The real life economics of virtual worlds

There is, of course, a virtual goods economy in Facebook - those $1 "gifts" you can give people through The Wall application.

What's also interesting is that there are "free" models in virtual worlds, as well, such as Guild Wars.

Well what's actually interesting is that it all comes down to social expectations. On the web, people expect to pay nothing unless they're buying "real" goods. In virtual worlds, there's no expectation - and no single "one true way" business model.

That's led to a plethora of different, and often quite inventive, ways of making money. Guild Wars costs nothing to play, but they charge for the game and keep churning out expansions - in effect, episoding content. WoW charges you per-month, but releases less new content (possibly because there's more in-world to begin with).

Second Life charges nothing to "play", but has an in-world economy that Linden Lab effectively "taxes" by charging for land and taking a cut of Linden dollar/real world dollar transactions. It's unique in that it's perfectly possible to make a legitimate profit from creating content in-world.

Notably, all these systems - including Second Life - have a form of copy protection which creates artificial scarcity for virtual goods. In WoW, gold might be infinitely farmable, but valuable items are kept artificially scarce.

In SL, content creators can mark goods as no-copy. SL copy protection, like real world copy protection, is easily broken - but, as yet, there's no expectation from consumers that virtual goods should be free.

All this goes to demonstrate a thesis that I really should develop properly: that what matters with digital goods is not whether they can be copied (they all can) but whether consumers expect them to be free or not. The "value" is all in the head of the consumer, not in the actual work that it takes to create.