Why Virtual Theft Should Matter to Real Life Tech Companies

habbo-hotel.jpgThe BBC recently reported that Holland police apprehended a teenager suspected of heisting nearly $6000 worth of furniture that does not, in the strictest sense, exist. That’s because he stole the goods from members of Sulake Corporation’s Habbo Hotel, the successful Finland-based MMO for older kids and teens. After Sulake suspected the Dutch kid had scammed password information off other users, the company reported him to the cops.

This might seem like one of those inconsequentially wacky news item, but it’s actually a significant harbinger of a problem that threatens not just the business of online worlds, but social networks and other Web 2.0 enterprises.

Why? Because as a service that doesn’t depend on subscriptions, Habbo Hotel relies in large part on selling virtual items (furniture, clothes, etc.) to its users for revenue. As a phenomenally popular online world (currently with about 8 million monthly active users) Habbo has inspired numerous other startups to adopt a similar revenue model. So now, many new and upcoming MMOs, especially those aimed at kids/teens, count on virtual goods. Looking at GigaOM’s Top Ten MMOs from June, a list that already needs revising, four of the largest, Habbo, RuneScape, Club Penguin, and Gaia Online, are primarily targeted at the under-18 market, and generate virtual item sales for some or all of the company’s revenue. According to some forecasts, the population of worlds like these is set to grow geometrically in coming years.

The inevitable problem, as the Holland arrest shows, is how much this revenue stands or falls on deeply serious real world constraints that no system can architect against. As Jane Pinckard noted last week, kids in avatar-based spaces have their guard down, and are thus especially vulnerable and easily manipulable, while some kids (and adults pretending to be kids) are good at exploiting this weakness with “phishing” schemes and other social hacks. Major “heists” could undermine them, either through a PR disaster (picture cute kids crying about their stolen virtual pets on CNN) or a sudden devaluation of their virtual economy, or both.

“The issue you touch upon– whether or not microtransactional business models are appropriate for and viable in kid-targeted properties– is a very meaningful one,” my friend Susan Wu e-mails me. Susan’s a partner with Charles River Ventures, which includes Raph Koster’s MMO platform company in its portfolio, and has been a longtime advocate of virtual goods as a business tool. “There’s the practical consideration of processing these transactions, when kids don’t usually own credit cards.” (When I talked with Gaia Online CEO Craig Sherman, he casually mentioned they had three staffers whose sole job was to open snail mail containing dollars and loose change from Gaia players who wanted to buy the latest virtual item they’d put on sale.)

“The other part of the problem,” Susan continues, “is around fraud and security. With regards to the case of Habbo Hotel, unfortunately the techniques the thieves used– phishing and social engineering– is not one that can be easily addressed. The right solution involves a mix of components including education, industry standards around virtual property rights, and technical solutions that both minimize a publisher’s exposure to fraud and maximize their ability to track/recover/restore assets quickly.”

Related to that, she tells me organizing an industry roundtable at next spring’s SXSW to address these issues on a broader level. “As the industry grows, we will need to move beyond the ‘Wild West’ mentality that exists in the space.” And as is often the case, what begins in the metaverse will probably influence the wider Web: Facebook and other social networks, along with other Web 2.0 sites , are rapidly introducing buyable virtual goods as third party widgets or central cash generators.

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