ESSAY: Assessment Item 3

The Economics of a Virtual World
“Business conducted via virtual reality programs is more efficient and effective than the real world methods”

Technological changes are causing the lines that divide local, national, and even international consumers to blur. These changes are forcing businesses to reappraise the role and potential of the Internet, and in particular direct their focus towards the benefits of using virtual worlds as a means on conducting business. To determine whether business conducted via virtual reality programs is more efficient and effective, the viability of the economics of virtual worlds and the efficiency of conducting business through them will be assessed. The ways in which business is conducted within virtual worlds and the advantages will be explored. The effectiveness of marketing within the realm of Second Life will then be discussed. Finally, the impact Second Life has on the real-world will be analysed.

The adults-only world of Second Life, created by Linden Lab (Linden Lab, N/A), is a 3-Dimensional virtual environment where participants can interact with other avatars across the world (Harris & Ritzema, 2008). A wide spectrum of users have been captured by virtual environments such as Second Life. As of July 9, 2007 the residents of Second Life totaled 7,922,884 identities, including abandoned accounts and those which are rarely used, and 1,746,040 avatars had logged in during the 60 days following that date (Cheal, 2007). Second Life’s unique economy operates using their own currency, Linden dollars (Barnes & Guo, 2007); which can be purchased using and converted back into real dollars. According to Grassian and Trueman (2007), Second Life is “a virtual world with many users participating simultaneously in creating their surroundings and objects within it.” In doing so, users also become consumers who develop the need to manufacture or purchase these items to enhance their existence in the virtual world (Peattie, 1997). Virtual worlds such as Second Life are an example of the next virtual step beyond the Web (Grassian & Trueman, 2007), and those corportations who do not exploit its potential will soon be competitively disadvantaged.

Technological changes are stimuating virtual worlds, and both the ‘virtual company’ and the ‘virtual economy’ are fast becoming a reality. An economy can be defined as “the management of the money, property and goods of a country, community or household” (Heinemann, 1995). Virtual worlds, such as Second Life, have grown into virtual communities with economic potential. According to DFC Intelligence (2005; Barnes & Guo, 2007), the revenue from trading virtual assets in virtual gaming communities will reach $1.8 billion by 2009. In such communities, real money is used in transactions betweens users for virtual items by means of virtual currency (Cheal, 2007). A market has also emerged for ‘virtual assets’. Barnes and Guo (2007) state that virtual assets are “intangible valuables that exist solely in the computer systems known as virtual worlds—elements that may have a significant role in improving the overall competence or appearance of the characters owned by a player, such as items (e.g., weapons or clothing), virtual property or virtual currencies.” The ability to possess, sell and exchange these virtual assets will transform the way in which business is conducted and redefine the key elements which indicate business success (Kippenberger, 2000).

It isn’t enough to simply do a job better; a new technology such as virtual reality needs to provide distinctive benefits. There are two major benefits to using virtual reality programs such as Second Life. First, it gives us a new way to explore reality. Comparable to a microscope or telescope, it extends our senses so we can learn to do something with reality that we couldn’t do before (Pimental, 1995). Virtual reality technologies present consumers with the ability to sample goods and services before they are developed in the real world. Genuine consumer feedback is gained during this process as users are able to trial the layout of potential buildings, such as supermarkets and hotels, to ensure the most efficient layout and design is achieved during real-world construction (Peattie, 1997). The second benefit we gain from using virtual reality is that it allows us to perceive abstract ideas and processes for which there are no physical models or representations (Pimental, 1995). A virtual world can be likened to a model of our own in magnifying and reflecting the important issues present in the real world (Cheal, 2007).

The information revolution is providing organisations with an opportunity to move their business from the physical to the virtual world. A business is a “moneymaking organisation or institution engaged in commerce, manufacturing, or providing a service” (Heinemann, 1995). Czerniawska and Potter (1998; as cited in Kippenberger, 2000) stated that “traditionally, it has been a company’s physical assets which determined its success. In the future, it will be virtual assets.” The businesses and organisations operating solely within the Second Life community are likely to manufacture virtual assets; intangible valuables that exist solely within a virtual world such as Second Life, ranging from clothes and appendages to houses (Barnes & Guo, 2007). A combination of Linden Lab granting Second Life residents the right to legal trading of the virtual currency Linden Dollars and the copyright over their content (Linden Lab, N/A) has encouraged the formation of solely in-world businesses, the creation of legally registered real-world companies which previously existed only in the virtual world, and the participation of previously unrelated companies and organisations (Noam, 2007).

Companies selling virtual assets in virtual worlds are presented with greater efficiency in the field of manufacturing. The virtual assets generated for use on virtual worlds such as Second Life are stored as computer files (Barnes & Guo, 2007), and once uploaded to Second Life’s server they can be duplicated and sent to copious users. As a result, one unit of output can satisfy an entire market of consumers rather than having to manufacture one good per consumer. This allows Second Life-based companies to direct their resources to creating variations of same item or entirely new virtual products (Peattie, 1997) and therefore diversify the market.

The virtual world and its growth provides an optimal environment for marketing. The Gartner Group (2007; as cited in Noam, 2007) forecast that 80% of internet users would spend time in a virtual world by 2011. Innovative companies are already being introduced to the world of third age computing by taking advantage of new generation technologies such as Second Life to re-engineer their marketing strategy (Peattie, 1997).

Virtual worlds reunite producers and consumers on an international level. “Formal marketing exists to connect producers and consumers who became distanced and estranged by the process of industrialization and the emergence of mass production for mass markets” (Peattie, 1997). The establishment of virtual companies within Second Life not only acts as an innovative method of advertisement beyond basic websites (Peattie, 1997) for real world organisations and brands, but also extends the market reach of companies far beyond that of conventional methods (Grassian & Trueman, 2007). Communication networks are opened by Second Life since participants reside in many different countries, and yet simultaneously connect with each other in real time (Grassian & Trueman, 2007). Interactive Marketing, a by-product of virtual worlds, allows marketers to bypass the distance placed between consumers and producers by an overreliance on basic forms of marketing communication and long supply chains (Peattie, 1997). In the third age of computing, consumers will initiate contact by finding the information they desire electronically on products, services and companies; therefore driving the exchange process (Peattie, 1997).

The virtual environment of Second Life has had a significant impact on the real world business environment; further blurring the boudnaries between the real and virtual worlds. According to Kippenberger (2000), “The scale and accessibility of information now available means that those individuals and organisations who find new ways of applying it will gain competitive advantage over those who are slow to understand the implications.” While this advantage may be transient as competitors catch up (Kippenberger, 2000), companies that implement new and innovative means of communicating to consumers, such as Second Life, will be better off. Evidence suggests that this ‘first-mover-advantage’ has increasing effectiveness under the evolving market conditions (Kippenberger, 2000) and companies which exploit virtual worlds will gain a real-world advantage over their competitors. Many predominant figures and real-world companies in society today have already established their presence on Second Life. The Swedish Government has constructed a virtual embassy and Reuters has developed a news bureau on the site (Noam, 2007).

While some common attributes shared between reality and Second Life are advantages in not only enhancing the realism of the virtual world but even making it more efficient in some aspects (Peattie, 1997), the virtual world has also adopted some seemingly negative aspects from the real world. Copyright issues encountered on Second Life are being settled in official law-courts in an attempt to see real world consequences being inflicted (Cheal, 2007). Furthermore, in August 2007, the virtual investment bank Ginko Financial operating out of Second Life collapsed (Noam, 2007). Far from a calamity, however, this event confirmed the economic realism and reliability of the simulation by experiencing a real world economic event. On the other hand, some economic events which companies in the physical world encounter will have little effect on those operating on an informal virtual platform (Kippenberger, 2000). The impact of phenomenon such as economies of scale, product differentiation, control over product distribution and customer relationships will be minimised (Kippenberger, 2000).

In conclusion, technological changes are stimuating virtual worlds, and both the ‘virtual company’ and the ‘virtual economy’ are fast becoming a reality. It isn’t enough to simply do a job better; a new technology such as virtual reality needs to provide distinctive benefits. The information revolution is providing organisations with an opportunity to move their business from the physical to the virtual world. Companies selling virtual assets in virtual worlds are presented with greater efficiency in the field of manufacturing. The virtual world and its growth provides an optimal environment for marketing, as it reunites producers and consumers on an international level. The virtual environment of Second Life has had a significant impact on the real world business environment; further blurring the boudnaries between the real and virtual worlds. Therefore, business conducted via virtual reality programs is more efficient and effective than the real world methods.

Related Links:

Craig, K. (2006) “Making a Living in Second Life” Text: http://www.wired.com/gaming/virtualworlds/news/2006/02/70153
(Accessed May 5 2008)
Discusses the many various business opportunities available to entrepreneurs on Second Life

Four Corners (2007) “You only life Twice” Text: http://www.abc.net.au/4corners/special_eds/20070319/
(Accessed May 7 2008)
View online the Four Corners report on Second Life

Four Corners (2007) “Virtual Rules – Real Life Lawyers and Second Life Avatars” Text: http://www.abc.net.au/4corners/content/2007/s1876068.htm
(Accessed May 7 2008)
Examines the close correlation between the real and virtual worlds in terms of implementing real-world laws on a supposedly lawless virtual environment

Linden Lab: “Terms of Service” Text: http://secondlife.com/corporate/tos.php
(Accessed May 5 2008)
The terms of service which users must acknowledge and obey while participating in the virtual world of Second Life

Tiffany, L. (2007) “Starting a Second Life Business” Text:
http://www.entrepreneur.com/startingabusiness/businessideas/article172768.html
(Accessed May 8 2008)
Explains the methods, sacrifices and benefits of own and/or operating a virtual business and explores the various opportunities for entrepreneurs to take advantage of

REFERENCES

Barnes, S., and Guo, Y. (2007) “Why people buy Virtual Items in Virtual Worlds with Real Money”. ACM SIGMIS Database 38(4): 69-76.
Retrieved May 8 2008, from the Emerald database

Cheal, C. (2007) “Second Life: Hype or Hyperlearning?” On the Horizon 15(4): 204-210.
Retrieved May 5 2008, from the Emerald database

Grassian, E., and Trueman, R. (2007) “Librarian avatars in Second Life.” Reference Services Review 35(1): 84-89.
Retrieved May 6 2008, from the Emerald database

Harris, B., and Ritzema, T. (2008) “The use of second life in long distance education.” Journal of computing sciences in colleges 23(6): 110-116.
Retrieved May 9 2008, from the Emerald database

Heinemann, R. (1995) Heinemann Australian Student Dictionary. Reed International Books Australia Pty Ltd: Melbourne.

Kippenberger, T. (2000) “Welcome to a virtual world.” The Antidote 24(5): 6-9.
Retrieved May 5 2008, from the Emerald database

Linden Lab: “Second Life: Terms of Service”.
Text: http://secondlife.com/corporate/tos.php (Accessed May 5 2008)

Noam, E. (2007) “The Dismal Economics of Virtual Worlds.” ACM SIGMIS Database 38(4): 106-109
Retrieved May 6 2008, from the Emerald database

Peattie, K. (1997) “The Marketing Mix in the Third Age of Computing.” Marketing Intelligence & Planning 15(3): 142-150.
Retrieved May 12 2008, from the Emerald database

Pimental, K. (1995) Virtual Reality: Through the new looking glass. McGraw-Hill Inc.: United States of America.