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On Interesting Investments, we’ve explored video game gold and video game real estate. Continuing with the video game theme one final time, let’s look at in-game items, and how one washed-up child actor created a multi-million-dollar empire with virtual items, eventually attracting the attention of Goldman Sachs (GS), before it all came crashing down.
My first encounter with video game items being sold for real money, known as real-money trading or RMT, was in the days of Diablo 2, a decade and a half ago. An armor set I had been hunting for was available for about $120. Being that I was still in school, it wasn’t worth it. But for some players, especially those with more money than time, this wasn’t a bad deal.
Child actor Brock Pierce created an empire on this very idea. Pierce turned to early massive multiplayer online game Everquest after a failed business venture. In 2001, he decided to turn his gaming obsession into a business. “I had to justify the way I’d spent the past two years,” he told Fortune Magazine in 2005.
Internet Gaming Entertainment became a secondhand in-game item retailer. It started with farming. Not actual farming, but “farming” — trying over and over to get certain items in the game. Pierce controlled six computers at once, in an effort to obtain a certain piece of armor that sold for virtual money that took most players about 150 hours to earn. On eBay (EBAY), Pierce could sell the item for $500. A subscription to the game was $13 each month.
Meanwhile, Pierce was part of a guild in game. The leader, 18-year-old Alan Debonneville, was raking in between $6,000 and $8,000 each month, playing the in-game market of items and selling in-game currency. Typically, even in today’s MMOs, this boils down to a sort of fundamental analysis. Each new update of a game could add in new items or change the rate a certain piece of loot drops from slain enemies, pushing and pulling on supply and demand.
Pierce convinced Debonneville to take a 2 percent stake in IGE, and the company was born in Spain, where Pierce was holed up after his last business venture was rocked by a pedophilia scandal. Debonville moved from his home in Switzerland to join Pierce.
By 2004, Pierce and Debonneville were both 23, and IGE was based in Hong Kong with 30 employees and pulling in more than $1 million each month. They moved from primarily dealing with items in Everquest to the emerging World of Warcraft. At a convention, their president, former video game giant Electronic Arts executive Steve Salyer, announced RMT was a $880 million industry. Former Goldman Sachs investment banker Stephen Bannon — yes, the now-former White House aide — was brought on board to net them venture capital.
The next year, former-rival-turned-employee Jonathan Yantis told affiliates that he would announce licensing deals with five MMO companies. RMT was a gray-market business, not entirely legal, but not entirely illegal, or at least heavily enforced. But then Yantis left the company, taking 22 monthly payments of $1 million each. Goldman Sachs itself courted the company, and in February, invested $60 million in IGE. The deal bought out some of Pierce’s stock, leaving him still with a controlling share and $20 million. Debonneville did not turn a profit in the deal, and left the company a few months later.
But profits declined, and by the end of 2005, IGE defaulted on Yantis’ payments. In the new year, World of Warcraft publisher Blizzard (ATVI) cracked down on gold farmers (see the article on in-game currency), banning accounts and costing IGE $200,000 each month in lost inventory. By January 2007, IGE was in the red to the tune of a half million each month. After a class-action lawsuit demanding IGE stop selling in-game items for real money, the company was essentially done with business. It was sold to Yantis, a win for the former IGE rival-turned-employee.
While Yantis controlled IGE US, Pierce created Affinity Media from IGE’s ashes. He was replaced by Bannon.
Now, Pierce is heavily involved in cryptocurrency, and specifically Bitcoin. He was elected director of the Bitcoin Foundation in 2014, though was called to resign after his prior pedophelia scandal was again brought to light.
IGE’s website returns an error, but the RMT business — despite remaining a gray market — is still booming. A single high-end sword in Guild Wars 2 can go for $400. Mounts in WoW, animals that characters can ride, can go for hundreds of dollars. Like many resources, supply and demand dictates prices. For items like armor, the rarity and time it takes to obtain the item sets the price. Materials used to make other items change price when updates bring in more craftable items, almost a miniature futures market. As an investment, as Brock Pierce showed, video game item trading can bring in millions of dollars, so long as business politics don’t get in the way.
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