Virtual World Outlook 2008 2009 by Chris Swan

August 25, 2008

Virtual World Industry Outlook 2008-2009 by Christian Renaud and Sean F. Kane, Esq.

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Virtual World Industry Outlook 2008-2009- Renaud/Kane

Original Contribution 8/25/2008

Contributors Christian Renaud

Sean F. Kane, Esq.

Executive Summary In this analysis, two industry experts come together to provide their outlook and predictions for the coming year for the Virtual Worlds industry. Christian Renaud, CEO of the Technology Intelligence Group and frequent writer and speaker on the future of virtual spaces in enterprise collaboration, reconsiders recent vendor announcements and predicts low and high probability developments in the coming year in the field of adoption of virtual workspaces.

Sean F. Kane, partner of

Drakeford & Kane LLC and noted expert and speaker on legal issues in the virtual realm, reviews the impact of legal rulings of the preceding year.

Target Audience: Technology Intelligence Group Prohibited

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Education, Legal, Marketing and Technology professionals in the process of investigating and or launching a virtual presence in a public virtual world, or an ‘Intraverse’ within their firm or institution.

Table of Contents Preface Disclaimer 2007-2008 Year in Review State of the Industry Ecosystem High-Performance Computers Graphics Capability Graphics Standards Platform Technology Penetration Broadband technology penetration Ecosystem Summary Recent Virtual World Legal Developments Publisher Control and In-Game Items BlackSnow Interactive v. Mythic Entertainment Inc. MDY Industries, LLC v. Blizzard Entertainment, Inc. Blizzard Entertainment Inc., v. In Game Dollar, LLC Virtual Assets and Player’s Rights Bragg v. Linden Research Inc. Hernandez v. Internet Gaming Entertainment Control of Intellectual Property in Virtual Worlds Marvel Enterprises v. NCSoft Corporation Eros, LLC, v. John Doe Eros, LLC, et al. v. Thomas Simon Industry Outlook 2008-2009

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4 6 8 15 15 16 16 17 18 18 19 19 19 20 21 21 21 22 22 22 23 23 25

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Preface The Virtual Worlds market is at a crossroads. Late 2007 and early 2008 saw the full effects of the over-hype/backlash cycle standard to emerging technologies and the industry has emerged from the firestorm scathed but sober.

Initial

investments in virtual world technology from customers began to bear fruit, providing the much-needed success stories and reference accounts for the industry. Major consumer brands, educators, corporations and governments all took notice of virtual worlds and began evaluating the potential of the technology for their own uses. The market continued to speciate, as it had originally moved from virtual worlds as the exclusive domain of massively multiplayer online games (MMOGs) into general social virtual worlds such as Second Life and There.com in 2005/2006. In 2007/2008 the industry moved once more when early experimentation bore fruit for virtual world vendors and developers focused on brand-experiences, collaboration, training and simulation.

What has evolved

are parallel sub-species of the industry that are specialized for these opportunities and not positioned as general public social worlds. This appeals to large organizations who wish to leverage virtual world technology without placing their assets and intellectual property in a public social world. The startup community has innovated across the board, providing services and products throughout the value chain.

From

companies specializing in lifelike avatars or virtual events, to integration with existing web, voice

and

text

collaboration

systems,

the

ecosystem is slowly building around the edges of the industry, providing much-needed assistance and infrastructure to customers who wish to experiment or deploy these environments and are looking for technology partners suited for their specific application. What this means is that Technology Intelligence Group Prohibited

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Virtual World Venture Activity July 2007-July 2008

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the cycle of invention/consolidation/standardization is still in it’s infancy, with heterogeneous

inventions

surfacing

frequently

challenge

incumbent

mindsets. Over one billion dollars were spent by the venture community on startups directly within or supporting virtual worlds between August 2007 and August 2008, and according to virtual world vendors and developers, the number of institutions leveraging virtual world technology for corporate collaboration, training, employee ‘on-boarding’, brand building, and education has multiplied considerably in the last twelve months as awareness has grown and earlyadopter customers saw their investments begin to pay dividends. Stanford SUMMIT has been leveraging simulations built on the Forterra OLIVE platform to train doctors on key critical-thinking skills with trauma patients, 18 of the top 20 educational institutions own land in Second Life with many using it to teach courses, McDonalds has created a Happy Meal virtual world to reinforce their well known brand, and customer and staff meetings are being held by enterprises across multiple platforms. The burgeoning industry has come of age in recent years with lawsuits challenging

the

user-created

content,

End

User

License

Agreements (EULAs), and third parties who buy and sell virtual goods outside of the ‘approved’ game mechanisms. These cases begin to develop a precedent of case-law for not only future legal challenges, but also the guidelines by which future virtual world platforms and business models are developed. As was the case with earlier attempts at building a 3D Internet, certain components of the market are further evolved than the rest of the required infrastructure.

In prior attempts, technologies like Virtual Reality Modeling

Language were flexible and robust, however other pieces of the overall puzzle such as high-performance desktop computers and pervasive broadband Internet connectivity were lacking. In his definitive reference work Designing Virtual Worlds, Dr. Richard Bartle defined five distinct ages in the history of virtual worlds to date. The seemingly-current issues of ownership of user-generated content, scripting Technology Intelligence Group Prohibited

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languages, interoperability, and portability of virtual assets are not new discussions, and have been addressed in previous decades. The previous ages of virtual worlds can be briefly summarized as follows: • The First Age: 1978-1985: Multi-User Dungeons (text-based) built by initial inventors • The Second Age: 1985-1989: Multi-User Dungeons (text-based) built by enthusiast users and amateur developers. Foreshadows of user-createdcontent. • The Third Age: 1989-1995: MUDs with scripting languages and birth of Object Oriented MUDs (MOOs) • The Fourth Age: 1995-1997: Emergence of online dial-up services as mainstream vehicles for MUDs/MOOs and new graphical multiplayer virtual worlds. • The Fifth Age: 1997-Present: Graphical worlds move from multiplayer to massively-multiplayer online games and late emergence of social and serious

use

virtual

world

technologies

beyond

game-focused

applications. The industry is now on the verge of a ‘sixth age’, when virtual worlds assimilate other Internet functions such as social networking and voice communication, and are assimilated themselves into other platforms as a feature of a website or a browser convention, making the Internet more graphically intuitive, entertaining, and collaborative. Whether this current attempt is successful at reaching mainstream adoption and fundamentally changing the user interaction with other users and data, is still to be determined. Disclaimer Given that this Industry Outlook is focused primarily on the emerging adoption of Virtual World (VW) technologies for non-entertainment uses, we will acknowledge that VWs are already a mainstream technology in the massively multiplayer online gaming industry. Technology Intelligence Group Prohibited

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references to gaming applications unless specifically relevant to a serious application, even as the industry attempts to make the nature of education, work, and overall collaboration more entertaining.

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Market speciation diagram

2007-2008 Year in Review The last year has seen increasing interest in non-game applications of virtual world technology. Despite the negative publicity reported in the mainstream media, there has been progress on customer adoption, simulation, training, brand building, and numerous new startups that could potentially take virtual world technology in to the mainstream. Technology Intelligence Group Prohibited

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Venture investment in the virtual world space has not been concentrated on a particular segment of the market in the past twelve months, which as a leading indicator of movement of the market, signifies that there is still considerable time before the market converges on a particular dominant technology or business model.

Right now, the venture community is placing bets on

component plays (those underlying technology providers who sell ‘guns and ammo’ to numerous virtual world developers or brands), as evidenced by the investments in Turbine1 , Havok2 , and ZeniMax3 . Since 2008 began, there have been at least seven separate ‘second round’ investments in virtual world technology companies4 , which is capital typically allocated to completing development and financing initial sales and marketing activity. If you consider this last funding as a fuse, you could assume that the fuse is lit and that we can expect to see the results of these second round investments in the near future. On the technology side, baseline graphics engine technology and physics engines have continued to mature with impressive results, reducing authoring costs for new market entrants wishing to develop worlds from a combination of off-the-shelf assets.

At the same time, last year saw Intel purchase Havok,

which was a savvy acquisition for Intel’s newly-public ‘Connected Visual Computing’ initiatives. When paired with technologies in the Intel development pipeline such as Larrabee (see ‘Graphics Capability’ below), and their acquisition of gaming-engine developer Offset Software, the current slate of graphics challenges associated with virtual worlds may soon be remembered in the same vein as 64k computers.

$40M- Time Warner, GGV Capital, Highland Capital, June 2008

$110M- Acquisition: Intel, September 2007

$300M- Providence Equity Partners, November 2007

Trilogy (August 2007), Media Machines (September 2007), Hidden City Games (October 2007), Qwaq (November 2007), Vivox (November 2007), Rocketon (February 2008), Gaia Online (November 2007 and a close-following third-round in July 2008) and RealTime Worlds (April 2008) 4

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General virtual

purpose worlds

social

such

Linden Labâ&#x20AC;&#x2122;s Second Life platform

continued

grow

the

negative press.

McDonalds Virtual World

face

Lindenâ&#x20AC;&#x2122;s

data shows year-over-year

growth of 146% in millions of hours used by their users, with over a million users logged in over the last sixty days.

This general purpose world model

often serves as the first exposure for companies, brands, educators and governments who wish to dabble in virtual worlds, often refining their strategies in smaller settings before embarking on broader efforts. A new development in the last year has been an emerging market for overlay functionality on top of general purpose platforms. Although there have been overlay brand-specific worlds before (vMTV on There.com), these new products endeavor to provide vertical-market-specific functionality on top of the general platform.

This serves both parties well, as the overlay developer is able to

leverage the installed base of a general world, and the world provider is able to offer greater functionality at no direct cost to themselves, and with the added benefit of not potentially competing with and alienating the user-createdcontent or developer community that gives these worlds value. Two examples of overlay functionality are the Immersive Workspaces product from Rivers Run Red, and Vivaty Scenes. In both cases, the overlay vendors are providing functionality (enterprise-centric features on top of the Second Life Grid, and persistent virtual spaces as an overlay to AOL Instant Messenger and Facebook, respectively) that is absent from the core platform, allowing the Technology Intelligence Group Prohibited

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platform vendors to focus on their core business without the inevitable scaling/ scope issues associated with startups attempting to tackle multiple vertical market opportunities simultaneously. When organizations have specific requirements for their application, be it a particular user-interface convention for a brand world or vertical-marketspecific functionality (e.g. SCORM integration for educational applications) there are existing virtual world platforms that have optimized for these verticals. Examples of these vertical-market focused worlds are Forterra OLIVE, which is optimized for simulation and scenario-training, and Proton Mediaâ&#x20AC;&#x2122;s Protosphere platform, which is increasingly optimized for mixed-media educational applications. Although often smaller than general-purpose platforms, these verticaloptimized platforms compete and win projects frequently due to their tighter focus and vertical-specific feature functionality. It is one thing as a platform to say that you are focused on, say, the enterprise workspaces market.

It is

another thing entirely to add features to your platform to integrate with existing enterprise collaboration tools, scheduling software, blogs/wikis, and the security and encryption required to secure valuable enterprise data. A wildcard in this market is the recent open-innovation occurring around the OpenSim project.

Individual enthusiasts, commercial developers and major

vendors have begun to collaborate on creating an open source alternative to Second Life and other general virtual worlds. controlled

servers,

the

OpenSim

project

Instead of a single grid with

provides

technology

allow

individually hosted servers to confederate with one another. There are multiple grids of servers, and numerous companies selling access to separate private grids. This would be divergent for the market, creating more disconnected outposts of virtual worlds, were it not for the rapid innovation occurring within these grids and the rapid modifications to the code. Each independent grid, and there are many, have developers augmenting the code base for their specific application. There are companies commercializing support (the tried and true Linux model) Technology Intelligence Group Prohibited

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as well as the ‘wild, wild west’ grids that allow anyone to connect. From this combination of open-source code, a flexible BSD licensing regime, and varying levels of support has sprung an amazing level of diversity of development. This model of open innovation is one to watch as it is applied to other virtual world types. One of the hottest areas in the past two years has been the emergence of branded virtual worlds. Beginning with web-based experiences and evolving to include both immersive worlds such as the vMTV properties built within the Makena There.com platform to web-based properties such as Barbiegirls.com, these branded worlds are brand-balkans built for a specific customer experience around Barbie, a Happy Meal, or a plush toy. Over 2007, a number of consumer brands launched virtual spaces, or are in the process of transitioning from uncontrolled-content social spaces to a controlled brand space, such as the television show ‘The L Word’. For brand spaces, as with training, simulation and enterprise collaboration, there were been vendors with platforms offerings in this space (Rivers Run Red’s Immersive Brand Spaces in Google Lively, the Electric Sheep Company’s WebFlock brand platform), as well as innovative business models, such as the evolution of Millions of Us, previously a virtual worlds development firm, evolving into a ‘virtual agency’ for mainstream brands to sub-contract their virtual world activities, for ease of brand placement across multiple virtual world platforms. Outside of mainstream product development, IBM launched multiple initiatives in 2007 and 2008, including the Virtual Worlds Interoperability Forum, interoperability demonstrations with Linden Lab, trials and demos (and presumably customer consulting) with ActiveWorlds and Forterra, and most recently assisting in teleportation from SecondLife to an OpenSim-based world, albeit ‘Ruthed 5’.

IBM’s Emerging Business Opportunity (EBO) around virtual

‘Ruthed’ is the name given for the default female avatar in Second Life, which is also the lowest common denominator during partial grid failures or other complicated untertakings such as inter-grid teleportation 5

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worlds has been omnipresent at conferences, releasing regular press releases and hosting conferences and other thought-provoking forums. Ian Hughes (epredator) at IBM continues to be a key driver in the evolution of the Virtual World industry.

His repeated innovations including taking

Wimbledon into the virtual world, simultaneous virtual world mixed-reality events, and promoting industry-wide innovations on the Eightbar blog are the kind of broader horizontal non-product-development-related components required to scale a market from ‘boutique human-interest story’ to mainstream adoption. IBM has also been active in evangelizing the use of virtual worlds as a complement to enterprise collaboration.

At the Lotusphere conference in

January, IBM demonstrated integration with Sametime and other IBM unified communications products. Nortel recently announced their Project Chainsaw (aka ‘Web.Alive’) positioned for enterprise collaboration and future potential vertical applications, as well as announcing intent to acquire two key technology partners, PingTel and DiamondWare.

PingTel is a known veteran in the SIP (Session Initiation

Protocol) IP-PBX market, providing call-control services for corporations, however entirely portable for telephony service providers. DiamondWare is a key technology player in the voice over IP space, as they provide spatial and positional audio mixing for voice systems, and license their technologies to MMOG vendors and virtual world technology providers such as Vivox. In total, the 2007-2008 period was a breakthrough year for the virtual world industry.

There was key investment by venture capital partners, the first

twitches of industry consolidation in the form of acquisitions, diversity of development by the startup community, and infrastructure development of organizations and standards efforts in an attempt to normalize the emerging industry for interoperability and a common language with adjacent systems such as social networks and micro-publishing sites.

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Original Contribution 8/25/2008

Virtual World Industry Outlook 2008-2009- Renaud/Kane

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State of the Industry Ecosystem As noted in the preface, there are a number of technology dependencies required to reach mainstream adoption of Virtual Worlds. These range from obvious

dependencies

such

pervasive

high-performance

computers,

broadband Internet access, and robust graphics processing technology and less intuitive dependencies such as standard graphics formats, penetration of pervasive platform technologies such as Flash and Java, and ease-of-authoring tools for User Created Content (UCC). In this section, we will investigate these technologies’ maturity and their ramifications on the burgeoning sixth age of Virtual Worlds.

High-Performance Computers

The modality used to access virtual worlds ranges from text on a mobile phone or thin-client terminal through to a fully immersive virtual reality room. The broader ‘Web 2.0’ industry has seen the enthusiasm in which consumers have embraced virtual world technology and are experimenting with implementing virtual world functionality into their core platform, and there are even companies such as Vivaty building virtual spaces on top of existing platforms such as Facebook or AOL Instant Messenger. Although multi-modality6 is an inevitable goal for virtual world developers who wish to attract mainstream audiences, many of the interactions will be compute-intensive, bandwidth intensive, and graphically-intensive. Although you may schedule a virtual meeting or party with your friends via your mobile phone, when the times comes to have the party, you’ll be encamped in front of your television or computer in all of it’s visual glory. This is why it is critical to have suitable compute performance at hand in order for the industry to reach mainstream adoption.

6 Multi-modality can be defined as the ability to interface with your friends and co-workers via integrated telephony, instant messaging, immersive virtual spaces, social networking sites and video conferencing Technology Intelligence Group Prohibited

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In 1995, the year VRML was released, the top of the line for general desktop computers was a 200MHz Pentium Pro, with the majority of desktops residing between 60MHz and 100MHz processors. In 2008, the top of the line is now multi-core 2.8GHz processors with even laptop computers in the 1-2GHz range of performance. The computational ability of these computers is no longer a gating item to mainstream adoption of virtual worlds in general usage.

Graphics Capability

The complement to high-performance computational ability is the ability for the computerâ&#x20AC;&#x2122;s graphics subsystems to render the data as quickly as required. This is not as rosy of a picture as many mainstream â&#x20AC;&#x2DC;office laptopâ&#x20AC;&#x2122; systems lack the graphical horsepower and memory to render virtual worlds. This limits the mainstream adoption today, until the lease/purchasing cycles or companies are iterated and new hardware, capable of faithful rendering of 3D environments, is widely deployed. Recent announcements may change the landscape.

At the SIGGRAPH trade

show in August 2008, Intel announced their Larrabee architecture, slated for product release in the late 2009-2010 timeframe. This would take what has typically been a separate Graphical Processing Unit (GPU) function and relocate it into the processor architecture on the motherboard of a computer. Although the early stages of this technology will undoubtably be prone to compatibility issues with legacy graphics drivers, the assimilation of this function on to the main

motherboard

should

streamline

the

graphics

performance

and

compatibility issues that virtual worlds have been susceptible to.

Graphics Standards

A related topic to graphics capability is the availability of widespread standards for graphical interchange.

If an organization is considering adopting virtual

world technologies, they will need to ensure that their current image libraries are compatible with that environment and others via standards. Peter Schickel, the CEO of Bitmanagement Software GmbH, illustrated this point by example with automotive or aerospace companies in Europe, who are unwilling to adopt virtual world technologies until they can be assured that there are standards Technology Intelligence Group Prohibited

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behind them. No organization wants to undertake a potentially decade-long airplane development effort only to discover half-way through the development that the graphics interchange format has changed. This requires that objects be transferrable, just as text can be denominated into ASCII text as a lowest-common-denominator, portable from system to system. Standards such as COLLADA provide organizations with a method to create object libraries that have reuse potential across multiple systems, versus application

specific

graphics.

The

downside

risk

potential

for

large

organizations with sizable libraries is that they invest in a virtual world technology that does not survive the evolutionary selection process, and they are subsequently stranded with graphics assets in outmoded formats.

Platform Technology Penetration

In addition to virtual world specific applications, an ecosystem of plug-in technologies needs to reach critical mass of broad adoption for the requisite infrastructure to exist for innovative virtual-worlds applications to leverage. Examples of these plug-in technologies includes Adobe Flash as well as Java. Flash, regardless of the criticism leveled at it from immersive virtual world vendors, boasts an installed base of over 890 million computers, and Flash Lite ships on over 500 million mobile phones. This foundation provides an easier path-to-market for virtual world vendors who are targeting the future market of mixed-modality experiences while still controlling costs. WebFlock is leveraging Flash for this very reason. When major brands look at the equation of â&#x20AC;&#x2DC;Do I develop for a virtual world platform?â&#x20AC;&#x2122;, the decision makers are typically personnel who are accustomed to purchasing advertising on broadcast mediums.

Offering the 50,000 users of your installed base, no

matter how loyal they may be, will inevitably suffer when compared to broadcast mechanisms such as television, or even Facebook (with 90 million active users). Leveraging an installed base of users of nearly 900 million users functions as a catalyst for brands who are looking for maximum market penetration for minimum development cost. Technology Intelligence Group Prohibited

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Java technology is a similar contender for a platform abstraction layer between a virtual world and an operating system. Companies such as Altadyn chose to use Java technology to realize their 3DXplorer platform, hoping to take advantage of the 70%+ installed base of Java 1.6 code on Windows and Linux computers. This precludes, however, multi-modal implementations from the common code base, such as leveraging the virtual world code on mobile phones with the same code base used within web browsers.

Broadband technology penetration

Twenty-two percent of the world has some form of Internet access, however only 21% of those Internet users have broadband access.

Of these 304M

subscribers, a subset of those have fast enough computers to experience an entirely-immersive virtual experience, however may be fully capable of engaging in a modality-appropriate interface that is not entirely immersive. This is even more critical for the mobile phone market, which is nearly 50% of the worldâ&#x20AC;&#x2122;s population, which is a very attractive market for virtual world developers who are capable of adapting their visually-compelling immersive experiences to a modality-appropriate interface for the mobile telephony market. There

Ecosystem Summary are

glaring

shortcomings

for

the

supporting

ecosystem

technologies required for virtual world technology to reach mainstream adoption. The recently announced acquisition of DiamondWare by Nortel does narrow the field of companies providing integrated voice functionality in virtual worlds, but this in itself is not a gating item. The lack of mature protocols for identity and asset interchange between these environments would have been a gating item had the market continued to develop exclusively in the walledgarden/thick-client model of prior years.

With the increasing degree of

integration into existing tools like Facebook and Flickr, the identity and asset interchange will be handled at a macro level and outside of the administrative domain of virtual worlds specifically. The industry is ready to expand rapidly into the mainstream. Technology Intelligence Group Prohibited

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Recent Virtual World Legal Developments7 (By: Sean F. Kane, Esq.) The first wave of virtual world-related litigations have come and gone in the past year or so and the judicial opinions and scholarly analysis has focused more and more on interpreting the level of protection due for virtual assets, intellectual property rights and even the game enjoyment of paying users. With that in mind, what follows is an overview of the more significant cases involving virtual worlds and massively multiplayer online games from the past few years. Each of the cases necessarily implicates a number of different issues, for purposes of this discussion the cases will be categorized into three groups: publisher control of game spaces, intellectual property in user created items, and player’s rights in virtual property. Publisher Control and In-Game Items BlackSnow Interactive v. Mythic Entertainment Inc. 8

Barbie Girls- My six-year-old daughter’s

In 2002 BlackSnow Interactive took a proactive stance bringing a suit against Mythic Entertainment Inc., publisher of the MMO Dark Ages of Camelot, on the This legal section is an abbreviated treatment of Sean Kane’s “Stop this Virtual World, I want to get OFF!” available at www.techintelgroup.com 7

8 BlackSnow Interactive v. Mythic Entertainment Inc., No. 02-00112 (C.D. Calif.) Technology Intelligence Group Prohibited

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grounds that the Dark Ages of Camelot EULA, was an anti-competitive mechanism. While this was a daring attempt to challenge the validity of the Dark Ages of Camelot EULA, its likelihood of success was greatly diminished when the court held that the case must be decided by arbitration in accordance with the terms of the EULA. Mythic eventually prevailed in this case due to the complete and abrupt disappearance of BlackSnow. MDY Industries, LLC v. Blizzard Entertainment, Inc.

Currently, there is an ongoing lawsuit between MDY Industries, creator of the “WowGlider,” and Blizzard Entertainment, Inc. (“Blizzard”), publisher of the immensely popular fantasy-themed MMO World of Warcraft. The WowGlider is a popular “bot” application allowing players to play and advance their Avatar even when they are away form the computer. Use of bots like the WowGlider is specifically prohibited by the World of Warcraft end user license agreement (“EULA”). MDY filed suit for declaratory judgment seeking an order declaring that it had not infringed any of Blizzard copyrights, had not violated the Digital Millennium Copyright Act (“DMCA”), and had not interfered with the contractual relationship between Blizzard and its customers.

The court has granted partial summary judgment on certain issues in this matter this past July. The Court granted summary judgment in favor of Blizzard finding MDY guilty of both vicarious and contributory copyright infringement as well as tortious interference with Blizzard’s contractual relationship with Warcraft players. However, the Court’s opinion was not entirely in Blizzard’s favor since it also found that MDY had not engaged in unfair competition or market an anti-circumvention device in violation of the DMCA.

Finally, a

number of claims against MDY could not be disposed of summarily, including certain DMCA issues and

allegations of trademark infringement, and are

scheduled to be tried. 9 MDY Industries, LLC v. Blizzard Entertainment, Inc., US Dist. Ct. Arizona, Case No. CV-06-2555-PHXDGC. Technology Intelligence Group Prohibited

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Blizzard Entertainment Inc., v. In Game Dollar, LLC10

Prior to Blizzard initiating the action, In Game Dollar had conducted a business of collecting in-game items and providing leveling services for user’s characters within World of Warcraft in exchange money. heavily item

for

real

world

In Game Dollar advertised

sales

and

these services

using the World of Warcraft chat and message functions. Blizzard

alleged

that

Game Dollar’s sale of virtual assets

other

users

violated the Warcraft EULA

Overview of SOW Task Requirements for U.S. Air Force MyBase: Source MyBase RFI

and that advertisement of such services not only violated the EULA, but also constituted illegal “spamming” under the Computer Fraud and Abuse Act. In Game Dollar decided to avoid a protracted litigation and essentially agreed to shut down their business in exchange for Blizzard not seeking monetary damages. Virtual Assets and Player’s Rights Bragg v. Linden Research Inc.

The conflict was between Marc Bragg, a Pennsylvania attorney and budding virtual world real estate developer within Second Life, and Linden Research, the creator and publisher of Second Life. The allegations were that Linden Research 10 Blizzard Entertainment Inc., v. In Game Dollar, LLC, US Dist. Ct. Central District of California, Case No: 8:07-cv-00589-JVS-AN. 11 Bragg v. Linden Research Inc. (487 F.Supp.2d 593) Technology Intelligence Group Prohibited

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froze Bragg’s Second Life account after he had allegedly took advantage a Second Life software glitch that allowed him to purchase virtual land at an undervalued amount.

Bragg and Linden ultimately settled the matter before

any great pronouncement on user rights in virtual property could be made. However, prior to the settlement, court did enter an order invalidating the arbitration provision in the Second Life EULA as unconscionable, thereby demonstrating the potential future limitations of EULAs. Hernandez v. Internet Gaming Entertainment12

Hernandez v. Internet Gaming Entertainment (“IGE”) may require an answer as to whether or not players have the right to enforce the terms of a EULA against other players. Antonio Hernandez, a World of Warcraft player, has brought a class action suit against IGE, a company which collects and sells Warcraft items and currency for real world money (in contravention of the Warcraft EULA). Hernandez alleges that all Warcraft players are intended beneficiaries of the EULA between Blizzard and each individual player and, as such, all players may bring a suit for enforcement of it. Specifically, Hernandez claims that IGE’s business which floods the market with virtual items devalues the in-world currency and the player’s efforts, reduces the amount of virtual goods available to users through legitimate paying of the game, and also places their characters at a disadvantage compared to those players that essentially buy their in-game success from IGE.

Control of Intellectual Property in Virtual Worlds

Marvel Enterprises v. NCSoft Corporation13

12 Cite to Hernandez v. Internet Gaming Entertainment, U.S. Dist. Ct. Southern District of Florida, Case No: 07-CIV-21403- COHN/SELTZER. 13 Marvel Enterprises v. NCSoft Corporation (74 U.S.P.Q.2d 1303) Technology Intelligence Group Prohibited

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Marvel Enterprises, publisher of Marvel comic books featuring Spider-Man, Iron Man, the X-Men and the Hulk, brought a suit for copyright and trademark infringement against NCSoft Corporation, publishers of the MMO City of Heroes.

Marvel claimed that the character creation tools in City of Heroes

allowed players to create playable characters that were very similar to those owned by the comic book publisher and as such NCSoft was liable for any infringing creation that took place. The court initially disagreed with Marvel on the factual basis of a majority of their infringement claims and the case quickly ended thereafter.

Eros, LLC, v. John Doe

In July of 2007, Eros, LLC (“Eros”), producers of the Sex Gen Bed, brought a John Doe law suit against Volkov Catteneo, a Second Life avatar who had allegedly copied the Sex Gen Bed and sold it to other users. Eros brought a suit claiming that Cattaneo’s unauthorized sale of the Sex Gen Bed infringed on copyrights and trademarks owned by Eros.

Through use of discovery and coordinated

private investigation it was uncovered that Volkov Cattaneo was actually a Texas teenager named Robert Leatherwood. While Leatherwood initially denied any knowledge of the Sex Gen Bed sales, a default judgment was entered against him in November and by March he had formally settled with Eros. Eros, LLC, et al. v. Thomas Simon15

Eros filed a second John Doe lawsuit against Second Life avatar Rase Kenzo again for unauthorized Sex Gen Bed copying and sales. However, this time five more Second Life virtual item designers joined Eros in claiming that Kenzo had copied and sold virtual items.

Within three months of the suit being filed

14 Eros, LLC, v. John Doe, US Dist. Ct. Middle District of Florida, Case No: 8:07-cv-1158-T-24TGW. 15 Eros, LLC, et al. v. Thomas Simon, US Dist. Ct. Southern District of New York, Case No: 1:07-cv-4777 Technology Intelligence Group Prohibited

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Thomas Simon AKA Rase Kenzo settled with Eros and the other aggrieved parties for a nominal sum and an agreement that he would no longer sell the unauthorized virtual items.

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Industry Outlook 2008-2009 So what developments does the coming year hold? As stated above, the market has speciated into different solutions for the wide range of applications of virtual world technology. This speciation will continue further for less mainstream applications and additional technology startups will continue to launch product that challenges the MMOG model of client/server interaction. supporting

As also noted, the broader industry ecosystem is robust with technologies

Flash

and

Java,

graphics

standards,

fast

computers, and broadband penetration. Larger technology players like IBM, Sun and Google entering the market has the effect of validating the market for skeptical large organizations who questioned the industry’s viability Finally, the virtuous cycle of invention/funding/liquidity-event is well underway with early entrants already being acquired. First and foremost, the growth of ‘Brand Balkans’, most often web/Flash based worlds, will continue rapidly as fast-follower brands rush to ‘me too’ the competition.

Toolkits such as WebFlock will shorten development cycles for

these new market entrants, as well as lower the authorship costs involved in world deployment.

Like any other technology, easier availability and lower

costs will cause rapid adoption. Brand-balkans will continue to grow, however there will be attrition of existing worlds within the next year as startups run out of money and/or larger firms determine that their return on investment (ROI) is not competitive when compared to their traditional broadcast marketing mechanisms. There will be less attrition in brand spaces however than there will be in the mainstream virtual worlds industry. Overlay experiences, that bring a degree of avatar-chat to the WWW will move from their current boutique status and into the mainstream. Companies like IMVU will need to expand beyond a proprietary environment and in to the broader Internet to compete against firms such as Weblin or Vivaty, who overlay Technology Intelligence Group Prohibited

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the existing Internet with avatars and virtual spaces.

Providing incremental

services on top of high-traffic sites, such as Facebook or Amazon, will drive traffic to these tools at faster adoption rates than standalone environments. A potentially-disruptive combination of brand-balkans and overlay experiences are the two product offerings from Rivers Run Red, with their Immersive Brandspaces and Immersive Workspaces products.

These solutions leverage

existing virtual world platforms to provide application specific tools, in Lively and the Second Life Grid respectively. This will appeal to customers who want the implied security of a large virtual world platform provider like Google however still require the high degree of customization like other brand-balkan and enterprise customers. The training and education market will continue to drive widespread adoption of virtual world technology, as the broad experimentation within Second Life demonstrates.

Universities and other teaching institutions that initially

experimented with Second Life are in the process of standardizing platforms for virtual classrooms, which will be a boon for companies that are already well positioned in this market, such as Proton Media and Forterra Systems. Linden Labâ&#x20AC;&#x2122;s CEO Mark Kingdon indicated that he is targeting three specific markets for Second Life: Enterprise (including government), Consumer, and Education. Obviously, Linden has to dedicate extensive resource to sustaining engineering of the existing product (bug fixes, feature requests) and walk a delicate line between â&#x20AC;&#x2DC;going mainstreamâ&#x20AC;&#x2122; with all of the infrastructure required to support the educational and enterprise market (assuming that their existing infrastructure will evolve to address the targeted consumer market).

Many

other companies that have attempted to rapidly grow their company in mainstream directions have managed to alienate their core installed base of customers while also failing to capture signifiant mainstream adoption (e.g. Tribe.net). For Linden to be able to expand this rapidly, they will need to fully leverage their developers and user-created-content community, and steer the direction of their community in these areas with a much stronger hand. They will need to Technology Intelligence Group Prohibited

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partner with key technology players that address shortcomings in their current product offerings in the enterprise and education verticals. Their objective to pursue these early-adopting verticals directly as a focus for Second Life is an excellent decision, however they will need to move aggressively to avoid being left behind by new market entrants without an installed-base of customers they risk alienating. Governmental adoption of virtual world technology is another potential disruptor to the development of the industry. Given the size of governmentallydriven technology decisions, the vendors chosen can often bifurcate from the mainstream market and develop solely for the application within government. This is necessary for them to please their customer, however disadvantageous to the overall industry if it creates separate islands of technologies that are incompatible with one another. Imagine the day when you go to renew your driving license virtually, only to discover that the governmental system does not have identity/interoperability interchange with public worlds. One example of this is the recent request for information (RFI) issued by the United States Air Force Air Education and Training Command (AETC). Their RFI is to evaluate potential vendors for their ‘MyBase 3D Virtual Learning Environment’.

If the winning vendor is adopted as a standard vendor for

subsequent projects by the other military services, and adjacent intelligence and policy agencies, their installed base could expand rapidly.

This would

ensure them access to development capital to expand, however would provide no incentive for the vendor to continue to interface with the broader industry requirements. Indeed, they could begin to exert leverage in the industry in the development of specific functionality based on the de-facto-standard nature of their footprint. Obviously, this is a separate market with different requirements than the mainstream ‘enterprise collaboration’ opportunity targeted by Nortel, Qwaq, Sun and others.

Enterprises require rich communication and collaboration

infrastructure for their employees that integrates well with existing identity and presence tools and collaboration solutions. The integration of existing team Technology Intelligence Group Prohibited

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collaboration tools such as blogs and wikis with virtual team rooms has considerable potential to address current ‘groupware’ tool shortcomings in distributed organizations. Enterprises are an example of a hybrid deployment model, as some enterprises require that any collaboration tools be installed within their own datacenter and not hosted by a third party or offered as Saas (Software as a Service). Other, often

smaller,

enterprises

are

culturally

amenable

SaaS

tools

for

collaboration, as evidenced by the number of WebEx and Salesforce.com customers. Encryption is a key issue when discussing enterprise uses, as proprietary intellectual property must be shielded from outside individuals, not only for competitive purposes, but also for many regulatory reasons. Very few virtual world platforms today employ encryption systems or connectivity to the installed base of enterprise identity schemes, which will slow mainstream adoption of these systems. The use of virtual world technologies as a ‘sidecar’ to the WWW is an area poised for rapid growth. Companies such as 3DXplorer that offer Java-based browser-integrated worlds linked to existing web presences can rapidly demonstrate the value of shared social spaces.

Once these companies can

integrate rich voice functionality and demonstrate integration with external content such as audio and video streaming, they will be viable platforms for virtual events such as trade shows, user group meetings, and other social gatherings. The frictionless nature of a ‘go to the meeting room’ button on a web page will lower the barriers to adoption. The industry has been dancing a delicate dance with governments with regards to sovereignty as well as regulatory oversight.

If virtual worlds would have

stayed the exclusive domain of gaming, the regulatory issues would have been complex enough.

Adding general-purpose social networking, education and

enterprise utilization of these environments only raises the regulatory temperature to take action. At a recent conference held in London with the UK Ministry of Business and Enterprise Regulatory Reform (BERR), and organized by Technology Intelligence Group Prohibited

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Ren Reynolds Virtual Policy Network, lawmakers, academics and industry assembled for two days to discuss the complex landscape surrounding regulatory posture towards virtual worlds. The existence of a financial component to many virtual worlds, often called a ‘currency’ that is convertible to existing sovereign-regulated currencies, practically insures that governmental action is forthcoming. What complicates matters is that governments will pressure virtual world vendors for particular oversight and changes, however each governments changes will be inconsistent with other governments, putting the vendors in a complex position.

This is

analogous to the position shared by Google and Yahoo when it came to light that the Chinese government had asked them to remove specific types of content from their results in China. Regulatory activity in the virtual world industry has the potential to accelerate or disrupt the momentum made so far, depending on it’s nature. Certainly, financial oversight of embedded currencies and markets by regulatory agencies will cause grief to those virtual worlds whose profits are predicated on embedded-currency arbitrage. In summary, we believe that the virtual world industry is emerging from primarily boutique and experimental uses to the mainstream. Over the next year we will see further vendor innovation in this space with new market entrants, casualties of earlier entrants from either market or execution failures, and consolidation in the form of the market-leading firms being acquired by larger technology and media concerns who wish to mark their territory. With all of the creative energy, financial capital, customer interest, and ‘eye candy’ to show the press, 2008-2009 should see considerably greater growth in the industry than years past.

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