Three virtual worlds that exist on the internet have grown economies with a per-capita income comparable to those of small countries and several more are well on their way, this from the latest report published by respected economist, Keith Ferold.

At the heart of each virtual world is a computer game played by hundreds of thousands of computer enthusiasts collabo-rating over the internet. The biggest of these games is Spherix and its virtual world Galande with 4 million registered cyber-citizens followed by Everquest and its fantasy world Norrath. The magic is in the control characters – or avatars – which each player creates. This means that characters can gain skills and possessions that can be traded, in the currency of the virtual world or sold through real trading websites like eBay.

Wars are waged, treasure hunted, dragons slayed, sports played and trading done in virtual space. Individuals spending an average of 20 hours a week online engaging in interactive entertainment has had a huge impact on competing leisure activities. Videogame culture is embedded in the lives of people under 30 and growing in adoption for those over 30. The challenge of competition added by the introduction of leagues, tournaments, competitive ranking and large cash prize money is attracting more and more cyber-gamers.

The money-pile is growing as billions of dollars flows through the many tributaries of this complex industry. Everything from game sales, game artefacts, hardware platforms, subscrip-tions, royalties, online time, grassroots community cam-paigns, endorsements, sponsor-ships, merchandising, advertising, online shopping, and more is packaged in this space.

These virtual worlds are being tracked as somewhat of an economic phenomenon which is teaching us a lot about the nature of free and unregulated markets. What you see when people get together where they can produce things and opportunities to exchange them, mostly unfettered, you’ve got the makings of an economic system.

ANALYSIS >> SYNTHESIS: How this scenario came to be

2002: America hooked on video games

America’s growing fascination with video games is hard to exaggerate. Last year, U.S. sales of video-game hardware and software rose 43% to hit US$9.4 billion – which exceeded Hollywood’s box-office receipts of US$8.35 billion.

According to a 2000 survey from the National Institute on Media and the family 92% of children between the ages of 2 and 17 play video or computer games. 35% of Americans rated video and computer games as “the most fun entertainment activity.” (TV came in a weak second with just 18% of votes, followed by the Internet, books, and movies.) That same year, U.S. entertainment-software sales topped US$6,2 billion – nearly three times the gross domestic product of Bermuda.

The early emergence of a new approach to advertising. Not invented by the ad agencies but by the games industry. There is now a new technique called advergaming – these are Internet games for advertisers. Between 16% and 45% of consumers who receive a game via promotional email actually play it – for an average of 25 minutes. It gathers information about the player and the preferences and behaviours they display during the game and feeds it back to the company. This is a fundamentally new way of online advertising and far advanced from the banner advertising.

2003: Golden eyeballs

September 2003 Madden NFL 2004, a videogame pitting real-life NFL teams against one another, grossed US$100 million in 3 weeks and before the next version is out will rake in another US$200 million. The average Madden player will spend conservatively 100 hours mastering the game. That’s 4 million sets of eyeballs times 100 hours. Each of the 13 songs by artists on the Madden soundtrack will burn into the brain of each player more than 100 times, creating more impressions for the artist than they can get on radio or TV.

The games industry is worth some $32 billion once games and hardware are added together.

Electronic Arts generates US$2,5 billion in revenues from its sports, movie and action titles. It has a market capitalisation of around US$13,2 billion and believes it will one day be the biggest entertainment company in the world.

This also makes Electronic Arts the worlds 4th largest software company (after Microsoft, Oracle and SAP)

Videogames is not just chomping up money that used to be spent on entertainment money but also time that would have been spent on music, movies, books etc.

A Fortune magazine article of September 22 2003 showed the changing time (number of hours spent per person per annum) devoted to various forms of entertainment:

An economic phenomenon is occurring. With increasing number of cyber-gamers collaborating they have started actively trading within the virtual worlds they inhabit and this trade is spilling into the real world with artefacts being traded on sites like eBay.

South Korea is making a big play in the cyber-gaming space, one of their leading companies is NCsoft. The problem NCsoft face is that most games in Japan, America and Europe are played on specially made consoles, such as Nintendo’s GameBoy or Sony’s PlayStation2 but Broadband is the solution for South Korea. Online gaming has a huge advantage; no inventory, much more flexibility on development and release cycles and a pay as you go model. What the South Koreans have also learned is that gamers are really keen to meet each other! This in turn fuels the growth of MMORG (Massive Multi-player online Roleplaying Games). The South Koreans are really pushing the boundaries of MMORG. Another angle that South Korea is correctly exploiting is providing a diversity of games, appealing to a wide variety of age groups, men and women and different countries and cultures. South Korea may hold the key to the next generation of online games and be a threat to companies like Sony with their Playstation2 and Microsoft with their Xbox.

2004: Internet boosts growth

Tens of thousands of players or teams of players compete against each other across the Internet on EA (Electronic Arts) Sports Nation

“The ability to create virtual communities online is going to be a much bigger part of the industry going forward”. Robbie Bach, head of the Microsoft X-Box team.

A virtual world called Everquest attracts 1 million people who pay US$10 per month to spend an average of 20 hours a week in that virtual world. Many other virtual worlds are growing in popularity.

The biggest driver of videogame growth is the internet. This is also the biggest inhibitor for those who do not have the access; another example of the “digital have nots”.

Microsoft launches a massive online subscription-based network called X-Box-Live.

IBM and software company Butterfly announce the Butterfly Grid – another internet gaming network.

AOL launches an online gaming league and paid gaming competitions.

The market scope is extending. Increasingly the gaming demographic is no longer solely teenage boys. According to a “State of the Industry” report published by the Interactive Digital Software Association, 72% of frequent computer gamers are 18 or older. In fact, the interactive gamer’s average age is now 28. And 43% of players are women.

The most avid gamers are young men and middle-aged women, but the goal is to create games that draw every demographic.

China gets onto the cyber-gaming bandwagon, they now formally regard this as a key industry sector and have established the first department of games software in a University. The volume potential is huge; as of 2003 they estimated that already almost half of the country’s 78 million online users play video games on 30 million Internet-connected computers.

The South Korean challenge is shaping up as their games start extending its appeal to the Japanese and American markets.

2005: Physical/Virtual Economy

Let’s play the numbers game. It is really the “eyeball” and “interaction” potential that is shaking the market. For example SportX, the best selling game of 2004 sold 20 million copies, an average videogame player spends 120 gaming hours per game per year, this means 2,4 billion eyeball hours for SportX this year. Burning each song, each logo, each artist into the brain of each player for 120 hours a year. Compare this to the 2006 smash hit TV series, “Who is doing it” with an estimated 14 million viewers over 14 episodes or 196 million eyeball hours. Where would you bet your money?

The music industry revamps itself and is first of the traditional entertainment sectors to get onboard the videogame and online bandwagon. Major deals have been signed between music companies and videogames companies. An estimated 50% of new albums are launched in joint-ventures with videogames companies.

The US$70 billion movie industry is under pressure. During 2004 an estimated 100 million movies were downloaded illegally and in 2005 this number could increase to 1 billion movies. Cyber-gaming with its increasing realism and quality (often tied into movie themes) is becoming a real alternative to movies.

An interesting real world/virtual world test case is pending in the courts. A number of virtual newspapers have appeared over the past couple of years, covering the virtual worlds of cyber-gaming. Many of these are deemed to be getting “out of hand” as it pursues its objectives of “muckraking” about the millions of virtual inhabitants and their society. Spherix have launched a law-suit to challenge what it calls the “grossly unfair practices” of The Cyber-eye, one of the worst of these publications. The outcome will have wide ramifications. What next?, law-suits in the Virtual Worlds themselves?

2006: The Avatar Economy

Fierce competition emerges between music stars, professional athletes and movie stars to be in this year’s top videogames.

A major pre-requisite for movie releases is the associated game. The game tie-ins are beginning to deliver more profits than the movies.

Sports and videogames are coming together. The young sports fanatic wants to watch AND participate. What better way to get close to your hero and his/her world. Even the music industry has embraced the media with an “Inside Victoria Beckham” game.

The AOL gaming league is a smash hit, attracting 50 million players. Cyber-gaming is establishing itself as a serious competitive category and prize money to top tennis and golf tournaments.

Gaming is featured regularly on Saturday TV sports programming.

The diversity of games are representative of the vastly broadened base of games players; all ages, men and women and many countries. People are spending a lot of time in these virtual spaces, whether they are virtual worlds or virtual sports events, and where there are people commerce will happen. Because of the vast number of consumers it is attractive to companies who want to advertise here. Furthermore the games spaces are interactive, so they can learn more about their customers through interaction with them, and can cater better to their needs. This is an even better medium than online with Amazon.com, who already has the highest customer satisfaction ratings in history. Increasingly this looks like an exciting way to transact business.

A formal currency index, linked to the dollar, is established for the currency of Norrath the most mature of the Virtual Worlds. This reflects the continued blurring between the lines of the physical and virtual world as the trade of both gaming artefacts and physical world items gets traded in this world.