{"id":3770,"date":"2007-11-05T10:47:46","date_gmt":"2007-11-05T18:47:46","guid":{"rendered":"http:\/\/www.dfcint.com\/dossier\/?post_type=forecasts&p=3770"},"modified":"2014-01-24T16:33:21","modified_gmt":"2014-01-25T00:33:21","slug":"virtual-property-ascendent","status":"publish","type":"post","link":"https:\/\/www.dfcint.com\/dossier\/virtual-property-ascendent\/","title":{"rendered":"Virtual Property Ascendent"},"content":{"rendered":"
\"Virtual

Virtual property issues have made the cover of Business Week.<\/p><\/div>\n

NOV. 5, 2007 \u2022 As an attorney in New York, I work with game companies frequently and have for several years. \u00a0In addition, I am often asked to speak and write about subjects that affect the game industry. \u00a0One of the most popular subjects in the last two years is the development of virtual property in the game industry. The industry stands at an exciting and interesting junction with virtual property that can be traded for real money, and this \u201creal-money trade\u201d (\u201cRMT\u201d) has the potential to be a substantial source of income for publishers, developers, and perhaps even unaffiliated third-parties.<\/p>\n

Arguably, the industry has been moving in this direction for some time. The concept of economic value in digital items, at least anecdotally, goes as far back as the 1970\u2019s and the first text based multi-player games including Oubliette and MUD1.\u00a0 Even my personal experience with RMT certainly goes back to the early 1990\u2019s when I wired $400 (more than my monthly rent at the time) to a text-based MUD in Finland.\u00a0 Yet, it has not been until this century that the world has had enough internet connectivity and a player base substantial enough to support robust markets trading in virtual property.<\/p>\n

By way of definition, virtual property, can have wide meaning in the literature, but in this article it is meant to include items, characters, real estate and currency in a game.\u00a0 This growth of markets in virtual property is, like many new business opportunities, a mixed blessing and comes with a myriad of unanswered or partially answered legal questions, a few of which are examined here.<\/p>\n

A Primer on RMT
\n<\/strong>RMT fundamentally comes in two types: \u201capproved\u201d or \u201cunapproved.\u201d\u00a0 Approved RMT is encouraged, sometimes even facilitated, by game companies.\u00a0 This type of trade is common in Asia and growing in frequency in the United States.\u00a0 However, historically, in the United States, RMT has not been approved by game companies.\u00a0 This resistance, coupled with consumer demand for RMT created a black market, sometimes called a \u201cgray market\u201d or \u201csecondary market\u201d in virtual property.\u00a0 This black market has continued to grow despite efforts, of varying sincerity, of game companies to stomp out the trade.\u00a0 Companies have banned accounts of those involved in RMT and posted press releases about opposition to \u201cfarming\u201d or buying gold.\u00a0 Companies have also flirted with settling these issues in court, most notably with the Black Snow and Peon4Hire cases.\u00a0 So far, these collective efforts cannot really claim success in stopping RMT, and there are still no definitive judicial rulings on the subject in United States.<\/p>\n

\"Illicit

Illicit gold sellers went so far as exploiting a bug in World of Warcraft to use dead gnome models as an advertisement.<\/p><\/div>\n

This growing market for RMT coupled with what many have called a near futile struggle against unapproved RMT has brought about a substantial shift in the game industry\u2019s thinking about virtual property.\u00a0 In the past eighteen months, a growing number of games have either started development or shifted development to include some form of RMT as an approved revenue source. \u00a0\u00a0In addition, the RMT issue is being contemplated during development to a much greater extent than was previously done.<\/p>\n

The battle to create and keep \u201cpure worlds\u201d without RMT has subtly shifted, into a different battle \u2013 the battle to internalize the RMT market and harvest that revenue for the game companies themselves.\u00a0 In the United States some would say that the losing battle against black market virtual property is proving the successfulness of this business model because it appears profitable in spite of the costs associated with the potential for game company sanctions, litigation, and cancelled accounts.\u00a0 We know from industry reports that approved RMT allows for higher per user revenue than subscription models alone.\u00a0 The key for user enjoyment lies in the game design where the \u201cvelvet-rope\u201d or \u201cpay-for-perks\u201d models that rely on virtual property are viewed as bonus material, not requirements for gameplay, especially early in the game.<\/p>\n

Approved RMT and Signs of Developing Virtual Property Business Plans
\n<\/strong>One could argue that \u201capproved\u201d markets for virtual property are already here.\u00a0 The game industry has seen that Korea is successfully using the micro-transaction model.\u00a0\u00a0\u00a0 Other more familiar \u201capproved\u201d models for virtual property arguably include the Xbox Live points system.\u00a0 Importantly, the money in this business model only goes into the system, is translated into points, and then allows users to buy items.\u00a0 This one-way flow of real-world dollar may offer some insulation for Microsoft from some of the potential legal issues discussed in this article.\u00a0 \"SecondlifeElectronic Arts also uses a point system on Pogo.com allowing games to be played for points, which turn into sweepstakes entries for real-world prizes.\u00a0 So, there are already some forms of approved virtual property markets providing revenue streams and more on the way.\u00a0 The current developments in virtual property for online games are arguably a second wave.\u00a0 Even so, there are signs that this second wave will be much larger than the first.<\/p>\n

Beyond the obvious press releases, announced games, and recent launches, patents tend to follow areas where companies anticipate there is money to be made.\u00a0 Currently, there are less than five issued patents concerning virtual property, but we can also measure the strength of the patent \u201cpipeline\u201d in an area by looking at published patent applications.\u00a0 A patent normally takes between two and four years to wind through the United States Patent and Trademark Office before it is allowed to issue (if it is allowed to issue at all).\u00a0 Knowing that, we can look at published patent application volume and have some preliminary sense of business interest for a subject.\u00a0 Even though there are currently less than five issued patents discussing virtual property, a search of the USPTO yields more than 65 pending patent application discussing virtual property with about forty five of these (two-thirds) filed in just the last two years.<\/p>\n

It is clear that the game industry is waking up to the idea of making money using virtual property, but what types of legal issues may follow from exploiting these avenues?\u00a0 For certain, these issues will be almost entirely new in this context.\u00a0 The courts are just now having some interaction with virtual worlds.\u00a0 The idea of in-game economies connected to outside economies is going to appear foreign, if not surreal to our judiciary as more litigation is brought to court.<\/p>\n

Exploring the Legal Aspects and Responsibilities
\nThe concept of virtual property can extend beyond the linking of monetary value to content.\u00a0 Consider what Linden Lab is doing with its virtual world Second Life.\u00a0 As a start, this world has a currency and items that have acknowledged monetary value.\u00a0 Furthermore, users have rights in their intellectual property created in the game.\u00a0 Finally, users are also actively building the world, filling it with user generated content.\u00a0 This extreme example of a developed virtual property system is so different than traditional game models that new rules will have to apply.<\/span><\/h1>\n
\"Actress

Actress Mia Farrow used Second Life to discuss tragic conditions in Darfur.<\/p><\/div>\n

The recently settled Linden Lab-Marc Bragg case highlighted this tension.\u00a0 The Bragg case involved a Pennsylvanian attorney that had \u201ccheated\u201d to purchase virtual property in the game.\u00a0 Linden Lab took a dim view of this type of opportunism and cancelled Bragg\u2019s account containing about $8,000 of virtual property.<\/p>\n

Traditionally, property in online games has not held an acknowledged value. Unlike Linden Lab, no game company would dream of granting user\u2019s IP rights or acknowledging value in virtual property.\u00a0 Those relatively simple systems had tremendous advantages in their simplicity.\u00a0 The advantages were especially evident for customer service departments.\u00a0 \u201cOld School\u201d customer service for people that cheated or otherwise violated the rules of the game, terms of service, or EULA was simple.\u00a0 For minor infractions, people were warned or temporarily banned.\u00a0 For repeated or major infractions, people were banned permanently, their accounts cancelled, and any virtual property they had including items, characters, and currency was destroyed in the process.\u00a0 This worked well under old models of virtual property, where the property had no acknowledged value.<\/p>\n

The Bragg case, however, eventually made its way to federal court where certain clauses of the EULA were found unenforceable, prompting review and editing of these documents by Linden Lab and other online game publishers across the industry.\u00a0 Specifically, the judge in the Bragg case found that the Terms of Service represented a \u201ccontract of adhesion\u201d and was \u201cunconscionable,\u201d at least as it concerned the mandatory arbitration provision.\u00a0 The judge noted that the arbitration section was relatively hidden in the agreement and many of the terms were so one-sided and onerous as to be fundamentally unfair.\u00a0 Furthermore, the substantial costs to Bragg of filing the arbitration and forcing his appearance for the arbitration in San Francisco also factored into the judge\u2019s findings. Where this type of anti-cheating customer service account cancellation outlined above was easily the standard response for most games without a virtual property component, in the Bragg case it was found wanting and eventually the lawsuit was settled in October of this year with Bragg\u2019s account reinstated. The Bragg case demonstrated that these traditional rule sets and customer service models may not be sufficient in some games with virtual property systems.<\/p>\n

Additional responsibilities will almost certainly come with this new revenue stream.\u00a0 The idea that virtual property has a monetary value, especially when these items can be explicitly purchased with money, and when that money can also be removed from the game system certainly generates some legal questions about regulation and responsibility.\u00a0 Acknowledging the monetary value of virtual property will also come with regulatory and legal responsibility.\u00a0 \"Gavel-S\"For instance, we know that Linden Lab shut down gambling in Second Life following an FBI investigation.\u00a0 Previously, games were selling \u201cfun\u201d and those database entries were just that.\u00a0 This is especially true when that value can be extracted from the world by consumers.\u00a0 Some of these regulatory issues include sweepstakes, gambling, securities, banking, and money laundering regulation.\u00a0 Consider these currently unanswered questions:\u00a0 If a customer pays to play a game with random drops worth real money, will that be judged as the same as putting coins in a slot machine?\u00a0 Does selling plots of virtual land to groups of people for development and profit constitute selling securities?\u00a0 Do game companies holding thousands of dollars of virtual property assets need to meet the standards for banking regulation?\u00a0 To what extent can criminal entities use games to safely and quickly move money across borders and currencies?<\/p>\n

Conclusion
\n<\/strong>In the next several years, these questions and others will surely be encountered by companies moving into the virtual property space.\u00a0 At least some of them must be handled on the regulatory or judicial level.\u00a0 For now, the questions remain largely unanswered, but loom as potential pitfalls for companies seeking out that virtual pot-of-gold attached to RMT.\u00a0 Currently, spotting the issues and making efforts to skillfully plan for and negotiate them based on our closest possible precedents is the best we can do.<\/p>\n

\u2013\u00a0Greg Boyd is an attorney with Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York. He has represented some of the most prominent game companies in the world. His work includes IP counseling and transactional work for both publishers and developers. He is co-editor of the popular reference book Business and Legal Primer for Game Development. Dr. Boyd has spoken at several national conferences including AIPLA, GDC, Austin, and State of Play. He has been an invited lecturer at HarvardBusinessSchool, ColumbiaLawSchool, and other academic institutions. His commentary on business and law in the game industry has appeared in publications including Fortune, Forbes, Game Developer Magazine, and Gamasutra. He sits on the Board of Advisors for Mobygames. Dr. Boyd obtained MD and JD degrees from the University of North Carolina at Chapel Hill and is currently enrolled in the NYU-Stern MBA program.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

NOV. 5, 2007 \u2022 As an attorney in New York, I work with game companies frequently and have for several years. \u00a0In addition, I am often asked to speak and write about subjects that affect the game industry. \u00a0One of the most popular subjects in the last two years is the development of virtual property […]<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/posts\/3770"}],"collection":[{"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/comments?post=3770"}],"version-history":[{"count":5,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/posts\/3770\/revisions"}],"predecessor-version":[{"id":11372,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/posts\/3770\/revisions\/11372"}],"wp:attachment":[{"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/media?parent=3770"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/categories?post=3770"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.dfcint.com\/dossier\/wp-json\/wp\/v2\/tags?post=3770"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}