December 02, 2005

Exploring Law and Economics in Second Life

For thousands of years, people have used games and theater for escape or to simulate fantasy and conflict. Sometimes it is for entertainment, sometimes as part of religious observance, sometimes for training or education. As powerful personal computers became more affordable, "games" have evolved beyond one-to-one encounters like Chess and Go and theater has evolved beyond plays in the Globe Theater in Stratford.

Now, thousands of people can simultaneously inhabit "virtual worlds" that persist independently of each participant's existence, and which can be permanently affected by the actions of each participant. Is it a game? Is it theater? Or is it a "new type of social order," as proposed by Lastowka and Hunter in The Laws of the Virtual Worlds (SSRN, May 2003).

Virtual worlds are increasingly becoming subjects of serious research by law and economics scholars as well entrepreneurs. Over the coming weeks, we'll be exploring a virtual world called Second Life, with the help of several embedded "avatars" living there, and comparing their reports with the thoughts of leading scholars in this emerging field.

(read more below the fold)

Early virtual worlds were text-based Multi-User-Dungeons ("MUDs"), then evolved into "Massively Multiplayer Online Role Playing Games ("MMORPGs" or "MMOGs"). Modern graphics capabilities and high-speed broadband connections now enable participants to inhabit "avatars" that have many of the characteristics of cyborgs, human-machine hybrids. These avatars can take the form of people, animals or fanciful objects and change at the click of the participant's mouse. They can move among each other in a visually rich "3D" environment experiencing the effects of simulated physics and showing emotions through facial expression and body language, while text-talking face to face or via Instant Message across virtual miles.

They may work, play, and acquire virtual property in the form of "game gold" (a.k.a. "plat" for "platinum pieces") or other virtual currencies and virtual objects of power or value. For "work," they may hunt resident monsters (and each other) for loot and "experience points," harvest and process raw materials, then manufacture and sell virtual goods to other participants or to the "government." Or, they may provide services to other players for pay.

As these virtual worlds have become more populous, detailed and complex, some became less like "games" and more like "simulations" of societies that are like our "real life' societies, but different. They develop true economies, markets that allowed exchange of their currency with "real world" currency, and measurable gross national products that appear to be larger than some developed nations.

They also precipitate real disputes over participants' virtual civil rights and law suits over virtual property rights that have reached "real life" courts. They have inspired scholars to study these virtual worlds for insights into human anthropology, sociology, economics and law. See, e.g., Unintended Consequences: Academics Experimenting With Virtual Worlds (November 28, 2005) for some references to some recent research by others.

I will not attempt to repeat or improve on the analysis of luminaries like Edward Castronova, Greg Lastowka, Dan Hunter, Robert Shapiro, Jack Balkin or James Grimmelmann. They bring far more intellectual horsepower than I do to the law and economics in and of virtual worlds. I will attempt to stand on their shoulders and explore the emerging sociology, economics and law inside one of the leading virtual worlds, Second Life.

Why Second Life is Different.

Second Life ("Second Life: Your World. Your Imagination.") is the creation of Linden Lab, a privately held California company founded by Philip Rosedale, former CTO of RealNetworks. Trying to find a niche, they have followed a path different than that of other popular Virtual Worlds such as Ultima Online ("UO"), or Everquest ("EQ") that focused on a culture of fighting and killing monsters and exploiting other virtual resources for gold and glory. They also have separated from the path of the more "residential" virtual worlds like The Sims Online ("TSO") which emphasize socializing, home decorating and fashion.

First, a Smorgasbord of Sub-worlds

First, Second Life has not required their participants to choose between the "sword and sorcery" games like UO and EQ and the "party and style" MMOGs like TSO. They have offered the opportunity for participants to do either, or both, or something they themselves have created, all in the same session. They have stepped out of the role of providing a prescribed game ready-made and instead providing the platform on which any number of games, societies or lifestyles can be simulated by their participants.

In part, they have done this by making their virtual world much like Disney World (r), in which you can visit the Magic Kingdom with the kids in the morning, tour the Animal Kingdom in the afternoon, spend the evening at the Boardwalk, then hop on the tram and zip back to your "themed" resort hotel for the night, all without leaving the Disney property or needing any payment medium but your Disney key card.

Linden Lab made their platform easily scalable and composed of discrete snap-together elements. Their virtual world consists of multiple "sims," each one an instance of their host operating system running on a separate server that interfaces seamlessly with all the other servers in Second Life. As a result, all sims work together as one network with common search, communication and monitoring tools and a common currency. Much like the Internet. Each sim can have different world dynamics, different permissions, different themes, different "realities" made possible by the Linden Lab operating system. If they need or want additional space, adding another sim is as simple as adding a server to support it.

Unlike Disney World or some competing virtual worlds, Second Life (or, as residents' say "SL") allows and encourages participants to "own," improve and visit plots of virtual "land" within SL. Participants "buy" or "rent" undeveloped "land" from the government or from other participants, and then can "build" structures and furniture to put on their land, using graphical tools built into the game interface. They can use those same tools to make clothing for themselves and perform virtual plastic surgery to make their avatars taller, thinner, bustier or more blond. Or they can pick up free clothing and furniture at various locations conveniently located throughout SL. With a click of a button they can switch their avatar from male to female and back again. None of this requires any "raw materials" or tools other than what is provided free to all.

Once all this is arranged, the participant, now appearing to herself and other participants as a uniquely clothed and accessorized avatar, settles in her virtual couch in her virtual cottage on her virtual plot of land in her virtual community, takes a deep breath and asks herself "what do I do now?"

"When the going gets tough ... the tough go shopping!" One of the first things our newly spawned avatar may do is to go shopping with the starter purse of virtual currency ("Lindens") provided to new participants. She won't have far to walk (or fly) before she is in front of one of thousands of virtual vending machines in virtual malls, ready to exchange her Lindens for virtual goods crafted by other residents. She will find a wide and diverse selection of affordable clothing, jewelry, and equipment made and sold by other residents.

Second, Letting the Customers into the Kitchen.

Which brings us to the second thing that Second Life does differently. They have open sourced the creation and sale of content by and to all residents. In Second Life, the variety of virtual goods is not limited to what the Linden Lab staff can think up and create. Residents are encouraged to create new things for themselves and to sell them or give them to other residents.

Linden Lab makes this a big selling point from the very start, describing their virtual world as:
"Your World. Your Imagination. -- A 3D Digital Online World Imagined, Created and Owned by its Residents."

Yes, owned. Not only has Linden Lab empowered their participants to create and manage the distribution of goods and services within SL, the Terms of Service ("TOS") document makes clear that residents retain the copyright on those original virtual items that they create and exchange. It also makes clear that the participant has the sole responsibility to police and enforce those rights, as Linden Labs disclaims any responsibility or intent to do so.

This contrasts markedly with positions taking by other MMORPG operators, which have reserved all rights in in-game characters, items and coin or "virtual goods". See e.g. Sony's EULA for its hit EverQuest virtual world, as discussed in Schwarz & Bullis, "Rivalrous Consumption and the Boundaries of Copyright Law: Intellectual Property Lessons from Online Games," 10 NO. 1 Intell. Prop. L. Bull. 13, 2005. (As hosted at Terra Nova: Terra Nova: Rivalrous Consumption of Virtual Assets)

Is Linden Lab Nuts?

So, how does Linden Lab expect to make money, if residents can make all the virtual goods they need and buy and sell them amongst themselves, without retaining some control over the intellectual property? Resident fees are modest, below $72 for a year paid in advance (which comes with a weekly stipend of $500 Lindens and a signing bonus of Lindens.

Linden Lab recently opened its world up to free accounts with limited rights, driving a 50% jump in their account numbers during October and November 2005 to 90,000 (up from 30,000 in June). Like other savvy welcoming sovereigns wishing to encourage a rising tide of eager, unskilled immigrants, Linden Lab has offered the one thing on which they reserve a creation monopoly. Presently, the chief limiting resource in this virtual world is virtual land.

Each new server hosts 64,000 square units of "land" on each sim. These grids of land can be created from nothingness and dropped into the virtual ocean that is the map of Second Life. They come pre-equipped with mountains, coastlines, roads, grass and trees. They can then be sold piecemeal or as a unit to individual homesteaders or to entrepreneurs who can customize them with little virtual bulldozers, add virtual trees or waterfalls and houses, castles, shopping malls or dance clubs and then either occupy them or remarket them to other residents in return for Lindens. An "in game" auction system makes land purchase and sale safe and efficient for those with the Lindens to pay the asking prices

How that land gets developed, sold and used is largely left to those who buy it. Linden Lab will step in if some instance of participant abuse is especially eggregious, but "the Lindens" are busy people in a fast-growing world, and they do not trouble themselves with trifles.

Land regulation, like the sale of virtual good and services, is largely left to the participants themselves to work out controversies. Like in the Wild West of North America or the early centuries of Eurasia, this freedom produces some dysfunctional behavior, failures of cooperation, fights over rights in virtual property, conflicts between residents over "individual rights," allegations of Ponzi schemes, vigilante behavior, "gangsta" shoot-outs in night clubs and outright wars between adjoining sims. It also produces serious efforts to create effective forms of representative municipal government, complete with public finance, financial transparency, zoning and dispute resolution.

Embedding Observers for Unintended Consequences

In his 2004 New York Law School Law Review article SSRN-Virtual Worlds as Comparative Law by James Grimmelmann (also v49n1p147-184.pdf (application/pdf Object)) James Grimmelmann introduced the study of the law in virtual worlds (as compared to the study of law of virtual worlds) as a study in comparative law, with rich opportunities for serious study and learning. I am accepting his invitation. I have opened lines of communication with several avatars in Second Life to serve as embedded reporters. As they get "satellite time" to report back, I expect to have something of value to share.

Posted by dougsimpson at December 2, 2005 12:11 PM