Monthly Archive

Virtually Blind, Benjamin Duranske’s blog focused on law in virtual worlds, has been covering the collapse of a Second Life scam perpetrated by a guy in Sao Paolo named recently that makes for a fun read. It’s best to read the articles in the order he wrote them to follow what went on. I’ll summarize each one briefly as well.

1. Ginko Financial Suspends then Limits Withdrawals; Head ‘Nicholas Portocarrero’ Calls it a “Bank Run,” Tells Depositors to “Calm Down - This is where it begins. Ginko Financial was a “company” in Second Life that let people “deposit” Linden dollars (which may be legitimately traded for real money and are, thus, real, legal assets) and then withdraw them from virtual ATMs. It pitched itself as a bank, but the difference was that it was claiming it would return outrageous rates on your deposits. They were promising .19% daily return on your money (compounded that’s 100% annually!). How could they achieve such an absurdly high rate of return? Clearly, they could not, and were simply funding the returns on initial deposits with the money people deposited later on. A Ponzi scheme, in other words, as noted by The Journal of the Business Law Society at U of Illinois Law College.

   As Benjamin notes in this article, a few days ago Ginko Financial stopped letting people withdraw money altogether and then began limiting their withdrawls to about $19/day, claiming that they had “invested” most of the deposits and couldn’t provide liquidity for their depositors. The head of Ginko, who is so trustworthy he won’t even reveal his actual, real-life name (Benjamin ferreted it out however. It’s Andre Sanchez), advised depositors to ‘calm down.’ After all, when you’re ripping people off you want to do it in peace and quiet. Who wants to listen to a bunch of your scam victims bitching at you? You’ve got free money to spend!

2. Commentary: Ginko Financial is Either a Fraud or Negligently Managed - Benjamin runs the numbers showing that Ginko almost certainly outright lied about its total deposits.
3. Commentary: Ginko Bank Run Update - Day Four - We discover that Andre Sanchez (known as Nicholas Portecarrero in-game) is going to try to do an “IPO” on an in-world “stock market” to cover the deposits. That alone pretty clearly demonstrates that Ginko is/was a Ponzi scheme.
4. Interview with Ginko’s ‘Nicholas Portercarrero’ - Benjamin interviews Andre/Nicholas, who has serious brass balls. He claims that it was an “objective fact” that he could pay depositors 100% annual returns on their investment. How? Why….he’d just pay them out of his own pocket. Yeah, that’s going to scale well. Andre spends the whole interview avoiding giving any answers about anything substantive.
5. Ginko Financial Claims to be Acquiring AVIX - We discover that Ginko wants to IPO in order to….buy the “stock market” it is IPOing on. This is while it can’t even cover a fraction of the deposits it claims its customers have made.
6. Commentary: Ginko Not “Buying” AVIX; IPO Off - It all falls apart. There’s a long chat session transcript with Benjamin, Andre and some other SL people that’s fun to read if only to marvel at the sheer disdain for other people’s money that Andre has. At one point he informs them that even though Ginko wants to “go public” it does not plan on releasing past profit and loss statements.

What baffles me about this is that, say what you will about Second Life, its interface if freaking unfriendly to the average joe and simply figuring out how to use SL and make a deposit with Ginko qualifies you as more tech-savvy, at least, than the average person. I always presumed that the only way the Nigerian scams work (and they apparently do work) is when said Nigerians manage to victimize elderly, half-senile folks. I don’t think that a half-senile person could manage to use Second Life leaving me wondering who the heck had so little common sense as to deposit money into something that was, from the get-go, obviously a scam? There’s something about virtual worlds that seem to make some people check their common sense at the door.

As for Andre, when I worked in the financial industry we had a word for people like him: Criminals. He and his co-conspirators should be prosecuted under applicable banking and securities fraud laws though I don’t expect to see that really happen. There’s still too big of an impenetrable legal cloud around in-world actions for the SEC or whoever the relevant body would be to take action, though I think there’s enough money involved here (several hundred thousand US dollars in claimed “deposits”) that they should. Benjamin is considerably nicer than I am and allows that Andre and his fellow scam artists might just be kids in over their heads but I don’t buy it. They ripped people off, flat-out, in an illegal Ponzi scheme. That’s malicious, not misguided.

(P.S. I’ve got nothing against Brazil. I love your jiu-jitsu!)

It was always pretty clearly illegal under US law and I’m surprised it took this long but Linden Labs has finally banned gambling in Second Life.

Reading the user comments is instructive and two things pop out at me from them.

1. Many users demonstrate a certain hostility to the puritanical culture of the US, blaming it for banning what is legal in many places in the world (as a US citizen who has zero problem with gambling I might point out to them that banning free expression and outlawing things like a swastika because it’s illegal in, say, Germany, is far more offensive to me a ban on gambling. The right to be a fool and throw away your money rates a lot lower than the right to express yourself on my personal scale of important freedoms.) Comments include, “The USA’s Christian Taliban wins again!” and, “Move your servers to Europe. This is absolutely ridiculous.“
2. Many users are unable or unwilling to distinguish between activities they are actually engaging in, such as gambling, and activities they are just pretending to be engaging in, such as prostitution. Comments include, “What’s the difference between escorts and gambling? It’s real money being used, you’re very naive if you think escorts aren’t next,” (Uh, yeah, who is being naive here?) and, “I wonder if the next hit will be on us escorts, put that prostitution is, too, illegal in the USA.”

There were some supportive comments as well, generally pointing out that Linden has no practical choice in the matter. Moving to the Isle of Man or whatnot is hardly worth it when a ban on gambling isn’t a game-ender for Second Life.

The release of the last Harry Potter book and the assured success of it (12 million books were printed for the US alone) got me to thinking about return on investment. Specifically, the return on JK Rowling’s investment (of labor/time), which has to be among the highest in the history of creative enterprises. Let’s look at some rough numbers.

• Harry Potter books have sold 325 million copies worldwide, making JK Rowling a billionaire and the wealthiest author in the history of literature. I don’t know what the average price/book is but let’s be conservative and say $10. Amazon sells the hardback for $18 as a point of reference and the MSRP is $34.99, but I doubt anyone is actually paying that price unless they’re buying it in an airport bookstore or whatnot. Paperback sales also cut into the average price quite a bit, so I think $10/copy is probably within the realm of reason. That’s $3.25 billion from the book sales alone (all of which is certainly not going to JK Rowling, lest anyone think I am implying that).
• JK Rowling spent 17 years writing the 7 book series. I doubt she put in the equivalent of steady 40 hour work weeks writing during that entire 17 years (I’ve never met an author who can legitimately claim to productively write 40 hours a week year in year out) but let’s be generous and say that 17 man-years of work went into the development and production (not including printing, marketing, and distribution) of the HP books.
• World of Warcraft cost, I believe, somewhere between 70 and 80 million to develop (not including manufacturing, marketing, and distribution) and had a team of upwards of 100 people. The current dev team for WoW is 135 people according to Gamasutra. I’m not sure when development on WoW started but given that Blizzard first announced WoW in 2001 at ECTS (European Computer Trade Show) and had gameplay footage there and at E3 that year it must have started development in 1999, at least. It’s likely that the WoW team size averaged at least 80 people on average for 5 years, or 400 man-years of work, at minimum.
• I’m willing to bet large amounts of money that the average person working on WoW did in fact work at least 40 hours a week, so even while comparing oranges to apples it seems certain that WoW cost at least 20x the amount of labor that Harry Potter did. I suspect the real figure (factoring in the amount of work done rather than just the (amount of time from start to finish*average number of workers) is more like 50-75x as much.

That means that if we just look at the book sales for Harry Potter (merchandising is easily 1-1.5 billion/year and then there are the movies, each of which has done very well) in terms of return per hour, they have earned about (using my very very rough estimates) $191 million for every man-year of labor put into them.

For WoW to hit such a ratio it would have to produce, in total, $76 billion (and again that’s without including HP merchandising, which certainly dwarfs WoW’s, or the HP movies). Currently, WoW brings in about $650-700 million/year plus box sales, which have added a few hundred million to the subscription and Asian net cafe figures. In other words, WoW would have to run for about 100 years at the current activity level to match the revenue/man-year from the Harry Potter books alone. (And of course given that a dollar today is worth a lot more than even an inflation-adjusted dollar in the future, the real answer is that WoW would have to run a lot longer than that to give the same return.)

Disclaimer again: Many of these numbers are estimates. Informed estimates, but still estimates. I’m also comparing apples and oranges to a large extent since WoW has enormous support costs that Harry Potter does not have, but similarly WoW has enormous recurring income that Harry Potter books do not have (though Harry Potter merchandise and the movies probably more than make up for that).

Richard Bartle recently named the five people he thought were the most influential in the history of virtual worlds. I’m in no position to argue with Richard and think his list is pretty darn good anyway.

Then I started thinking about who would be on that list were it confined to the most influential people currently, and I came up with this list. It’s woefully inadequate as I simply don’t know as much about the Asian market as I do about the Western market. In no particular order, except for Rob Pardo as first:

• Rob Pardo. VP of Game Design at Blizzard. Lead mind behind WoW’s polished excellence. Time Magazine named him one of their 100 most influential people in the world due to the 6 million then players (8.5 million now) that call it hobby or habit.
• Timo Soininen. CEO of Sulake, creator of both Habbo (there are individual websites for something like 19 regions, so the .com is just for the US, explaining their not-particularly-high Alexa rank on the .com site) and Disney’s Virtual Magic Kingdom. Habbo is one of the most popular virtual worlds in existence, with something like 8 million unique monthly players. They continue to grow
• Jun Zhu. CEO of The9 (Not an English site, sorry.) The9 is the publisher of World of Warcraft in China as well as MU, Ragnarok 2 Online, Guild Wars, Granado Espada, and other games. China is is easily going to surpass the US in internet users and they are, like the South Koreans, absolutely mad for online games. Jun Zhu seems to have his finger on the pulse of the Chinese online gaming culture.
• Andrew Gower. The founder and driver of Runescape. His game is more popular in the US and Europe than World of Warcraft. 7 million players can’t be wrong.
  

I promised five people but the truth is that I can’t decide whom the fifth should be. I’m almost positive it should be someone in Asia but I just don’t find myself connected enough to what’s going on over there. There is a very large cultural divide even now, exacerbated by the fact that so few of us speak Korean or any of the Chinese dialects. Richard put Jake Song on his list, which I completely agree with, but Jake left NCSoft to do his own thing and has yet to prove his relevance to the right now.

Richard opined that Philip Rosedale (CEO of Linden Labs, which develops Second Life) could be on the kind of list I’m giving but I’m looking mainly at how many people’s lives have been significantly affected and Second Life is not one of the major virtual worlds there despite the media attention. Having said that, were this a list of the top 10, Philip would be in there, as would Lane Merrifield, the CEO of New Horizons Interactive, developer/publisher of the immensely popular Club Penguin, as well as Matt Bostwick, Senior VP of Franchise Development at MTV, where they have released something like five or six virtual worlds in the last year, backed by big money and big brands.

Who would you put on there, particularly from Asia?

Richard has an interview with the Guardian that’s worth reading, especially for his response to the question, “If you could take control of one major MMORPG, which would you choose and what would you do with it?” His answer?

“I’d take over World of Warcraft and I’d close it. I just want better virtual worlds. Sacrificing one of the best so its players have to seek out alternatives would be a sure-fire way to ensure that unknown gems got the chance they deserved, and that new games were developed to push back the boundaries. Er, I would get to do this anonymously, wouldn’t I?”

See? What the hell are you thinking, Richard? Think it, don’t say it! I’m pretty sure that some of those 8.5 million people can find out where you sleep. Doing it anonymously would be no good as we all know that you can’t hide information from MMO players. They will ferret out that it was you and then you’ll find yourself on the receiving end of the mother of all gankings as Millenium and Nihilum team up to find out what your drops are.

Gamasutra has a short interview with Frank Pearce at Blizzard. Most depressing, humbling, and downright scary fact: Their cinematics team alone has 85 developers.

Time names it one of the five places on the internet to avoid. That’s a little ridiculous but considering that the other sites Time thinks should be avoided are MySpace, Evite, eHarmony, and the ever-irritating Meez, at least Linden can feel pleased that SL is listed alongside companies that have done things like managed to actually turn a profit.

This part me made chuckle and sigh at the same time:

“Fans praise Second Life as a virtual hangout where you can meet and chat and buy sneakers and real estate (that’s fake stuff for real money) and dance and go bowling and have sex — suggesting that “virtual humans” doing “human things” online in Second Life is somehow less pathetic than, say, cooking Kaldorei spider kabobs or making magic pantaloons in World of Warcraft.”

I don’t like the implication that doing things virtually is pathetic, at all, but at least Time recognizes that there’s nothing inherently more pathetic about moving some bits around and calling it “spider kabob cooking” than there is about moving some bits around and calling it “virtual bowling” or “virtual lapdancing.”

There’s also an article from July 9th in AdAge entitled, “Second Life Losing Lock on Virtual-Site Marketing” subtitled, “As Users and Brands Head to Startups, Giant in Space Starts to Seem Outdated.”

Here’s the report. Note that the report only measures visits to websites so people playing games with a desktop client like WoW aren’t counted in it unless they visited the website (which I’d imagine a decent percentage of users do, but certainly not all).

Edit: Steven Davis dissects the numbers and comes up rightfully skeptical.

Gamasutra is reporting that the new GamerMetrics report from IGN Entertainment is out and that they predict that three games (Halo 3, Madden 07, and Grand Theft Auto IV) will account for 30% of game sales in 2007 all by themselves. 30%!!

When someone pointed me to this (thanks Martin!) I thought it was a joke. Even after watching the video (included below) I thought it was just a piece mocking the “We read Snow Crash too many times and are building the Metaverse!!!!!!!!!!!!!!!!” crowd. But no. It is not a joke. Watch the trailer before you read any further.

Yes, that’s right, you too can lower your efficiency by a factor of approximately 1000% by reading your email in a 3d environment in which spam is represented by fat slimy guys and your good mail by starlets. You too can “feed your spam to the sharks” and “hang out with your email!”

Remember people, as the video says, “One name spells entertainment. One name spells excitement. One name spells email. That name is 3d Mailbox. Go where no email has gone before!”

When I think of the one name that spells email, I just think of ‘email’ but I’m glad to see that there are people out there for whom that kind of practicality takes a back seat to letting your email take a cool, disinfecting shower.

One of the blogs I read now and then is Fargo’s Fileblog (part of Fileplanet/Gamespy). Last week Fargo wrote an article about Korea’s recent decision to add a specific value-added tax on RMT transactions for entities/individuals doing more than about $6500/year. I wanted to clarify a couple issues so sent in an email, which Fargo’s re-printed. I wouldn’t normally reprint a blog entry but since it’s my email anyway I thought I’d post the letter here. Perhaps someone can correct me somewhere, or perhaps it’ll just be useful to some of you in clarifying your thinking about taxation of virtual assets. Hope it’s helpful in any case, though I’ll take pains once again to mention that I’m not a lawyer or a tax pro of any sort.

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