InfoTech & Public Policy

Avi’s recent post “The New Ads” asserts the death of the 30 second ad and points to viral advertising as the new frontier in pushing products. While his points are well taken, focusing exclusively on the new forms that commercials will take as television moves online misses the larger picture: content, not just advertisements, is sure to evolve.

Between Tivo, Slingbox, piracy, ad-blockers, desensitization and competition from an ever-increasing array of media, it certainly looks like television producers are in for a rough period. Only very recently, with the introduction of itunes, the online broadcast of sports events and ABC’s next-day streaming of popular shows, have they started to take advantage the new distribution channels the internet offers. Even more nascent is the use of the internet to supplement media content.

ABC has been a pioneer in this area, particularly with Lost, its breakout hit, now in its second season. For the uninitiated, Lost follows a couple dozen survivors from the crash of Oceanic Airlines Flight 815, who are trapped on a mysterious island. When the show first launched, ABC created a web site for Oceanic Airlines complete with the ability to look up flights and make reservations to create buzz about the show. More recently, in anticipation of the summer break between seasons, ABC has launched “The Lost Experience,” a game set to run in parallel to the show that includes web sites, commercials airing during the show, billboards, phone calls and other interactive multimedia.  The show has also made a serious effort to have its cast and writers engage the fan-base by taking part in online forums and actively responding to feedback and theories about the show.

In a way, The Lost Experience can be seen as the direct descendent of Majestic, a PC game that EA introduced and then swiftly abandoned about 5 years ago. Majestic was a fully immersive mystery game; not only would you play around on the computer to try to figure things out, but the game would contact you by email, phone, fax and IM and would tailor its content to you specifically. For instance, the game might send you a handwritten, threatening letter that mentions your family by name. While Majestic proved to be staggeringly unpopular, largely a function of being too involved, it and its derivates represent the sort of total immersion that will likely become increasingly common as the internet enables new content, not just new ads.

A while ago, Cory Ondrejka, VP for Product Development from Linden Labs came to Princeton to talk about Second Life. He argued that the success of Second Life came from two things – freedom and ownership. These two factors have interesting implications for the network neutrality debate. If we see Linden Life as the gatekeeper to the Second-Life network and Verizon and Sprint as gatekeepers to the internet, it is amazing how different their philosophies are toward regulating access.

There are eerie parallels between Second-Life and the Metaverse of Neal Stephenson’s SnowCrash (I swear, I’m not a geek, that’s one of the few sci-fi books I’ve read). The similarities go beyond the way avatars interact with a 3D world to the transportation system for getting those avatars around and the complete customizability of the system (Second Life uses quaternions as datatypes, which is fairly ridiculous). It is the customizability that gives Second Life and the Metaverse their richness and makes them vulnerable. The premise of SnowCrash is that there is an eponymous virus inside the Metaverse (which is also a drug in the real world) that threatens to enslave humanity (yeah, kind of far-fetched). A significant amount of the plot revolves around how the Metaverse is open enough for hackers to plant this virus and also open enough for the protagonist to save the day by hacking. To a large extent, this is how Second-Life works – people are given the freedom to tinker, but that comes at a price. One of the more interesting elements of Cory’s talk was about how two people in Second Life went around as alien avatars in a B-movie spaceship abducting other users and giving them TV-shirts that read “I got abducted by aliens and all I have to show for it is this lousy T-Shirt.” Openess allows Linden Labs to tap the skill and labor of millions of users and enhance the richness of the game at no direct cost. Of course, this openness has great risks: the so-called “W-Hats WMD” (in which objects replicated rapidly enough to shut down servers) is to Second Life what the SnowCrash virus is to the Metaverse.

There are also obvious parallels to the internet, in that the creativity of users to do whatever they could over HTTP has made the internet the vibrant world that it is. This is in stark opposition to the Bell-Head model of networks – in which the default policy is to forbid uses outside of a narrowly defined set. As Susan Crawford noted in her IT policy talk, this has not led to much innovation in phone service over the last fifty years. This dichotomy has parallels to international economics: the telephone system is a typical caricature of European or Indian Bureaucracy; the internet is much more like the open capitalist system the US or Taiwan. Most economists argue that the freer economic systems allow for greater growth. If the telcos are too heavy handed in regulating permissible traffic they could destroy the vibrancy of the internet – the very product they are selling.

But neutrality is not enough – property ownership is another key ingredient. The idea is that to motivate entrepreneurs, one has to let them profit from their creations. In Second Life, the game creators grant property rights to in-game creations. This, Cory claims, has led to a whole slew of businesses: from fashion designers of virtual clothes and notaries (using standard cryptographic techniques). Again, millions of users are enhancing the richness of the game at no cost to Linden Labs. There is a parallel with theories on jump-starting economies in developing nations. Many economists argue that the lack of strong property rights in those countries is one of the key factors inhibiting economic growth. In the network neutrality context, this also argues for a more hands-off approach for the Bellheads. If they charge websites too much for traffic (as they are trying to do), they could destroy the entrepreneurial incentives that make people want to buy internet access in the first place.

Second Life makes a strong case for the Openist perspective toward network neutrality.

The New York Times has an article today about a virtual world introducing a real world ATM card linked to your virtual wealth. (Requires NYTimes account to read.)

This past week’s discussion about virtual worlds raised some very interesting issues that are related to what we’ve discussed about internet governance, but are also somewhat distinct. While we’ve talked about the value and the widespread desire to retain the internet as a space free of regulation and coercion – a libertarian Xanadu – the nature of virtual worlds makes the case for leaving them unregulated especially compelling.

The internet, arguably, loses its special character when it is used to replicate what can be done offline. Few would argue that purchasing something online instead of in a store for the sole purpose of avoiding the sales tax or evading the law (as in gambling, drugs, Nazi memorabilia, &c.) deserves some sort of protected status. At the same time, virtually everyone acknowledges that the Chinese government’s requirement that Google censor politically volatile information from its searches is, at a minimum, unfortunate.

At its core, what makes the internet special is its ability to transcend the restrictions that mark everyday life, be they restrictions of geography, identity or information. Nothing more clearly embodies these characteristics than virtual worlds like Second Life.

Second life allows people to interact with each other with a minimum of rules and restrictions. People can be, do and say whatever they like. A cursory tour of Second Life reveals hundreds of casinos, strip clubs and war games, but also opportunities to meet, chat, debate, build and explore. The currency people use is wholly managed by Linden Labs, which in turn is responsible to its customer-citizens. It is clear that much of what goes on in SL would be illegal if it took place inside a brick and mortar building in the United States, but regulating SL seems, at least to me, to be quite different from regulating partypoker.com. SL is less a business transaction than it is a transcendental experience.

It is also unclear that the US government even has the authority to regulate business transactions in a virtual world. While Congress does have the authority to regulate interstate commerce, and that this power has been read extremely broadly since WW2, the courts have taken tentative steps towards making this power less of a carte blanche. Who is to say that transactions in Linden dollars – other than the purchase of Linden dollars with US dollars – constitute commerce? When the currency and the transactions are entirely confined to the online world, shouldn’t they be governed by that world? I don’t think the location of the servers is significant, in part because server location is arbitrary and completely unrelated to the operation of the world – servers in Silicon Valley could just as easily be in Canada or the UK or on a boat in international waters – in a way that the physical location of offline transactions is not. Modeling each virtual world as another country, with its own laws (EULA), taxation (fees), government (operating company) and citizens (customers), which citizens enter and leave when they sign in or sign off, provides a much more satisfying – and in some ways more sensible way of thinking about and interacting with these worlds.

In my post, I would like to continue the discussion of the regulation of online gaming. As has been discussed in class and in previous posts, a major issue is whether regulation is appropriate when in-game events have consequences in the real world. Specifically, I will focus in this post on the regulation of economic transactions that involve virtual worlds, transactions which increasingly have real-world impact as games such as Second Life enable currency exchange between in-game currency and real-world money, and the purchase and sale of in-game property for a real cost.

I think that a reasonable approach to dealing with regulation of virtual worlds is to make a clear distinction between in-game and out-of-game transactions and to regulate each in their respective domain. Though some of the points regarding the difficulty of regulation cite the overlap between in-game and out-of-game transactions, I think that such a distinction is possible and wish to defend the feasibility of regulation on these lines.

The current regulations as they are seem to support such an approach. In terms of the purchase of property or goods, this would mean that the only thing subject to out-of-game regulation (such as income tax) would be the difference in value between the (real) money put into the game and the money taken out of the game (so the real-estate developer from Second Life discussed in class would be ok keeping capital in the game). The conditions of such an exchange would then be subject to the terms of the EULA, another out-of game agreement. In this sense if, for example, Linden Labs made some change to Second Life that significantly devalued property held by someone in the game, or if Second Life simply disappeared due to a problem with the servers, the Participant would have no way to recover the lost value of in-game items since the Second Life Terms of Service contains provisions that remove it from any such liability. In such a scenario, a user who lost money would have essentially just made a bad investment.

As has been previously discussed, in the case of an attack on the game’s functionality (such as the creation of destructively self-replicating objects in Second Life), the game maker may wish to seek action against the attacker, and individuals who lost value in the game may wish to seek action against either the attacker or the game provider. In Second Life, the Terms of Service expressly prohibit a participant from transmitting “Content that contains any viruses, Trojan horses, worms, spyware, time bombs, cancelbots or other computer programming routines that are intended to damage, detrimentally interfere with, surreptitiously intercept or expropriate any system, data or personal information,” so it would be valid for Linden Labs to seek real-world legal action against the creators of the object. The Terms of Service additionally removes Linden Labs from responsibility to users for any losses in value the in-game goods due to such a third-party attack, so a user could not seek damages against Linden Labs, but could against the attacker.

The question then arises of what damages the company or an individual Participant could claim since much of the loss might be in in-game currency or property. Maintaining the separation between in-game and out-of-game transactions, neither the company or individual participants could claim losses due to the loss of in-game objects (or money) themselves, but they could seek damages for any real world income that they expected to have on their in-game holdings. The Second Life Business Opportunities Page suggests that a fair number of participants make some real-life income in this way (“here are just a few in-world business occupations which Residents founded and currently run, and make part or all of their real life living from…”). The game maker could seek damages on real-world losses by claiming, for example, that the attack damaged their participant base, and therefore any income that would have been derived from subscription costs, purchase of in-game property which can be sold to consumers for a real U.S. dollar amount, or any loss in revenue due to fewer land holders and therefore payers of the real-money property taxes.

We might imagine that individual participants may think it would be unreasonable to have to directly seek losses against an attacker responsible for shutting down a game, or to be unable the seek damages against a game creator for changing the game in a way that substantially devalued their property (because of the Terms of Service). I would suggest that if this were significant enough of a problem, we could imagine that some kind of “insurance” policies might arise. For example, if enough participants stopped investing real money into property in Second Life for fear of its loss in value, Linden Labs may find it beneficial to offer “insurance” that would pay real money for in-game losses in order to increase property purchases and holdings and thus their revenue from property sales and taxes. Linden Labs could presumably then also seek damages for the amount they had to pay out (in real money) due to the insurance policy against a third-party that damaged their service.

Such a system in which only out-of-game agreements and increases/losses is regulated in the real world would enable in-game transactions to still be made according to in-game standards of behavior, while making real-world laws applicable as soon as in-game assets, income, or losses/payments have an out-of-game impact.

Many students have posted to the courseblog concerning virtual worlds and the need to regulate them. On one side, are those who believe that regulation is ridiculous and unsustainable or that their real world irrelevance makes regulation unnecessary. Others argue that events in the virtual world have real world consequences on players and economics which necessitates real-world regulation

To a certain extent, both sides are talking past each other rather than engaging in a debate because the terms of debate have not yet been set. That is, with many other issues we have discussed the question was clear: online gambling is becoming a problem, find a solution that effectively curbs it given the technical possibilities and respects civil liberties. We knew the objective of intended regulation.

The rationale for regulation follows from societal perceptions of the (usually) economic and (sometimes) social consequences of an activity. For instance, we regulate financial market fraud because we believe having functioning capital market where investors can trade with confidence is necessary for a free market. That is, regulation is intended to foster behaviors deemed socially beneficial. On the other hand, we place many restrictions on gambling because we fear the ills it brings to society.

It is tempting to argue that people who spend all their time engrossed in MMORPGs are contributing nothing to the economy and therefore such activities should be discouraged. If one took this as a premise, then one might take the same attitude towards virtual world regulation as one does gambling[1]. However, simply because one is not churning out widgets in a factory does not mean one is not helping the economy. For instance, few would argue that watching a movie is a productive activity, but this form of entertainment is an important part of the American economy. In fact, we deem it to be so important that we have created a complex set of laws called copyrights to ‘incentivize’ the production of creative content. Without any consumers, products would have no purpose: all work and no play stifle the economy. If one is to justify regulations against virtual worlds, one would have to do so on the basis of negative externalities generated by online addiction, much as one might justify regulation of gambling based on gambling addiction. However, one would have to find significant negative externalities. As a society, we don’t believe in regulating behavior simply because it is “unsocial:” there are no rules barring you from being glued to your TV set or being a workaholic.

But there is another way to view virtual worlds, and that is as a platform for economic activity. The Second Life economy is booming: in January 2006, the Linden dollar equivalent of $5 million US was traded. If a sizable market springs up, then the government has a strong incentive to regulate n order to smooth out the rough edges of the free market. (Alternately, if one is of a libertarian persuasion, one could take the cynical view that the government will find a way to regulate any sizable market, especially when tax dollars are at risk.) Accepting the premise that virtual worlds are a perfectly legitimate (and socially desirable) medium in which to transact business, one would consider regulation (or the lack of it) to promote growth. This is not terribly unlike the stock market analogy: in both economically significant bits are being flipped in servers and these bits are redeemable for real and virtual services. However, it is difficult to say that the LindenX plays the same fundamental economic function that AMEX or NYSE does so any proposed regulation will have be tempered by this “irrelevance.”

The above is a discussion of two views of the purpose of government regulation. I don’t know if I subscribe to either view entirely; both have their strengths and shortcomings. Neither argument deals explicitly with the form and scope of regulation. On this point, I think Tim Wu made a good point. He gave a talk March 30^th on campus entitled “Who Controls the Internet?” in which he brought up the importance of physicality. Internet-based forms of punishment inflictable by game masters – lowering one’s score, or banishing someone from a site – do not seem to have an effect on certain individuals (consider, for instance the attacks by W-Hats on the Second-Life servers). However, even these people are afraid of real world sanctions that the government is capable of imposing – fines, prison time. While virtual punishments should be a first choice they sometimes need to be backed by real-world consequences.

For my post this week I wanted to take a similar stance to Martin’s but approach the argument from a slightly different angle. Although the virtual world may have begun as just another computer game, it may be more helpful to view these worlds as what they seem to be turning into: independent economic nations. As mentioned in The Unreal Estate Boom, the GDP of these virtual worlds is reaching nearly $300 million, on par with the per capita GDP of Bulgaria. Yet these economies have some unique properties of instability that could threaten more “real” markets if they remain unregulated and unchecked. The interesting question is then, how would the US handle trade with such an unstable economy, and what special steps can they take considering they exist entirely within US jurisdiction.

The most characteristic instability of these virtual-world economies is that all of the wealth that exists in them sits on a server somewhere; it’s not real. Some may claim that all forms of our economy have become digitally abstracted, however, unlike securities markets, online vendors, and digital bank balances, this world is accessible by nearly everyone and exists in near lawlessness. It’s clearly a much more difficult task to hack the NYSE and inject a self-perpetuating destructive virus than it apparently was for a single user to do the same in Second Life, twice. In most cases, free markets would prevent investments from flowing into such an unstable market; however, most users view the virtual world simply as entertainment and don’t spend much time scrutinizing the soundness of their investment. If the government saw large amounts of US dollars flowing into an unstable foreign economy, they might take some steps to hinder the exchange.

Another dangerous characteristic of this new economy is the “government” regulating it: the programmers and company management. A normal nation’s government has a vested interest in maintaining its economy’s stability and growing domestic production. The people in charge of the virtual worlds only really care about keeping membership growing and happy, and thus far have had little interest in the virtual economies that have sprouted. They also have a unique power over this economy that poses a much greater threat than any real government could. They have absolute power over scarcity of resources. With basically the press of a button these “Gods” of the virtual world can double the country’s land resources and dole it out to whomever they choose. They can also make anyone’s possessions disappear, or make anyone’s virtual dreams come true at no cost. Thus far the companies have strived to maintain a sense of fairness in their worlds (however they may define that), but possibility remains for a virtual world whose creators wait until it has amassed an amount of real world wealth and then try to gather it all up then cut and run. We should not depend on the virtuousness of these company owners while we watch these worlds expand and begin to have an actual influence on our own economy.

There is also the sense that this is not just a foreign nation, but an economy that is drawing from our own economy for its growth. US dollars are being earned and spent on battleaxes that aren’t real, and castles that don’t exist. Even though these “products” don’t exist they still somehow have to be “produced”, through a series of mouse clicks and key presses. If interest in this kind of product continues to grow, the workforce that actually makes their living from it will grow with the demand. At some point we will being exchanging large sums of US dollars with likely foreign companies staffed with “sweatshop gamers”. Yet the paradox of this fact is that the only real value of these virtual products is given to them by the arbitrary scarcity that the game designers have given to resources in the world. There seems to be something illogical about spending good money on that, but that may just be the fun of it.

These new economies pose some unique threats that have thus far been overlooked and as real money becomes invested, the allure will grow and they will take on an accelerating, self-perpetuating rate of growth. Yet there doesn’t seem to be much added to the experience for allowing real value to attach to virtual money. The scarcity still exists without outside real-world markets; that is after all what makes it exciting. Furthermore, the level of addiction discussed in other posts seems similar to gambling addictions, which is not a far-off description when virtual money takes on real value. To me the clear solution seems to be to keep virtual and real economies separate, however, I may have misstepped in some of my economic assumptions. I’ve only taken a couple of economics classes, so I welcome any responses or corrections from more experienced economists.