Virtual worlds economy

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Information about Virtual worlds economy

Published on November 30, 2007

Author: lablogga

Source: slideshare.net

Description

A definition of virtual world asset classes, the virtual worlds ecosystem and the attendant accounting, valuation, taxation and legal issues that arise in virtual world economics.

Audio: http://feeds.feedburner.com/BroaderPerspectivePodcast

Virtual World Valuation Accounting, valuation, taxation and legal issues in virtual worlds November 2007 Melanie Swan MS Futures Group Palo Alto, CA 415-505-4426 [email_address] www.melanieswan.com

Valuation summary Virtual worlds are becoming increasingly routine for business, academic and government use Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain Doing business in a virtual world is similar to doing business in a foreign country

Virtual worlds are becoming increasingly routine for business, academic and government use

Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices

Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain

Doing business in a virtual world is similar to doing business in a foreign country

Agenda Virtual worlds What are virtual worlds? Who is using virtual worlds? Second Life Financial perspective Accounting issues Valuation issues Tax issues Legal and other issues Industry leadership opportunities

Virtual worlds

What are virtual worlds?

Who is using virtual worlds?

Second Life

Financial perspective

Accounting issues

Valuation issues

Tax issues

Legal and other issues

Industry leadership opportunities

What are virtual worlds? Definition: 3D online persistent world with a sense of presence and simultaneous experience in context Examples (over 30 worlds): Second Life ActiveWorlds BrandGames Entropia Universe There Kaneva MultiVerse Club Penguin (pre-teen) WebKins (pre-teen) Source: http://www.virtualworldsreview.com

Definition: 3D online persistent world with a sense of presence and simultaneous experience in context

Examples (over 30 worlds):

Second Life

ActiveWorlds

BrandGames

Entropia Universe

There

Kaneva

MultiVerse

Club Penguin (pre-teen)

WebKins (pre-teen)

Virtual world vs. MMORPG  Game  World Source: Linden Lab

Who is using virtual worlds? IBM Dr. Dobbs Life 2.0 Conference Princeton International Spaceflight Museum US Congress Second Health Operating Theater Showtime “The L Word” CBS “CSI New York” Vodafone “Inside Out” SLCN “Metanomics”

Second Life is the biggest virtual world 40,000 concurrency (at any time) 475,000 active users (last 7 days) 1.5 m active users (last 2 months) 11 m total accounts 2 m assets created per day 35 TB of user-created data 800,000 unique items sold or traded per month 500 events per day 15 m concurrent scripts 10 Gbps peak bandwidth Source: http://secondlife.com/whatis/economy-graphs.php Million Square Meters of Second Life Land Total User Hours (millions) Source: Linden Lab

40,000 concurrency (at any time)

475,000 active users (last 7 days)

1.5 m active users (last 2 months)

11 m total accounts

2 m assets created per day

35 TB of user-created data

800,000 unique items sold or traded per month

500 events per day

15 m concurrent scripts

10 Gbps peak bandwidth

Diverse Second Life residents 43% female 60% international Top 5 countries: US, Germany, Brazil, Japan, UK Source: http://static.secondlife.com/economy/stats_200710.xls Resident market share by age tier Average monthly hours by age tier %

43% female

60% international

Top 5 countries: US, Germany, Brazil, Japan, UK

Currency: Linden$ LindeX exchange operated by Linden Lab Buy: USD $.30 transaction fee Sell: 3.5% transaction fee Monetary policy Sources: http://secondlife.com/whatis/economy-market.php, http://secondlife.com/whatis/economy-graphs.php, http://secondlife.reuters.com US$ Spent by Users (in Millions) US $ Exchanged on Lindex (in Millions) 270 L$ = $1 USD

LindeX exchange operated by Linden Lab

Buy: USD $.30 transaction fee

Sell: 3.5% transaction fee

Monetary policy

Economy Reuters Banking and credit Stock markets SL Capital Exchange (US, 20 listings) World Stock Exchange (Australia, 15 listings) VSTEX (Italy, 7 listings) Ancapex (US, 3 listings) Source: http://secondlife.reuters.com

Reuters

Banking and credit

Stock markets

SL Capital Exchange (US, 20 listings)

World Stock Exchange (Australia, 15 listings)

VSTEX (Italy, 7 listings)

Ancapex (US, 3 listings)

Advisory firm presence in virtual worlds H&R Block Island BDO Stoy Hayward Island KAWG&F (Baltimore MD CPA firm), CPA Island Accenture

Virtual world accounting issues Asset and liability accounting Precedent by analogy: software and websites Revenue recognition Currency related issues Revaluations and gain/loss International and regulatory issues

Asset and liability accounting

Precedent by analogy: software and websites

Revenue recognition

Currency related issues

Revaluations and gain/loss

International and regulatory issues

Traditional accounting asset definitions Asset Any item of economic value owned by an individual or corporation, especially that which could be converted to cash Tangible Assets Assets having a physical existence, such as cash, equipment, and real estate Intangible Assets Identifiable non-monetary assets without physical substance Examples: computer software , licenses, patents, brands and copyrights Source: International Financial Reporting Standards (IFRS)

Asset

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash

Tangible Assets

Assets having a physical existence, such as cash, equipment, and real estate

Intangible Assets

Identifiable non-monetary assets without physical substance

Examples: computer software , licenses, patents, brands and copyrights

Are virtual world assets different? Non-physical, like software Multi-state / non-persistent Specific risks of impairment, destruction, infringement World disappearance Economic disturbance Ease of copying International environment Low transparency Physical identity obscured, limited reporting infrastructure

Non-physical, like software

Multi-state / non-persistent

Specific risks of impairment, destruction, infringement

World disappearance

Economic disturbance

Ease of copying

International environment

Low transparency

Physical identity obscured, limited reporting infrastructure

Virtual world asset and liability classification Intangible assets Land and real estate Objects Scripts and animations Intellectual property Patent, trademark, copyright Liabilities Loans payable, bonds

Intangible assets

Land and real estate

Objects

Scripts and animations

Intellectual property

Patent, trademark, copyright

Liabilities

Loans payable, bonds

Land is the most significant virtual asset Purchase via auction or resale Premium membership required ($9.95/mo) USD $13 + $5 monthly for 512 sq m USD $1,675 + $295 monthly for 65,536 sq m island Source: http://www.secondlife.com Available plots Available island areas Raw Land Growth of Second Life 2007 2005 2003

Purchase via auction or resale

Premium membership required ($9.95/mo)

USD $13 + $5 monthly for 512 sq m

USD $1,675 + $295 monthly for 65,536 sq m island

Real estate Anshe Chung Second Life real estate developer Virtual homes, offices and meeting spaces

Virtual homes, offices and meeting spaces

Objects and scripts

Asset recognition and measurement An asset is recognized when it meets all of the following criteria it is identifiable the entity has control over the asset it is probable that economic benefits will flow to the entity the cost of the asset can be measured reliably Initial measurement at cost of generation or acquisition or other assessment of fair value Holly Kai Golf and Country Club Sun Microsystems Pavilion

An asset is recognized when it meets all of the following criteria

it is identifiable

the entity has control over the asset

it is probable that economic benefits will flow to the entity

the cost of the asset can be measured reliably

Initial measurement at cost of generation or acquisition or other assessment of fair value

Asset useful life, depreciation, disposition Useful life Shorter life Amortization Software: purchased vs. developed Non-software: amortized over useful life Impairment More frequent reassessment Retirement and disposal Disclosure

Useful life

Shorter life

Amortization

Software: purchased vs. developed

Non-software: amortized over useful life

Impairment

More frequent reassessment

Retirement and disposal

Disclosure

Revenue recognition and currency issues Services Developer Initial project Maintenance / support Other Site allowance/stipend Currency issues Not different from high-risk international currencies IBM’s Forbidden City Sim

Services

Developer

Initial project

Maintenance / support

Other

Site allowance/stipend

Currency issues

Not different from high-risk international currencies

Rapidly developing virtual world ecosystem Investment transaction in 2007 or acquisition Virtual World Providers Linden Lab/Second Life , ActiveWorlds, Entropia Universe, There, Kaneva, Muse, MultiVerse, vastpark, metaplace, Cybertown, Habbo Hotel, Whyville, Voodoo Chat, Taatu, Traveler, Sims Online, Club Penguin, WebKins, Hipihi, Uonenet, Noviking Virtual Businesses and Brands Anshe Chung Studios, DeCuir Creations, FairChang, Etopia, Hunter’s Cove, SL Boutique , Preen, House of Nyla, Second Life Cable Network, Rezzable, caLLie cLine, PeoplePool, Raven Pennyfeather, Lapointe & Bastchild Designs, InStyle, Vista Animations, Chai Skins, Acedia Albion, AV Puli Animations, Reel Expression, J&S Aviation, SZ Designs, Vindy Vindaloo, Esoterica Couture Virtual World Developers and Agencies Electric Sheep Company, Millions of Us, Rivers Run Red, CMP, Aimee Weber Studio, depo consulting, Forterra, Metaversatility, Wish Farmers, Virtual Worldlets, Icarus Studios, Proton Media, NGI Group 3Di, DAZ 3D, Code 4 3D Physics Engines and 3D Modeling Platforms Havok , Ageia PhysX, Unreal Engine, Open GL, Maya, 3D Studio, Croquet, SoftimageIXSI, Form Z, Strata 3D CX, RenderMan, Blender, Wings3D

Virtual world valuation issues Valuation situations Asset transfer, purchase or sale Internal accounting Settlement: legal, estate, divorce, etc. Valuation considerations Ownership Portability to other virtual worlds Virtual business risks Intangibles Intellectual property Brand value: reputation, management, innovation and human capital

Valuation situations

Asset transfer, purchase or sale

Internal accounting

Settlement: legal, estate, divorce, etc.

Valuation considerations

Ownership

Portability to other virtual worlds

Virtual business risks

Intangibles

Intellectual property

Brand value: reputation, management, innovation and human capital

Virtual world valuation issues Assets to be valued In-world business: product, service Brand: sim, business, avatar Account: avatars/characters, assets World, economy Valuation techniques DCF: emphasize near-term flows, low TV Sales comparison: Second Life classifieds, stores, eBay Recent transactions Multiples: assets, sales, EBITDA, trading Metrics: customers, contracts, sim and web traffic, conversion Motorati SpokesAvatar: caLLie cLine Coke’s virtual branding

Assets to be valued

In-world business: product, service

Brand: sim, business, avatar

Account: avatars/characters, assets

World, economy

Valuation techniques

DCF: emphasize near-term flows, low TV

Sales comparison: Second Life classifieds, stores, eBay

Recent transactions

Multiples: assets, sales, EBITDA, trading

Metrics: customers, contracts, sim and web traffic, conversion

Virtual world tax issues VAT, sales tax Income tax 1099 contractors Gains tax Challenges of levying tax Identity verification Identification of activity Monitoring, tracking and enforcement Highly international environment

VAT, sales tax

Income tax

1099 contractors

Gains tax

Challenges of levying tax

Identity verification

Identification of activity

Monitoring, tracking and enforcement

Highly international environment

Legal and other issues Key rules Linden Lab: Terms of Service Agreement, Community Standards, Privacy Policy, Digital Millennium Copyright Act Policy Sim covenants Dispute resolution Metaverse Republic Recent cases Eros, LLC v. Doe (pending) Copyright infringement (US $2,250) Marc Bragg v. Linden Lab (Oct 2007) Land acquisition via landbots (US $8,000) Money laundering

Key rules

Linden Lab: Terms of Service Agreement, Community Standards, Privacy Policy, Digital Millennium Copyright Act Policy

Sim covenants

Dispute resolution

Metaverse Republic

Recent cases

Eros, LLC v. Doe (pending)

Copyright infringement (US $2,250)

Marc Bragg v. Linden Lab (Oct 2007)

Land acquisition via landbots (US $8,000)

Money laundering

The future of finance and virtual worlds Growth: participants, breadth, size Formalization of the financial sector Stock indices and mutual funds In-world stock market crash Third-party audit and analyst function Regulatory initiatives In-world GAAP Explicit banking, securities and tax laws Technical initiatives Cross-world avatar portability

Growth: participants, breadth, size

Formalization of the financial sector

Stock indices and mutual funds

In-world stock market crash

Third-party audit and analyst function

Regulatory initiatives

In-world GAAP

Explicit banking, securities and tax laws

Technical initiatives

Cross-world avatar portability

Industry leadership opportunities Provide industry leadership Accounting and valuation white paper Implement international GAAP / IFRS In-world third-party audit infrastructure Client earnings announcements Audit, valuation, tax, SOX checklists Support clients in the virtual medium Accounting and business advisory, virtual dispute resolution Facilitate internal initiatives Recruiting, telepresence, collaboration

Provide industry leadership

Accounting and valuation white paper

Implement international GAAP / IFRS

In-world third-party audit infrastructure

Client earnings announcements

Audit, valuation, tax, SOX checklists

Support clients in the virtual medium

Accounting and business advisory, virtual dispute resolution

Facilitate internal initiatives

Recruiting, telepresence, collaboration

Valuation summary Virtual worlds are becoming increasingly routine for business, academic and government use Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain Doing business in a virtual world is similar to doing business in a foreign country

Virtual worlds are becoming increasingly routine for business, academic and government use

Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices

Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain

Doing business in a virtual world is similar to doing business in a foreign country

Thank you Melanie Swan MS Futures Group Palo Alto, CA 415-505-4426 [email_address] www.melanieswan.com Slides: http//www.melanieswan.com/presentations/Virtual_World_Valuation.ppt Virtual World Valuation Provided under an open source Creative Commons 3.0 license http://creativecommons.org/licenses/by-nc-sa/3.0/

Resources Getting started in Second Life http://sl.nmc.org/wiki/Getting_Started Second Life SLURL Directories http://nbhorizons.com/list.htm (companies) http://npsl.wikispaces.com/Tenant+Directory (non-profit commons) http://edumuve.com/tour/ (international locations) Event listings http://secondlife.com/events http://metaversed.com/ * http://www.metanomics.metaversed.com/ * News, blogs, etc. http://secondlife.reuters.com/ * http://www.ugotrade.com/ http://www.virtualworldsreview.com/ http://www.metaversemessenger.com/ http://dwellonit.blogspot.com/ (most visited locations) * Finance and Economics

Getting started in Second Life

http://sl.nmc.org/wiki/Getting_Started

Second Life SLURL Directories

http://nbhorizons.com/list.htm (companies)

http://npsl.wikispaces.com/Tenant+Directory (non-profit commons)

http://edumuve.com/tour/ (international locations)

Event listings

http://secondlife.com/events

http://metaversed.com/ *

http://www.metanomics.metaversed.com/ *

News, blogs, etc.

http://secondlife.reuters.com/ *

http://www.ugotrade.com/

http://www.virtualworldsreview.com/

http://www.metaversemessenger.com/

http://dwellonit.blogspot.com/ (most visited locations)

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