Why do people spend billions on virtual clothes?
Loyal virtual communities are putting their money where their mouths are
In our previous article, we mused that humanity is inching towards a world where reality and virtual reality co-exist. Perhaps the biggest indicator that human beings are ready for life in the virtual world is the fact that virtual game assets have real world value — a lot of it. Here are the revenue figures for some of the top 10 most popular video games in 2018 (Source: Superdata):
- Fortnite: $2.4 billion
- League of Legends: $1.4 billion
- Pokemon Go: $1.3 billion
- PUBG: $1 billion
This puts Fortnite on the same level as some of the highest-grossing films ever made! These games, as well as every other game in the top 10, are free-to-play (F2P), making money off player purchases of virtual items, currency, or other virtual features.
This is not a new phenomenon — gamers have been spending real money on virtual assets since the days of the first MMORPGs in the early 2000s, and even trading and purchasing these items on the secondary market. A virtual axe in Diablo 3 sold for $16,000 in 2012. World of Warcraft, which was released in 2004, even had an entire sub-industry located in China which farmed game items and currency, sold them to online retailers, and help players to complete quests and level up their characters in exchange for cold, hard cash.
Yet, many non-gamers find it hard to understand why gamers spend such significant amounts of money on virtual items. Much of their confusion stems from their belief that since these items don’t actually physically exist, gamers who purchase them don’t really own these items.
These critics are not actually wrong. Gamers don’t actually own the virtual game items that they purchase from game developers, but they still spend tens of billions of dollars on these virtual items anyway. From the gamers’ point of view, it makes sense to spend money on items which they like and can use in a game they spend most of their free time on. In this post, we will investigate why gamers buy virtual game items, as well as the implications of this phenomenon.
Business Model: Free-to-play Opens the Door for Virtual Item Economy
To understand why people spend money on virtual items, it is necessary to first understand the context surrounding the sale of game items: the free-to-play (F2P) business model. F2P has become the de facto business model for games over the past 10 years — F2P games brought in almost $90 billion in revenue in 2018, more than 80% of the $110 billion in 2018 revenue of the digital games industry.
In contrast to traditional pay-to-play models where gamers pay the full price of the game up front, F2P games give players access to a significant portion of the entire game content for free. F2P allows game developers to earn recurring income from players as opposed to just the one-time upfront price of the game — and the numbers back it up. The average price of a traditional game ranged from $50 — $70: yet, the average user on the F2P battle royale sensation Fortnite has already spent $85 so far at a much larger user base.
There are several variations of F2P, but the most common ones are freemium models where players are given access to the entire game for free, but have to either pay for additional premium content or in-game items, or deal with the presence of advertisements within the game. The movement towards free games has resulted in an increased emphasis on promoting virtual items and incorporating virtual items into the game experience since these items are now the main source of revenue for the game developer.
That’s all fine and dandy for the game developer, but why exactly do gamers bite? In other words, we return to the original question: why do gamers spend lots of money on virtual game items? To answer this question, we must first understand the different kinds of items in video games.
In general, there are two types of virtual items in games:
- Functional items: items which directly affect gameplay and player performance
- Cosmetic items: items which have no direct impact on performance or gameplay whatsoever
Functional Items
Functional items are game items which have direct utility by providing in-game boosts to performance or by speeding up a boring game process. In other words, functional items provide concrete benefits to the user, mainly to save time and to help them perform better in the game.
To Play Better
In our previous post, we talked about the three main reasons why people play video games — as an escape, as a social outlet, and as an avenue for competition and achieving competence.
Players who purchase functional items are hopeful that these items can boost their performance — a competitive outlet. In that sense, purchasing in-game performance items is no different to purchasing accessories for whatever other hobbies one might be pursuing.
Opportunity Cost of Time Spent / To Save Time
In many games, players are forced to “grind”. Grinding refers to repetitive, generally boring, activities which players need to do in order to level up, to reach the next level of a game, or to unlock a special item in the game. Grinding is time-consuming and boring. This makes it a chore for most players who would prefer to just skip to the exciting parts of the game; there is an entire secondary industry devoted to helping players grind in exchange for real world cash starting from as far back as the mid-2000s.
In the popular tower defense game Clash Royale, players collect character cards whose levels are key to winning the game. Character cards can be obtained by unlocking treasure chests which can take anywhere from 3 to 12 hours to unlock. Players can either wait long hours for the chests to unlock so they can get their cards, or they can purchase gems to speed up the chest unlocking process or to purchase specific cards to level up.
In this context, the gem is a functional item which speeds up gameplay. Think of it as a Disneyland fast pass which allows you to ride the roller coaster you want without waiting hours in line. This makes sense from an economic perspective: if the player is already committed to playing the game, then if the opportunity cost of grinding is more than the real world price of the game item, it makes more sense to buy the game item.
Cosmetic Items
Cosmetic items refer to items which do not provide any performance boosts to the user. The most popular cosmetic items are skins. Skins are items which change the appearance of an object in the game. In the context of avatars, skins refer to virtual clothes which players can use to dress up their characters, but skins also exist for other items such as guns in Counter Strike: Global Offensive (CSGO). An entire subculture has emerged based on video game skins, and derivative activities such as skin gambling, have even evolved from it.
Other examples of cosmetic items include features such as unlocking a dance move on your avatar in Fortnite, or unlocking certain celebrations in FIFA Ultimate Team.
The arguments made for purchasing functional items cannot be made for cosmetic game items which have no functional purpose. Since they have no direct utility, the only possible purpose of cosmetic items are to help players to differentiate themselves from other players. The question thus simplifies to this: why are players willing to spend money on virtual items to distinguish themselves from other players even in the virtual realm?
Time Spent in the Game — A Metric for Emotional Investment
The lack of functionality of these skins allow us to more cleanly distill the essence of why people buy virtual game items. The fact that players are willing to spend large sums of money signals that this — the game world and the community which accompanies it — is something that they are heavily emotionally invested in. And the reason they are so invested in these games boils down to the amount of time spent playing these games: the more time spent spent playing a video game, the more emotionally attached a player will be to the video game. In fact, this statement is true in general: the more time you spend on something or with something or somebody, the more emotionally attached you will be to those objects or communities (This line of reasoning takes into account the fact that if you don’t like someone or something — the video game, for example — then you will not end up spending time on it).
This idea extends to all aspects of the game, such as video game items or the community associated with the game. Many players cite attachments to their virtual possessions, and even more cite attachments to these communities as reasons for enjoying video games. In fact, some players are attached to these virtual communities as much as, if not more than, the communities they belong to in reality. Therefore, it matters to them how they look and how they are perceived by other members of the game.
The idea that social reasons are driving the sales of cosmetic game items is supported by findings that people who play with friends buy more skins than people who play alone. The fact that rare and limited edition skins are highly sought (rare League of Legends skins sell for as much as hundreds of dollars) after serve as further evidence to support this notion.
The bottom line is that video games have managed to build up vibrant virtual communities which rival or exceed the strength of communities in real life. Gamers put great stock on their relationships and their own standing in virtual communities. Therefore their subsequent purchases of cosmetic in-game items are simply a natural consequence.
This helps us to understand other reasons for the purchase of functional items as well — for status in the community. Having a powerful item in the game can make you the subject of envy and attention of your in-game community, just like that popular kid at school who had the coolest toys.
Finally, it’s important to note that while gamers might purchase cosmetic virtual items for reasons associated with their emotional attachment to the game community, this would not be possible without solid gameplay. At the end of the day, the game has to be of sufficiently high quality to draw a large core of users, from which a strong community can be built.
In our previous post, we asserted that video games serve as a Trojan horse for the adoption of the virtual world. The phenomenon of a thriving video game cosmetic items market imply the development of sophisticated virtual communities and on a higher level, a large scale movement towards living in virtual realities which can provide new life opportunities for players. Through video games, players have become comfortable with socializing in virtual worlds and communities. So what’s standing in the way of further adoption of virtual reality?
Roadblocks to Virtual Adoption
We posit that there are only two factors which stand between us and a world where the real and the virtual are indistinguishable.
- Visceral experience
- True ownership of virtual assets, and the rights that accompany it
Visceral Experience
As human beings, we perceive and make sense of the world around us through our senses. Despite advancements made in VR and AR, we still have a way to go before we can reach the levels of simulation achieved by the equipment portrayed in popular media such as movies like The Matrix, Ready Player One, or the manga/anime Sword Art Online (SAO). The sensory experience is where the largest gap exists between the virtual world and reality. This aspect of development is out of our control: the speed of progress is dependent on engineers working to advance this technology.
True Ownership of Digital Assets
The other obstacle to virtual adoption is the restrictions on virtual items imposed by game developers. To truly inhabit the virtual world, players must be able to monetize their efforts and make a living through the virtual world. This means that they must be able to easily convert their virtual possessions and services offered to fiat. This would allow virtual worlds to become not just an escape, but a solution and a tool to level socio-economic inequality.
As it stands, game developers police the borders of the virtual worlds they create by restricting the movement and supply of in-game items and currencies, creating a walled garden which greatly constricts the flow of value between the game economy and the wider economy. In this walled garden, players are constrained by the rules set by the game developer, which in essence deprives virtual items of familiar key properties that real items possess, such as true scarcity (a fixed supply) or true ownership (the ability to do whatever you want with your item). In video game end user license agreements (EULAs), game developers essentially own the virtual goods they sell to players. Practically speaking, these restrictions on ownership and transfer of virtual items limit the ability of individuals to reap the benefits associated with their in-game activities and possessions in the real world, consequently restricting interaction and dependence on the virtual world, hindering its adoption.
This is profoundly unfair for players who invest real money and time into the game world. Game developers enjoy the ‘benefits of virtual goods’ ownership and control in the virtual environment through accumulation of players’ investments and contributions without the obligation to provide fair remuneration for such contributions or without any liability’. Although there are legal precedents which indicate that such EULAs are unfair and that the terms of service provided are “unconscionable”, not much has changed in how games are designed.
Why do game developers create walled gardens which restrict virtual asset transfers? Why don’t we own the virtual items we buy? And why are we, as gamers, okay with this situation? These are some questions we will explore in our next post.
