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Banking on a virtual economy

Online gamer Jon Jacobs recently spent $100,000 in real-world money to buy a virtual space station. Is he nuts?

Late last month, Jon Jacobs, an independent filmmaker from Miami, became the first person in the history of online gaming to spend $100,000 on a single virtual item when he bought a space station in the game "Project Entropia."

Jacobs, whose avatar Neverdie is somewhat of a celebrity in the space fantasy game, is so confident of his ability to turn his hefty investment into quick riches that he pulled cash out of his real-world home to help raise the hundred grand.

His certainty is based partly on the experience of David Storey, who earlier this year set the previous record for highest price paid for a virtual item when he plopped down $26,500 for Treasure Island, a private piece of "Project Entropia" land. Storey, Jacobs said, has already made his money back through revenue earned by hunters and miners who pay a tax to use his island.

And though there haven't been many instances of people paying five or six figures for virtual items, the trade in such goods is big business. The value of all virtual items--swords, armor, dwellings, vehicles and the like--is measured in the hundreds of millions of dollars a year. And it is only growing.

With that in mind, CNET recently talked to Jacobs to pick his brain on his in-game celebrity and why he would do something that the rest of us would never even dream of.

Q: Where does the name Neverdie come from?
Jacobs: That's my idea for the ultimate video game avatar, because the thing you do most when you play video games is die. So the ultimate character is the one who never dies.

I'd previously spent $1,000 on a small piece of land, a tiny piece of land inside "Project Entropia," and it was already yielding like $15 a day in revenue, you know, which is like $450 a month.
Why is Neverdie famous in "Project Entropia"?
It started early on. When I started playing, I went after all the good stuff and I was like the first person to acquire a full set of shadow armor, which was the uberequipment. That was a historic day in itself, and the first time Neverdie began to establish a reputation. About a year later I recorded a song about my girlfriend: "My girl is a gamer chick, I really love her so." I sent it to the developers of "Project Entropia," and they really loved that. They offered to put it in the jukeboxes (scattered throughout the game). It was just amazing. I would go from town to town, and people would be playing the song everywhere. Once the word got around that Neverdie had created the song, both my avatar and my girlfriend's avatar became celebrities.

Tell me about your participation in the real cash economy?
I was very much in love with the whole concept of the real cash economy. When they put this Treasure Island in the auction, I ended up selling everything and doing everything I could to raise enough money to get it. I did it almost entirely with profits that I had accumulated in the game, and I managed to bid $26,000. But I got beat. It was really one of those real historic moments like being in "EverQuest" and killing the first dragon. I've seen the potential of it all, and I've gone through it, and I learned my lesson, and my lesson was that I can't afford not to do this. I could not afford not to get the space resort. It's too valuable. The guy that bought the Treasure Island recouped his investment in a year.

Where did the $100,000 come from?
Well, probably around $35,000 was accumulated (from the sale of virtual goods from the game) over the course of three years. We have items that are very, very valuable. The rest of the money, I basically refinanced my house. If I bought a property on the beach in Miami, I would just be another guy with a little bit of rental real estate and I probably wouldn't actually see any income for a couple of years. Whereas I'd previously spent $1,000 on a small piece of land, a tiny piece of land inside "Project Entropia," and it was already yielding like $15 a day in revenue, you know, which is like $450 a month.

Where does that revenue come from?
On my particular small piece (of land), I've got six different kinds of monsters for hunting. I'm able to control the amount and density of each of those monsters, as well as their maturity. So I can control whether they're young ones that are easy to kill or if there's an uberone that is going to cost you an arm and leg to kill. Basically, I tax anybody that hunts my land between 1 percent and 10 percent (of the value of what they collect). So let's say you kill a whole bunch of stuff and you loot $7 of cash value. I will then charge a tax on that. If I'm charging 5 percent, I would get 35 cents. You might ask, Why do I want to go and hunt on your land? Why not just go to the untaxed land? The reason is that I'm able to cater very specifically to hunters' needs. I can provide the right creatures in the right density in a convenient location.

So tell me about this space station?
Well, the space station is very special because first of all it has 10 hunting grounds. I can probably attract a total of 100 hunters an hour. That could mean a gross turnover of $1,000 to $5,000 an hour (in looted goods) of which I can tax between 1 percent and 10 percent, or $100 to $500 an hour, just from hunting. There's also going to be mining opportunities, and I get 1,000 hotel rooms. On the space station, there is no public storage, which means that if you're a hunter or a miner, you can't hunt for very long and get laden with too many items before you can't move. So you're going to want somewhere to store your stock, so it's going to be worthwhile investing in an apartment. I'm also going to have 200 shops, so hunters and crafters can exhibit their wares. But here's the key, and this is why I did this. Why are people going to come to this space station? One of the features is that I'm going to have audio and visual streaming so I can bring in DJs to stream in live DJ sets. If I'm working with top DJs, they're going to be pumping in fantastic music, and (I can) advertise to the DJs' fan bases that they can see their favorite DJs live in virtual reality.

So how much can you make with this?
Let's say there's 20 hours a day of hunting, times as many as 100 hunters at a time. With my 5 percent tax, that's as much as $5,000 a day. That's $35,000 a week, $140,000 a month, or $1.68 million a year. I'm calling that the successful low end.

Let's say there's 20 hours a day of hunting, times as many as 100 hunters at a time. With my 5 percent tax, that's as much as $5,000 a day. That's $35,000 a week, $140,000 a month, or $1.68 million a year. I'm calling that the successful low end.
It sounds like a good plan, but also a little far-fetched, don't you think?
Not really. Ten years ago, I was wondering what the Internet was all about and wondering if people could watch films online and wondering if I should even use my credit cards online. And, well, a lot of people today, they hear about this stuff and games and they don't realize why virtual reality is a step beyond the Web. It's an online environment where you get a community of people that have a far more and far greater degree of ability to interact socially than even online because they can relate to each other on a physical level instead of purely on a chat level. If you've been in "EverQuest II," you know that wherever you go, people around you are buying and selling. You walk into any public area and people are offering this and offering that, right? It's very much a community of trade, and the money is real. And take the guy who bought the Treasure Island. I mean, he bought it for $26,000 and 11 months later, he's got $26,000 back. He's still got the island, and if he wants to sell it, I bet he could sell it for $100,000, so he's probably got a 400 percent increase in the value of the real estate itself.

You've spent all this money. Do you have any insurance in case the publisher goes out of business, or they cancel the game?
I don't have a safety net in that respect. And I didn't make this purchase lightly. I sweated about it a long time, I mean, I really did. You know, I wanted to put more money into the Treasure Island auction and I kind of got scared. And then I watched what happened over the year. And I've been involved in the "Project Entropia" economy for three years, and I've frequently taken money out to pay my bills. I've drawn out money to pay my mortgage during tight moments. I actually had paid a deposit on a condo in South Beach and the hurricanes were coming. The first one came and I was supposed to put down the second phase of the deposit and I got scared and I pulled out. The American housing market cooled off and Greenspan put the interest rates up after Hurricane Katrina, and I lost confidence in the American economy. I felt like there was more opportunity right now in a virtual economy than in the American economy for this kind of profit potential.

Were there a lot of other bidders for the space station?
As I understand it, there were eight other serious bidders. In fact, the guy that bought the Treasure Island would have got it an hour later. And that tells you something. A guy that spends $26,000 was trying to put in $100,000 to get the next piece of property. Why? He more than anybody knows that that scale of an investment is realistic. And the next day I was offered $200,000. I mean, it's no good to me. In the real world you're going to have to buy a labor intensive business to generate this kind of income. So I preferred to stick with my investment and go for the serious revenue.