Introduction

One deficiency of a centrally planned economy is that the central planners cannot foresee the many niches and opportunities that a market will root out. When you hear about virtual economies you may well nod and reflect that the rise of Google and Facebook demonstrate this beyond doubt. But if I told you of a $50 million market in which the principal investment is virtual hats you can be forgiven for disbelief.

Let’s backtrack. In 2007 the computer game company Valve, already famous for the popular Counterstrike, released another online multiplayer shooter called Team Fortress 2 (TF2).  It was a hit, and as a result was updated and iterated upon over the years to follow, including the addition of extra weapons for players to use.

It was in September 2010, however, that the true impact of this simple addition was felt. An in-game store was added to allow players to purchase- with real money- the multitude of weapons added, and the ability for players to trade amongst themselves.

But what of hats? In May 2009, items were updated to be distributed by a random ‘drop’ system. Hats were also added to the game. For reference, TF2 is a first person shooter. So you view the world through the characters’ eyes; so you cannot see your character’s own head; so you cannot see any headwear your character might happen to be sporting. Nevertheless, the most desirable in-game hats have sold for up to two thousand dollars.

No-one buys a virtual hat for such ridiculous sums without some form of (baffling) justification. The context is what we’re after: the context being a live and functioning virtual economy.

Methodology

How, then, can we state that it amounts to $50m? The steps taken to arrive at the figure are available to all thanks to the distribution service required to play the game. Essentially the iTunes of PC games, ‘Steam’ also includes statistics tracking. So let’s work this out.

Team Fortress 2 typically has between 30 000 and 70 000 current players at any time. We’ll use the low estimate of 30 000 to avoid inflating the results. Note that this is concurrent players.

The system by which weapons ‘drop’ to players is fixed to 11 per week, which stop after 10 hours of playing that week. This cap complicates the equation somewhat: players who have already reached the maximum limit are no longer causing weapons to be inputted into the economy, yet account for hours played in the statistics. We’ll use a high estimate of 50% of total weekly hours spent being from players already over the limit, thus not contributing to the economy. That is, 50% of the hours recorded coming from players who have already contributed 10 hours earlier in the week.

So far, we have 30 000 players at all times. Meaning 720 000 hours per day, or 5.04 million per week. Accounting for the assumption that only half are inputting their 11 weapons in that time, we still have 27.72 million weapons added to the economy per week.

Now it gets even stranger. Weapons dropped (and the term ‘weapon’ is used loosely, including sandwiches (see below), mackerel and busts of Hippocrates) can be combined by the player to form a ‘scrap metal’. 3 of these can be combined to form a ‘reclaimed metal’, and three of those can combine to make a ‘refined metal’. Phew! If you were following closely, you’ll have worked out that it therefore takes 18 weapons to make a single ‘refined metal’.

Looking back to our stats then, we can estimate that there are the equivalent of 1.54 million ‘refined metals’ added to the economy per week.

Here comes the kicker: the trading system and the store work in tandem. Items from the store have set prices, which means that the dropped items in the game can be traded against paid-for store items. This system allows us to work out what the market rate for the dropped weapons is.

From Pixels to Pounds  

The most liquid asset in the economy are ‘keys’. Each key can be bought from the store for $2.49. Their purpose is to open ‘crates’ that drop alongside weapons (more on that later), but we shall concentrate on their market value. The going rate for a key is between 2 and 2.5 refined metals. Taking the upper estimate (thus the lowest value of metal), we can deduce that 1 refined metal has a market value of $1.

Remember how many refined metals were added to the economy each week? That’s right. The equivalent of $1.54 million dollars is created by a server continuously adding numbers to a system.

Now look back to when this system commenced: May 2009. At the end of November 2011, therefore, a grand total of $46.2 million had been added to the game.

…But what about?!

Of course, this figure will be wildly inaccurate.

One problem is that the 30 000 concurrent player figure would probably not have held steady since May 2009. However, considering that the figure currently fluctuates between 30 000 and 70 000, it seems fair to say that our estimate remains conservative.

Every other estimate has been at the low end too. In reality, there are more players putting in more hours, with more hours resulting in more drops, with more weapons and metal added. In addition, there are entire elements of the economy unconsidered here.

For one, hats.

Hats also drop randomly, or can be created by merging 3 refined metals. These are the most sought after commodity in the economy. But there is another tier to hats. ‘Unusual hats’ are the same assortment of headgear, simply with a particle effect- think steam coming off it, or it being circled by a love heart. So far so weird. Yet people go crazy for them, with prices ranging from around $25 to $2000. Yes. Thousands of dollars for a virtual hat surrounded by a visual effect.

Taking the most authoritative site’s minimum confirmed figure of 25 000 unusual hats, and once again a low estimate of $50 (I know…), we can add another $1.25 million to the increasingly ridiculous total

Secondly, anything bought in the store.

The multitude of items in the economy can each be purchased from between a few pence and a worrying number of dollars. Valve do not provide figures for sales, but we can work out an approximation for keys.

The only method of acquiring unusual hats is to open a crate with a key (which must be purchased from the store), with a 1% chance of acquiring one (and a 99% chance of getting another random item). Given that there are at least 25 000 confirmed unusual hats in the economy, that is roughly 2.5 million keys sold (totalling $6.25 million).

Conclusion

Having consistently used low estimates, we can be confident in a minimum figure of $52.7 million (regular drops + unusual hats + keys), without even taking into account weapons bought in the store, promotional items and more. The true figure is probably double this.

That is not, it must be stressed, to say that Valve can laugh their way to the bank with such money (although the $6.25m figure for keys sold does allow precisely this). The vast majority of it will remain within the game: it will remain virtual. Even people paying ridiculous sums of money for fancy virtual hats will likely plough it straight back into virtual goods, either to trade their way up, or to fulfil a peculiar desire for an unusual Otolaryngologist’s Mirror to match their Surgeon’s Stethoscope.

Stories such as the 15 year old who made $10 000 profit buying and selling virtual hats, for example, cannot be extrapolated beyond an even tinier niche within the economy.

In spite of this, the very fact of this vast, bizarre, economy’s existence- a haberdashers niche within a niche- is surely worth some discussion.

*UPDATE*

It seems there was a significant error in the calculation above regarding drop rates, pointed out by Reddit user _YourMum (interesting name).

The calculation implies 11 drops per hour as the suggested rate, whereas this is actually the weekly rate. It’s not quite so drastically different as that sounds, however. Rather, we must divide by 10 to  account for the 10 hours required to reach that cap. As YourMum writes (I see what he did there),

For a maximum total items per week, we assume that each player reached their drop cap and immediately stopped playing, but that there were 33000 players at all times. This means that each player played 10 hours to reach their 11 items, so

33000*((24*7)/10)*11 = 6098400

The low estimate we used was actually 30 000, and again we’ll divide by two to compensate for the fact that many of those hours will be over the 10 hour cap, to reach the figure of 2.772 million, consequently reducing our total to $12.12 million

Well that’s the headline ruined then!

Hang on a second though. What if we take some time to take into account some of the factors glossed over before?

From crates

Remember the estimated figure for keys dropped? We only considered the raw value of keys available, dismissing the 99% of non-unusual ‘uncrated’ items. Most of these bear the ‘Strange’ designation (it does indeed get more arcane), which vary wildly in value. We’ll use a (hopefully conservative this time) valuation of $0.50 for these drops. Multiply by 99% of the estimated keys and that’s another $1.25 million alone.

From the store

Now consider other items bought in the store. This is even harder to work out, but we can again take a stab. The items in the game are created not only by Valve themselves, but also by community contributors. Profits made in the store are split (at an undisclosed ratio) with those contributors. Valve recently announced that this amounted to over $2 million dollars for contributors. Assuming the split is equal, that’s $4 million in sales. Now consider that this doesn’t account for Valve created items.

It’s impossible to work out hard numbers. We can, however, assume that hats are the most bought commodity (other than keys) in the store. Further assuming that Valve and contributor hats in aggregate make the same level of profit (and taking into account the fact that there are 2.4 contributor hats for every Valve hat in the store), we can add $1.67 million to that, to make another $5.67 million. Then consider that a large majority of non-hat items are purely Valve’s own, and we can safely round that figure to $6 million.

From promotions

Another major contribution is promotional items. Awarded to players who pre-ordered other titles on the Steam platform, these items are branded ‘Genuine’, and are strictly limited in number. This increases their rarity, hence value, considerably. Ironically, low selling titles have high value promotional items: the rarity of the promotional items can cause them to be worth up to as much as the title itself. Once again, however, figures are very difficult to work out.

For one, there are no reliable sales figures for PC games, lesser still reliable figures for those on Steam, lesser still the percentage of pre-orders, lesser still the percentage of pre-orders going to people who then went on to redeem promotional items in TF2. We do know, however, that The Witcher 2 sold 200 000 copies on Steam. That the likes of Deus Ex: Human Revolution and Football Manager 2012 easily made more, and that recently released Skyrim sold more than any of those. With a multitude of million selling titles offering between 1 and 10 promotional items each, we should be safe to estimate that at least 500 000 of those available made their way into the economy.

With the over 50 different promotional items available worth on average 5 refined metals (according to here), that adds another $2.5 million.

Concluding, again

Adding these extras to our revised estimate still leaves the economy with a hearty $22 million. With the figures being so impossible to predict, and having used conservative estimates,  the true figure could still easily reach the $50 million spot.

There will be more items sold in the store, more promotional items, more unusual hats and many one off special items (such as earbuds) to add to that total. Earbuds alone, once awarded to all Mac users, are valued at $20 each. Once again we have no details of numbers awarded, but the value of this single commodity will likely rest at over $1 million.

At the end of the day, however, no matter how large TF2′s economy actually is, it stands as a testament to the potential of this market. Virtual economies are still untested. Whether it’s Zynga flailing on the stock market, or Chinese  ’gold farming‘ horror stories, virtual economies do hit the headlines. Until the sheer weight of these operations start to become noticed, however, the broader picture will not emerge.