Video games went from virtual currency to real money, and it changed the business

This week is E3, the huge video game trade show. People spent around $138 billion on games in 2018 according to various analysts. The game industry has been growing in double digits for a decade. Part of the reason is that way more people are playing games, mostly thanks to mobile gaming. People are also spending a lot more money in games on virtual currencies and virtual goods, like digital outfits called skins, upgrades and accessories.

Host Molly Wood talked with Vili Lehdonvirta, an economic sociologist at the Oxford Internet Institute who studies digital economies. He said for a long time games had their own complex economies that were entirely virtual, and then a big shift happened. The following is an edited transcript of their conversation.

Vili Lehdonvirta: In the 1990s the first massively multiplayer online role playing games … gave rise to this phenomena of players trading virtual goods inside the game for real money. So you could buy a virtual castle for something like a $1,000. The designers of the games just expected those virtual real estates to remain virtual, but people started trading it for real money. And now we are in a situation where this sort of a virtual item is, obviously, a very major source of revenue. Conversely, we’re moving away from the more complex, player-to-player virtual economies.

We found that people spend real money on virtual items for the very same reasons as they spend real money on any items, branded handbags and what not.

Molly Wood: It’s not without controversy though, right?

Lehdonvirta: Yes. So there was controversy around pay-to-win, which means if you’re used to the idea that after you’ve paid for entry into the game, then everyone plays on equal merits. Then this idea that you could pay to get some kind of an advantage in the game was very controversial because now, suddenly, you have the real world economic inequality seeping into this game economy, which was meant to be a sort of escape for many people.

Wood: A lot of the incentives now around these sort of basic economic decisions — buy this and you will look cooler — have a lot to do with status.

Lehdonvirta: Yes, I think that’s absolutely accurate. So originally in the early noughties when people started paying money for virtual items, clothes for virtual characters, there were a lot of people wondering, “Why would anyone pay real money for something as useless as that?” Then we studied that topic, and we found that people spend real money on virtual items for the very same reasons as they spend real money on any items, branded handbags and what not. They are symbols and markers that are used in showing status, but also membership of a particular group or community or subculture or drawing a distinction to other people. These are the main drivers of consumer behavior whether in the virtual economy or outside of it.

Wood: Now it has become an insult in the Fortnite world, and in the real world also, to refer to someone as a default.

Lehdonvirta: Yes, I suppose. Although, Normcore has been one fashion trend. Could be a statement in itself.

Wood: Reclaim your digital identity by saying, “I’m not default, I’m Normcore.” That’s amazing. I hope that that happens. Is it a little disappointing? I may be showing my age, but it does feel like kind of a bummer that those of us who grew up in those early days … [of] these incredibly complex digital economies that were so beautifully constructed and well thought out. It’s like “The Lord of the Rings” versus Nickelback or something. It just feels a little disappointing that the economics are so simplistic now, so blunt force.

Lehdonvirta: Well, the number of people playing games, playing digital games, has increased, so those more complex and evolved virtual economies haven’t really gone anywhere. They’re still there. They’re just for certain audiences. Then you have bigger audiences that are enjoying experiences that are more accessible for people who don’t necessarily have so much, for instance, time to invest into grappling with a complex virtual economy. In that sense, I’m not disappointed. The potentially positive thing about this whole trend around spending more money on virtual goods and virtual currencies is that the environmental impact of virtual consumption could potentially be very low. You can purchase new items and discard your old virtual boots or what not, and you’re not increasing your carbon footprint in any way. The only thing is if we keep upgrading our hardware at the pace we’re upgrading, obviously that has a big carbon footprint. But the game content itself, you can spend any amount of money on game content without necessarily increasing your carbon footprint. I think that’s quite interesting. The more virtual we can turn our economy, in that sense, the more we can potentially decouple consumption from environmental impacts.

Related links: more insight from Molly Wood

Generally speaking, gamers are fine with in-game microtransactions when the game is free or cheap and the purchases are mostly cosmetic. But research shows most people don’t want to have to pay to win.

There’s a good analysis from IntelligentEconomist.com about the history of microtransactions in games and how it’s still controversial, especially when companies want you to pay full price for a console game, which for you non-gamers is like $60 to $80 and then ask you to spend more money on things like loot boxes, which are full of randomly generated digital goods. In fact, loot boxes got so controversial that they’re banned in some countries as basically gambling.

In 2017, Electronic Arts actually pulled microtransactions out of its game Star Wars Battlefront II after fans complained that they had to spend another $80 to unlock a character like Darth Vader or spend at least 40 hours playing. That was the case for each of the characters that you wanted to unlock. It’s a delicate balance. Fans don’t like the double-dip but, on the other hand, some analysts think that removing microtransactions is partly why Battlefront II actually didn’t make as much money as investors had hoped.

But Investopedia reports that the two games that make the most money off microtransactions are League of Legends and Fortnite, both of which are free to download and play.

Correction (June 10, 2019): In a previous version of this story, Vili Lehdonvirta’s name was misspelled. The text has been corrected.