? Could you approach Blizzard with the idea of making a market to trade Warcraft gear and characters in an official, controlled manor?