Is Virtual Real?

+8* ABL Column Thoughts Virtual worldsPublished January 11, 2010 at 10:37 am No Comments

This is a guest column written for the Chinese business magazine “China Electronic Business” (invested by Jack Ma of Alibaba) and IT news site Interfax. Syndication inquiries are welcome!

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In last month’s column, I mentioned our estimate of 7 billion USD for 2009 of the Asian virtual goods market, which includes most online games, social networks and virtual worlds in China, Japan and South Korea. The US market was barely 1 billion USD and my point was to explain how the video game industry is transitioning. This month’s column will not deal with numbers and markets. Rather, it is my attempt to explain, by way of comparisons, the fundamental human drives behind the consumption of digital goods.

If you consider virtual goods (their basic form are “avatars” and game power-ups) a mystery, the purpose of this column is to take you out of this predicament that could simply kill your company if you head, say, a gaming company or a social network, for missing out on an important concept of our times.

We have three mysteries to solve:

1. Is “virtual” real?
2. Can we “own” something virtual?
3. What are we really paying for?

Please make a quick note of what you think of people paying for avatars and game power-ups. We will use it later on.

Is “virtual” real?

I have read countless variations on “only idiots would pay real money for a new hairstyle of an online avatar”. When I first encountered this phenomenon in South Korea in the early 2000, I thought: “that sounds crazy, but it looks like millions are doing it, so there must be something to understand”. Years of research on numerous social networks and virtual worlds later, my understanding improved.

First, I realized the terms we use to describe this frame our thinking. Today, “virtual” is commonly used as an opposite for “real”. This is more important than you might think as the correct opposite of “real” is “imaginary”. I’ll try and explain how virtual goods are not only very real but also that you have been buying them for years. Let the journey begin!

Would you call music on iTunes virtual?
We can probably agree on “digital” as it is clearly not “imaginary”.

Would you call a blog, a picture on Flickr or a YouTube video “virtual”?
You probably get the idea.

I believe the proper term to use would be “digital” rather than “virtual”, as it helps avoid the confusion due to the vagueness of “virtual” and keeps the latter in the drawer with all those terms that one thinks he knows but cannot explain.

The difference between buying a two-dimensional or three-dimensional digital object is not a whole lot different from buying a song on iTunes. Those objects might be digital but they exist as much as an iTunes song. Hence, virtual does not mean “that don’t exist” despite having no physical embodiment.
If we have established that “virtual” is “real”, we still have to solve two problems that are quite difficult to grasp: what is it we “own” when paying for digital goods and why many accept to pay for them.

Can we own digital objects?

One common point raised is that people pay real money to buy digital things that they don’t “own”. I heard claims that when we buy a CD or a DVD, we own it, while we cannot own a new avatar hairstyle or a weapon in a video game in the same sense. This sense ownership of cultural products – physical or digital – is largely an illusion.

If, like me, you don’t read the disclaimers when playing a DVD, you might think you “own” it in the sense you can do as you please with it. The reality is that you can’t. While you own the physical object, you don’t have 360 degrees rights to its content: in most cases, you are not allowed to share it publicly or copy it. Considering the cost of sharing and copying in digital form is zero, this is an understandable restriction from the seller’s point of view but is also a very strong restriction of your ownership.

What is the difference then between buying a CD or DVD limited to personal use and paying for background music on your personal webpage, like Cyworld has been offering for years in Korea and Tencent offers in China on its QZone service?

What about pay-per-view video?

The main difference is that you don’t have a token object – which might have its own artistic qualities – to make you feel comfortable with the fact that you paid for the same content. When looking at homo sapiens from a zoologist point of view, it is actually not surprising that humans feel more comfortable with objects. I think this explains the popularity of touch interfaces too – they are simply more “natural”. If all this sounds very logical, now let’s now look into our contradictions.

My virtual holidays

If you go skiing for a day and don’t have your own equipment, would you rent cheap or expensive equipment? After you are done skiing, what will you own? You won’t own the equipment, the snow or the resort. You might “own” some bruises or a broken leg (I hope not). You will “own” memories that you might store under a physical or digital form (photos, videos), while the ones in your head will gradually be altered over time. In short, you have paid for something that you don’t “own” in a physical sense.

From holiday to sport to study to watching a movie in a cinema, any “experience” fall into the “virtual” (non-physical) category, and many are not free.

You might pay with your time, your money or both. In such cases you might like a physical object to symbolize or act as a reminder of the time or money invested, but it will be “worth” very little in terms of bill of materials compared to the value of the experience itself. More, it sounds perfectly reasonable to pay for having a good time and pay more for a better time thanks to better equipment. Better golf clubs, better running shoes, better resort by the beach.

Is it unreasonable to pay to have fun in a video game? Video games used to be arcade machines in which you had to put a quarter of a dollar to play. Is it unreasonable to pay more to get better “digital equipment”? I saw recently the movie “Avatar” (an interesting name in this context) and the novelty of 3D lead me to pay more for the experience.

In a similar way, you might buy nice-looking clothes or sports gear. They don’t improve your performance but make you feel better by looking better. Why would it be different online where the only visual cues are your name, an icon and sometimes a 2D or 3D avatar? If I had a way to make you look 50% more professional or 50% more attractive when you use email, wouldn’t you buy it?

Now we might be getting somewhere: people already pay for experiences, i.e. non physical things, for fun, for work, for looking better. It seems like what people pay for online is also for fun, for work (though not much yet) or looking better. Calling again the zoologist, he might argue that our specie is especially interested in fun, food and reproduction, in which case we could think of work and looking better as means towards those ends.

Real money vs. Virtual currencies

Since we’re dealing with this topic, I might as well cover virtual currencies and “real” money.
There are two main types of virtual currencies used online so far: “points” that you get with activity and “cash” that you pay for. Depending on the service, they can be used to pay for separate things or combined in various ways.

Generally, “points” reward activity and engagement into the service. They are comparable to loyalty points. “Cash” is the way how the company behind the service makes money and are comparable to prepaid credit for your mobile, your Skype account or transportation card.

So virtual currencies are new names for old concepts used in a variety of consumer goods and services. This is why we hear now increasingly that virtual goods are consumer goods.

Several governments worry about virtual currencies. So far the main concern is about the use of a service’s currency outside the service (convertibility to “real” money). For instance: paying for a massage with QQ points (I heard this was possible in some places in Shenzhen). This is a problem for several reasons among which are money laundering (money transfers are hard to trace in virtual currencies and without real names) and disguised gambling (illegal). I believe the most important reason is that each company operating a virtual currency is actually printing money.

If you consider that money is “anything that is generally accepted within a community to pay for goods or services” then a “virtual currency” that is widely used online might start to get accepted also offline just as well, provided it can be spent in enough ways to make it attractive. The fact that it is “digital” is almost secondary as most of our money already moves in digital form to pay for salaries, rent, loans, utilities and many large and small purchases (the fact we use a plastic card for those payments does not change the money’s digital form).

So virtual currencies can become like real ones but are real ones more “real”? It’s up to your assessment. My opinion is that governments print money when they need it pretty much the same way Tencent prints QQ money. There is moderation in doing so, as printing money should be somewhat related to the increase in value created in a country to prevent inflation, but some governments seem to be fairly liberal with that too.

While I don’t think alternate currencies will overtake “official” currencies (though I heard of some large companies in Africa whose vouchers were more “official” and accepted than the local money) and as far-fetched as it might sound, there is surely a lot to learn about currency management from well-run digital economies!

By now, it is likely you have a better idea of the motivations behind virtual goods in social settings such as virtual worlds and social networks, as well as in games for fun and looks. Do you remember the note you wrote down earlier? What do you think now?

Your ideas are welcome at benjamin@plus8star.com. Our presentation on “Virtual Goods in Asia” is available on www.slideshare.net/plus8star.

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