Virtual sweatshops 4 comments

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Forget all the intricacies that MNCs find they have to overcome when they try to outsource their services functions to the cheaper countries in Asia. There is one segment that came in for the least attention but which is now thriving as an income-generating community in itself. Indeed it is a fine example of the invisible capitalistic hand innovating ways to arbitrage costs across borders in ways that central planners could never have anticipated.

I’m talking, of course, about the “virtual sweatshops” in China where youths spend entire days in LAN arcades to “pick up gold coins” in online games which can then be sold off on Internet exchanges to lazy gamers from more affluent countries. They can apparently be paid up to $300-400 a month --- substantial considering the low living costs in China. This must be the most interesting piece of news I have read this week.

This Internet trading exchange where virtual games items/treasures can be exchanged for real cash must be the ultimate trading platform. The purpose of me bringing this news up here is to compare it with the operations of a stock market exchange. Online exchanges bring together buyers and sellers in a manner similar to online stock trading, although the trading liquidity and consequently the buy-sell spread are obviously less comparable (although the gap might be closing judging from how the China youngsters seem to be able to make a living out of their gaming existence). The “sellers” (the China virtual gamers) buy low (their time) and sell high, the “buyers” (affluent and lazy gamers) see value in the virtual treasures and are willing to pay. One can also see this as a form of “virtual mining” where virtual commodities are “mined” and then sold across geographical boundaries to richer countries with little transportation cost --- the ultimate mining business. The China gamers are the cheap labour at the upstream of the entire supply chain, with higher profit margins reaped progressively downstream, from the LAN arcade owner whose business is assured, to the virtual treasures aggregator who puts them on sale online, to the US-based online exchanges (like Ebay) who earn commissions off every trade, and then finally to the end consumer.

Back to the stock exchange analogy. The online game developers like Blizzard (Warcraft Online) and Sony Entertainment (Everquest) have professed to be against such outsourcing as it destroys the spirit of gaming. But really? Imagine a stock exchange where the companies can keep on placing new shares to willing buyers who snap them up. Man, that is a money-printing machine if I ever saw one. Now imagine an online game developer in the position of both the stock exchange (typically the market regulator) and the company issuing the shares. Translate the “shares” to “virtual treasures”. Theoretically, the online games developer can churn out new “gold coins” and sell them off online for huge profits ---- it costs them nothing! And if they operate the online exchange as well, that removes one level of check-and-balance. Practically, huge influxes of online treasures dilutes their value in the same way as a massive new placement of shares, but that can be carefully managed, and easily managed as well since the gaming world by definition is highly opaque and there are no Standard & Poors manuals telling you how many outstanding treasures are available in the entire virtual world. So much for transparency! Why would the game developers want to stop such a potential money-maker, instead of diverting the niche to themselves? Incidentally, I read that Sony Entertainment has created a “legitimate exchange” for its Everquest gamers to exchange such virtual goods, “as an alternative to crooked sellers in unsanctioned auctions” (quoting them).

It is no wonder that Singapore sees digital media, including gaming, as a future growth driver, seeing how fanatical gamers can be as to pay real bucks for virtual items. Who knows, one day it can even be the Asian hub for such online virtual trading. Hopefully, when (and if) that day comes, there will be some cross-fertilisation of ideas from previous experiences in stock market governance, such as regulatory independence and market transparency, to guard against market abuse in this new virtual market. There will be such a virtual market, that I do not doubt.

References:
(1) Sunday Times Feb 5 article: Dragons to Slay? Outsource To China