Tag: Virtual goods

I wrote just now about the report that Vietnam’s Ministry of Information and Communications (MoIC) is working on a draft decision regarding online games in Vietnam.  You can read my views on that here.  I wanted to write a separate post about the most interesting aspect of that draft decision: its implications for the timebomb issue of virtual goods ownership.  

The report:

The MoIC draft decision, according to Vietnam.net, said this about virtual goods:

“Related to virtual assets in games, the draft said that virtual items are not assets and they can’t be converted into money or assets in any form. An MoIT official remarked that objects in online games are not recognized as assets in the world and conflicts between gamers and game providers are not civil conflicts.”

This superficially innocuous statement actually conceals a great ongoing debate as to the legal ownership of virtual goods, the resolution of which will have significant implications for any games company that sells or interacts with virtual goods.

Caveat: the following is a whirlwind tour through the issues over virtual goods and is not meant to be a detailed exposition!  If you want more information, look at sites like Terranova or tVPN.

The issues over virtual goods:

As I and many others have have been saying for some time, virtual goods ownership is a ticking timebomb of a legal issue, which has been around ever since virtual goods themselves but has been growing increasingly important with the massive growth in the sale of virtual goods over the last few years. These are the critical questions:

• Are virtual goods ‘property’?
• Alternatively, are they just electronic ‘services’ in which there can be no property rights?
• If they are ‘property’, then does the player have property rights in them?
• If they do have property rights, then which ones? The right to hold and sell the virtual goods? The right to take the virtual goods or their equivalent monetary value out of the game? The right to destroy the virtual goods?
• Can players go to court to protect these property rights, as they could for e.g. a car or a house?
• If virtual goods are property, should they be taxed like any other property? If so, how?
• Most importantly, if virtual items are property, then how will games companies have to adapt legally? (more on that below)

The question as to whether virtual goods are ‘property’ in the legal sense is complex (and way too detailed to be resolved here).  Many games market virtual goods as being ‘property’ which you can buy and do anything you like with, in return for which you have to pay real currency.  There is now good academic analysis which argues that, for this and other reasons, virtual goods should be classified legally as ‘property’.  In particular, two academics called Lastowka and Hunter have argued with force that virtual goods have all the characteristics of property and therefore ought to be treated as such – in which case all of the above issues come into play.  On the other hand, in some basic sense should ‘virtual property’ – for which there is no concept of limited supply, for example – be different to ‘real property’? 

The meaning of ‘virtual goods’ has become increasingly complex as well.  Is a product which you can code from scratch in Second Life and use as you wish the same kind of ‘virtual good’ as some corn seeds or livestock which you can purchase in Farmville and only use as the game designer lets you?  As a result, should they both be considered property?  The answer to that is entirely unclear (and it’s worth keeping that in mind during the rest of this post…)

How are virtual goods dealt with currently?

To date, games companies have dealt with virtual goods in their legal paperwork (typically a EULA) by stating that all aspects of a games whatsoever belong to the game company, to which player can have access on a strictly defined licence basis and which the games company can revoke at any time for stated reasons.

This works fine for the player’s access to the game itself, but does that argument work when you encourage a player to ‘buy’ an item from you?  Again, there is good academic analysis suggesting that it isn’t enough.  In a very short nutshell, it is said that the problem with the current EULA model of dealing with virtual goods is that they are a contractual attempt to deal with a property issue.  Terms and conditions etc can impose limits on the use of purchased virtual goods, but they do not resolve the question of whether those virtual goods are property or something else instead. 

Take a real world example: if Alan and Bob sign a contract in which Alan says that a particular car is his property and can be used by Bob on certain conditions in return for a monthly payment, that contract does not of itself mean that Alan (or Bob, for that matter) owns the car.  You have to look at real world property questions (like ‘did Alan pay money for the car?’) to establish ownership.  The same applies with virtual goods (or so the argument runs).

So, there is a decent argument that the current model doesn’t deal with the property issue very well: they simply amount to an assertion that virtual goods are not property, or alternatively are the property of the games company notwithstanding everything to the contrary which is said to the player at the time of the purchase.  (This is pretty much exactly what the Vietnamese official said: “virtual items are not assets and they can’t be converted into money or assets in any form“.) 

But, there are more sophisticated alternatives that could be deployed to deal with this thorny problem of virtual goods and property:

Alternative #1: virtual goods are a service, not property

One alternative approach is to argue that virtual goods aren’t property but they are services: i.e. ‘you pay us money and we will generate an item for you which we will host on our servers and you can use in our game until such time as we decide to discontinue it or you cease paying us a subscription etc’.  If virtual goods are services, then essentially the EULA model could be modified into a services model and none of the above property issues would apply (although there would then be separate issues about what constitutes a ‘service’ and when a games company can/cannot terminate that service).

But is that enough?  Does that satisfy the very basic problem that the player is being encouraged to think he is ‘buying’ an item which then becomes ‘his’?  What if he spends very significant sums on that ‘service’

Alternative #2: recognise that virtual goods are property, and adapt accordingly

Another option is to recognise that virtual goods are property and to treat them with property law solutions rather than contractual terms and conditions.  For example, using some form of lease arrangement (‘this virtual cow is a piece of virtual property, I will lease it to you on these terms’) rather than a EULA/licence model.

Alternatives #1 and #2 are interesting, but diametrically opposed: virtual goods can either be property or services, but not both.  Different people have different views on that one, which it would take too long to rehearse here (I realise that’s partly a cop-out, but my purpose is to show the virtual goods issue exists, not to answer it in a short blog post!)  In any event, I think the only way this could be resolved definitively is through either a judicial or legislative decision (more on that below).

Does this really matter?

Definitely.  If you have players paying millions of $1 or $5 to social games companies per annum, or even individual players paying huge amounts of money for virtual goods (like the guy who spent $330,000 for a space station in Entropia Universe, sooner or later someone is going to turn around and start asking questions about what they ‘own’ in return for their money.  What happens if a whole bunch of people start asking for property rights in their virtual goods, perhaps even to the extent of class action lawsuits to force the issue?  If successful, it could change the way in which the games industry has approached virtual goods – which to date has effectively been to treat them as the holy grail of games monetisation with relatively little regard to the accompanying legal issues.

In fact, in the past there have been people who’ve asked questions exactly like that.  For example, back in 2006 a Second Life player called Mark Bragg brought a case against Linden Labs over their closure of his account, which he said deprived him of access to substantial amounts of virtual goods that were his property.  The case settled and as a result there was no detailed analysis of the property issues, but clearly they were there (and the court didn’t dismiss Bragg’s arguments, either).

That said, (so far as I’m aware) no Western court has had to consider the issue in detail yet, nor has any Western government/regulatory authority set out its position firmly on the matter. But, with the sheer amount of money coming in through virtual goods, virtual currency and micro-transactions of all kinds, I think it’s just a matter of time before that changes.  There have already been suggestions for some time that the IRS in the States and HMRC in the UK intend to look more closely at the taxation of virtual goods, which inevitably will focus a spotlight on virtual goods more generally.

In the meantime change is already coming in the Far East, as this Vietnamese report suggests.  For example, what if the Vietnamese government were to pass a law stating quite clearly that virtual goods are not property?  Together with other changes happening over there (such as a recent Korean case on the legality of RMT), this could well have a significant impact on the legal status of virtual goods. 

So, if that legal battle over virtual goods isn’t already here, it’s coming.  Watch this space…

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