Monday, May 5, 2008

David Grundy (Metasecurity) Interview: An academic view on the industry, customer behavior and potential fraud of RMT

This week we have the privilege of David Grundy from Metasecurity- a Program Leader at Newcastle Business School in the UK. He will be sharing with us his insights in virtual goods from both academic point of view and as a gamer himself.

Can you please introduce yourself to our readers. How did your academic career got into online worlds? What is it that interests you the most about them?

My interest in virtual games really and rather dramatically changed when I realized I could draw upon both aspects of my life for my PhD; both my work and leisure time. I realized that by day I was David Grundy, Senior Lecturer in International Corporate Finance at Newcastle Business School, and, every night I would go home, log onto the computer, and I was in this wonderful third-space with my friends in which we would engage in various tasks and generally enjoy ourselves. It didn’t take a great amount of quantitative insight to work out that what I was spending a lot of time doing anyway might provide for an interesting area to examine.

However, it was really when I started to examine the literature that quite quickly it became apparent that video games in general are academically a very under-researched area, something which has constantly spurred me on. It’s actually surprising how little academic literature exists on a $30bn industry, when you compare it to something like British Farming (circa about $8-9bn) which has a wide range of academic journals are dedicated to it.

I came across virtual money, and Ed Castronova’s article on Norrath, very early in the research phase of my research, and certainly this article opened my mind to a great deal of possibilities. As I’m from a very business orientated background I began to see this as a business issue, ones which companies like Sony and Vivendi had to tackle, and, as a business issue, there was practically no research in it (Though MacInnes and Lehdonvirta have made great strides since I started my PhD).

How would you describe the current state of virtual goods and real money trading in online games? What is your point of view on spending real money for virtual assets? Is it a natural part or bad influence for the game industry?

Turbulent. The virtual goods market operates very much at the fringe and certainly while there are a number of companies out there who are acting in good faith and reputably, there are also a number of companies who are abusing customers or even downright defrauding customers. News travels fast on the internet though, and those companies which gather the reputation for being the safest to use will be the ones to succeed. Recently one of my Undergraduate students completed his dissertation examining Real Money Trade Use and he found that, not unsurprisingly, in the 30 participants he interviewed, security of their credit card information and safety where the number one priorities. Price of the money actually came in about 4th, which should be exceedingly interesting information to RMT providers as it should perhaps make them reconsider the marketing strategy of selling on price when they should be concentrating on trust. Unsurprisingly a player won’t be buying WoW Gold if he can’t trust the RMT vendor.

The point of spending real money on virtual assets? Time. I recently interviewed about thirty people for a paper I’m writing and a lack of time over and over again became the main issue behind these peoples transactions. Indeed, I call them “time-motivated-transactions” as only in a couple of individuals did other lesser motivations come through. MMO players can come in a variety of forms, but certainly from the information I’ve been gathering it’s apparent that those individuals who have real world commitments of jobs and family (or indeed, even just a girlfriend) are concerned about the impact of the time they spend playing MMO games upon the rest of their activities. I see the Virtual Asset market really coming about when these individuals decide that $20 of their money isn’t worth about 20 hours of their time, not exactly a great logical leap when many of these people get paid more than $20 for 1 hour of their time.

As for natural part or bad influence, I’m very much a neutral observer. I certainly see it as entrepreneurship, indeed, Adam Smith would be proud, the invisible hand has found a way, and a gap in the market is being fulfilled with monies going to risk-takers. Conversely, and perhaps controversially, I also see it as a game design flaw, and I believe games designers should take note of why players are willing to pay real money to skip their “content” (if you can describe grinding gold for 20 hours for an epic World of Warcraft mount as a “content”). From the view of a games design flaw certainly a number of issues in current MMO-games can be learnt from and hopefully this can be addressed in future games.

What is your opinion on the virtual currency selling business in regards to money laundering risks? Do you think this will be more of an issue for the game publisher's endorsed marketplace or for the secondary market outside the publisher's control?

Money Laundering requires a number of factors to come to the fore for it to become an issue. Certainly some MMO-games can present with the risk of being used as an Alternate Remittance System (ARS), that is a system of moving money around that skips the usual banking system, which itself should be of concern to law enforcement agencies. The other main issue is Trade-based Money Laundering (TBML) whereby a company who is retailing virtual assets may either be funding their stock through illegal proceeds (cash based buying) or keeping a number of workers off the books and paying their wages with illegal proceeds.

Certainly the risks have been noted by a wide range of reliable and reputable commentators, but we should not get ahead of ourselves here, or indeed, make a scare story. There exists currently a wide range of money laundering avenues which operators could use, many of which can handle much higher volumes of money than virtual worlds currently can. My personal view is that if MMO-games and virtual asset markets grow at the rates they are predicted to, in the next three to five years the scope for Money Laundering activities in all secondary markets will be vastly increased, and the risks will be that much higher.

What type of fraud could arise from virtual goods and currency trading? Do you have any advice for customers or even business owners themselves to deal with fraud?

Fraud is a concern which virtual asset buying customers rank very highly. For customers unfortunately though at the moment there is very little to protect yourselves as effectively many of these companies operate outside of US (or in my case EU) national boundaries and very little can effectively be done if fraud does occur. In effect buying virtual assets is all about trust, who do you trust with your credit card information? This trust issue can of course be mitigated by reputation and recommendations from other buyers. My best advice being make sure you buy from a company which friends have successfully used in the past.

For businesses, I have even simpler advice. To succeed, become the most reputable. Concentrate more on your reputation of trustworthiness and honesty than bargain basement prices, as this is what the customers really want. Simply put, I’ve interviewed and spoken to a large number of MMO games players who are very much put off by the fact that they have to give out their all important financial details to companies they don’t quite trust. Thus, in this business it seems that people aren’t just concentrating on the per unit cost of the virtual currency, indeed, they are very willing to pay a premium on that unit cost if they feel that they can trust the vendor.

What is the outlook for virtual goods and currency trading for online games? You mentioned console gamers as a new potential, with lower age demographics does this present a new potential for fraud such as credit card usage and more criminal?

Console gaming will present us with a huge increase in the volumes of virtual asset markets and their diversity in terms of number of games, and may indeed be the trigger for a number of the money laundering concerns I outlined before. It is really the increase in transaction volume which allows for greater hiding of dubious transactions which is the issue here. The fact that a lower age range group is involved is of great concern to a number of people though.

The outlook for virtual goods markets is of great threats and great opportunities. The greatest threat comes from the games companies themselves who may start to follow the Gamestation approach and thus eliminate much of the secondary market middlemen (though Blizzard seems highly unlikely of taking this approach as of this date). More importantly though, games companies can much more effectively lobby law makers to simply illegalize the secondary market in their Intellectual Property, though I see this as many years off, if ever.

The opportunities for providing customers with virtual cash for money though are vast, and entrepreneurs will see these risks as well worth the rewards. The new games on the PC horizon, the console market in the future, the constantly increasing player base of the MMO-market, all these issues mean that certainly the RMT is set to be increasing in future years.

As a WoW gamer, did you ever personally get in touch with gold farmers? Can you describe the occasion (positive, negative, impressions)?

As a World of Warcraft player I’ve many times came across gold farmer’s in their work. I must admit that I was very glad when the anti-spam measures where introduced by Blizzard, as certainly these where very annoying to say the least. I think like many players I get very frustrated by the actions of gold farmers sometimes, and certainly on a number of occasions I’ve been very glad I play on a PvP server. Consequentially, and unfortunately, my impressions of the farming workers themselves isn’t highly positive, as I’ve seem first hand how disruptive their actions can be to players who are just trying to play the game when their “farming zone” gets interrupted.

As for researching or interviewing the farmers themselves, I’m very much from the customer and business perspective in my research and some very good research is already being conducted by Ge Jin in this area ( so I don’t feel a need to approach this subject from that angle.

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