This article titled “Virtual worlds: is this where real life is heading?” was written by Victor Keegan, for The Observer on Sunday 22nd August 2010 04.33 Asia/Calcutta

Recently a man bought a space station for 0,000, while last month Small Planet Foods, a subsidiary of General Foods, introduced a new brand of organic blueberries. What have these two products got in common? Neither actually exist. Well, not except as pixels in the virtual worlds where they are traded. Only the money is real.

The space station was sold in the virtual world Entropia Universe, which has its own economy and currency. The buyer, who converted his 0,000 into 3.3m PED (Project Entropia dollars), is convinced that virtual shops on his virtual space station will produce virtual profits that can be converted back into real dollars. The blueberries represent a "brand extension" of a product that exists in the real world as US company General Foods aims to establish a presence in FarmVille, a game which exists as an application on Facebook and which at its peak has had nearly 80 million players. It is a classic example of a new genre.

Farmers in FarmVille buy cartoon-like virtual farm animals, which have to be regularly fed, or crops that require fertiliser (virtual, of course) to help them grow, in order to be more successful than their friends. The real-time game has its own virtual currency that makes it easier for members to trade and for the game’s makers to profit. Parent company Zynga has revenues of more than 0m a year which come mainly from FarmVille, despite competition from half a dozen other farm games on Facebook. Zynga is reckoned to be worth between bn and bn, based on the value of investment stakes that have been taken in it.

To many, this seems crazy: why spend real money to buy a virtual currency to purchase food in order to stop a pig that doesn’t exist from dying through lack of food? The easy answer is why not – if that’s what you want to do. It is arguably a lot more "real" – whatever that means these days – than, say, sitting like a couch potato watching a soap on television.

This might still seem the stuff of fantasy but it’s where real life seems to be heading: according to some analysts, we are in the midst of a virtual revolution that might one day be considered as important as the industrial revolution. Nic Mitham, founder of KZero, a Cambridge-based consultancy, says that there are 175 virtual worlds that are live or in live beta and that the number of registered users to them has risen from 880 million in the fourth quarter of 2009 to 1.1 billion today, a 25% increase within six months in the middle of a recession. The registered population of virtual worlds (even if this is not the same as active users) is greater than the populations of the US and Europe combined.

Children are already, and perhaps inevitably, very familiar with all this. Habbo Hotel, a virtual world where teenagers trade goods and clothes, has increased the number of its registered residents to 175 million from 160 million a year ago and the London-based Moshi Monsters, a sub-teen world where kids meet and trade virtual goods with each other now has 20 million members compared with 12 million at the end of last year.

Meanwhile, going in the opposite direction to General Foods, Moshi Monsters recently announced that the branded goods it has developed within its virtual world are to be sold in the real world, an example of something else we will have to get used to: a convergence of real and virtual products.

Little wonder that Will Walsh, CEO of Sharpcards, which creates virtual cards for people to send to each other from their mobiles, believes "there will be a time in the future when kids spend more money in certain areas on virtual goods than they do in the real world."

Second Life, where you can choose your own avatar, build your own house and buy and sell clothing, is still the best-known virtual world in this country. Launched in 2003, it claims up to 20 million registered users, although only about 1.4 million have been active in the past 60 days. For some it’s been a rocky road: its San Diego-born creator Philip Rosedale stepped down as CEO in 2008, but is now back in charge following recent redundancies at developers Linden Lab.

The latest published figures claim that virtual transactions (sales of land, clothes and artefacts) in Second Life came to 0m last year and that the volume of user-to-user transactions (selling each other clothes, furniture and land) rose between April and May this year from .9m to .6m. However, it would be surprising if this growth were maintained in view of Second Life’s managerial problems and a sharp decline in the value of land within the virtual world. Casual visitors are arriving in fewer numbers and long-term residents seem increasingly to keep themselves to themselves – focusing on niche educational projects, virtual business meetings, sex or art.

I joined Second Life five years ago and, with the help of a neighbour there, set up an art gallery. To begin with, I displayed other people’s artworks before – after I realised that the game’s tools enable anyone to transform creative ideas into (virtual) paintings or sculptures without formal training – showing off works of my own.

My neighbour Juanita Deharo (her SL identity – in real life she is Judy Barrass and lives in Australia) now produces artworks that bridge the real and virtual worlds. But citing falling sales of her work because of problems there, she has thought about leaving Second Life. "There are signs the community is on the move into other virtual worlds," she says.

Other virtual worlds? Competing with Second Life now are several similar online communities, including OpenLife, Blue Mars and Inworldz. The former bills itself an an open-source alternative grid for Second Life, set up in Australia in 2007, "to create a user content created virtual world orientated towards users, affordable ownership and community".

Blue Mars is more restrictive than Second Life in terms of allowing its users to make their own content, but this 3D virtual world platform (developed in Hawaii by a company called Avatar Reality) has let more than 200 developers – mostly individuals or indie game designers – loose on creating cities, games and 3D environments on a terraformed version of Mars. Opened to the public in September 2009, and still in beta testing, it promises users better graphics and a more streamlined experience as a result. Blue Mars further differs from Second Life in that avatars cannot be fully customised and the emphasis is on shopping and gaming rather than social interaction.

Nonetheless, successful (virtual) fashion designer Estelle Parnall is taking her business away from Second Life into Blue Mars. "Everything will be better, once the content gets created," she says. "The graphics, and in particular avatar appearance and clothing, are of a much higher standard than could be reproduced in SL and in virtual platforms relying on social engagement, this is of paramount importance."

For Juanita Deharo, "what keeps me in Second Life is the international community of artists, audience and curators, and these new grids can’t match the diversity, stability, performance and security of SL at this stage." She acknowledges none the less that "the scene is changing rapidly".

The growth in virtual worlds for children is also continuing. Last month, for instance, saw the launch of Innerstar University, created by a US toy company, in which pre-teens can create doll avatars to navigate the campus of a virtual university, earning stars by competing cheerleading or horseriding games that can then be redeemed for pets or a haircut.

Closed virtual worlds dedicated to business or education are also flourishing. Based in Florida and Boston, ReactionGrid was founded by three Second Life programmers in January 2009. They build bespoke virtual worlds for business clients (including Microsoft and a number of universities) – usually as a "fun" way of facilitating business tutorials, such as an interactive arcade version of a PowerPoint-like presentation. Worlds created include classrooms, campuses, and bar lounges.

Side by side with the trend to build escapist worlds such as these is a dash to construct 3D reproductions of actual places in the real world in the hope of attracting people to buy goods and entertain themselves without an irksome journey to town. There is a virtual London in Second Life, with a 40,000-strong community, which according to its founder Debs Regent (or Debs Butler, as she is known offline) made a small profit last month, mainly from renting out shops and clubs. But at least five virtual versions of the capital have been built or are in the throes of construction by companies such as Twinity, NearGlobal and Microsoft, as well as by University College, London.

Vistors to Twinity can also enjoy virtual replicas of Berlin, Singapore and Miami. Earlier this month, the company hosted a virtual barbecue in (its recreation of) South Beach, Miami, while in a game of one-upmanship with the mayor of London, the company’s vehicle engineers have just built a (virtual) motorcycle that lets visitors tour the cities (without ever being required to wear a helmet).

For sheer ambition all these projects are dwarfed by Project X, the brainchild of Mike Fotoohi from Egham, Surrey, who intends to reproduce the entire planet as a virtual world in which members will be able to build replicas of their homes on the same street as in real life. Project X is still in closed beta and at the moment Fotoohi and his team have only finished building central New York and a few other places, but after merging the open source Openstreetmap – a free and open source editable map of the world – with publicly available satellite image mapping from the US government to produce a 3D skeleton of practically every road on the planet, users will be invited to take over the planet.

Fotoohi and his colleagues believe that virtual worlds – in which social media will integrate with a three dimensional web – have a great future. "We have only scratched the surface," he says. "As bandwidth increases and technologies like ray tracing [simulating 3D effects] and video delivery become more realistic thanks to increasing processing power and faster connections then we will have worlds that will look very real in the future.

"Project X is the initial phase of what I believe will be the next generation of how people will use the internet."

One feature being developed using mobile technology aims to synch the virtual and the real worlds – so that your avatar in a virtual world will follow you in real life wherever you go. "Shopkeepers who advertise their products in our virtual world can actually see customers attracted to their store as a result of that advert," says Fotoohi. "This is something that has never been done before and for the first time you can measure accurately the pounds and dollars that you spend. The person who uses this system will also get a revenue share, which is great for the consumer and advertiser."

The early virtual worlds, most of which have been grossly underperforming for their investors, according to Nic Mitham at KZero, found it difficult to establish their virtual brands in real life. Mitham now sees two trends. First, virtual worlds are changing from levying monthly subscriptions to charging small amounts for virtual goods, a practice made popular by FarmVille. The second driver, he says, is brands creating their own virtual worlds to sell their products. Virtual goods that carry real-life brands, Mitham says, have 10 times the buying power of virtual brands.

How big is the virtual revolution? Factor in games like FarmVille, massively multiplayer online games such as Entropia Universe and World of Warcraft and other virtual services and it is a case of pick your own number. Some unofficial estimates claim that virtual products are worth bn in the US and bn in Asia. This is a woeful underestimate since one part of Facebook, FarmVille, may soon be worth a billion and it is already capitalised at more than bn. In the future, too, the mobile phone, is likely to be a major incubator of virtual products.

FarmVille may one day be seen as a milestone in accustomising non-geeks to the idea of online currencies and virtual products. Virtual products have a particular attraction to businesses because beyond the cost infrastructure already in place, overheads are few and manufacturing costs zero. Carbon footprints become less of a concern, too. And in a recession, virtual worlds offer their colonists the chance of a cheap escape from everyday reality.

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