Virtual Goods

I did not have the time to attend the recent conference on Virtual Goods at Stanford, however the write ups did pique my interest and raise a couple of questions.

Firstly, where do Virtual Goods end? For example, is a downloaded music file a virtual good? I can see that there is a distinction between an MP3 file I have downloaded to my home system and a virtual good that only exists on a server for a virtual world, for example land in Second Life or gold in World of Warcraft. However, there are DRM schemes for music where I cannot use a music file that I have downloaded unless my system is in contact or has recently contacted the server through the internet.

It is fine to define virtual goods as digital goods that are under the control of some other entity, but we need a definition. (I put in the word digital because there are slightly more tangible goods that I own but that are kept under the control of others. A good example is in the stock market, where when I buy shares in a company, the share certificate is held by my broker.)

Secondly, how should we value Virtual Goods? As Susan Wu says in her introduction to the conference, in general we can value virtual goods like any other goods based on their utility. However there are some special considerations. A base value for any goods is its marginal cost of production. The marginal cost of producing virtual goods is zero, so virtual goods can become worthless. For example, if I spent dollars buying gold in the World of Warcraft and Blizzard Entertainment ceases business, my gold has zero value.

Now I do not expect Blizzard to go out of business any time soon. Anyway, if I did buy gold, I would not spend more that I would on a meal in an expensive restaurant. Also, I would immediately spend the gold on something useful like a Vorpal Sword of Bunny-Smashing and go out and kill some bunnies or Orcs or whatever to get value from the money I had spent.

A much more interesting case is presented by Second Life. The company is a private startup without the transparency of Blizzard Entertainment and the controversial business model is less proven. The things that you buy are virtual land and virtual adornments, things that you might expect to keep and cherish in the real world, yet which have a more fleeting existence in the virtual world. While one person has made a huge business success out of Second Life, others have tested it and found it wanting.

We will just have to wait and see what happens to Second Life. In the mean time, I put virtual goods in the same category as fancy food, flowers and 'gifts'. That is something to consume and savor as they are being consumed.