Through social networks, virtual worlds or online games, virtual property is increasingly entering the mainstream. Whether you have sent a friend a virtual birthday cake in Facebook, created a fashion line for “Second Life” or won a coveted piece of armor in “World of Warcraft,” you have engaged in the use and trade of virtual property.
Smart Business learned more from Stephen Goldstein of Stubbs Alderton & Markiles, LLP about how any business looking to exploit virtual property needs to protect itself by developing strong online documentation setting forth the rules of use.
What is virtual property?
Virtual property is data that functions within a software program and enhances the value of that software program by creating a better experience for the end user. Virtual property exists in places you might never expect, like a Microsoft Word or Excel file. However, the term ‘virtual property’ is most commonly associated with some type of entertainment or online community experience. The ‘terrain’ of virtual property is generally within social networks, virtual worlds and massively multiplayer online video games, or so-called MMOs. Virtual property is essentially any type of goods that a user may acquire or create within an entertainment software environment. These goods could be anything as nominal as a virtual beer to something as expansive as a private island in which parcels are leased to other users.
What kinds of business models are associated with virtual property?
There are mainly two types of business models associated with virtual property: 1) subscriptions or 2) ‘free-to-play.’
Under a subscription model, a user is either provided full access to a virtual world or MMO for a short period of time and thereafter must pay a recurring fee, or the user can access limited areas of the MMO or virtual world for free but must pay a recurring fee to enter other areas.
The ‘free-to-play,’ or what is sometimes called a microtransaction model, allows a user to use the entire virtual world or MMO for free, but to enhance the user experience, the user may purchase items of virtual property during his or her user experience. This model typically involves a ‘dual currency’ system, in which users may purchase one type of virtual currency (coin) but earn another type of currency (gold) through achievements made while playing.
Publishers who achieve success with this model understand how to balance scarcity, item desirability and cost. Additionally, the most successful uses of this model allow users to trade coin and gold with other users. By allowing this free trade, publishers achieve a balanced community. For instance, users who may not be able to buy coin but have time to earn gold are able to trade with users that can purchase coin but do not have time to earn gold.
Publishers usually offer virtual property for sale through a combination of the currencies. For example, a virtual vest could cost two coin and five gold. This system helps ensure fairness because users that cannot afford coin are still able to obtain coin through trades and exchanges. This system also ‘forces’ users to socialize with one another (a very desirable result for the publisher), because they must trade in order to have enough of both currencies to buy scarce items.
A developing ‘free-to-play’ model actually allows users to directly exchange virtual currency they may have earned for real money. In other words, the virtual currency has a direct exchange rate with real currency. Examples of these ‘real economies’ are Linden Labs’ ‘Second Life’ and Mindark’s ‘Entropia Universe.’ This model increasingly blurs the line between the virtual and the real. Less than a month ago, one of Mindark’s subsidiaries received a license from the Swedish Financial Supervisory Authority to provide real-world banking services within Mindark’s virtual worlds.
How do businesses that use virtual property protect themselves?
Because there is no specific legislation addressing virtual property, businesses that utilize virtual property must determine what legal issues they could face when implementing their business model and address them in concise but comprehensive ‘terms of use,’ which must be agreed to by the user as a condition of play.
Depending on the type of model, those legal issues can range from policing against black market sales of virtual property to massive cases of fraud, all the way to potential imposition of taxation on virtual property and potential FDIC regulatory and banking issues.
The ‘terms of use’ allows the business to prevent abuses within its MMO or virtual world, while, at the same time, protects the business from lawsuits by users who may have lost their virtual property.
Terms of use are very similar to the terms of service (TOS) typically associated with the use of a Web site, like those commonly found in e-commerce, search engine and new media sites. Both terms of use and TOS must be carefully drafted with the assistance of attorneys knowledgeable in this area. Simply copying terms of use or TOS from other Web sites is not advisable as there are many traps for the unwary, and a significant risk that the instrument will not provide complete protection. A recent U.S. District Court case held that an arbitration clause in the TOS for ‘Second Life’ was unenforceable because the arbitration clause was unconscionable as drafted. Any business using virtual property or interacting with consumers on the Internet should consult a qualified attorney to develop an appropriate terms of use or TOS.
Stephen Goldstein is senior counsel with Stubbs Alderton & Markiles, LLP. Reach him at [email protected] or (818) 444-4510.
