Virtual Currencies in Online Gaming

Table of Contents

I. Introduction

II. Framework
1. Theoretical framework
1.1 Approach
1.2 Specifics of virtual currency in online games
1.3 Processes in virtual currency
1.4 Consequences and effects
2. Basic terms and definitions
2.1 Virtual currency
2.2 Online gaming
2.3 Governmental and legal framework
3. Methodology
3.1 Selection of case studies
3.2 Business modeling matrix
3.3 Platform types
3.4 Literature

III. Case Studies
1. World of Warcraft
1.1. Overview
1.2 Business model
1.2.1 Value network parameters
1.2.2 Functional architecture parameters
1.2.3 Financial model parameters
1.2.4 Value proposition parameters
1.3 Platform type
2. Pocket Change
2.1 Overview
2.2 Business model
2.2.1 Value network parameters
2.2.2 Functional architecture parameters
2.2.3 Financial model parameters
2.2.4 Value proposition parameters
2.3 Platform
3. Facebook Credits
3.1. Overview
3.2 Business model
3.2.1 Value network parameters
3.2.2 Functional architecture parameters
3.2.3 Financial model parameters
3.2.4 Value proposition parameters
3.3 Platform type
4. Game Coins
4.1 Overview
4.2 Business model
4.2.1 Value network parameters
4.2.2 Functional architecture parameters
4.2.3 Financial model parameters
4.2.4 Value proposition parameters
4.3 Platform

IV. Lessons from case studies
1. Tabular overview
1.1 Findings in a nutshell
2. Opportunities of universal virtual currencies in online games
2.1 Potentials of universal virtual currencies
2.1.1 Rewards in the real world via applications
2.1.2 Premium use with possible extensions
2.2 Chances of universal virtual currencies in online games
3. Risks for universal virtual currencies in online games
3.1 Third party operations in twilight zones
3.2 Lacking differentiation

V. Conclusion

Annex

Declaration of Honor

Acknowledgements

List of figures and tables

Bibliography

Abstract

This master thesis approaches the field of virtual currencies in online gaming. It pursues the overall question if it is possible, to establish a universal, virtual currency in the online gaming environment. It aims on showing how virtual currencies in their particular fields work, what the different mechanisms imply and who the stakeholders are. In order to give a comprehensive insight on the topic, framework issues such as clarification of terms in the field of virtual currencies in online gaming will be given. Furthermore, processes, consequences and legal aspects are provided. The core of the thesis contains the analysis of four case studies, covering a representative range of virtual currencies in four different areas of online gaming. The analysis contains a massive multiplayer online role playing game, a gaming application for smart phones, a social network with a gaming section and a virtual marketplace featuring browser games. With the help of a business modeling matrix and a platform typology the cases are analysed on parameters such as e.g. functional and financial architecture. The results, put together in a comparative overview, help to point out particular potentials, chances and risks of virtual currencies in online gaming.

Key words: virtual currency, online gaming, business modeling, platform type

Amount of words: 30.888

I. Introduction

Virtual currencies in online gaming - the composition of the scope of this thesis stems from two rapidly increasing phenomena in the online environment. One is the massive exchange of conventional money for virtual currencies as a means to perform instant online payments. Let alone in the U.S. in 2012 an amount of $3.7 billion was spent for virtual currency.¹ The other part is the increasing number of people choosing from an uncountable amount of online games and playing them regularly. This happens amongst an evenly spread base of users and on all kinds of devices - be it on computers, laptops, smart phones or tablets. The first serious attempt to grasp the online gaming environment was done by Edward Castronova, an American professor and titled as one of the founders of online gaming studies, in 2006 in “Synthetic worlds”². He determined that “It is hard to look at these developments without concluding that something quite bizarre must be going on”³ and so initiated a starting point for research amongst virtual economies in online games and beyond, pointing at what I just introduced in short in the lines above. The changing role and increasing importance of virtual currencies can be described as follows:

“However a new kind of currency is developing these days, which have no place in the real world - yet. They are virtual, in both senses of the term: they are only used on the Internet and have no equivalent in metal. They have no real value whatsoever, but do have use value: the value that people who use them are willing to grant them.”⁴

This quote from the article “Virtual Currencies on their Way to Conquer the Real Economy” published in September 2011 sets one initial point for my analysis.

Not only does it describe how virtual currencies are perceived now, one and a half years after publishing of the article the topic is more current than ever. Touch points with virtual currencies for users in the online sphere are growing: the European Central Bank released a 55 page publication of virtual currency schemes just in October 2012, which is most likely due to the topic’s growing relevance and the added contact points with real world issues. Hence virtual currencies are a highly relevant topic, be it in form of Bitcoins that enable users to make decentralized instant transactions⁵ or in form of the widely discussed Facebook credits that find themselves among online games hosted on the platform.

As the title of the thesis indicates, the latter form will be taken into account on the next pages - it will be online games and how virtual currencies are used among those which are in the focus of this work. When regarding just few basic figures on online gaming it becomes clear that playing online has indeed become a habit of internet users. An average person in the U.S. spends three hours and seven minutes daily online of which 17 minutes are spent on playing online games.⁶ This makes almost two hours a week and refers only to browser games, which do not need to be downloaded on the user’s device. They are mostly free in access and pooled on platforms like Facebook. Time spent in virtual worlds on the base of a multiplayer environment that require more of the user’s effort (and money) to proceed in the games is already about 20 to 30 hours per week - a massive amount of time invested of a person in gaming considering that he or she is for example working full-time.

Current state of the topic

The online gaming environment is not only rapidly growing in terms of games offered it is also undergoing massive changes on a daily basis. Taking the fact into consideration that Castronova’s book published in 2006 is the first one to seriously tackle the topic of virtual worlds and their economics and that there is no comparable successor until April 2013, it is understandable that the author is still the main source of reference when it comes to businesses in online games. Obviously it is quite hard to grasp the field of virtual currencies in online gaming. A couple of recent papers by Vili Lehdonvitra, a rather well known Finnish researcher in the field of information and communication technologies, hits the topic quite accurately. Lehdonvitra does extensive research on the field of virtual currencies and goods. Interestingly the two authors, Castronova and Lehonvitra, are going to publish a common book on virtual economies, focusing on design and analysis of the field, in summer 2013 - which is too late to take it into consideration for this thesis. What can be said by now is that the very basic outlines on the field of virtual currencies in online gaming are covered to some degree. Sources on the basic outlines of online games can be found, as well as different aspects of virtual currencies and their side effects. Current research captures that online games can appear and work in different forms and that they bear potential in terms of economic participation of additional stakeholders. Virtual currencies on the other hand are still in its infancy and especially regulatory issues such as taxes, money laundering or (illegal) third party activities are problems that need to be discussed more completely. Out of the scope of current research is the focus I put on my thesis which takes the concept of virtual currencies in online games a step further to another level of dealing with gaming currencies. The question of research I pursue is “What are potentials, chances and risks of a universal, virtual currency for partners involved in the online gaming ecosystem?” Hence the explanations in the following chapters will not only deal with the combination of virtual currencies and online games and how the business models standing behind the different models function. Additionally the topic of universality will strongly be stressed. Recent efforts of for example Facebook show approaches to make virtual currencies universal, i.e. to have one currency that all users, no matter where they live or play, can use in the same way and under the same conditions. In a world moving together in huge parts in the online area through advanced information and communication technologies, putting the topic on a universal scale is a rather consequent step. As this specific topic is still in a very early stage in which studies can rarely be found, I see my work as a contribution on the development in research in virtual currencies in online gaming. Furthermore I see it as a snapshot work - it was established in a time-span of less than three months - that quite relevantly captures the virtual currency in online gaming landscape which is changing quickly.⁷ This means that this thesis is of high relevance when it is going to be submitted and so runs out of the risk of being outdated the same day. As a consequence the topic is tackled very practice-driven. The findings provided are mainly based on observations and online documentation rather than on literature. Though the current publications deliver some basic ideas on the topic, the predominant part of the thesis consists of the firstly mentioned practical approach.

Motivation

These observations and trends introduced lead me to the topic of this thesis and to the interest to analyse how virtual currencies in online games are dealt with. Not being a gamer myself, but being interested in economic constellations and future business models in the online environment, I have a rather explorative view on the topic which will help to gain an objective set of insights on virtual currencies in online games.

Although games are omnipresent throughout all kinds of media and especially in the form of online games in the internet I never felt like playing them. From my point of view playing games was an aimless undertaking and a waste of time, spending even more hours in front of a laptop or computer. Nevertheless the recent developments made me curious. With constantly growing numbers of people investing time and effort in playing online games and trying to gain virtual currency, the impact of online gaming cannot be ignored. The

establishment of new business models and interconnected services can be observed in the online gaming environment. With more connections to the real world online gaming finally becomes fascinating to me. It is the curiosity on how game developers attract their users by building up co-operations with third party services and different stakeholders from both, online and offline environment. When playing online is rewarded not only by virtual currency, but also by real world items, the bridge between the two worlds is finally build. Hence I would like to find out how virtual currencies in online games basically work, who the stakeholders are and how the virtual currencies function in their specific environments.

Structuring the topic

Focusing on my research question: “What are potentials, chances and risks of a universal, virtual currency for partners involved in the online gaming ecosystem?” a mass of associated and supporting questions evolve when trying to tackle the topic. These sub questions help to set up the structure for the thesis and will be answered step by step in the upcoming parts. To be able to find an adequate answer to my research question, the following issues need to be analysed and solved: How do users access the games and get the virtual currencies? What does it cost them apart from the amount of conventional money they exchange? Are there any other possibilities of gaining virtual currencies except for buying it? How are the platforms hosting the games and offering the currencies designed? What actors take part in the online gaming environment? How is revenue generated among the value chain of the platforms?

In order to be able to approach these questions, the thesis pursues a rather matter of fact way of analyzing virtual currencies in online games.

In chapter II, I will introduce the basic setting for the practical part of the thesis. After giving a short explanation on virtual currencies in online games the theoretical framework will provide the approach of this thesis, outline its specifications, processes and possible consequences in effect. After having built a theoretical basis, crucial terms and definitions will be explained that help to gain deeper understanding on the main topic as well as on the legal and governmental framework. The following methodological part explains the selection of the four case studies that will be analysed. Then the essential models for the analysis will be explained - the business modeling matrix and the platform theory that build the basis for the investigation on the case studies are provided. Additionally, the methodological part contains a deeper insight on the issue of literature. This section serves as additional information to the current state of the topic provided on page two and following.

Chapter III builds the core of the thesis. It contains the four case studies and provides for each an overview that contains general information as well as a special part dedicated to the virtual currency in use. Furthermore a figure of every particular value network is provided to make the relations between the different actors of each platform better visible and understandable. On this basis the business model is lined out according to twelve parameters that are introduced in the methodological part. The platform type rounds up the analysis of the cases. Here too, a special insight on the virtual currency on the platform will be given.

Part IV compares the findings of chapter III in a tabular overview and highlights the most important findings of the business model and platform analysis. The table serves as a starting point for picking out the most remarkable findings in regard to potentials, chances and risks of virtual currencies. These will be presented as a set of best practice (respectively worst practice) features of virtual universal currencies in online games and will be undermined with current literature findings.

The final conclusive chapter V will sum up the key findings on the previous analysis as well as the lessons drawn in the preceding chapter. It will also provide an outlook on the topic.

II. Framework

1. Theoretical framework

When trying to grasp the topic of virtual currency in online gaming and attempting to articulate a notion of it, I pick up an economic approach at first hand. With its many connections to our real world economy - even if it is all about virtual currency, the latter is still created by people. Therefore it is obvious for this thesis to regard the business models standing behind the different forms of virtual currencies in online games. The different relations, partners and mechanisms of virtual currencies have to be investigated on and outlined in order to gain understanding of the field. This will be done by four case studies and the application of a business modeling matrix on which I will come back in the methods part in more detail. This chapter will serve to further structure the topic and give an overview on the theoretical framework.

1.1 Approach

In my thesis I will be dealing with the topic of virtual currency in online gaming. By investigating on four case studies I will point out the mechanisms of virtual currencies and will then discuss about potentials, chances and risks of those for partners being involved in the ecosystem of online gaming.

The topic of virtual currencies is of relevance: when putting it into a bigger context with what currently takes place in economy and what grand challenges the world will have to face (e.g. financial markets with different systems moving together in a globalized world) it can be considered as highly valuable. Virtual currency in online gaming might be regarded as a topic in development that will not necessarily meet huge enthusiasm throughout all kinds of different people, but it is a niche that not only bears huge potential for investors and providers, but also and foremost for interested gamers, respectively users.

This leads to my research question, which is “What are potentials, chances and risks of a universal, virtual currency for partners involved in the online gaming ecosystem?” The investigation aims on showing, in the big picture approach, on how virtual currencies can solve a few of our worlds challenges and in how far they can contribute to economic growth, changed demands of living and dealing with new models of e-commerce.

1.2 Specifics of virtual currency in online games

In the case of virtual currency in online gaming the different areas in which these currencies appear have to be regarded. This contains online games played on a computer, laptop or net book but as well and even increasingly games played on mobile gadgets via apps. There is a massive spread of those currencies. To find out which ones the big players are I rely on the publications on the various games. When regarding the accumulation of number of scientific publications and references in academic literature, economic importance and number of users of online games dealing with virtual currency, four fields stick out: massive multiplayer online role playing games (MMORPGs), applications for smart phones, social networks and platform services. When e.g. talking about MMORPGs, the search results in scientific publications covering this type of game are huge. There are various analyses of how the game is designed, deep insight is provided into the functionalities, its users and how trading, i.e. virtual online currency, is used in the game. Numerous metric studies on this kind of game and interpretative analyses can be taken into account. The careful and complete way in which investigation on games like for example World of Warcraft is done can be taken as a role model when regarding the other case studies in terms of their virtual currency.

In all case studies hard facts will be regarded. Such are number of users, amount of money that is dealt with in the game in certain time spreads or stakeholders involved in the game. During investigating on the topic more relevant aspects will be discovered and as a main aspect the platform and business models will be pointed out. The properties and hard facts on the different case studies will serve as a basis for understanding why and how virtual currencies in online games are this promising and what potentials they contain.

1.3 Processes in virtual currency

Two strings have to be considered when talking about how virtual currency can appear in online games: one is how the users proceed with virtual currencies in online gaming and the other is how the game providers proceed when establishing the virtual currencies. This is of importance as I am investigating in an economic sense. The user is in the focus - but before each process is ready to start and to happen, a stable business model has to be established to ensure the functionalities in trading with the virtual currency. Starting with the processes the game supplier goes through, we have to assume a chain that contains multi-level decisions - the selection of the type of the game e.g. multiplayer, browser game, application; followed by creation of an account; decision between free access or paid access; offer of different payment methods; giving the possibility of different levels of membership etc.

Each online game brings another set of procedures with it. The string of processes passed through by the user is partly integrated into the steps mentioned in the chain above but the motives are fundamentally different. To name the first steps of the process: selection of the game; creation of account/ avatar/ world; depending on the type of game decision on payment and/ or its amount; exchange into virtual currency etc. Here, too, we face the same challenges as in the chain on the side of the game supplier appear. The options are extremely complex and have to be regarded cautious from case to case. Furthermore a completeness of those chains is hard to be reached as the processes are subject to permanent changes due to adjustments in the ICT landscape. Nevertheless it is crucial to keep these processes in mind in order to tackle the logics of how virtual currencies are implemented in the different games. The processes help to build understanding why virtual currencies are used where they are used and where the specific differences are.

1.4 Consequences and effects

When talking about the big picture approach of virtual currencies in online gaming and considering the huge impact and economic value of e-commerce on the one hand and the instability of a lot of conventional currencies on the other hand, one could put these two aspects together and claim that virtual currencies in online games could be a solution or way out of instabilities and uncertainty of conventional currencies. Keeping this thought in mind, the observation of possible consequences puts on even more weight and can be used as a leitmotif and motivation for investigating on the topic of the thesis. Due to the newness of virtual currencies in online games, consequences of those will hardly be found in literature in an interpretative way or in experiments in a metric approach. The focus will so be put on close examination of the business approaches of the different case studies and their practicability and relevance for the world economy.

Putting the parts of this chapter together, the main issues will be focused around the case studies, how the virtual currencies work in those explicit examples and how the users and other actors such as the providers of the games or banks are involved into virtual currencies in online games. I will put a strong focus on chances of virtual online currency and on the enhancement on the research already made on the topic.

2. Basic terms and definitions

Before going into the depth of the topic of virtual currency in online gaming by explaining the methods in use and then analysing the case studies introduced briefly already, I will highlight the most important terms that will be used intensely throughout this thesis. It is crucial to give a short insight on the various types of virtual currencies and how the expression will be treated and should be understood in the following explanation. Furthermore, an overview will be given on the field of online gaming. For online games, being a rapidly growing sector, it is necessary to capture the current state. As a third and last part of this chapter, a brief sketch on the legal and governmental framework of virtual currencies will be given. This will take place on the field of virtual currencies itself, but also in relation to online gaming. For the sake of clarification and common understanding, I will start with the two main terms.

2.1 Virtual currency

In order to be able to adequately explain the term virtual currencies a current release by the European Central Bank will serve as a basis. This report puts together the most actual findings on the topic and makes an approach to clarify the term and the reach of virtual currency itself in e-economy as well as in the real world. The European Central Bank money matrix classifies virtual currency as a means of exchange that has been established within a virtual community. This money is controlled by the developers of this community and is accepted among all members of the virtual community.⁸ In figure 1 it is shown, where virtual currency can be settled in relation to conventional currency: the virtual currency finds itself in the digital world with an unregulated legal status. This clearly distinguishes it from e.g. e-money that is digital, too, but legally regulated.

Figure 1. European Central Bank money matrix (2012)

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To further classify the characteristics of virtual currency, two ways of obtaining the virtual currency can be distinguished - one is by exchanging conventional money into the particular virtual currency by an exchange rate that has been set beforehand. The other way is to gain virtual currency in a rather playful mode by completing tasks - like filling out surveys, writing feedback reports on games or by accepting additional in game advertisement which is rewarded with the virtual currency in return. These two superior classifications are crucial in understanding revenue models of the case studies that will be investigated in the next main chapter. To further deepen the understanding for what is called virtual currency schemes by the European Central Bank, three main distinctions are made:

(1) Closed virtual currency schemes
(2) Virtual currency schemes with unidirectional flow
(3) Virtual currency schemes with bidirectional flow

Figure 2 shows the directional of the flows and its outcomes.

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Figure 2. Types of virtual currency schemes

For dealing with the topic of the thesis, these definitions should be a solid basis for understanding the typology of virtual currency and for investigating on the case studies. To push the efforts already made on the topic even further, it will be of special interest if these schemes are sufficient to grasp the field of virtual currency in online gaming.

2.2 Online gaming

As mentioned in the introductory note of this chapter, the field of online gaming is a rapidly growing sector with changing developments each moment. Therefore it is only possible to give a reflection of current categories of online gaming. A necessary precondition, brought to us with the word online is the connection to the internet that has to be established whenever playing the game. This connection enables the user to experience the immediate interaction that makes the games unique and thus creates the games special value for the player. When virtual currency comes into play, the online connection is crucial.

There are four main types of online games:

(1) Single player online games
(2) Multiplayer online games
(3) Massively multiplayer online games (MMOGS)
(4) Social network games⁹

The first three definitions describe the amount of users involved in the game and the possibility to evolve the game state - from one player in single player online games to millions in MMOGS¹⁰, from the access over a website to the possibility of developing whole worlds within the games. The fourth type that can be found in social networks like e.g. Facebook¹¹ describes games embedded in the social network environment. Of course this categorisation of online gaming can only touch the margins of a description. To adequately grasp the characteristics, an investigation has to be made from case to case. In the proceeding of this thesis we will see e.g. mixed forms that appear not only in the environment of social networks but also as applications for mobile phones. These applications, too, require online access and might have the same, less or additional features as the version played on a PC, laptop or netbook. As the categories listed above originally refer to the latter mentioned, I would like to broaden the description to any (mobile) device that allows access to the internet and supports playing online games. The number of games played on mobile devices is increasing on a day to day basis when considering the downloading rate of game applications. Therefore, it is even necessary to extend the types of online games to the whole spectrum of (mobile) online devices. All games operate on different platforms. Therefore a specific description of technical aspects has to be made on an individual basis.

2.3 Governmental and legal framework

In order to understand the various types of virtual currencies in online gaming and their impact and connection on and with economy, as it will be shown in the following chapters, it is essential to capture the current state of the topic within a governmental and legal framework. It is not possible to give an expert’s report as the topic is still in its infancy concerning framing laws and regulations. So far, only a few recent publications by governmental or federal institutions try to approach virtual currency in online gaming. One we already encountered is the report on virtual currency schemes by the European Central Bank. In its conclusion, the report admits that virtual currency schemes “are not often bound to a specific country or currency area, which complicates law making, regulating and law enforcing.”¹² In a 2008 publication by Duranske on Virtual Law the touch points of virtual worlds with real world issues are listed in the table of contents. Here, we can already see how strong the relations between real and virtual worlds are. Virtual worlds are affected by the areas of property law, contract law, intelligent property law, civil procedure, tort law, criminal law, privacy law, security law and finally tax law.¹³ This strong interconnectedness makes it even more difficult to figure out a clear framework. At the same time it shows how close real and virtual worlds are and that due to the quick upcoming of virtual currencies more work has to be done on regulating it. To bring up a third and for this part last source on the governmental and legal framework: an article in Paris Tech Review lists the concerns arising from the upcoming of virtual currencies - such as tax issues, problems of speculations and bubbles, money laundering as well as twilight zones that affect third party stakeholders involved in online games¹⁴, e.g. Gold farming¹⁵, that will be picked up when investigation on World of Warcraft in the first case study. The article also reports about one intervention of the Chinese government on the rapid growth of a virtual currency, the Q coin, in 2007. There was a law set up to ban virtual currencies with flexible exchange rates in order to protect the Yuan. So far, this was one of the very few governmental actions on virtual currencies.

3. Methodology

When approaching the topic of virtual currencies in online games from an economic point of view, it is important to select methods that help to reveal the economic core of the topic and to gain an access to it and its mechanisms in a rather matter-of-fact way. As discussed already in the previous chapters, my focus lies on the platform types and business models forming different virtual currencies in online games and to establish the potentials, chances and risks of those for the partners involved in the online gaming ecosystem.

The investigation will contain two steps. First of all, I will take four case studies into account on which I will investigate from different parameters. To give a solid basis for this investigation an overview on each case will be given and the platform type will be outlined. In a second step I will draw the conclusions of these findings and interpret them in regard to my research question with the support of the selected literature.

The method to use is case studies because these cases give deep understanding on organizational processes “because of the rich data collection in context”¹⁶. This method is ideal to gain the necessary overview and insights on the topic. The case studies were finally chosen under discussion with the supervisors of this master thesis. The explicit choice of the cases will be explained in the next paragraph.

3.1 Selection of case studies

The main work of the thesis will be done through the investigation on four case studies - i.e. World of Warcraft Gold, Pocket Change, Facebook credits and Game Coins. The reason for choosing these explicit cases lies in the various fields of virtual economy and therefore virtual currency on which they operate. Furthermore, they all got different backgrounds concerning their historical platform development and originate from different disciplines what makes it even more interesting.

Starting with World of Warcraft (WoW) one can argue that this MMORPG is one of the most popular and deeply established online games with a widespread and worldwide user base. With a high amount of 9 million players of which each pays a monthly subscription fee that allows playing the game, it serves as a role model on the trade and exchange of virtual currencies.¹⁷ Additionally World of Warcraft players can operate with Gold farming a so called third party online gaming service. It is a business that is used for the professional development of avatars via outsourced companies, mostly based in Asia. Players that e.g. do not have the time to develop their character in game on a legal basis can opt for this possibility. Due to the relevance of that third party online gaming services, scientific releases revealing the practices of the companies will be taken into account in this work, too.

The application Pocket Change was developed in 2012. From the beginning it allowed users of the application to earn rewards in different types of application based games like Tiny Wings, Doodle Jump or Cut the Rope.¹⁸ Immediately after playing successfully, users get the opportunity to change the points earned into real, physical goods. It is possible, for example, to change the points into a voucher for stores or to go to the Pocket Change shopping page and spend the currency gained on physical goods, no matter from which area.¹⁹ The application Pocket Change, as mentioned above, went public in 2012 showing an innovative business model which is worth analyzing. By the time of the analysis on Pocket Change, the applications reward system has been expanded to hotel bookings, uploading photos, making purchases, inviting friends and many other actions on mobile websites. For the case study in this thesis, though, it will be regarded in the state of March 2013. Hence, applications play an outstandingly important role in the online gaming area. A recent report by the application enterprise Flurry states that “[...] the U.S. consumer spends an average of 2 hours and 38 minutes per day on smart phones and tablets. 80% of that time (2 hours and 7 minutes) is spent inside apps” and “of all the apps consumers use, games command more than 40% of all time spent.”²⁰

The third case study is on Facebook credits. Not only that Facebook itself is a highly interesting enterprise in all of its fields of operation. It would deserve to be investigated separately on its virtual currency but such an extensive analysis is out of the scope of this thesis. The special interest for this research is based on the fact that Facebook tried to establish a universal, virtual currency starting in 2009. Its aim was to compete with companies like PayPal that offer an online payment service and operate as an external provider for online money transactions. In 2012 the establishment of a universal virtual Facebook currency was cancelled.²¹ The reasons for the close-down of this approach were not named by Facebook. There was a rather quiet return to the former system that is based on standard models. Overall an interesting case of investigation as the social network itself affects many people’s lives on a daily basis - irrespective of them being gamers or not. Still - in September 2012 the amount of Facebook users playing games was at 251million, which is a quarter of the overall amount of Facebook users.²² With this number in mind Facebook credits become even more relevant.

The fourth and final case, which was in comparison to the other case studies rather difficult to point out, is Game Coins. As it is my aim to cover four fields of virtual currencies in online gaming I searched for something that can be regarded equally in terms of appearance and public awareness to the first three cases that are already strong players. In case of virtual currency platforms there are many providers offering similar services. But some seem to be rather dubious in terms of their presentation, fields of operation and legal aspects. Game Coins is a platform that allows its subscribers to earn or purchase virtual currencies or goods and spend and use these in their various games. Virtual money can be earned by e.g. writing about games, watching a video or completing missions in the games. The virtual currency is already integrated into various games.²³ The platform is - in contrast to Pocket Change - only available on PC.

Taking these four into account on the basis of what was already mentioned in the theoretical framework, four important fields of virtual currencies in online games are covered: the MMORPGs, the mobile applications, the social networks and the virtual currency marketplace. Due to the accumulation of numbers of scientific publications and references in academic literature, their economic importance and the numbers of users of these four, the case studies pointed out can be considered to display a complete overview of virtual currencies in online gaming.

3.2 Business modeling matrix

By investigating on the four case studies on the basis of the business modeling cycle provided by studies of Ballon and Breat, each case will be tackled in a four dimension way: organization design, technology design, service design and finance design.²⁴

Figure 3. Business modeling cycle according to Ballon and Braet (2007)

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The different phases can be described as follows:

Organization design phase: Definition of business scope - who are the customers that try to be reached and how is this done, identification of competences and taking of business governance decisions.

Technology design phase: Definition of the technological scope - what is the technical design and how is it achieved, identification of systemic competences and decisions on IT governance

Service design phase: Value proposition towards end user in terms of delivery and sales channels, their flexibility and the channels bottlenecks and effect on daily operations.

Financial design phase: Fixing the financial perquisites, formalization in binding contracts - description of benefits and responsibilities, eventually different forms of financial exchange.

These clear classifications lead to the possibility to draw comparisons between the different cases and point out conclusions that lead us to the question of potentials, chances and risks. Organization and technology design phases refer to the control parameters, whereas service and financial design phases can be classified as value parameters. Control parameters describe all technical aspects that are crucial for operating the platform and how the relationships between different actors are. Value parameters contain all actions that add value to the platform - be it for the operator or the user.

Each case will be investigated upon these key attributes that were established and adapted in this following model of the business modeling matrix that goes back to the revisited business modeling by Ballon.²⁵ To further structure the underlying aspects of each design phase, the control and value parameters are defined as follows:

Figure 4. Selected business model design parameters by Ballon (2007)

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The parameters will be analysed with the support of the following figure that outlines the possible trade-offs of each parameter:

Figure 5. Business model design matrix trade-offs by Ballon (2007)

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3.3 Platform types

In order to be able to grasp the different actors involved in virtual currencies in online gaming and to define their roles properly, it is essential to emphasize the underlying structure of each case − respectively business company − that will be investigated on. To do so and before starting to apply the business modeling matrix and its parameters to dig deeper into the functionalities of the cases, a typology of platform types and gatekeeper roles by Ballon will be applied.²⁶ Although the paper focuses on the mobile communications industry, the platform models introduced can be adopted to the cases named already. It will be fruitful in order to manage the different levels of interaction between its stakeholders:

“A central feature of ICT products, services and systems is their increasing complexity and, as a consequence, the division of labour and knowledge in designing, producing and providing them (Baldwin & Clark, 2000). Over the last decades, both strategic management scholars and information and communication studies scholars have identified the resulting modularity in the ICT industry as one of the core subjects for research.”²⁷

The approach starts from the ontology to reveal business functions “as actors- roles relations and technical architectures as modules-functions-interfaces” and with the precondition that “some roles within a business configuration, as well as some functions in the technical architecture, carry more weight than others”²⁸.

Four models of platforms are being introduced. These are in particular:

Telco-centric platform model: Most roles in this model are performed by one real-life stakeholder. It acts as provider, service aggregator, network - and platform operator.

Device-centric platform model: The main service platform is tied together with the mobile device.

Aggregator-centric platform model: A service aggregator takes the role of the portal provider which acts independent from the mobile network operator.

Service-centric platform model: The so far theoretical model contains the management of profiles by individual service providers and is possibly exchanged by them.

When shifting the emphasis to the roles of control over assets and control over customers within these different models, a reinterpretation on the different types is done that is summed up in the following typology that shows the key characteristics of the platform models just introduced:

Figure 6. Typology of platform models by Ballon (2009)

illustration not visible in this excerpt

On the basis of this matrix and the platform types described above the value networks standing behind the companies offering the different types of virtual currencies will be systematically revealed. It will also help to highlight the value chains in the ecosystem of online gaming.

3.4 Literature

The findings from the investigation of the case studies will be supported by the selected literature. As it is all about a business approach the main work will be done with hard facts. All the information needed will be gathered by desk research. Business information will be taken from the homepages in the about or faq sections as well as in the articles covering the cases.

Due to the newness of the topic, publications such as books can rarely be taken into account, as few are available. There are very few traditional sources that should be considered like the work of Castronova, who already published a book on virtual economies in 2006. His book serves as a source of basic understanding on the topic.

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¹ MIT Technology Review (2013): Could Amazon's Virtual Currency Buy You a CoffeemakerSomeday?, 05.02.2013; http://m.technologyreview.com/news/510876/could- amazons-virtual-currency-buy-you-a-coffeemaker-someday/; last access 11.05.2013

² Castronova, Edward (2006): Synthetic Worlds. The Business and Culture of Online Games; Chicago, The University of Chicago Press

³ Ibid.; p. 2

⁴ Paris Tech Review (2011): Virtual Currencies on their way to conquer the real economy, November 22nd 2011; http://www.paristechreview.com/2011/11/22/virtual-currencies-real- economy/; last access 10.05.2013

⁵ Bitcoin (2013): Starting page; http://bitcoin.org/en/; last access 10.05.2013

⁶ Warc (2013): Time spent online increases, 09.05.2013; http://www.warc.com/LatestNews/News/Time_spent_online_increases_.news?ID=31372; last access 11.05.2013

⁷ According to analysts of ScreendDigest the market for games in social networks grew to 639 million Dollars in 2009. In 2008 this number was about 76 million Dollars. Original quote: “Laut den Analysten von ScreenDigest wuchs der Markt für Spiele in sozialen Netzwerken 2009 auf 639 Millionen Dollar (496 Millionen Euro). 2008 wären es noch 76 Millionen Dollar gewesen.“ Bube, Lars (2011): Wenn Spielgeld wertvoll wird, February 18th 2011; http://www.crn.de/software/artikel-88953-5.html, p. 5; last access 11.05.2013

⁸ European Central Bank (2012): Virtual Currency Schemes, October 2012; http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf; p. 12, 14

⁹ Committee on Modelling, Simulation, and Games, National Research Council of the National Academies (2011): The rise of games and high-performance computing modelling and simulation; The national academic press, Washington D.C.; p. 109

¹⁰ MMOGS is used in the original source. Another common expression is the abbreviation

MMORPGs that stands for ‘Massive Multiplayer Online Role-Playing Games’. It describes the same type of game - in a technical sense - but it puts more emphasize on the interaction between the gamers and groups of gamers. In the following chapters the latter abbreviation will be used as the case of investigation will be on World of Warcraft which is one of the most successful MMORPGs and should therefore be adequately applied.

¹¹ "Founded in 2004, Facebook’s mission is to give people the power to share and make the world more open and connected. People use Facebook to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them." Facebook (2012): Key Facts; http://newsroom.fb.com/Key-Facts; last access 01.07.2013

¹² European Central Bank (2012): Virtual Currency Schemes, October 2012; http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf; p. 48

¹³ Duranske, Benjamin Tyssen (2008): Virtual Law. Navigating the legal landscape of virtual worlds; ABA Publishing, Chicago; p. vii-x

¹⁴ Paris Tech Review (2011): Virtual Currencies on their way to conquer the real economy, November 22nd 2011; http://www.paristechreview.com/2011/11/22/virtual-currencies-real- economy/; last access 18.02.2013

¹⁵ "The third-party online gaming services segment consists mainly of activities known as “gold farming” and “powerleveling”. Both are essentially services where an online game player hires someone else to play the game on their behalf. They do this in order to obtain the virtual rewards of the play without having to spend the time and effort." Lehdonvirta, Vili; Emkvist, Mirko (2011): Knowledge map of the virtual economy, April 2011; www.infodev.org/en/Document.1056.pdf; p. 21

¹⁶ Hartley, Jean in Cassell, Catherine; Gillian, Symon (2004): Essential Guide to Qualitative Methods in Organizational Research; Sage Publications, London; p. 323

¹⁷ Blizzard Entertainment (2012): Alliance and Horde grow with launch of mists of PandariaTM - 04 october 2012; http://eu.blizzard.com/en-gb/company/press/pressreleases.html?id=6147208; last access 12.03.2013

¹⁸ Inside Mobile Apps (2011): Pocket Change Brings Virtual Currency Revenues to Games That Lack In-App Economies; http://www.insidemobileapps.com/2011/12/19/pocket-change-brings- virtual-currency-revenues-to-games-that-lack-in-app-economies/, 19.12.2011; last access 15.03.2013

¹⁹ Pocket Change Homepage: https://pocketchange.com/last; access 15.03.2013

²⁰ Khalaf, Simon (2013): Flurry Five-Year Report: It’s an App World. The Web Just Lives in It, 03.04.2013; http://blog.flurry.com/?Tag=Usage+Statistics; last access 30.04.2013

²¹ Facebook (2013): FAQ on Facebook credits; https://developers.Facebook.com/docs/payments/local_currency_faq/; last access 15.03.2013

²² Techcrunch (2012): ¼ of Facebook users play games, up 11% 251m this year as it fights spam and genres diversify, 25.10.2012; http://techcrunch.com/2012/10/25/Facebook-games/; last access 15.03.2013

²³ Game Coins (2013): FAQ; http://www.gamecoins.com/help/#q1; last access 15.03.2013

²⁴ Ballon, P.; Braet, O. (2007): Business Model Scenarios for Remote Management; Journal of Theoretical and Applied Electronic Commerce Research 2(3): 62-79

²⁵ Ballon, Pieter (2007): Business modelling revisited: the configuration of control and value; Inof, 9(5): 6-19

²⁶ Ballon, Pieter (2009): Platform Types and Gatekeeper Roles: The Case of the Mobile Communications Industry, Conference on Copenhagen Business School (CBS); http://www2.druid.dk/conferences/viewpaper.php?id=5952&cf=32

²⁷ Ibid: p. 3

²⁸ Ibid: p. 7