Part 1 | Part 2 | Part 3

Last time, we looked at how the fees for the different auction houses will affect trading in Diablo 3. Today, I’d like to look at it from Blizzard’s perspective and understand how the company selected the fee structure, what it will be paying attention to, and how it might treat the auction house in the long-term.

If there’s one thing Blizzard learned from Diablo II, it’s that there is a huge demand for functional in-game economies. Where Blizzard did not provide, players and companies emerged and established methods for trading and valuation. Both Diablo II and World of Warcraft have shown that there is a huge demand to use real money to purchase things, like characters, items, and gold. Blizzard took a staunch “no-RMT” policy for World of Warcraft, as expressed in the game’s Terms of Service, and does not hold back in banning accounts used to sell items or gold. If you haven’t seen it yet, it really shines a light on how serious Blizzard is about preventing RMT in WoW:

Blizzard has acknowledged that WoW gold purchased from third parties is “most commonly” obtained through compromised accounts. Blizzard has also acknowledged that third-party sites in Diablo II were often the source of credit card fraud and often did not provide a high level of service. It also promoted spam, bots, and hacking. It makes sense for the company to offer this service to players directly and built into the client: it provides a better experience and Blizzard can skim a bit of cash as well.

What do you get from using Blizzard’s service instead of a third-party service?

• A single, convenient, and unified player-driven market
• Security in transactions: only Blizzard processes your payments.
• The ability to get paid without intermediaries
• Reliable customer service in case of disputes
• A long-term reliable economy: Blizzard will have access to lots of data to make decisions and better records to track down botters and fraudsters.

All of this is done relatively cheaply: the flat $1 per transaction is worth the convenience and peace of mind you’ll get from using the auction house for big-ticket items. However, it is not without its drawbacks. Here are some of the big ones:

• Paying 15% to payout to PayPal and requiring it to be done on-the-spot are slightly more inconvenient and expensive methods than they could be.
• Selling cheap items on the real-money auction house is not very economical, nor is converting the money from the gold auction house.
• There is a floor and ceiling price on the real-money auction house ($1.50 and $250), and if items exceed that amount, players will have to make complicated arrangements to part with them.

I think that Blizzard might have underestimated the second point a bit. With micro-transactions taking gaming (and other markets) by storm, lots of players are willing and conditioned to pay very small amounts for things, potentially many times. The success of mobile phone apps and digital music sales asking users for $0.99 and becoming billion-dollar industries over-night are a testament to this. As we saw in the previous part, the realized profit for sellers for cheap items is very low.

Blizzard has an obvious and huge interest in ensuring that the Diablo economy is a success:

• Of course, Blizzard is certainly cutting a profit from the transactions fees despite the services and security offered.
• The ability to sell items through the auction house is a compelling gameplay feature that is a great selling pointfor the software.

By introducing and effectively managing a new digital currency – the “Battle.net credit”, Blizzard reaps significant rewards:

• Since Battle.net credits are created solely by players depositing money into the accounts, players holding Battle.net credits equates to a free money forward for Blizzard – money that can be invested and turn a profit before the player spends it and the company has to pay out real funds for it.
• By making it more expensive and less convenient to cash out to PayPal – the company is encouraging the use of the currency and allows for the purchase of some of itsn(digital) products using the currency. This will undoubtedly yield increased sales of these digital items.

The most curious thing to me is that the items that you can buy from the Blizzard store is so limited. Here is a list of what you can buy from Blizzard with the Battle.net balance:

Battle.net Balance FAQ  

• World of Warcraft Character Services
  • Appearance Change
  • Faction Change
  • Name Change
  • Race Change
  • Realm Transfer
• World of Warcraft Guild Services
  • Guild Faction Change
  • Guild Name Change
  • Guild Realm Transfer
  • Guild Faction Change + Guild Name Change
  • Guild Realm Transfer + Guild Faction Change + Guild Name Change
  • Guild Realm Transfer + Guild Name Change
• World of Warcraft Digital Upgrades
  • WoW: Battle Chest to Wrath of the Lich King
  • WoW: Battle Chest to Cataclysm
  • Wrath of the Lich King to Cataclysm
• Other Digital Blizzard Games
  • Diablo II
  • Diablo II: Lord of Destruction
  • StarCraft II
  • StarCraft Anthology
  • Warcraft III: Reign of Chaos
  • Warcraft III: The Frozen Throne

The most conspicuous digital items missing from this list include World of Warcraft game time and WoW pets, as well as WoW itself. They are listed in this blog post as future additions, but why they aren’t available on launch is a mystery to me. It might be that they are not yet easily reversible in case of incidents. Blizzard has done very well to “cross-pollinate”, with the WoW Annual Pass giving World of Warcraft players a copy of Diablo III and ensuring that they continue to subscribe to WoW for a year. I imagine that Blizzard is concerned with the Diablo and WoW cannibalizing each other’s player bases, and it seems to me that giving WoW players the ability to pay their subscription fees by playing Diablo III is a no-brainer. Giving Diablo players a chance to easily dip into WoW can only increase game and service sales.

With all of these amazing methods for Blizzard to profit from the Battle.net Credit, why would they even want players to use gold? Blizzard does not directly profit from the gold auction house: the 15% cut from the auction house does not go into their pockets. It does provide for a “gold sink” that scales with the size of the game’s economy, but is it worth precluding transactions in Battle.net currency? While it is clear that a gold auction house should exist for convenience, as gameplay features will require the acquisition of lots of gold (and gold is freely generated, if Battle.net Credits were instead, they wouldn’t be able to peg them to the dollar), we saw in the previous post that there are lots of situations where the real-money auction house will fail to provide a good solution for trade, particularly for very cheap items. For this reason, the gold auction house will be preferable for players in many circumstances. I can’t imagine that Blizzard would prefer players to use gold over Battle.net Credits when possible, so I do expect the fee structure to change to better incentives using a Battle.net balance. More on this in the final part.

Another burning question for potential auction-house moguls is: why not offer a way to “cash out” your Battle.net balance? We answered this a bit previously – having players hold that balance gives Blizzard a profitable cash advance. Even if it means that players hold a few dollars or cents left over from not completely spending their balance, it can add up to a lot of money that would otherwise be completely depleted. However, I really wonder if Blizzard will eventually rescind the decision. Players can, with the help of a friend, use their balance to buy their friend’s item and cash out to PayPal, again paying the auction house fees. This is ultimately what gives the Credits a close-to-real-world value: situations where you can use them or real-world currencies, with the other party receiving their choice of currency. I imagine that many players would be more comfortable using the Battle.net balance and treating it more like a real currency if they were able to cash out. Perhaps implementing restrictions on cash outs could provide a win-win situation for Blizzard: a more expensive fee than the on-the-spot transaction, say 20% instead of 15%, and the stipulation that it can only be done once every 90 days or so. The benefit of receiving credits at the AH in both the current and this theoretical scenario is that you don’t have to pay the 15% cash out fee is you are just going to spend the proceeds on in-game items anyway. Providing an alternative cash-out method might incentives more players to consider using the real-money auction house, and use the convenience factor to close the buddy-system loophole for cashing out after the fact.

The last big regulation that I’d like to consider is the 10 auction limit per account. Every account can only list 10 auctions per mode – that is, 10 auctions in softcore (the “main” mode) and 10 auctions in hardcore. It seems that this limit applies across gold and the real money auction houses. A clear reason for this limit is that auctions are free – there are no fees for listing or failing to sell an item. Without these fees, there is no reason not to “spam” the auction house, which makes it more difficult to navigate, more expensive to manage, and harder to maintain a functioning market. Additionally, it makes it much more difficult for botters to realize profits from farming or even from directly botting on the auction house. In order to have a real impact, several game licenses would be required, each of which is very expensive and would outweigh the cost of dealing with the botters. If a botter can’t make $60 before getting banned, they aren’t going to bot. At the end of the day, they provide the tools for the average player to buy and sell, and enthusiasts have some freedoms for expensive and larger operations. This isn’t going to be a platform for botters or speculators to make massive amounts of money – the fees and structure of the auction house prevent these sorts of activities.

In the last post in this series, we will look at the in-game economic welfare effect of Blizzard’s policies and whether third-party services can thrive. Stay tuned!