UsableMarkets

Dan Kelly, CEO of Sparter, graciously agreed to speak with me over the Thanksgiving holiday. I encourage you to take the time and read this, since Dan spoke about a number of fascinating topics, such as gold farmers, virtual currency arbitrage (or lack thereof), scarcity in Virtual Worlds, and delivery risk.

UsableMarkets: How did you get involved with Sparter? What is the business opportunity that Sparter saw?

Dan Kelly: I was invited to help with Sparter by Bessemer Venture Partners. They saw a need for a secondary asset market for online virtual worlds and were incubating the idea of Sparter. This is a 2 billion dollar business which has been dominated by B2C companies who bought gold from gold farmers and resold it at a high markup to players of these games in North American and Europe.

We felt that introducing a consumer to consumer (C2C) model would add real value to gamers playing these games, since they would be able to trade for gold with another gamer. This opens the sell-side of the market to all gamers, not just those hired by B2C companies, and makes buyers very happy since they can buy without these high markups. The value-add is buying the game, playing it and setting a price for your gold. B2C sites were imposing a huge tax on gamers for online marketing and in-game delivery of a digital good (that is, a delivery with no transportation costs). Our goal is to see as much of this purchasing power recycled back to gamers, thereby benefiting the industry.

Our service provides price competition for buyers, listing tools for sellers, support for multiple payment systems and languages, dispute resolution and fraud management. Our business model is to charge a commission on each successful transaction. We cover processing fees and charge the seller 20%.

UM: What are gold farmers?

DK: These are essentially small to medium sized businesses – there are thousands of them across Asia employing in aggregate hundreds of thousands of people – which hire people to collect gold in game which the business owner then resells to a B2C company.

UM: How big are these markets? How big is Sparter?

DK: Globally there is a 2 billion dollar per year business for digital items in all the online games, from World of Warcraft to Maple Story, mainly centered on games in the Korean, North American and European markets.

We have customers all over the world, and we support trade in USD, the English pound, the Euro and Chinese Yuan. Thousands of gamers have either bought or sold gold (or other virtual currencies) on Sparter.

A typical seller makes enough to play World of Warcraft for free – about $200 a year – but some make a lot more than that

UM: Do you get traders who don’t play any of the online games, but just come here to trade virtual/real currency? Do these types of traders make up a large percentage of the users?

DK: It’s unclear how many gamers are doing this. You have to have a copy of the game, since the gold only exists within the game. And there appear to be some resellers who buy gold from other sellers in order to keep loyal customers happy. But there does not appear to be much arbitrage trading taking place.

The reason for this is that Blizzard [the publisher of World of Warcraft] does not want there to be a secondary market for their gold. So, if they uncover this activity, they may take away the gold, that is, confiscate your inventory. This makes arbitrage trading unattractive.

If you look at the price charts for currency in EVE Online, or other games, there can be a lot of volatility, with 20-30% price swings in a few days. Some of that is certainly due to the fact that publishers occasionally make changes to the games and the price of gold adjusts accordingly. Were confiscation risk not an issue this would be attractive to arbitragers, but for all practical purposes, we don’t tend to see that.

Some publishers are opposed to this type of secondary market for their currencies, but there clearly is a need for it. Some guilds in WoW, for example, only want to raid. They prefer to buy the gold they need and focus their time — 20-50 hours per week — on the parts of the game they love most. This is not a bad thing. The online games industry needs to listen to what our customers want and support them.

UM: You address multiple online games … how do you decide which ones to support? And will you ever support trading of the Linden dollar?

DK: We think this platform can add value to almost online community where people might want to trade digital bits (e.g., virtual currency, game items, characters, land) and if we find any games where we think we can add value, we will. Our preference is to partner with publishers so we can automate delivery, improve fraud controls and compensate them for this value that they made possible.

UM: How did you come to the interface design of your site? In other words, were you inspired by other trading sites?

DK: We looked at professional trading sites. Some FX sites. But we’re dealing with gamers here, not professional traders. One site we liked was half.com. We studied eBay of course but we didn’t want an eBay like interface, where sellers can describe the same item in various ways.

There are two important things about our site. We’re dealing with a commodity – gold, or some other virtual currency – which is essentially the same no matter who sells it. And delivery risk. We have to highlight who the sellers are because of delivery risk. That’s the key reason we hold buyers’ funds until sellers complete delivery.

But you can imagine a future where there is a system where delivery risk is not a problem. In that case we don’t need to highlight who is selling the currency, but just the price. That would change the interface dramatically. Something like an FX or stock market.

UM: In general, what’s your opinion on the growth of virtual economics? Is this going to be a booming business one day, or continue to be a niche market?

DK: We think that online communities will continue to grow at very attractive rates. As they get bigger, more people will want to trade. And the secondary markets will have to be there because otherwise they’re absence will hold back the growth of the primary markets. We’re focused on providing that secondary market functionality wherever it adds value. That means we offer publishers a white label solution if they think that fits their business needs.

The great thing about online games is that just by consuming a piece of content you’re creating value for someone else. This doesn’t happen when you listen to music or watch TV.

And the interesting thing about this currency, at the moment, is that it is not real property, in the traditional sense. If it were it would create all kinds of unknown liabilities for the game publishers, where potentially in some situations they might have to redeem the currency. This is an issue that we have to resolve, to support gamers and their interest in trading while protecting the rights of content creators.

UM: It’s interesting, because it has been noted that with online goods there is no scarcity – we’re essentially talking about processing power.

DK: There can be scarcity in virtual worlds. We’re talking about earned goods, or earned currency. It’s a scarce item because there is controlled scarcity. You have to do something to get the gold. It isn’t just given away. And because of this there becomes a good reason for secondary markets. We think publishers should encourage this activity, of course.

Obviously publishers could sell more of that currency – that would be one option – but then they would be adding more of it to the game and encouraging inflation. It would reduce the value of the currency.

And, by allowing secondary markets to exist marginal utility is increased. Both the buyer and the seller get increased value from the market. The seller makes some money on extra gold. The buyer can get enough gold to get what they want. And, what’s really interesting is that we’ve increased value in both the real and the virtual worlds.

UM: Thanks for your time Dan.

And, as always, thanks for listening.
~alex