The Primacy of the Digital World

Part 1: Exploring Virtual Worlds

Source: Creative Commons

We’re in a kind of interesting transition period…generally in society and with the internet. A lot of people still think of the digital world as kind of second-tier, second class to the offline world. And we hear this even in the language we use — commerce (which is offline commerce) and then there is e-commerce… Whenever you have an ‘e’ modifier, that’s a subordinate world: e-mail, e-commerce, the fact that we say ‘digital goods’ vs ‘goods’, e-sports.

I think we’re in this transition period. Twenty years from now it’s going to be obvious that the digital world is in many ways primary. It’s where you meet friends, earn a living…you do all these important things. […]

I think it is just a matter of time when we will have almost a basic right that you can own things in the digital world.

Chris Dixon, partner at Andreessen Horowitz, 2018

How the world of bits is different from the world of atoms has always been an interest of mine, both as an academic and individual. My academic field is strategy — business, corporate and international. Nowadays it is impossible to teach strategy without an insight into how digital giants such as Facebook, Apple, Google and Amazon have gained their market dominance and customer loyalty. The strategy field has recently moved from a focus on the value chain-based physical world of product-based offerings to digital platforms with network effects. And yet listening to Chris Dixon’s podcast on Unchainedhad a surge of new questions rushing through my head, including the most important question of all — is our society indeed at the point of embracing the digital world as primary?

Why is this an important question? Technological change is inevitable, we as a society need to work with it. If the transition is happening now, then there is a pressing need to re-adjust our thinking. From what I have seen so far in some critical areas of human activity, this adjustment is not happening… and this is alarming. As a university professor, I can say with a high level of confidence that many higher education institutions will be extinct in a decade or even less. Or take some less progressive regulators whose only reaction to a new technology such as cryptocurrencies is to prohibit them or make them hard to use. As Kevin Kelly, a prominent futurist, puts it, “banning the inevitable usually backfires”.

This is the first article in a series where I will try to explore the question of the primacy of the digital world, while supporting intuitions with some hard data and research.

Internet Trends and Virtual Worlds

When last year Mary Meeker, General Partner at KPBC, spent 70 slides on gaming and e-sports in her much anticipated Internet Trends Report 2017, I was mildly amused… I’m not a gamer and prefer physical strain to virtual fatigue.

This year, I am paying attention. Gaming and e-sports seem to be preparing our society for human-computer interaction, and many famous tech entrepreneurs, including Elon Musk and Vitalik Buterin, say that gaming is how they got into programming. FIFA — football is one of the few sports that, being a European, I mildly care about — is hosting eWorldCup Championships. The Olympic Channel is also looking at engaging with the younger audience through e-sports.

Gaming has already become a $100B business, with 2.6 billion gamers in 2017 (vs 100 million in 1995), growing at 9% YoY. The 2017 League of Legends mid-season tournament was watched by an epic 360 million viewers. Key multiplayer franchises — World of Warcraft, Diablo, Starcraft and Overwatch — enjoyed some 40M plus monthly average users. Contrary to what you may believe, it’s video gaming, not Facebook, Snapchat, not even Instagram (!), that leads the way as the most engaging form of social networking, where many of us spend on average 50 minutes per day.

What People and Businesses Do in Virtual Worlds

What people and businesses do in the physical world should be no mystery to anyone… But what does one do in Virtual Worlds (VWs), apart from, obviously, playing games for entertainment? As it turns out, a LOT more… and many of the participants in these worlds spend more time in virtual worlds than they do in real life.

Source: Creative Commons

Suppose you a resident of Second Life (SL), one of the most popular social VW, boasting some 2 billion user creations. You can interact with places, objects and other avatars; you are free to explore the world, meet other residents, socialize and trade goods and services. There is a view that early VWs were all about social networking before “social networks”. Even though SL, like other VWs, is artificially pre-designed, you will be able to engage in meaningful joint activities, such as the event organised by two avatarswho discovered they had a passion for peace. PeaceFest — “a global, interfaith, cross-cultural effort to create lasting peace through mobilizing dialogue, support and learning with real life peace organizations” — became one of the most effective virtual fund-raising events, attracting between 8,000 to 10,000 avatars, and raising 870,000 Linden dollars from nearly 3,000 users from all over the world. This money was then donated to 10 real world charitable organizations, including UNICEF and Amnesty International. Competitive games like World of Warcraft also require cooperation of several players who act together to overcome certain obstacles, and manage skills and relationships. So just like in ‘real’ worlds, you are not a passive recipient of the environment, but can shape and even create the world you inhabit.

It may come as a surprise, as it certainly did to me, that the Virtual World economy (VE) is a multibillion-dollar industry where virtual goods are sold for virtual and real money. Back in 2014 World of Warcraft had the GDP larger than that of Samoa. Players are willing to pay for avatars, power-ups, land, treasure islands, asteroids, night clubs and other game items. Digital assets are protected by IP laws. In 2010, Jon Jacobs surprised everyone when he sold his Club Neverdie, one of the most sought-after properties in the VW game Entropia Universe, for a record sum of $635,000. At that time, it was the largest virtual transaction. Jacobs had bought the asteroid on which the club was located in 2005 for $100,000 after taking out a mortgage on his real-life house. If you are into real estate, on SL you can buy an entire private region for $350. As in real world, prices fluctuate depending on supply and demand, and some use cases even attract VAT. Sinespace, however, is undercutting SL’s pricing with a top-tier land package running at $54 per month. If equities investment and trading is something that attracts you more, then you can buy and sell shares of virtual companies on SL’s virtual stock exchange (established in 2011). One can trade with in-world currencies or real money,bringing currency into and from a virtual world. This creates a dual money trading economy where real money flows from the real world into the virtual world and vice-versa.

Real-world businesses have found VE opportunities very promising. For example, in 2014 there were some 50 private real estate management companies in SL, which provided virtual properties for rent and sale. These companies varied in size, ranging from individual SL residents to real world companies holding dozens of privately owned islands in SL. Companies as diverse as Dell, American Apparel, Nissan, Pontiac and H&R Block have tried their luck in VE, with varying success. Banks started to find their way into SL since 2008 to offer services similar to what they do in the real world, such as offering interest rates on deposits. A particularly intriguing case is GinKo, a virtual bank which collapsed because it was not able to pay the interest rate promised to the depositors. Linden Labs (SL’s creator) banned this virtual bank alongside all other banking activities. How refreshing to see that the VW is sometimes more progressive than the real world!

Source: Creative Commons

You can also test your entrepreneurial talents in the VE economy. The conditions and individual characteristics leading to entrepreneurship in VWs do not seem to be all that different from those in real life. Some VWs open up opportunities leading to entrepreneurial behaviours in the ‘real’ world as well as further opportunities in the virtual world. Back in 2006 Anshe Chung (a SL resident) became the first real life millionaire to have amassed her wealth purely from SL economy. Starting with an initial investment of under US$10, in two and a half years she accumulated virtual property, landscape, and resorts, each of which she sold and rented to SL residents. Peter Gray, a senior spokesman for Linden Labs, describes the in-world economy:

People are making money renting land, selling avatar fashion accessories, giving musical performances, providing services like hosting events, and for quite a few people, this is their primary source of income.”

The last part of his quote — that the VE can be a primary source of income — is particularly telling.

The tipping point?

Are we at the tipping point, as far as VWs are concerned? It is fair to say that Virtual Worlds are upon us. They embody a microcosm of human activity, where people can take on identities, create virtual communities, learn a new skill, tell stories, attract customers, build things, own and sell assets, and set up companies. It seems plausible that living a part of one’s life in cyberspace can eventually become common practice, as it has become already for millions of game players.

A second observation is that the boundaries between the two worlds are becoming increasingly more permeable. Surely, game players can leave behind in the real world some of their attitudes, beliefs, insecurities, limitations, disabilities and physical characteristics to explore a completely new digital environment. And yet I tend to think that these two worlds — the real one and the virtual one — are more complementary than binary. Virtual worlds enable us to be both/and: both inside and outside, both player and avatar, both character and person. Real money trading and in-game IP protection of digital assets are symptomatic of the blurred real-virtual boundaries.

Many standard gaming tools have already penetrated our real worlds. They are useful in optimising learning and user engagement through, for example, dynamic difficulty adjustment and solving puzzles. In-game player analytics (dashboards) are increasingly common in enterprise and consumer products and services. Reputations and ranking, digital badges for achievement, interactive storytelling and learning, messaging — all of them have become foundational for modern internet services. Things believed to be improbable in the physical world — take simulation of cities, together with their power grids and web networks — can now be done in VWs.

We’re not there yet…but the unfolding transition can’t be any clearer.