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Oct 13, 2008

Comments

1.

I think that as the economy worsens in real life, more and more people are going to be looking to virtual worlds for pleasure. A place where they can still enjoy their hobbies, socializing, etc. even if it is virtual. With that said, I think that the value of virtual currencies will change minimally, perhaps gaining value.

2.

Virtual Worlds will probably flourish and become like the escapist Busby Berkeley musicals of the 1930's - updated from kaleidoscopic images to fractals maybe.

3.

In times of hardship e.g. Depression, people look to the community for support. Peer to peer discussions, passing of jobs, paid for with real or virtual currency, who you are connected to will matter enormously.

Jobless, with limited disposable income? Well, instead of watching TV why not have the lifestyle you want, but virtually. That sort of thing.

In fact, virtual currencies will be used to trade for real world items, more and more, as what we value moves online.

And I agree with comments above - escapism will rule and games/virtual worlds that have a message of positive empowerment and allow the player a measure of control over the virtual world, will give self esteem to those with lack of control over a real world in depression.

4.

I would go one step further than escapism and empowerment. Monopoly (the board game) enabled folks back in another time of economic distress to game and arguably learn some of the perspective of those who had need to manage significant assets. In Dan's example, EVE allows many to contemplate markets, proactively and interactively, who otherwise would not be able to.

5.

I think it's far more likely to see the end of CCP before the end of the Eve economy. CCP as an Icelandic company has a hell of a lot debt on its books:

http://ccp.vo.llnwd.net/o2/www/ccpgames/pdf/Summary_CCP_08_0728.pdf

"Assets
At year end 2007 CCP’s total assets amounted to USD 47,295,214, compared with USD 18,076,407 at year end
2006, an increase of USD 29,218,807, or 262%, since the beginning of the year. The increase is explained in part
by the bank note with Kaupthing. The proceeds from the bank note were mostly invested in market securities.

Liabilities and equity
CCP’s total liabilities amounted to USD 33,767,943 at year end 2007 compared to USD 8,526,258 at year end
2006."

Read http://www.ccpgames.com/press/investors.asp

I'd be worried for those MMO companies who haven't lowered their operating costs this year. And any who had tapped the debt markets to raise money in once cheap convertible-bond offers. I expect we'll see some consolidation in '09, i.e. CCP.

6.

Actually, Iceland's economic problems are neutral to positive for CCP, financially. Nearly all of their revenue is in foreign currency (mostly US dollars and Euros, but a scattering of everything else from rubles and shekels to yuan and pesos).

If the costs of their US studio is greater than their dollar revenues, they could be hurt a bit by the strength of the dollar against the Euro (since they'd have to convert dollars to Euros). But overall, they get paid in enough different currencies it doesn't much matter what happens to any one of them, the others will gain strength to make up the difference.

But owing such a huge load of dollar debt they apparently used for market speculation.... I guess they weren't immune from the tulipmania that swept through Iceland (well, let's face it, through the world). Underneath it all, though, they should have revenues on the scale of tens of millions and even if their investments tank, they could carry their debt. Having to come up with money to cover that debt would explain some rather...curious decisions they've made lately (like changing the GTC's in a way that effectively meant a 20% fee increase for people using them, and not allowing inactive accounts to train skills).

MMO revenues may be resistant to economic woes, but that doesn't mean MMO companies can't be affected.

--Dave

7.

I posed this question last week to Arend Stührmann when we met at what would have been the Virtual Worlds Forum. He said that CCP was in a strong position because of its foreign currency income, but that as individuals employees in Iceland itself were feeling the pinch because they were paid in Icelandic króna.

When I was in Iceland last year, I found it a very expensive place; things that would have cost me 30 pounds in the UK came to more like 50 (this at a time when the pound itself was regarded as being very strong). This ratio was reasonably constant no matter what I was buying, which led me to suspect that the ISK was overvalued. Icelanders were themselves aware of this when I moaned about high prices, and although they seemed to be quite proud of the ISK's strength I don't think they saw it as being a long-lasting phenomenon - the currency was only floated in 2001, so it hadn't really found its true level.

Bearing this in mind, it wouldn't surprise me at all if CCP had prudently kept much of its US dollar income in a US bank (they merged with White Wolf 2 years ago, of course). Following the inevitable (and now actual) decline of the ISK, paying back their ISK loans from their USD reserves should not be painful for them.

Richard

8.

One of my questions concerns the relationship between Eve Isk and Icelandic Kronor ISK. I know that there has been concern about Isk inflation on Eve boards but don't know how that relates to meat-world ISK.
Even though Eve/CCP's revenue stream is made up of different currencies, I understood that (at least at one point) it was being converted to ISK and one bank (Kaupthing, IIRC) was pleased to be the major partner in this transaction. CCP has some major debt with Kaupthing as Tide pointed out. Further, I rather suspect that CCP has put its funds into those big interest accounts that were a symptom of Iceland's problems.
Also, in interests of full disclosure, I should say that I have never played Eve and, though I have played other MMO(RPG)s, I'm not particularly active at this time.

9.

Oh, and I know that InterStellar Kronor are not the same as Icelandic Kronor. Maybe the question boils down to: does CCP have all its holdings in ISK or not? Of course, they can divert their current revenue anywhere they want (unless their bank deal is really restrictive).
A year or so ago, Eve said that they had hired a professional economist (or at least, someone with an Economics doctorate) as "manager" and this fellow, Gudmundsson, would be issuing quarterly reports on the Eve economy. Anyone know any more about this?

10.

he has published a number of quarterly report, among other things, which stopped Q4 2007:
http://myeve.eve-online.com/devblog.asp?a=author&p=CCP%20Dr.EyjoG

The next eve expansion is supposed to be about economy and industry, so we may hear of him again soon...

11.

more on the actual question later, but this post seems to have shrunk the margins for following posts. Someone with phenomenal cosmic powers should check that out.

12.

Time for Iceland to make the ISK the official currency. Seriously.

13.

Dan Hunter wrote:

Will we see a run on games the same as a run on banks?

Isn't this a nonsensical question? How could you see a run on games when you can't remove currency from a game?

--matt

14.
Matt Mihaly says:

Dan Hunter wrote:

Will we see a run on games the same as a run on banks?


Isn't this a nonsensical question? How could you see a run on games when you can't remove currency from a game?

--matt

A couple of ways you could have a run -- first, people attempting to liquidate all their virtual assets at once (this would include the black market sites or under-the-table deals). Theoretically, this might equate to massive deflation (following temporary hyper-inflation)but, in game terms, would effectively strip the games of value; second, people quit paying their monthly fee. Again, in theoretic terms this would be similar to production (or investment?) shutting down but in reality would be a run situation once panic sets in. That's the key, I think, not the institutional aspects of a bank but the panic aspect of a run.
15.

One opinion:

"As the 'real world' gets worse, virtual worlds get better," Gaia CEO Craig Sherman told Forbes.com. "As things get worse, people spend more time at movies or spend more time on a site like Gaia Online, which provides a relatively inexpensive respite from the offline world."

Found here.

16.

Matt>Isn't this a nonsensical question? How could you see a run on games when you can't remove currency from a game?

But if you can, as is the case in (for example) Project Entropia?

Richard

17.

Richard wrote:
"But if you can, as is the case in (for example) Project Entropia?"

You can't remove in-game currency. You can only convert it into real-world currency.

Further, a run on banks causes a problem because banks don't maintain a 1:1 ratio of cash on hand to deposits. When lots of people try to withdraw, they literally run out of cash since they can't create more.

Games/virtual worlds can, of course, just create more and cannot run out of currency except by choice.

CCBC wrote:
"Theoretically, this might equate to massive deflation (following temporary hyper-inflation)but, in game terms, would effectively strip the games of value; second, people quit paying their monthly fee."

If you assumed that the value a person receives from a game is completely wrapped up in the currency of the game, perhaps. That's absolutely not the case though.

Take WoW: So what if everyone tried to sell all their currency into the real world at once? How does that affect me? I still gain gold at exactly the same rate and NPC vendors still sell me things at exactly the same rate. The game content is still exactly the same. I can still have a great deal of fun questing, raiding with friends, etc.

The parallel just isn't there.

--matt

18.

I had just woken up and wasn't thinking clearly. Fair point about Project Entropia, Richard, assuming that they don't maintain cash reserves sufficient to cash out everyone in the game.

--matt

19.

CCP took a 2 billion ISK credit note from Kaupthing in July '07. http://ccp.vo.llnwd.net/o2/www/ccpgames/pdf/Securities_Note_CCP_08_0728.pdf

"Kaupthing Bank is among CCP largest creditors." (p.6)

That bank was nationalized and its assets seized in the UK. Dunno if CCP used that note to finance the merger with WW or as stated above "The proceeds from the bank note were mostly invested in market securities."

20.

New devblogs out today on this very subject.

One commenting on the effect of the financial crisis on CCP (not very detailed though):
http://myeve.eve-online.com/devblog.asp?a=blog&bid=595

And one from Dr. Eyjolfur Gudmundson with the latest economic newsletter:
http://myeve.eve-online.com/devblog.asp?a=blog&bid=594

21.

The operator of an on-line game is more like a government than a bank. Matt said, the can always print more money if they need to. However, you could certainly have a run on a player-operated bank inside the game. I haven't personally seen an example, but I'm sure it's happened somewhere. Even if the bank is honestly run (and most aren't) they vulnerable to a run exactly the same way a real bank is. Short-term deposits have been loaned out long.

22.

Well, if you want to take a look at some of our graphs relating the real world "market price" for Eve currency check out:
Eve Online ISK Chart

We haven't seen any large trends in virtual currency prices related to the current economic crisis. However, that could change as the "production" of virtual currency is based on both virtual game factors and external "real world" factors such as the wage rates in developing countries for a desk job farming virtual currency in 12 hour shifts.

23.

Matt, MindArk, the company behind Entropia Universe, do have enough cash to cover 100% of the virtual currency. It is in the annual reports found on their web page.

24.

EVE is a nasty, addictive game that will take a real hit when people will realise the game is completely worthless. Lots of real life time is spent playing or waiting for skills, while the output is not worth at all, due to CCP efforts to get rid of RMT. Which means that players can gather a real economic output from WoW or EQ, while everything that's made such hard in EVE has no value at all... Just lots of years invested in unmarketable assets. It's quite funny that a RPG shooter like Entropia has a real currency while the RPG economy of eve, with its huge, eye-candy stations that resemble steady and persistent institutions doesn't worth a dime, as the InterStellar Krona is just "monopoly dollars". A real currency EVE would have been the most successful virtual economy by the date, but CCP is not smart enough for something like this.

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