Risk Markets And Politics

Monday, July 24, 2006

Random laws and real-money market possibilities

A few weeks ago, I hinted about possible strategies available to US-based firms seeking to operate "hybrid" real-money markets. What I had in mind was the example of Sony's EverQuest and other MMORPGs where virtual game items are sold in secondary online markets for real-money. Such examples have been popular since 2001, so it's a bit surprising that they are almost never brought up in the context of prediction market legality.

One reason for this is the "catch-22" involved in establishing a viable real-money market in play-money. In the early stages, if someone wants to buy the play-money (enabling someone to sell it), they are essentially paying to play the associated game, but if you've designed a game so fun that people are willing to pay to play it, you have already solved your "liquidity" problem, and you might be able to monetize participation directly, as with monthly fees. So allowing player-traders to exchange play-money won't hurt participation, but won't by itself cause a breakthrough either.

It is useful to think of play-money markets as games however, and consider the games they are competing against for attention. Trading games (play-money prediction markets) do not substantially compete with MMORPGs. They are more likely to compete with fantasy sports leagues (which enjoy legal protection, exempting them from anti-gambling laws) and any online game that doesn't require large, contiguous demands on one's time.

Frustrated entrepreneurs that wish to run real-money markets should - so far - be encouraged by the example of Sony's Station Exchange, an in-house auction system launched in June 2005 where users can buy and sell virtual items for real money. By hosting the market and promoting trade, Sony is acknowledging that players can win or lose things of real value in the game (which, at one point at least, contained casino-like sub-games in virtual locales). Forum discussions have popped-up here and there on the legality of such arrangements.

The defense of EverQuest/StationExchange would seem to be two-fold:

1) EverQuest is a game predominately of skill: This is the crucial point, and if EQ/SE is viable in this respect, this is excellent news for non-sports real-money prediction markets. Clearly there is some element of chance in EverQuest, as there must be in markets linked to future events. Then again, it's disturbing that poker is not considered a game of skill — and this is why I'm uncertain whether HR 4411 will apply to prediction markets. (Chris Hibbert and I agree that it ought not). Again, we come back to the notion that the legality of various games is often based more on the influence of interested parties and historical vagaries than anything intrinsic to the games themselves.

2) EverQuest players don't risk real money: More precisely, their losses are capped by the participation fee, but if that's the case, what's to stop others from specifying "participation fees" as a way to get around gambling laws? Also, wouldn't it be possible for an EverQuest player to buy virtual goods only to have them looted-away or otherwise lost in the game, resulting in a more substantial real-money loss?

Someone closer to the game should be able to shed more light on these points. How EverQuest/StationExchange is treated legally could have a significant bearing on real-money prediction markets in the US, and could determine which interests cast their lots in together.


  • Two things concern me: 1) Is the number of players sufficient to ensure a critical mass? 2) Note the the game administrator is effectively the legal entity for the virtual world. In that respect, they have to maintain the satisfaction of the players.

    By Anonymous Aleks, at 7:26 PM  

  • Just stumbled on your blog and wanted to comment on this topic.

    You ought to look into Second Life. Unlike EQ, WoW and some other games, it has been oriented from the beginning towards letting people play games and buy and sell items within the game, and also to exchange the in-game currency, called "Linden dollars", "L$", for real money. You can buy and sell Lindens freely for U.S. dollars on their web site. Some people even make their livings entirely from in-game activities.

    The other relevant point is that gambling is extremely popular within the game. Second Life doesn't have the kind of structure of other MMORPGs, it is free-form. You just walk around buy things, and talk to people. This means that sex and gambling are the most popular activities.

    I don't know how they get away with this, being based in San Francisco while running so many real-money gambling operations. Probably they've just been low profile and haven't attracted regulatory attention. But the game is growing rapidly and is expected to pass 1 million accounts before the end of 2006. Sooner or later someone is going to notice this kind of activity (not to mention the virtual prostitution) who is in a position to do something about it.

    For now, though, given that people can play poker and slots, the could just as easily bet on future events. One problem is that there are no real contract enforcement mechanisms within the game, so it's hard for people to set up long-term financial relationships. Some in-game "banks" have disappeared with their depositors' money. It's strictly caveat emptor.

    Anyway, quite an interesting and fast growing virtual world, very different from the more traditional combat oriented games.

    By Blogger Hal, at 3:55 AM  

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