A Lesson In Economics

HomoSpacien

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For all intents and purposes, this is an economy that has activity equal to a small city in real life, There’s nothing ‘virtual’ about this world. Although it is no Eve Online with 400,000 members in our active economy system. It still suffers the same economic troubles of a real world economy, Inflation, deflation and even recessions can occur. Having a strong background in economics i find EU very interesting as it allows me to study concepts that rarely occur in real life. What troubles me is that being one of only a few MMO's that offer a real cash economy, MA has not hired an economist to their staff to balance our current problems out. Seeing as others like CCP, Valve, and a few more who do not even use a RCE model have done so.

Over the past few months i have run a very comprehensive study on the EU economy covering things such as currency dilution, labor markets, investor returns, arbitrage, equilibrium and participation. With a ton of data collected, analyzed, re-analyzed, and concluded i have found the following using basic economic principals. Please be fore warned, this is going to be a lengthy read if you chose to continue beyond this point. I will do my best to write this article in non-technical terms so everyone can grasp the concepts and failures.

Section 1: Currency Dilution

Definition: A reduction in the ownership percentage of a share of an item caused by the issuance of new like items.

Scenario:

Suppose MA has issued 5 of a particular item into the virtual world, for this instance we will use the UL CalyTrek BLP rifle from this point forward just referred to as “CalyTrek”. For the basis of this dilution model we will say that each CalyTrek has a value of 20,000 ped. With that we can say that the item, the CalyTrek’s hold an economic value of 100,000 ped. Now let’s assume that MA has a second issuance of CalyTrek’s in which 5 more of them are released into the economy. The increase in supply drops the demand, which lowers the items value. Now your base value of a CalyTrek is only 16,000 ped. It is true that there is now 160,000 ped of the asset in game after the issuance of 5 more of the CalyTrek and after the first sale of each of them MA has earned 160,000 ped into the economy, but on the flip side of that, these items will be sold several times and again diluted. So let’s get to the math. The original 5 owners of the first issued CalyTreks each lose 4,000 ped when they sell their item, so in theory MA just made 20,000 ped and 5 people just got a heck of a deal on a rifle. But now lets consider the effect. The sale of UL weapons and their value is based on the following data points. DPS, Economy, Range, and Tier. For this example we will use a number system, 1,2,3, & 4, 1 being the best gun, and 4 being the worst. The dilution of the value of gun 1 decreases the worth of 2,3,&4, meaning each time the item is bought and sold the amount needed to conduct that transaction is less, the amount of ped needing to be deposited is less, and MA’s returns decrease as a result of currency dilution. Yes they made ped off the initial dilution, but through residual sale of the item, the margin is down. Having a few dozen UL BLP rifles to choose from and all directly corresponding to their DPS, Economy, Range and Tier, by adding only 5 of one particular item to the economy for a quick profit you have essentially removed likely over 1,000,000 ped from the marketplace and can only hope to make it up with frequent use and decay.

The Solution:

Arbitrage, I know I said I wouldn’t use technical terms but there is no other word for it, so please google it if you do not know what it means.

The practice of Arbitrage results 100% of the time in Rational Pricing in the end game. Arbitrage is a fluid state in which can truly only exist for a period in time. At some point between buying low and selling high a rational price is reached, we will use the Herman ARK TT-R as an example. There is an unlimited supply of them in the Entropia Universe. Anybody who travels to Planet Arkadia can pick one up at the same fixed price which is lower than what they are selling for on Planet Calypso, even still the rational price for this item is around 4.5 – 5 ped. Every time a new one is generated from the trade terminal MA makes an additional 2 to 2.5 ped. Its been that way and stable for quite some time now. Granted this is minute amounts of ped, but the same principal applies on higher value items. Lets impose this scenario on the above mentioned CalyTrek, using this model which Eve Online already employs. Make a Blueprint for the CalyTrek, it requires X amount of whatever materials, these materials have X value, in gathering these materials, whether it is hunting for them, mining for them, or walking around trying to find them there is cost incurred, decay, ammo, probes, the chance of success, all stable factors. It does not matter if 1,000 of the item were crafted the bottom line is at some point you are going to reach a rational price somewhere above what it costs to make them, just like the (L) items in the game. With that you sustain stable profit in the use of time/decay/ammo/probes to manufacture this item, and you never have to worry about a diluted currency in game and losing your tail on vanishing in game funds.

The Lesson:

When you create a static item with a set availability, each time you add to the item quantity you dilute its value as well as the value of dozens of other things in relation to the item type, by setting a living economy principal of arbitrage leading to the establishment of rational pricing, your economy becomes stable, residual, and predictable. Even if some tool starts manufacturing them and selling them at a loss, as the platform owner ( MA ) you make some ped of his stupidity and when he goes broke the market re- establishes a rational price.
 
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HomoSpacien

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Section 2: Investor Returns

Definition: also known as return on investment (ROI)

Case Study:

The following is recorded data gathered from 20 EU members who asked to have their names withheld from the published findings.

Of 20 members who deposited from between 100 ped to 1,000 ped for the intent of game play the following was concluded

1: 100% of all ped deposited is eventually decayed, as it should be so our game continues to have funding.

2: Even accounting for economy, 100 ped and 1,000 ped decay at the same rate if you are using equipment at your skill level respectively.

3: The only way to truly make a profit off this game is by not playing the game. We were able to consistently show profits by playing only the player markets taking advantage of players who were in quick need for ped and willing to sell things at less than their value.

4: Gaining skill in game and upgrading to your appropriate skill level equipment only forces you to deposit more ped to play, and at a point you will reach a level in which you can no longer afford to play the game and will either sit stale, or quit.

Conclusion:

As with any game, the purpose of play is to gain skills and be able to do more. For the purpose of simplicity we will measure your entertainment as a share of stock for relation purposes.

At levels 1-10 we will say that a share of your entertainment stock is valued at $10 a week, you can only economically afford to use low level equipment which by nature has higher economy. Every week you are forced to buy another share of your entertainment stock because your $10 share has de-valued.

At Levels 10-20 we will say that a share of your entertainment stock is valued at $20 a week, Your guns, finders and other equipment now cost more ped, they now decay at higher rates, and surprisingly your returns percentage wise are now less.

For sake of saving space, we will just tell you that this pattern and trend continues as you continue to skill.

The Problem:

With this base model, at every point, every member reaches a point where they must continue to either stop playing as they cannot afford that week of entertainment, or they are forced to stay stagnant at their skill level, at which point, what is the point in playing if not to get better. With this model we can state the following.

The percentage figure of returns is static across a set dollar value, meaning that no matter what level equipment you use you will find the same percentage return across X dollars spent. You might see a 83% return across your first 100 ped spent, but if you continue the model you will find that your return lowers to 68% across every 1000 ped spent. With this static number we lose members due to not being able to afford to play anymore. It is safe to say that we are all aware we are going to lose our ped at some point. But with such low return on investment (ROI) as you continue to skill. With this, you find severe economic instability in game as with each member we lose, MA loses profits, and must decrease the amount of return we get percentage wise to keep the lights on. Further causing this game to be out of the price range of many players. It’s a vicious cycle which over the past few years has decreased the player base from around 5k players down to around 3k active members.

Solution:

There are several, we do not want to speculate, You could increase the rate of return so members can afford to buy shares of entertainment for the week. You could increase the economy of higher level equipment so members can afford to play. There are a ton of ideas that would fix this, but one thing remains constant. When marketing to a player base and setting your requirement at over $100 a month to play, you cannot expect to have a sustainable player base. Just as a real town, when you increase the cost of living, double housing costs etc. people move out of town, businesses fail, and economies collapse. There is no magic answer to fixing our current economic state. But it is clear that something must be done before our economy fails and we lose our beloved game.
 
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HomoSpacien

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HomoSpacien

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One last reserved spot to finish off the article with.
 

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:popcorn:

Subscribing, interesting read.

Would be nice if you include the customer base/ TAM growth or lack thereof and it's effects on Dilution in your analysis.
 

the-unknown

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Subscribed as well.
 

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Great thread :yay:
 

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Reminds me of Econ101 I took with a great Prof...

[Subscribed]
 

TACUTTING

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Main problem here is a players continues doing things with loss and dumping things for a quick sale or kill the competition


Good post , and a good read
 

dr3w

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What troubles me is that being one of only a few MMO's that offer a real cash economy, MA has not hired an economist to their staff to balance our current problems out.

Hiring economist - isn't eco.
 

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The Lesson:

When you create a static item with a set availability, each time you add to the item quantity you dilute its value as well as the value of dozens of other things in relation to the item type, by setting a living economy principal of arbitrage leading to the establishment of rational pricing, your economy becomes stable, residual, and predictable. Even if some tool starts manufacturing them and selling them at a loss, as the platform owner ( MA ) you make some ped of his stupidity and when he goes broke the market re- establishes a rational price.

The price on the items don't matter on the profit MA does, that just between the players.
Problem is that many craft and sell things with a price that often are under the price needed to profit, I know because I do that now and then. So a lot of the prices on sold items are too low compared to the cost of crafting them. The prices are not always "rational" in an economic seance, because we value the gaming and the skills we get from the activity.
 

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The price on the items don't matter on the profit MA does, that just between the players.
Problem is that many craft and sell things with a price that often are under the price needed to profit, I know because I do that now and then. So a lot of the prices on sold items are too low compared to the cost of crafting them. The prices are not always "rational" in an economic seance, because we value the gaming and the skills we get from the activity.

problem is that many, or most, people are using the crafting interface for other purposes than they were originally designed for and i dont really think gaming is the proper word to describe that.
 

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problem is that many, or most, people are using the crafting interface for other purposes than they were originally designed for and i dont really think gaming is the proper word to describe that.

To clearly, I did not mean gaming as in gambling, just gaming as enjoying the game :)
But I agree, it would not hurt do change the crafting system do something that is not so similar to a jackpot machine.
 

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nice try but two problems.

1. theres no rational pricing. the entire game is irrational, there is no predictablity. any asset can have its utility changed relative to others in the next VU, even if its actual utility hasnt changed.

2. most items are infact sold for below their cost. this probably applies to UL items when factoring in the cost to hunt, and certainly applies to majority of L or crafted goods. a given carbine might sell for 135% which equalises its dmg/sec to that of an UL equivilent*, but this doesnt reflect the cost to make it/hunt it.

* there is some rationality that generally hunters will target a narrow dmg/sec range, over which they wont pay for. a premium is paid for dmg/sec and PvP weapons buck this trend.

in short, there is no real economy, as there are so many practical things missing, like labour, energy costs etc., we cannot add value to anything or provide services (no contracts).
 

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HomoSpacien good read, but you have to consider other factors in your analysis.
1.What if there are 100 UL CalyTrek BLP rifle and the population is 10 000 players. 1 rifle for every 100 players. Than the population gets to 10 500 players and they put 5 rifles more. And I think that MA do that (or at least try).
2.They add 5 UL CalyTrek BLP rifle and and the same time remove some old rifles of the same level.
 

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It is true that there is now 160,000 ped of the asset in game after the issuance of 5 more of the CalyTrek and after the first sale of each of them MA has earned 160,000 ped into the economy

The original 5 owners of the first issued CalyTreks each lose 4,000 ped when they sell their item, so in theory MA just made 20,000 ped

The dilution of the value of gun 1 decreases the worth of 2,3,&4, meaning each time the item is bought and sold the amount needed to conduct that transaction is less, the amount of ped needing to be deposited is less, and MA’s returns decrease as a result of currency dilution. Yes they made ped off the initial dilution

Every time a new one is generated from the trade terminal MA makes an additional 2 to 2.5 ped.

You are not making sense to me at all. Could be because i had no coffee yet. But virtual guns are not stock market shares and we seem to have a very different view on how MindArk makes money.
 

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You are not making sense to me at all. Could be because i had no coffee yet. But virtual guns are not stock market shares and we seem to have a very different view on how MindArk makes money.

It's not just the lack of coffee, I was thinking the same thing. MA pays the TT value, the MU we players assign and pay for an item doesn't make MA a dime, it just means that PED has changed hands from one avatar to another. It could still be withdrawn so MA didn't profit and didn't reduce it's liability.
 

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It's not just the lack of coffee, I was thinking the same thing. MA pays the TT value, the MU we players assign and pay for an item doesn't make MA a dime, it just means that PED has changed hands from one avatar to another. It could still be withdrawn so MA didn't profit and didn't reduce it's liability.

Agree'd... and if player B buys an item off player A for 100k PEDs... then 6 mths later it's only worth 5k PEDs cuz MindArk dropped another 150 of them items... then that's not MA's fault. Typical EU scenario where something new drops... looter WANTS it to be worth huge PED... so they price it high (understandable cuz they've probably lost lots of money). Some sucker gets over excited and buys the WAY OVER PRICED item (Usually Bjorn Longstaff.... sorry buddy. Ya know I love ya m8!) MindArk drops another pile of them because that was their initial intent anyways and the playerbase just couldn't leave well enough alone for 6 mths till things balanced out. Players who spend huge money feel "ripped off" by the drop rate set by MA.

*Que Vampiric Coat sales threads while I wait for (L) leech heal buffs to drop with much more signifigant leeching power*

Menace
 
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Divinity

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You are not making sense to me at all. Could be because i had no coffee yet. But virtual guns are not stock market shares and we seem to have a very different view on how MindArk makes money.

I might be low on coffee too as i dont get the relevance of dropping increasing ul item drops and how MA makes money from dropping it.

Player A loots an item worth 35-40k peds ( Calytrek) and sells to player B who had deposited the amount ( to MA). Now if Player A withdraws the 35-40k peds (from MA) where exactly is the difference it makes to MA. If the item devaluates and the Player B sells to Player C for 25k peds , Player A withdraws his 35-40k and Player B gets to withdraw his 25k ( 10-15k loss suffered by him) etc etc. I dont see the relevance perhaps but can the OP enlighten me as to how that affects MA's bottomline/topline besides the fact that it can piss off some players ( due to loss in investment value) and such.
 

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I think you are looking at it all wrong.

Mindark cant put a value on any item, and base there business on that. Markup is what one fool is willing to pay another chancer. The value of any item from mindarks perspective is tt value only. All the other peds an item may generate are player to player only, and of no concern to mindark.

Mindark make money from deposits - withdrawals

The in game economy is not held together buy resellers selling off high end items. To me the economy is the hunter or miner, selling off loots and ores, to people who need them to craft. Or selling other items of use, to try and make there day or weeks hunting a profit. I think the only way to greatly improve the ingame economy is a complete rebuild of the loot table, as to me there are just far to many stackables in game to make anything really worth money.

Lets say you are a crafter, and you want to make profit on crafting some weapons. You have a huge selection of blueprints and materials available to use. If you craft item A, and the materials cost you around 200% MU, and so you have to sell the weapon and 210% to make a profit. Or item B which cost 105% to craft and can sell for 110% to make profit. You would choose item B, as the market will want to buy the cheaper product also.

That's what I think anyway, to much choice, which in turn kills MU on everything else. People selling materials will naturally have to lower there price as to compete with item B, otherwise they cant sell the materials, which in turn lower the price of crafted item A. Rinse and repeat with a much larger selection of items. Also competing with (L) items dropping as loot.

The economy is slowly killing itself with to much competition in materials, needs a complete restructuring IMHO
 

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Hey guys, thanks for all the replies, i will work on getting section two up today, but i wanted to chime in and clarify a few things.

1: less than 3% of the EU player base withdraw PED, that is not an estimate, it is a statistical fact out of polling over 500 members and even 3% is giving a .5% margin of error as the actual statistic was 2.56%

2: There are 4 people in the history of EU who were able to withdraw more than they deposited who did not own LA's or other high end EU real estate.

3: MA does NOT just make profit off decay, If you go on a 500 ped hunting trip, and return with 300 ped worth of loot you just dissolved 200 ped, of which roughly 25% goes into the global pool and the rest is profit for MA. Same goes with crafting or mining.

4: The economy as a whole operates as a non-fractional banking system, i do not want to get too technical in this article for fear of losing some of the members in technical lingo. so just google it and a lot more of this will make sense.

5: And finally, 95% of all ped deposited into this game is eventually decayed through low returns, decay, and other various losses. whatever is done with the ped in game in the short run, you need to realize that eventually 95% of it is gone. even if you do withdraw a few thousand ped, truth is you lost a lot more than that in game.


Taking those things into consideration, i hope this study makes more sense to those of you following. There is going to be a lot of debate, but respectfully, i have the economics degree, and prefer facts and statistical data over speculation. A person can speculate the mechanics of this games economy all they want, but without empirical data to back it up, it holds about as much weight as Helium. so lets please keep speculation out of this discussion as i am publishing only things that have statistical recorded data to back them up.

Once this article is done, i intend on using the same data and publishing an article on how we as EU players with only 20% of us participating in the exercise can balance out our own economy and negate the imbalance in the current system to better our own returns from our respective trades. Again using only common science, as speculations are useless.
 
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crazy

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Hey guys, thanks for all the replies, i will work on getting section two up today, but i wanted to chime in and clarify a few things.

1: less than 3% of the EU player base withdraw PED, that is not an estimate, it is a statistical fact out of polling over 500 members and even 3% is giving a .5% margin of error as the actual statistic was 2.56%

2: There are 4 people in the history of EU who were able to withdraw more than they deposited who did not own LA's or other high end EU real estate.

3: MA does NOT just make profit off decay, If you go on a 500 ped hunting trip, and return with 300 ped worth of loot you just dissolved 200 ped, of which roughly 25% goes into the global pool and the rest is profit for MA. Same goes with crafting or mining.

4: The economy as a whole operates as a non-fractional banking system, i do not want to get too technical in this article for fear of losing some of the members in technical lingo. so just google it and a lot more of this will make sense.

5: And finally, 95% of all ped deposited into this game is eventually decayed through low returns, decay, and other various losses. whatever is done with the ped in game in the short run, you need to realize that eventually 95% of it is gone. even if you do withdraw a few thousand ped, truth is you lost a lot more than that in game.


Taking those things into consideration, i hope this study makes more sense to those of you following. There is going to be a lot of debate, but respectfully, i have the economics degree, and prefer facts and statistical data over speculation. A person can speculate the mechanics of this games economy all they want, but without empirical data to back it up, it holds about as much weight as Helium. so lets please keep speculation out of this discussion as i am publishing only things that have statistical recorded data to back them up.

Once this article is done, i intend on using the same data and publishing an article on how we as EU players with only 20% of us participating in the exercise can balance out our own economy and negate the imbalance in the current system to better our own returns from our respective trades. Again using only common science, as speculations are useless.

I have on my FL more than 4 people who have withdrawn more than they have deposited, and they don't own any land areas, or piles of CLD.

edit: deleted the rest im probably wrong as im no economist :D
 
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For all intents and purposes, this is an economy that has activity equal to a small city in real life, There’s nothing ‘virtual’ about this world.

The problem with this line of thinking, that there is little difference between the real world and virtual worlds when it comes to things like economic thinking, is it fails to recognize some very basic differences that affect everything that comes later.

For example, using real world economic thinking when talking about material possessions in Entropia is faulty. You can't compare real estate on Calypso to real estate on Earth. Why? Because there is no cost to maintain possessions in Entropia. One can buy an entire apartment building complex and let it sit empty forever. Why? Because there is no deterioration. No taxes. No upkeep. Etc.

Similarly, simply possessing things like guns or cars in the real world have costs beyond simply purchasing the items. Cars deteriorate over time even if they sit in the garage. There are storage costs and license costs and Etc.

There are so many variables that are different between the real world and any virtual world (and economics have enough variables already) that using the theories from one and applying it to the other is futile at best.

It's a game. Using sexy talk about virtual economies and real world economies doesn't change that fact. It's just a marketing ploy to justify a higher cost to play.
 

HomoSpacien

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The problem with this line of thinking, that there is little difference between the real world and virtual worlds when it comes to things like economic thinking, is it fails to recognize some very basic differences that affect everything that comes later.

For example, using real world economic thinking when talking about material possessions in Entropia is faulty. You can't compare real estate on Calypso to real estate on Earth. Why? Because there is no cost to maintain possessions in Entropia. One can buy an entire apartment building complex and let it sit empty forever. Why? Because there is no deterioration. No taxes. No upkeep. Etc.

Similarly, simply possessing things like guns or cars in the real world have costs beyond simply purchasing the items. Cars deteriorate over time even if they sit in the garage. There are storage costs and license costs and Etc.

There are so many variables that are different between the real world and any virtual world (and economics have enough variables already) that using the theories from one and applying it to the other is futile at best.

It's a game. Using sexy talk about virtual economies and real world economies doesn't change that fact. It's just a marketing ploy to justify a higher cost to play.

thoreau, to a point i could not agree with you more, but you did forget a few aspects, although owning an apartment building may not cost you maintenance, buying the apartment does, in monthly fees.

also, although owning a Herman SIR-20 might not cost you anything if you do not use it. But then your not playing the game. which is not what this is about, we are talking about an "active" economy.

I really didnt start this to get into a debate about the difference between real world and virtual economies. This is about using real world economics to improve a virtual economy, like a half dozen MMO's have already done, and they are all sitting on top of the revenue stream, where MA fights to keep its head above water daily. So for now i am going to leave it at that. i would however be open to hear everything you have to say in a private message, i do love a good economic comparison, a person can never stop learning. i just dont think that this thread is a good place to have that discussion as it distracts from the point of the thread.
 

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...Taking those things into consideration, i hope this study makes more sense to those of you following. There is going to be a lot of debate, but respectfully, i have the economics degree, and prefer facts and statistical data over speculation. A person can speculate the mechanics of this games economy all they want, but without empirical data to back it up, it holds about as much weight as Helium. so lets please keep speculation out of this discussion as i am publishing only things that have statistical recorded data to back them up.

erm, but those considerations are speculative or based on limited research. point 4 doesnt even make sence, it conflate the game economy with the indivudal's potential use of their balance.
 
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They need ads and sponsors.
EU could easily lure in some huge companies. Besides huge billboards which would actually look cool through the universe, items could be used aswell.
Let's say Nike is lured in and through some kind of deal they are given the right to design and distribute some clothing lines which will bare their brand on it. A high percentage of that amount could be used to make the game more viable for MA's customers through higher returns, which in turn would lure more players and more ads and sponsors.
For the sake of sci-fi environment everything could be remodeled and used according to the game concepts, but still baring the real life brand names.

I really can't see this virtual reality having a future without the use of some sort of ads and real life sponsors.
Graphics are spectacular, content is huge, it simply lacks the population and interaction between players to really lift off.
 

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They need ads and sponsors.
EU could easily lure in some huge companies. Besides huge billboards which would actually look cool through the universe, items could be used aswell.
Let's say Nike is lured in and through some kind of deal they are given the right to design and distribute some clothing lines which will bare their brand on it. A high percentage of that amount could be used to make the game more viable for MA's customers through higher returns, which in turn would lure more players and more ads and sponsors.
For the sake of sci-fi environment everything could be remodeled and used according to the game concepts, but still baring the real life brand names.

I really can't see this virtual reality having a future without the use of some sort of ads and real life sponsors.
Graphics are spectacular, content is huge, it simply lacks the population and interaction between players to really lift off.


Very valid point, and a good step towards a stable economy
 

crazy

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crazy DaLegend Immortal
They need ads and sponsors.
EU could easily lure in some huge companies. Besides huge billboards which would actually look cool through the universe, items could be used aswell.
Let's say Nike is lured in and through some kind of deal they are given the right to design and distribute some clothing lines which will bare their brand on it. A high percentage of that amount could be used to make the game more viable for MA's customers through higher returns, which in turn would lure more players and more ads and sponsors.
For the sake of sci-fi environment everything could be remodeled and used according to the game concepts, but still baring the real life brand names.

I really can't see this virtual reality having a future without the use of some sort of ads and real life sponsors.
Graphics are spectacular, content is huge, it simply lacks the population and interaction between players to really lift off.

you cant lure big sponsors if only 2000 -3000 people will see it daily
 
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