Archive for October 5th, 2005

State of Play III: Pre-Conf Thoughts


Back at the Berkman Center, I’ve been preparing for State of Play III, where I will be participating in a workshop entitled “Building the Metaverse: The Role of Property, Intellectual Property and Commerce.” It turns out that the workshop agenda, circulated in the last-minute, develops in a different direction than I expected, but anyway, here are some pre-conference thoughts (thanks to my friend and colleague James Thurman for research assistance):

1. Virtual worlds were originally considered to be communities of fantasy, but today equally constitute communities of interest, relationship, and transactions. Indeed, virtual worlds have developed their own economies with production, assets, and trade activities comparable to national economies in the offline world. At the core of virtual economies are marketplaces for virtual world goods, where citizens/users are increasingly engaged in creating, providing, and demanding digital items. Depending on the virtual world, between 20% and 70% of citizens/users are estimated to be engaged in smaller and larger transactions of this sort.

2. The first online games that provided an immersive experience and created a persistent environment as is now characteristic for virtual worlds debuted in the second half of the 1990s. It is noteworthy that first-generation virtual worlds such as Meridian 59 already enabled transactions—besides being based on killing and adventuring. However, transactions in this stage of technological evolution were rather simple and straightforward: Avatars had the ability to deal with computer-commanded merchants who bought and sold virtual items. Those items could then be further traded between avatars within the game.

3. More recently designed social virtual spaces are centered around creation, development, exploration, and engaging in transactions as opposed to simple “hack and slash” or playing out an overall adventure or storyline. EVE Online, for instance, enables users not only to buy and sell virtual items, but also to create and operate virtual businesses, to manufacture digital items, provide services, etc. In second-generation virtual worlds, in-game transactions have both increased in importance as well as gained in complexity. In addition, the locus of the marketplace on which digital items are traded has blurred: In many cases, large-scale in-game trades simultaneously take place with economically significant trades over platforms such as ItemBay or eBay.

4. The increased participation of users in the creation of virtual world items in second-generation worlds marks the transition from a hierarchical and centralized paradigm of production to a decentralized mode of peer-production of virtual worlds. In emerging third-generation virtual worlds such as Second Life, users are no longer engaged in the production and trade of particular virtual items aimed at eliminating scarcity in the economic sense, but become co-creators of the virtual world as such. Against this backdrop, transactions in virtual items are not only of economic relevance, but will increasingly become “part of the game” in the (different) sense that they are constitutive elements of virtual worlds.

5. Each of the three stages of market evolution as outlined above is associated with a distinct set of legal/regulatory problems and governance challenges. In first-generation games, the complexity of such problems is fairly limited due to the limited number of transactions and types of transaction that constitute the in-world marketplace. Governance problems in this phase may include phenomena such as digital looting or cheating. Second-generation virtual worlds, by contrast, increase the level of complexity of transactions dramatically by enabling users to become more creative and more interactive. As a consequence, virtual worlds of this generation are facing a series of legal/regulatory challenges, ranging from the question of ownership of digital property to disputes between market participants or fraud. In third-generation virtual worlds, these governance issues get even more important and complex due to ubiquitous creation and exchange of digital items as building blocks of the virtual world. The associated re-allocation of the roles of platform providers on the one hand and users on the other hand may ultimately result in many-faceted tussles over control, both vertically (between platform providers and users) and horizontally (between users and/or group of users.)

6. A tentative and non-comprehensive analysis of the governance regimes of several online worlds across the three generations suggests that the regulatory problems and challenges mentioned above have mainly been addressed by using two modes of regulation: Code and law. (NB: It appears that alternative regulatory mechanisms such as reputation systems prove less successful in this part of cyberspace than in others.) Code, of course, seems to be the first choice to regulate behavior on the marketplaces of virtual worlds. However, an initial analysis suggests that code, in this particular case, has much more an enabling function than a constraining function based on users’ demand to be able to do more things (including transactions) in virtual worlds. Further, code is limited to in-game regulation. Where problems occur at the intersection of virtual worlds and other worlds, code-based regulation seems to be much less effective. Finally, code can be and has been circumvented.

7. Law as a mode of regulation has mainly been applied in form of End User Licensing Agreements (EULAs) and Terms of Service (ToS). Most of the first-generation-virtual-worlds EULAs, as far as we can see, have not set forth specific governance regimes aimed at regulating transactions; rather, they look similar to general software licenses. Given the characteristics of these transactions and the low conflict potential at the early stage of development, this does not come as a surprise. The EULAs of second-generation virtual worlds commonly address (if not necessarily resolve) some of the conflicts outline above. The question of content ownership and copyright as the basis for virtual commercial transactions has got a fair amount of attention in EULAs. Overall, a notable feature of many second-generation EULAs is that they seek to establish control and possession over all of the content which appears upon their platforms. Further, many of the EULAs or ToS contain provisions which explicitly restrict the real world sale of digital items or avatars. However, it does not appear that such activities have ceased concerning those games which prohibit them. Some EULAs of second-generation virtual worlds also contain provisions aimed at regulating users’ behavior on in-game marketplaces, e.g. by establishing rules against trade scams or other forms of abuse. Finally, EULAs and rules of conduct, respectively, of some virtual worlds contain provision regarding trade disputes between users and corresponding disclaimers of liability. The EULAs of emerging third-generation virtual worlds—most prominently Second Life—tend to establish a less restrictive ownership regime, i.e., recognizing that players have copyrights in their virtual creations whenever applicable. (The potential problems associated with such an approach have been discussed elsewhere.) In other respects, EULAs of third-generation worlds appear to be similar to governance regimes of second-generation virtual worlds.

8. A high-level analysis of selected EULAs and ToS’s of three generations of virtual worlds suggests that sophisticated regimes aimed at regulating digital transactions (in the broad sense of the term) have not yet emerged. It appears that EULAs and ToS of contemporary virtual worlds are eclectically dealing with questions of ownership/copyright, while paying less attention to the regulation of other important aspects of the marketplace—despite indication that some form of regulation might be (or become) necessary due to in-world market failures. Further, the analysis suggests that virtual world governance regimes, as far as they have developed and as far as transactions are concerned, are largely replicating traditional institutional arrangements of the offline world. In this regard, one can not yet observe large-scale experiments with alternative governance approaches to market regulation.

9. It remains an open question as to what extent those second-generation virtual worlds in which transactions and markets play an increasingly important role will need, over time, a more advanced approach to governance in order both to organize and protect markets. A more comprehensive framework would probably also include some form of contract law, consumer protection laws, and rules ensuring competition on virtual markets. Even more interesting is the question of whether currently available institutional frameworks—such as rules and enforcement arrangements as established by contract or corporate law, for instance—are appropriate to deal with the potential challenges that emerge in peer-produced third-generation virtual worlds. Further, current governance regimes as established, in part, by EULAs and ToS’s still have a strong vertical orientation, heavily focusing on the interactions and transactions between users and platform providers. Complementary “horizontal” and peer-oriented governance approaches, by contrast, have not gained much visibility, although precursors exist (e.g. in form of new digital institutions such as in-world laws drafted and enacted by users as in the case of A Tale in the Desert.)

10. The analysis of existing and emerging governance regimes—here focusing on transaction frameworks—suggests that we are only at the very beginning of the often quoted competition among governance regimes of virtual worlds. Whether competing governance systems also emerge between virtual worlds on the one hand and the real world on the other, depends increasingly on the creativity of virtual citizens in peer-designing their own innovative governance regimes as we move from centralized to decentralized virtual worlds.

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