Wednesday, May 30, 2007

The Sony Station Exchange Model and Licensing

In my previous article, I outlined the basics of the World of Warcraft and Second Life licensing models, along with a business plan that could be applied in the way Sony has implemented Station Exchange for EverQuest II. This article will take a look at the Sony model and explain an alternative model .

Sony Station Exchange

The Sony model is a basic re-sale of license model. Looking at the Station Exchange Service Agreement (which is incorporated in whole in the EverQuest II EULA), (Emphasis added)

You agree that you do not and will not own anything. You agree that, as between you and SOE, SOE owns all copyrights, trademarks and other intellectual property rights in game characters, items and coin (characters, items and coin are, collectively, "Virtual Goods"). SOE hereby grants you the limited right to transfer and receive the licensed right to use Virtual Goods, in return for real money, solely through the Station Exchange and solely in accordance with this Agreement. AS USED IN THIS EXCHANGE AGREEMENT, THE GAME AND ON THE STATION EXCHANGE SITE, TO "SELL" MEANS "TO TRANSFER TO ANOTHER PERSON THE LICENSED RIGHT TO USE VIRTUAL GOODS IN ACCORDANCE WITH THIS EXCHANGE AGREEMENT;" TO "BUY" MEANS "TO RECEIVE FROM ANOTHER PERSON THE LICENSED RIGHT TO USE VIRTUAL GOODS IN ACCORDANCE WITH THIS EXCHANGE AGREEMENT." Accordingly, regardless of SOE's shorthand use of the words "buy" and "sell," whether in this Exchange Agreement, any game, any message board, on the Station Exchange site or elsewhere, SOE has not granted, is not granting and will not grant you ownership of any Virtual Goods.

"Licensed use" and "licensed right," among other things, means that your game play, acquisition and use of Virtual Goods -- and the transactions you engage in through Station Exchange – are all governed by the provisions of this Exchange Agreement and the Underlying License Agreement and Rules. You agree, therefore, that if you violate any of the provisions of this Exchange Agreement, or any of the provisions of the Underlying License Agreement and Rules, SOE can take any action which it believes is appropriate, including but not limited to terminating your participation in Station Exchange, deleting Virtual Goods associated with any of your accounts, and/or suspending or terminating your accounts entirely.

In short, you still own nothing, but you are allowed to transfer your license in the item for money. You are more or less an intellectual property broker with an odd way of acquiring what you're "selling."

Station Exchange and Income Tax

The only other peculiarity of the Sony system is income tax. If you are selling on Station Exchange, this should be the part you pay attention to. As eBayers have discovered, money from auctions is income, and a PayPal account is a real bank account. The difficulty is determining a starting value for the items being sold. I would contend that the correct base value on all items is $0, and as such all money made from them is reportable, taxable income to the IRS. Under this model, you would only have taxable income if and when you sold an item, but selling any item (or character) would generate taxable income, and taxable income must be reported to the IRS.


Solving the Tax Problem

The whole taxable income problem has two solutions a developer could implement, one which seems more likely than the other. The unlikely solution would be automatic withholding on transactions. This, however, puts quite a burden on the developer, not to mention potential liability for tax fraud. The alternative would be to generate quarterly and annual sales reports for each user. This would help the user file correctly without unduly entangling the developer with the IRS.

Alternative License Structuring

The alternative license structure is one I mentioned in my last article. Basically, rather than allowing the player to re-sell licenses, it is to designate the items, characters, etc. as representations of player effort. The player is then re-selling their "time" and "effort" rather than the license to the object. It operates almost like contract labor. Rather than buying the item, I'm retroactively paying you for the time it took you to get the item, as if I hired you to find it to begin with. The only difficulty would be structuring around the general contract principle that you cannot contract for past performance. If this could be solved, then an alternative to the license resale model can exist.


There's an old saying about there being more than one way to skin a cat. While I'm not a fan of animal cruelty, I do agree that there are usually multiple solutions to any given problem. Here, there may even be more than the two I've suggested, these just happen to be the two that most readily came to my mind. As the MMO genre moves more to this economy, more models are always likely to emerge.

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