Ed Castronova: Making Gold out of Thin Air

Ed Castronova has a job that couldn’t have existed until very recently – he’s an economist of virtual worlds. His talk – “Gold from Thin Air” – is designed to surprise the audience that real money is being made online. (For those of us who’ve already spent way too much time in virtual worlds, this is less of a shock, though great to see someone this knowledgeable speaking about it.)

Castronova points out that there are 4 times as many videogamers in the US as there are golfers – doesn’t this mean we should have at least five hours a week of televised gaming coverage on TV? The average gamer is now 30 years old, and one of five people over fifty are gamers.

Videogames (sometimes) make enormous amounts of money – the launch of Halo2 made $125m on the first day – the largest opening of any media property in history. Folks are fond of comparing Hollywood and gaming software – in pure terms, the gaming industry makes slightly more money than Hollywood, though some of that money from from gaming hardware. In purely software terms, gaming grosses about $7.6b a year, while Hollywood grosses $9.5b… but Hollywood’s revenues have been flat for three years, while gaming revenues are expanding exponentially.

Castronova estimates that real money trade – people paying actually dollars, euros or yen for virtual items – is worth $100m – $1b a year. In terms of synthetic money, the trade is worth $2b – $20b. This means that the GDP per capita in one virtual world is, by his calculation, four times the GDP per capita in China.

He shows us some of the setups used by “gold farmers”, who kill the same monsters over and over again, making virtual gold which they can sell in the real world. They’re able to make about a dollar an hour doing this. Julian Dibble, a scholar of online gaming, did an experiment in gold farming on Ultima Online and discovered he could make about $47,000 a year, which is more than the median salary of school teachers in America.

We tour an auction in World of Warcraft and find an item selling for 1550 gold pieces – going into ebay to buy some gold, we can figure out that this item sells for $146 in realworld terms.

Castronova’s big point is that we need to take games more seriously – the total budget the National Science Foundation is spending to study gaming is less than one would need to release a good singleplayer game ($20m) and far less than the development costs of a multiplayer game ($75-150m). As this medium evolves and grows, we should be considering using simulations to figure out things like how to build Iraq, letting Iraquis work through agreeing on a constitution – try it a few dozen times online before we try it in the real world.

I wish Castronova had a bit more time – right at the end, he’s asking questions like “what’s real?” If online currency works the same way – or better – that real world currency, is it real? Sounds like I may need to buy his book (which he’s helpfully reminded us is attractively priced on Amazon…)