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Virtual Goods, Gaming and the Trouble With Secondary Markets

Jim Gatto recently wrote an article for the World Online Gambling Law Report. Check out the beginning of the article below and click through at the bottom for the full PDF.

Many creative business models enable users to acquire virtual goods or virtual currency and then use those virtual items to participate in an activity that may give them a chance to win something or acquire virtual items through some element of chance. James G. Gatto, a Partner at Pillsbury Law, discusses the legal issues presented by virtual goods and the secondary market, which by its very nature implies that virtual items are far from valueless.

virtual-moneySince the early days of online games, ‘virtual goods’ have been used to enhance game play and to provide revenue to game developers. These are earned by accomplishing tasks or bought from the developer, typically for use in the game in which acquired, but exceptions may exist. Secondary markets, online markets where players can sell virtual goods or currency to another player, have sprung up. In most cases, the secondary markets are not authorised by the game publisher and the sale of virtual goods or accounts is precluded by the games’ terms of service. As with real goods, scarcity is one factor that drives the perceived ‘value’ of virtual goods.

The US market for virtual goods and currency is estimated to be over $3.5 billion annually. While virtual goods-based business models are flourishing, a number of legal issues have arisen with their use, particularly with secondary markets. The law in this area is still evolving and some important issues have yet to be addressed. For some industries, the resolution of these issues could have a significant impact. One such industry may be social gaming.

Social gaming
Social gaming is a rapidly growing field featuring ‘gambling-like’ games, but not for real money. So most social gaming activities do not run afoul of the gambling laws and are not subject to gambling regulation. One example is Zynga poker: users pay real money to buy virtual chips which are wagered in online games. The chips can only be accumulated, not cashed in for anything of value. In contrast, some other social gaming activities involving virtual goods, if not done properly,may cross the line. In other popular business models, users acquire virtual goods and/or currency and use them to enter ‘contests’ or sweepstakes or have a chance to win virtual goods or currency.

Secondary markets can be a turn off for some gamers: when certain virtual items can only be acquired through skillful game play, it is a badge of honour to possess those virtual goods. However, if the same item can be bought, it devalues that honour. For players who are not skillful enough or lack time to earn certain virtual goods, secondary markets enable them to buy these items.

One legal issue is whether the user actually owns virtual goods. Most terms of service make clear that users only have a licence to the virtual goods and the licence is terminated if they breach those terms. Thus, if a user sells a virtual good on the secondary market, the licence terminates and the good becomes worthless. Additionally, if a user’s violation of the terms of service is severe enough, their account may be terminated. By having a licence provision, the game operator need not reimburse the user for any virtual good in the terminated account.

A number of companies have taken action against secondary market operators. On 8 April 2010 Zynga sued for operating a website that provides an unauthorised secondary market for enabling Zynga game users to post and sell virtual currency and virtual goods allegedly in violation of Zynga’s Terms of Service. According to Zynga, its Terms of Service prohibits users from selling virtual currency or virtual goods for real-world money or anything of value outside of its games. No decision has yet been rendered.

Please check out the full article here.

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