Virtual Items Continue to Harvest Bushels of Real Money, For Now

The explosive growth in sales of virtual goods items continues to astound me, but not for the reasons that you might expect.   Having played World of Warcraft for a time (yes, I am a WoW addict, but I’ve been clean for 4 years and counting), I fully understand the appeal of paying real dollars to quickly get a cool/powerful/rare item that helps you play the game and impress your friends and enemies.  I am not surprised that these sales, legal and illegal, continue unabated.  What surprises me, however, is that even though people are shelling out time and resources for swords & armor or tractors & crops, their rights with respect to these items are barely any more defined now than they were a decade ago.  People honestly have no idea what exactly they are buying (or licensing) and they don’t seem to care.  I can say that they have no idea because I continue to see discussions by lawyers and scholars about how virtual goods should be classified and what law should govern them and if none of them can decide, then I’m sure it’s not remotely clear to the average Farmville farmer.  I just do not understand why there hasn’t been more pressure for a clearer set of rules to govern these transactions.

This article from TechCrunch, by a guest author who made $300M selling a virtual currency offers startup to Yahoo!, documents the optimism for growth in the field of “virtual goods”.  But, as social games like Farmville and Scrabble expand to ever-wider audiences than WoW or EQII or SL can even hope to see, I wonder how long they can go before some sort of concrete law develops to regulate these sales.  Having studied commercial law briefly during law school, I’m familiar enough with the UCC to know that virtual goods aren’t really handled well by UCC (Uniform Commercial Code) Article 2, which governs sales of goods (things made of atoms you can put in a shopping cart).  I’m still trying to get my head around Article 9, which deals with intangible assets like bank accounts, but from what I can tell from some experts I know, it’s not really the same thing as a picture of an ice cream cone that you pay $1 to send to a friend on Facebook.

This brings me to the crux of my point:  we generally assume people need to understand the fundamental nature of their rights before they open up their wallets.  And it’s not just about price.  Just because the games involve micropayments or the music download only costs $.99 doesn’t mean that consumers should automatically stop caring.  This is not to say that no one cares what goes on in the transaction.  Indeed most of these are often governed by exhaustive EULAs which define the terms and set the rules.  The purpose of these is generally to shift most of the burdens onto the consumers as a way to keep costs low.  And, as we all know, no one reads the EULAs because it’s often not worth our time.  After all, the thing we’re buying only costs pennies.  Yet if something happens to your virtual items, most people’s gut reaction is that the merchant who sold the item should replace it, even if the company wasn’t at fault.  And why shouldn’t they, one might ask?  The companies selling these items are making tens or hundreds of millions of dollars on these microsales of pixels and data and it can’t cost that much to send the information again.  In our society, we’ve grown accustom to looking for the party with the deepest pockets to “make things right,” but if companies actually want to fill their pockets with anything more than lint, the first thing they have to do is learn how to keep their duties to a minimum.

I think the problem is that the commerce of our age is dependent on EULAs and Terms of Service agreements.  Yet many of these EULAs are inconsistent and incomprehensible.  Even with the growing number of lawyers out there, the vast majority of the public is in no position to read them all, let alone comprehend them on the same level as the corporate attorneys who drafted them.  (Heck, I know an experienced attorney who drafts EULAs all day who admits she still doesn’t have a clue what the iTunes EULA says, even though she continues to buy music tracks for her iPod.)  So far, most of us are willing to risk the loss of a couple bucks for the fun and convenience of these items.  What is troubling is what happens when the virtual items start costing more than a few hours of income.  Comprehension of EULAs becomes essential.  A friend of mine a while back asked what the difference was between a WoW sword and an iTunes download.  The answer came down to an esoteric (and mind-numbing) discourse on the difference between the two programs’ EULAs because, even though the two were made out of the same “stuff”—1s and 0s, they had completely different properties that weren’t remotely obvious unless you spent a few hours with a dictionary and a highlighter.

The question is whether this is an issue for the law or for unified public action.  Massive popular anger over “Scamville” or the frequent Facebook privacy “blunders” has caused those companies to change their policies–demonstrating the power of the market.  It’s possible the same could happen some day with EULAs.  It’s always tempting to yell, “there ought’a be a law!” and look to government to regulate.  But with a nascent economy such as the ones with virtual goods, getting government involved would only gum up the works.  As I understand it, the UCC is mainly a collection of business best practices that were codified into law after centuries of commercial transactions.  Maybe some day there will be a Virtual Commercial Code.  Who knew from the start of this post that I’d end up being a free-marketeer.  But there needs to be some movement to bring order to the chaos and right now, it could happen without government intervention.  We’d better hope because if we have to rely on the same legal system that watched over Wall Street or the Gulf of Mexico, we’re all doomed.

ADDENDUM: June 30, 2010

Over the last couple of days, I’ve been thinking about the part of my post above where I thought it would be best to defer to the market.  A discussion about recent trends in the Supreme Court got me thinking–why should we trust the market in this particular instance?  It turns out that there’s a big difference between the build up to the development of Article 2 of the Uniform Commercial Code and what’s happening now.  The UCC-Article 2 was derived, by and large, from the outcomes of court cases relating to contracts between businesses or parties who could at least negotiate on some level.  The two key differences between virtual world/virtual goods companies and consumers are that: 1) the two are not remotely on equal footing in bargaining power and 2) disputes between them are not going to court but to private arbitration.  These issues are fairly interdependent, but I’ll start by addressing the latter point first.

We have known for some time that the game companies like the law just the way it is right now.  It generally favors them and allows them a wide berth in terms of how they do business and shift burdens onto consumers.  California has some laws that are more protective of consumers, but beyond that, the scales tip toward the companies.  In order to prevent the buildup of adverse case law, where people complain about unfair practices, companies use mandatory binding arbitration agreements to resolve disputes.  These are generally cheaper (for the company), allow the company to choose who will supply the arbitrator, and have the added benefit of not establishing precedent.  We’re hearing a lot about precedent this week as Solictor General Kagan answers questions before the Senate Judiciary Committee, so it’s obvious that it’s important.  But the reason why it is particularly crucial in this context is that, with out it, we have nothing from which to build a history that could be summarized and added to the Commercial Code.

The second point is that without a relatively equal power balance, there is little chance a genuine back-and-forth between sides that would allow a fair model of contract to emerge.  The UCC, Article 2 in particular, compresses centuries of dealings between merchants and buyers.  Most of it deals with companies exchanging orders or arranging shipping contracts and deciding who bears what burden and how the contracts between them on those points are arrived at fairly.  Today, the era of mutuality of contract is but a distant memory.  Everything now comes with terms dictated by the company that you have to accept, take-it-or-leave-it.  The rules on these one-sided “adhesion contracts” have hardly kept pace with their takeover of modern commerce.

So, while I fret that government might not be a savior that will swoop down and impart upon us the Wisdom of Solomon, perhaps what it can do is make sure that the system is at least fair enough that it can develop some genuine and fair precedents that future generations can take to build a realistic and fair set of laws to govern commerce as it evolves beyond our tangible reality.


About Justin Kwong

An attorney in the Twin Cities and adjunct professor at William Mitchell College of Law where I teach a seminar on the law of virtual worlds.
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One Response to Virtual Items Continue to Harvest Bushels of Real Money, For Now

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