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Get a (Second) Life

By Ilya Zak - posted Thursday, 5 April 2007


A very interesting development is occurring in the world of technology and on the Internet at the moment, one that many of you may already be part of. This interesting development is known as Second Life. I won’t hide my inspiration for this article, I like many others watched the Four Corners program recently about Second Life. There are interviews and other relevant links here. While the report did a good job of explaining what Second Life is, I thought it missed a few significant issues.

Second Life is an online virtual world, where tens of thousands (and eventually hundreds of thousands) of people can interact in 3D at the same time and on the same map. They can talk, dance, walk, fly, buy things, sell things, and do just about anything one can do in a “first life”.

The concept of a virtual world has been around for quite some time. The original concept would have come from video games, where the term MMORPG is commonly used, which stands for Massively Multiplayer Online Role Playing Game. These games catered for tens of thousands of people at any given time, and are called “role playing games”. The participants take on the roles of fictional characters that they create and complete tasks or quests to gain higher status within the game. Some examples are the Everquest game from Sony, or the more popular World Of Warcraft.

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There was a deviation, however, from this type of game late in the 90’s, with a game called The Sims: this game quickly became the most popular ever made (in terms of sales figures). In The Sims players take control of a person, and guided that them through life by building a house, feeding them, bathing them, getting them to socialise, and working their way up the corporate ladder. If the needs of the character were not tended to i.e. hygiene and sustenance, the character would die and the game would end. The popularity of this game reflected people’s interest in leading a virtual life.

The games creators continued with The Sims 2 which eclipsed the first one in terms of sales, but the developers were eyeing a much greater prize, The Sims Online. The idea was that The Sims Online would be what Second Life is becoming: it would be the players’ Second Life.

There were many issues, however. In games like World of Warcraft, players build their status in the game by completing quests or tasks, or finding items. This is the basic need within the game. In The Sims Online, other than social interaction there was no basic need. You could hit a limit with your skills, progress through your character through their career and that would be it. The content in the game was limited to what the developers chose to create, and the only remaining reason to play the game would be for social interaction (which was enough for some).

What the creators of Second Life have done that is different to all other games and virtual worlds so far, is established the idea of Intellectual Property within the game environment.

To do this, they have made one change, (almost) all the content in the game is developed by the players. All players start out as one of the basic “avatars” with a few animation gestures and no real possessions, and if they want to attain any possessions or learn any animations they must be either created by the player or obtained somehow from other players. Most of the time this will be done by purchasing from another player using the game currency, Linden Dollars, which are freely exchangeable for US dollars at a fixed exchange rate.

Linden Labs (the developers of the game) make money from first selling real estate in the virtual world to the citizens (citizens want the real estate in order to have a place to sell their wares) and then charging a land tax at the end of each relevant period. This creates a functional economy, there is a limited supply of land as each piece of land requires server processing power which gives a supply side floor on the price. And the demand for land is created by entrepreneurs looking for a place to sell their wares, which creates a price ceiling.

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Now the world within Second Life is a functioning economy which responds to the supply and demand of its citizens. Money is exchanged for goods and services and everything has a real world value as a result of the functional exchange rate (there are actually some “World Exchange Markets” that even trade in all currencies).

Similar to the real world, in the Second Life virtual world, the economy places great value on intellectual property. Within the real world however, there are physical limitations on the capabilities of all beings. In the virtual world, the only limitations are those that are programmed in by the developers, which is open to constant testing and manipulation of its citizens.

This came to fore when a program called “copybot” gave citizens the ability to copy any item that they could see in unlimited quantities. This of course would destroy the games intellectual property base, and as a result Linden Labs sent out many threatening warnings that accounts would be closed, the official word regarding this action can be seen on the Second Life website. It appears that Linden Labs has handled the situation, and its advice to those that have been targeted is to appeal to the courts of the “real world” using the Digital Millennium Copyright Act (DMCA). The fact that Linden Labs handled the complaints and policed the situation to solve the problem, and their suggestion to pursue legal action under protection of the DMCA raises two very peculiar issues.

Recommending that the issue be pursued under the DMCA is interesting because the DMCA protects copyrighted content. Things created in the virtual world of Second Life are “copyrighted” so to speak only within the realms of Second Life, they are not given any real trademarks by any official patent offices. How can they then be prosecuted under the DMCA?

Further, how can the US legal system have jurisdiction for actions within a virtual world? All laws are created by the developers of the world, all the policing is done by developers of the world (as shown in the example), and the idea of intellectual property and the means by which it is given is also controlled entirely by the developers of the game.

How can anyone possibly be given the task of policing something over which they have absolutely no control?

Even if all of that is forgotten, even if a government could find laws that had been broken, how would this be any different from the current situation with spam and viruses originating from servers not in the US (or relevant country), would the government have any jurisdiction at all? The answer is a resounding "no", not under current laws.

The other issue that stems from this is that of taxes. Currently it is being investigated by authorities in the US as to whether or not these virtual worlds need to be taxed. They have normal transactions purchasing goods suggesting a sales tax, and they could eventually have steady incomes within the game so income tax is a possibility later on. The issue is however that the government does not provide any services to these virtual worlds.

There is no infrastructure that they are providing that facilitates any tax on in world activities (everything of that sort is provided by the games developers). The only possible service that the real world governments may be able to provide is that of a legal base on which the worlds can rely, however as shown in the above example this is highly unlikely to occur. The only taxes that can be charged are on the avatars real world counterparts.

That is, if a person pulls out a real world profit from their business in the virtual world, then this would have to be counted as a profit in the real world, no different essentially from making profit from overseas ventures for a transnational corporation.

That analogy is actually quite significant. That is, Second Life is to America what Japan is to Australia, they are just different countries that are able to exchange currencies and trade. That’s essentially what I’ve been leading towards: that each virtual world will need to be seen as a new country in legal and economic terms without any possibility of regulating the activities within the worlds by any governing body other than the worlds creators (just as Japan can’t regulate activities within Australia under its legal system).

The second that any attempt at regulation will be made, the worlds will instantly jump to offshore servers making the regulation irrelevant, although this jump is likely to occur anyway.

Now that it can be seen that these virtual worlds are no different from any sovereign nation with their economies and governments, it follows that they would be subject to the rises and falls in value and strength that any economy today has to deal with.

As mentioned on Four Corners, the virtual worlds have a GDP at the moment equivalent to Bulgaria in per capita terms.

The stability of world markets however comes from the natural floor on prices and demand imposed by humanity. This floor comes from the basic needs that humans can’t suppress, we need sustenance and shelter, or put simply we’re just hungry and cold. In the virtual world that is Second Life, there is no basic need that the residents have.

As Kevin Kelly pointed out in his Four Corners interview, he can’t “unwrap” what virtual sex is all about in the Second Life universe. What this suggests is that all the demand for products and so forth in Second Life has no floor on which it can rely, there is no basic requirement for goods. The problem with that is that it makes the economic stability of Second Life nonexistent. Even if there was a basic need in the game that the players had to fulfil (like that attempted in The Sims Online), the players are still able to quit at any time and stop spending their money.

Such volatility is not uncommon and any new market is subject to it. It is a necessary factor in market economics that the market corrects itself when it realises that there is nowhere near as much demand for the products supplied, as was experienced in the dot.com bust of the early part of this decade.

The unfortunate thing with virtual worlds is they could be subject to volatility the likes of which has never been seen. For example, when prices in the virtual world are determined based on the only real cost that is applied to suppliers, in this case the price of land and the ongoing land tax, what happens when there is a shift to the right in the supply curve? 

For example, some programmer at Linden Labs rewrites a major portion of server code making it much more efficient, with the result that the cost of land (which is directly related to the cost of server processing power and space) is reduced by 80 per cent overnight. The price of everything will drop almost instantly as will the income of many suppliers.

But why stop there? Why does it have to be a programmer at Linden Labs? Why can’t it be a programmer at a start-up company, creating a new virtual world with capabilities never seen before in Second Life? What happens if the demand in Second Life contracts because all the residents in Second Life have found it more appealing in the new virtual world, let’s call it Third Life?

Such changes are unavoidable. The volatility will stay for a long time until the market for virtual worlds is as strong as the market is in the real world, that is, there’ll be such a large number of these virtual worlds and so many residents will set up their second, third and fourth lives there that changes such as the ones mentioned above will not have such dire consequences on a mass scale.

In addition, the potential for uncontrollable activity in a lifelike environment has infinite possibilities, both negative and positive. All activity not allowed in the real world would most likely shift to the safe havens of the virtual worlds, all of which is beginning to sound an awful lot like the Matrix to me. I encourage all to try the revolutionary experience that is Second Life, it’s free to play and is quite an eye opener in terms of seeing where our lives are headed and how soon we’ll all have to start praying for Keanu Reaves to come save us!

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About the Author

Ilya Zak is an immigrant from Russia, and has lived in Australia since the age of three. HeI went to Sydney Boys High School. Ilya is studying for a Bachelor of Business and Bachelor of Science at UTS in Sydney.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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