The fact is, there is no such thing as virtual commerce. You might think you’ve been making money buying and selling virtual items from your favorite MMORPG on eBay or IGE, but it’s just not true. Don’t tell the game companies, though. As far as they’re concerned, virtual commerce is alive and well – and they’ll do anything to keep it that way.

If that sounds like an upside-down version of the world you know, you may be in for a surprise. Let me explain.

Aimee Weber sells clothes at stores in two locations: one at the southwest corner of Umber’s central park, the other at the east side of the Chase Manhattan park near the Limelight Club in Hawthorne. If those places don’t sound familiar to you, it’s because you probably haven’t spent much time in Second Life, a 3D virtual world where reality is what you make it (for the most part), and a place that gives you the tools to make reality almost anything you please.

Umber and Hawthorne are the names of two of Second Life‘s 1,000 or so interconnected server regions. (It’s all one infinitely scalable world in Second Life, no sharding here.) Aimee Weber is the name of a Second Life avatar who’s garnered quite a reputation for her fashion line of funky skirts, tops and plaid lingerie – all of which can be worn only by other Second Life avatars, of course. But as virtual as all this sounds, Aimee earns real money for her work. That is, she earns Linden dollars, which can then be converted into U.S. dollars on sites like GamingOpenMarket.com, IGE.com or eBay. While she won’t say just how much she makes, she does say her virtual clothing sales bring in enough that if she concentrated on it full time, it would pay all of her real-life expenses.

Others in Second Life earn even more. According to Philip Rosedale, CEO and founder of Linden Lab, the company behind Second Life, a handful of the world’s 40,000-plus residents earn the virtual equivalent of $100,000 a year or more, most in the virtual real estate business, and close to a thousand of them turn a profit on their in-world activities. One made more than $38,000 in one month alone earlier this spring, according to Linden Lab vice president for product development Cory Ondrejka. Though SL is a place where you can live out your fantasies as a sex slave, a dream-world architect or a guy with a box of cocks, among other things, it’s also a place where you can turn your fantasies into reality in the form of cold hard cash. And Second Life is not alone. Selling UO gold or EQ plat on eBay has long been a moneymaker for dedicated gamers. And it doesn’t take a Chinese gold farming operation to turn a profit. One gamer I spoke with recently said he earned $25,000 a year for the three years or so that trading UO items was his full-time job. He wasn’t getting rich at it, but as he pointed out, “It doesn’t get any better than getting paid to play games.”

All in all, the market for goods and services produced in online games – things like gold and plat, power leveling services, entire characters or the set of Runescape armor that recently sold on eBay for $167.50 – has reached almost a billion dollars a year, according to Steve Salyer, president of IGE.com, the largest broker of virtual goods. By some estimates, the market could be twice that size.

The idea that someone would pay real money for a collection of screen-bound pixels that will never enjoy a physical existence is old hat to most gamers, especially to MMORPG fans. But try to explain the idea to most civilians and you’re met with blank stares or, worse, a shocked incredulity that someone might be tricked into buying something that doesn’t actually exist. In laypersons’ mouths, the “virtual” label has even taken on a slightly pejorative tone, one that seems to imply a touch of insanity about anyone who would be foolish enough to pay hundreds of dollars for an entry in a database in Austin and some screen art the size of a postage stamp.

But what is it that’s really being bought and sold here? The fact is that a great deal of our real-world economy these days consists of things that would be termed “virtual” in another context. Take this magazine, for instance. Chances are you’re reading it on the screen of your computer. Does that make it virtual? No. Because The Escapist is more than just a pattern of colored pixels on your screen, it is the ideas that are contained in its words. You’re buying (or in this case, getting for free) the content, not the physical product itself. The same is true for movies, music, software and a host of other things we buy, sell and consume each day. Yet none of those things get slapped with the “virtual” label. No one rolls their eyes when you tell them you just bought Photoshop or rented a DVD. But try to talk about the market for your favorite MMORPG’s armor and weapons, or the pair of thigh-high stockings you just bought for your Second Life avatar, and often enough the eyes don’t just roll, they glaze over at the same time.

For those who’ve never set foot in a virtual world it’s hard to imagine why someone would pay cash for a sword or a skirt that’s made of nothing but software. But what even most gamers don’t realize is that the things they’re buying and selling in online worlds aren’t virtual at all.

You might not be able to hold Aimee’s panties in your hand (as much as you might like to), but that’s not the point. You’re not buying them because you want to wear them in the real world. You’re buying them because they add something to the character you’re guiding through the online world. They add to the story that unfolds on your computer screen each time you log into Second Life. In that sense, they’re no different from buying the latest issue of your favorite manga or taking yourself to the movies. When you buy a DVD you’re not paying for a piece of plastic (which costs pennies to produce), you’re paying for the content stored on it. And Aimee’s skirts and stockings are content in much the same way. There’s really nothing virtual about them.

The same goes for the virtual items bought and sold in more traditional MMORPGs like World of Warcraft, Guild Wars and all the rest. They add to the narrative that is the reason you’ve logged on in the first place. That Bewildering Sword of Whoop-Ass you’ve been coveting isn’t something you can hold in your hand, but it’s something that will make your avatar’s story more interesting. It’s extra content in the same way that buying the director’s cut of your favorite movie is – you get a richer, more engaging narrative out of it (except in the case of Apocalypse Now Redux). There’s nothing virtual about it.

And this is what game companies fear.

In March of this year, Blizzard Entertainment, makers of World of Warcraft, banned more than 1,000 accounts for selling WoW currency and goods on eBay and other sites. In June, CCP, the Icelandic company that developed Eve Online, moved against what it described as “a virtual crime syndicate, dealing in vast sums” of the game’s currency. More than 80 accounts were permanently banned. And yet WoW gold and items are still sold on eBay and elsewhere every day, and at least one “power seller” runs an eBay store that is clearly flagged as offering Eve Online goods, and has been doing so for over a year. IGE moves vast sums in game goods and currency every day. And even a site like MarkeeDragon.com, which deals only in Ultima Online items, does a million dollars in annual transactions.

As Marcus Eikenberry, who runs MarkeeDragon, points out, Blizzard has been known to send “cease and desist” letters to dealers informing them that they will have to provide financial records to the company of just how much they’ve bought and sold, but they rarely if ever back it up with legal action. So why don’t game companies move more decisively against the people who profit from the “virtual” items they claim sole ownership of? Why haven’t they gone to federal regulators to stamp out this trend that is supposedly destroying the integrity of their games?

As Eikenberry puts it, “They don’t want to go to court and actually have a value assigned.”

His argument makes sense. If that suit of Runescape armor is legally found to constitute a separate product of Jagex, the company behind the game, a host of messy legal questions immediately crop up. For instance, what if Jagex’s armor doesn’t work as advertised? Is Jagex liable for damages? Or would it be the player who sold the armor on eBay? An 8 percent sales tax on $167.50 is $13.40. Who pays that, the game company or the player? And what if the buyer, the seller and Jagex (a British company) are all in different countries? What authority would collect those taxes? And, to take it a step further (though not that big a step), if game gold is a recognized currency, what would be the anti-money-laundering reporting requirements when large “money” transfers were made? Already, the game companies’ nightmare scenario has started playing out in China, where in 2003 the Beijing Chaoyang District People’s Court ordered the maker of the game Hongyue (Red Moon) to return the equivalent of $1,200 in virtual loot, including virtual biochemical weapons, to a customer who went to court after the items were stolen by a hacker. The court found the game company responsible for the holes in its security that allowed the hacker in – even though what was stolen was ostensibly the sole property of the company and not the customer. The prospect of these kinds of cases seeing the inside of a courtroom must strike fear in the hearts of many game companies in the far more litigious United States.

So they try to scare you off. But for all the bannings and press releases, MMORPG companies don’t seem to be able to convince most players that there’s anything wrong with the trade in game items. Instead, they feed the fantasy that what you’re dealing in is somehow “virtual,” something of no consequence anyway, so why bother. Don’t believe them. What you’re dealing in will only become more and more real as more and more people start spending time in virtual worlds.

In economic terms, there’s actually no difference between real currencies like the dollar, the pound and the yuan, and virtual coin like the platinum piece and the Linden dollar. The value of each is determined the same way: through a series of agreements (in the form of transactions) that, when taken together, give a rough idea of what the currency is worth. That’s what economics tells us: a currency is a unit of exchange facilitating the transfer of goods and services. The only difference between the U.S. dollar and the Linden dollar is that many more people deal in greenbacks than in Lindens. But the fact that Lindens can be used to buy dollars is all the proof that’s needed that this “imaginary” currency is worth something in the real world. Already, game companies are beginning to admit this to themselves. Sony Online Entertainment’s new Station Exchange program supports “real-money trade,” as it’s called, on a number of EverQuest II servers. Games like Project Entropia explicitly recognize the value of in-world currency by allowing players to buy it with a credit card, not just on eBay but within the game itself. Linden Lab is even considering hiring a virtual Federal Reserve board to manage Second Life‘s economy. Game currency not real? I don’t think so.

Which brings us back to Aimee’s underpants. They sell so well these days that Aimee, a 20-something web designer at an art services company, is toying with the idea of converting her virtual fashion line into one you could wear on your physical body. Others are taking similar cues from Second Life. A British trendspotting firm recently assigned someone to mine SL for commercial ideas, and a big North American bank is setting up a program to teach teenagers about money management in a dedicated region of SL‘s world. Sure, there are plenty of in-world items being bought and sold by SL‘s residents every day (almost $1.5 million worth in a typical month, according to Ondrejka). But where commerce is concerned – virtual or not – much more is going on than just fashion boutiques and land deals.

All this is happening because Second Life is a different kind of virtual world than almost any other. It’s not a game, but it contains multitudes of games. (In fact, one resident scripted an in-world game that was then licensed to a real-world game company for a sum “in the low five figures.”) The “things” of the world can’t be touched, but they are real enough to earn you a living. No one minds if you do, since Linden Lab grants residents the intellectual property rights to whatever it is they create in SL. And the stories that can be created there are so rich and complex that they are less a Second Life than an extension of your first one. For many people – and this goes for the players of more traditional MMORPGs as well – the stories they’re creating in virtual worlds are very much a part of their real lives. It’s just that most of those stories don’t have an impact to the tune of $100,000 a year.

But they do have an impact, both in terms of entertainment and in terms of economics. That’s why the important questions to ask, as we go on creating the shared narratives that take place in virtual worlds, have to do with more than just what makes a great game and whether RMT is spoiling immersion. The real-money trade in so-called virtual items isn’t going away. In fact, it’s just going to grow. Trading MMORPG items and designing pixellated clothing are now viable alternatives to trading bonds or designing clothes you can actually wear. What we don’t yet know is what laws will govern such ventures. Game companies’ Terms of Service – which always include a “we can do whatever we want” clause – will not be enough. Eventually, these things will become more clear, either because the courts step in, because game companies come to embrace what’s already happening, because some open-source model of the future is developed or because the power of the players and residents of online worlds to create the narrative that’s taking place within them will grow too great for anyone to resist. And as that happens, online worlds, and the commerce that takes place there, will be forced to come out of the “virtual” closet and admit that they’re not virtual at all.

You can’t touch Aimee Weber’s virtual panties, unfortunately. But it’s worth remembering that they’re very, very real.

Mark Wallace is a journalist and editor residing in Brooklyn, New York, and at Walkering.com. He has written on gaming and other subjects for The New York Times, The New Yorker, Details and many other publications.

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