eBay Prohibits Virtual World Trading, IGE To Benefit

eBay's (EBAY) recent decision to prohibit all real-money trading [RMT] of items from virtual worlds has ostensibly been taken on grounds of the "legal complexities" these trades throw up. The legal ownership of items acquired within gameworlds such as Blizzard's World of Warcraft remains a gray area, as the intellectual property is arguably owned by the gameworld publisher and not the individual player. Terms of use contracts between publishers and players in many gameworlds, for example in Sqaure Enix's Final Fantasy XI, in any case explicitly prohibit RMT. eBay's move out of RMT seems designed to limit liability in the event that publishers pursue it as the facilitator of these dubious trades.

The move is short-sighted. eBay's market power stems from the defensibility of its network effect - buyers come to eBay because the sellers are all there in what for eBay is an ongoing virtuous circle. Breaking that circle for a specific category of goods or services is probably not a reversible decision - once a network effect has established itself at a new marketplace within that category the same defensibility that secures eBay's wider business is very likely to prevent eBay clawing back a share of that market segment.

The secondary market for virtual assets was estimated at a value of $900 million in 2005, with forecasts for it to reach $7 billion by 2009. As long ago as 2002 Edward Castronova, an expert in the economies of virtual worlds, posited that Norrath (the Everquest gameworld) had an economy that made it the 77th richest "country" on earth. eBay is turning its back, probably irreversibly, on a vast and growing market.

Dedicated RMT markets, most notably IGE, are poised to capitalize on eBay's abandonment of the RMT space. IGE has already bought out its main independent secondary market competitor, Yantis Enterprises, in 2004, which with eBay's departure leaves as its main competition game publishers' own exchanges such as Sony's (SNE) Station Exchange. As publisher marketplaces deal only in their own games, these sites are far more limited and eBay's move out of RMT means that IGE should be able to build its own network effect in the RMT space virtually unopposed.

Disclosure: Author has no position in EBAY.