Tobold's Blog
Thursday, November 17, 2011
 
Arbitrage

I just read the interview with Marcko on MMO Melting Pot, which is controversial to say the least. Marcko sold his name and WoW gold guide blog for $50,000, and is now planning to make even more money with a Diablo III real money making guide and blog. Quote: "My goal with Diablo 3 is to get people making $25 per hour." Sorry, not going to happen.

First of all consider the step change: Marcko claims his WoW gold guide made people 40k gold per week. Now I'm not up to date on current WoW gold prices, but 40k gold is certainly not worth hundreds of dollars, and far from $25 per hour. But we all know that there are already a lot of "Chinese" (in reality they come from many countries) gold farmers in World of Warcraft.

So the second and bigger problem is one of arbitrage: There are quite a lot of people in the world who do not earn $25 per hour in their current day job. If it was possible to earn $25 per hour in Diablo III, they would do it. The more people trying to make money from the auction house, the less money there is to be made for each of them. If you price your goods so as to make $25 per hour, somebody will come and undercut you with a $24 per hour rate, and he will be undercut again, and so on. Basically the amount of money you will be able to make is by definition less than what a professional "Chinese gold farmer" is willing to work for. If Marcko's offer was in any way realistic, what would prevent a gold farm operator to buy 1 guide for $17 from Marcko, and use the information in that guide to have a hundred workers make $25 per hour from Diablo III?

I believe I understand where the flawed logic of the "get rich in Diablo III" business plan is coming from. The economy in World of Warcraft does not completely comply with standard economic rules: It is possible to "get rich quick" to the tune of thousands of gold per week in WoW. Been there, done that. But the reason why that is possible is that gold is not a legal currency. Lots of people treat gold like Monopoly money, and if they somehow got lots of gold don't think twice before wasting it on overpriced items. The same is not going to happen with a real money auction house. People have a far firmer grasp of the value of real money, and are not going to waste it like WoW gold. They can't just go out and farm some mobs or ore nodes to make real money to spend on Diablo III auction house items like they did with gold in WoW. AH trading for WoW gold worked because few people were actually interested in making a lot of gold.

I am already not a big fan of gold making guides. I'm not saying they don't work, but you are paying money for information you could have gathered for free from various blogs and game sites. But in the case of Diablo III the matter is much worse: Any guide promising you $25 per hour or similar amounts is a scam. You are more likely to make real money in Diablo III by just playing it and hoping for a lucky drop than you are by playing the auction house. There will simply be too many traders interested in real money for trading to be profitable.

P.S. I'm not so cheap as Markco as to sell my name and blog for $50,000. I have said before that my price would be $100,000, and I am sticking to that number. :) But frankly, I don't think I'll ever get an offer. A site making money by selling "guides" to gullible people has a better commercial outlook than a site providing written content for free.

Comments:
Most real world economies deviate from "standard economic rules". And "firmer grasp" for real money isn't that much firmer, really.

Big barrier is getting users to invest money into system, but once it's broken they can become as virtual as wow gold in mind's eye - just with background "cash back" option. You're not going to make same mental effort calculating your D3 spending as you do calculating your house budget. You might say "i'll not spend more then this amount" - which is still exploitable by determined individual.

But average level of investment can vary quite a bit, so getting specific hourly rate depends a lot on variables that cannot be seen until game goes live, and is very much "shot in the dark".
 
You are right. The only thing I'd add is that the fact that having stable access to the internet and some experience with games is reqired for the gold farmer to be effective.

And something else. D3's AH has the potential to change everything. We may slowly enter an age in which the real money can be made by creating arbitrary systems that allow other humans to satisfy the arbitrary (virtual) needs of other humans.

This may be like finding an asteroid full of gold circling earth. You wouldn't guess how fast humans would enter another space race. Technological progress is started by idealists but only changes society when there's enough incentives. A cold war and pride is a good one. But economic incentives are even better.

This could be the start of something remarkable. I'm just not sure whether I like it.

Extra Credits just made a nice video on the topic.
 
You both are right until proven otherwise.

Like it or not, Marcko does have a VERY good reputation with his WoW blog. I may not like the niche he occupied, but he damn right made the most of it. He used tons of marketing techniques to lure people in, but his (free) content was also extremely valuable. Most of the "how to make gold" articles that appeared on MMO-Champ or other more popular WoW sites were taken from his blog.

So we shouldn't be so quick to judge. His 25 bucks / hour might be indeed a bit over the top, but that's not to say good money won't be made from D3, with the right knowledge.

Right now it's your reasoning (that makes sense on paper), against his reputation and claims. There really is no way of deciding who's right until we're a few months into the game. And even then, the truth will probably be somewhere in the middle. :)
 
I believe he commented on his blog somewhere that the $25/hour was actually a goal to make $25 in the first hour you play. I'm not sure what the frame of reference was (per day, week, month). And it might have been to make $12.50 in 30 minutes or $6.25 in 15 minutes.

What do you call that? False advertising? Or is the fact that if you make $6.25 in 15 minutes every day proof that you're making $25/hour?
 
Or is the fact that if you make $6.25 in 15 minutes every day proof that you're making $25/hour?

Tobold's Diablo III $25/hour Real Money making guide: Play Diablo III as you normally would, for several hours per day. At the end of the day, spend 15 minutes to put all the rare items you found on the AH, undercutting the competition by 1 cent. You will make $6.25 in that 15 minutes. Thus $25 per hour. Voila! Please use the "Buy Tobold a coffee" button on the main page to send me $17 for this guide!
 
After reading the MMO-Melting pot interview yesterday I am not convinced that the blog was actually sold; making up a story about it selling as a means to distance oneself from a bad reputation garnered from failed attempts to get Tobold and Gevlon (and possibly others) to advertise a gold guide that was no better than what could be found out their for free. It's selling Enchanting Vellums on the AH and relying on people being too ignorant/lazy to realize you can get it much cheaper elsewhere. We all know that Marcko and his "successor" are good at marketing; just looking at his profile this is not the first time he has done this. What credibility he had he lost, so now he is trying to rebuild it by any means necessary (and just looking at the letter he wrote to Gevlon a while back shows that he is more than willing to use any tactics he can to achieve that goal). I certainly can't prove it, but were I his shoes I would.

Tobold is probably absolutely right though; in D3 you are directly competing with gold farmers who can afford to undercut you until it's no longer worth your time. There will also be the same issues of account hacking that plague WoW. The only exception I see is one Gevlon pointed out: The people who will make the most initial cash in D3 will be the people that rush to max level and sell what they find...the first wave as it were.
 
I firmly believe that some people are going to make money from the D3 auction house. The smart traders, who know the market and can spot underpriced items to snap up and relist will do OK. The guy who gets the one in a million perfect drop will sell it for a good price to someone with plenty of cash and a burning need to buy enery possible advantage. A lot of people who think they're going ot make money, though are going to lose a lot of their own time and possibly money.

The D3 aH isn't a perpetual motion engine. For money to come out of it, money has to go in. A whole bunch of people believing that they can each make $25/hour can only be right if other people are spending that much money. Otherwise, the would-be entrepreneurs are in for disappointment. The ones who are farming items to sell will not lose actual money, they'll just find their time isn't as well-rewarded as expected. The ones who buy items to relist... they have the potential to end up out of pocket if they aren't as sharp at trading as they think they are. Should be interesting. The game of poker has made quite a few good players rich at the expense of the ones who aren't as sharp as they think they are, now D3 AH offers the same opportunity :)
 
I know that "Chinese Gold Farmers" aren't all Chinese in reality, but there was a recent case of guards at a Chinese prison forcing players to play WoW 14+ hours a day grinding gold so they could sell the gold. It's pretty hard to make $25 an hour doing something when your competition is literally using slave labour.
 
People getting rich quick selling guides to getting rich quick far outnumber those who get rich quick reading guides to getting rich quick.
 
You raise great points Tobold, and the only real answer is... we'll just have to see what happens.

I'll repeat myself from the interview:

If I'm going to sell a guide then I need to crush the numbers I'm promising others can make.

Tobold, you're right that people will most likely spend their money wisely on the RMAH, but are you forgetting that there will be a gold auction house in Diablo?

Why can't you become "rich" on the gold auction house where players DO throw gold around like it's nothing? It wouldn't be hard to then convert the gold into valuable items to sell or just sell the gold if that's feasible.

It's all about going through the hoops that most people wouldn't think to attempt, and that's what I'll do. I'll try it all, succeed or not.

What's interesting about Diablo 3 are two features that I believe will play in my favor:

1. Randomness and how players simply fail at math.
2. So many different ways to manipulate items, in a far more complicated network than wow ever possessed.
 
I too think that $25 an hour is not realistic for the vast majority of players and even if it were for a short period of time, it can't be sustainable. At $25 an hour many people would afford to just stay at home and hammer away at D3. Just think of all the unemployed.

Besides, like someone else mentioned, you need people who BUY stuff before you can SELL stuff and thus make real money.

I wrote a more moderate article which analyzes the idea of earning merely $1 an hour playing Diablo 3 and my conclusion is that it is very worth it, even with those seemingly puny earnings.
 
If I'm going to sell a guide then I need to crush the numbers I'm promising others can make.

I would be very much interested in your exact interpretation of that $25 per hour number. Is that still valid if you do it for 40 hours per week, thus earning $1000 per week, and $4000 per month? Or is that $25 per week provided you do AH activities only 6 times per week for 10 minutes each?

If there is a limit to earnings per week, because you can't make $25 per hour EVERY HOUR, then I would think that it proves my point: If you can't make $25 per hour for 40 hours per week, then 40 people trying it won't be able to make $25 per hour for 1 hour per week.

The math might be complicated, but as soon as there is real money on the table, a lot of people are going to figure it out. That includes trading for gold and selling the gold.
 
Tobold, don't forget that there's a farly solid cap at the amount of money you can pump out of the economy: servers are relatively small. Even in WoW, if you "get serious" at making gold, you can easily saturate a market by yourself, and with a lot less time than 1/hr per day (thanks to addons). So $25/hr can be a perfectly valid claim, which simply does not scale up (unless you start repeating the pattern across multiple servers).
 
servers are relatively small

Hmmm, I've read that the auction houses in Diablo III would span whole continents (or rather currency areas). There would be only ONE market for all Diablo III dollar transactions, and ONE for Diablo III transactions in Euro currency. I don't think Diablo III has a typical MMORPG server structure.
 
Single market can mean that any temporary market flaw can be exploited for big personal gain. And both general and specific advice increases your chances of profiting from and noticing such disbalance. With market flow around 1m$ just 0.1% fluctuation you move in to "correct" can give you $1000 right there - and most holiday/work or even daylight cycles are likely to be far higher then that. And i think Blizzard expects totals to be much higher, since they profit from percentages there.

It's a gamble, but like in poker, your chances of making profit are much better if you follow theory.

With farmers "luck of drops" becomes irrelevant, and "playing the market" wins... and you don't expect "chinese farmers" to play the market, do you? Undercut, yes, but with millions of buyers, their relative contribution will be unnoticeable on general trends. And if it's noticeable, you'll account for that and adjust - buy right after they finish shifts, sell in the middle of them etc.
 
To address your question:

$25 per hour spent on the auction house and farming if farming is part of the strategy. I'm convinced that you won't need to farm if you stockpile correctly with cycles.

With the auction house bein so big, demand may or may not allow you to make money for many hours per day, but there will be a limit. Things take time to sell.

The real question is, how much money would the average player want to make?

Let's say I play with trends for an hour and I ah for an hour, I would expect to male $25, not $50. Does that answer your question?
 
Shakier has the exact same reasoning as I have: cycles will be the secret to making any consistent money in diablo3.

It's not enough to make money once in a while.
 
"People have a far firmer grasp of the value of real money, and are not going to waste it like WoW gold."

Your belief in humanity is great. But I've see too many people wasting their money on new tvs, phones, clothes, dinners and other luxuries they can't afford to believe that.
 
I would just like to point out that during the Guardian Pet announcements, Blizzard said what most people assumed: most sold gold comes from hacked accounts. So the idea of a third-world "gold farmer" happy to be sitting down and earning $1/day is more the myth than reality. The crooks who write the hacking software could just as easily come from Moscow or Palo Alto.

I don't disagree with your assessment of guides and the repackaging of free information. However, I would quibble that because the information is available does not mean the right compilation does not have value. The argument from the 90s is that most of the non-local information I read in the newspaper is available elsewhere (e.g. the thousands of AP/API newswire postings) A lot of the value of the newspaper is the editors: deciding which of these thousand wire stories are dubious or irrelevant, which few are important enough for the front page and which make the inside.

E.g., if 1 week before MoP launches someone would go through all the posts of the top 40 Gold bloggers for the last two years, decide which are still valid, organize and index them and correct the grammar/spelling, then that would have have value. Not enough to be profitable mind you and egos and copyrights would be a minefield, but editing has value.

Anyway I am so thrilled that the Annual Subscription removes the barrier to trying D3 so i will get to see how it turns out.

I guess that initially it will be underwhelming as all the people who planned to pay for their gaming or mortgage with D3AH learn about supply and demand. Perhaps Nils' possibility happens and it turns out to be revolutionary. In which case, regardless of the slow start, in 5 years people may be surprised how far we have come in virtual worlds.

I am most excited about the focus on everything on AH - no BoP - that is a consequence of all this AH focus. That is a real convenience.

----

I do think the next "camel nose under the tent" will be advertising, probably linked to the RM AH. E.g., there was an end cap in the grocery store with cases of Pepsi and Mountain Dew with "Double XP". It was for MW3. Nils and millions of others would complain, with many valid reasons, if Blizzard sold me triple XP. But the furor over dual boxing RAF was quite minor. Similarly, if Pepsi gives AB millions of dollars and someone get in game benefits from purchasing their products, there is a bit less QQ.

What if instead of a $1 off coupon for "1000 Pepsi points" I got a virtual pet or sword of awesomeness that I could sell on the AH?
 
I think it's hilarious that anyone is actually stupid enough to believe they'll make much money by selling things on diablo 3's AH. If you're that stupid, you deserve to be scammed by Marcko. It will be a cheap way to learn a lesson.
 
@trymayneslaw:

No, the smart traders will NOT do okay. We're not dealing with fake gold anymore, we're dealing with real money. All those under-priced items will IMMEDIATELY disappear from the AH.

Unless you camp the AH 24/7, you'll never see a single significantly under-priced item. And if you camp it 24/7, your hourly wage will still be abysmal because you'll be competing with chinese farmers.
 
I wonder if anyone will actually lose lots of real money by trying to play the diablo 3 AH? It would be amusing if someone bought a bunch of stuff when prices peaked, and then lost all their money when prices crashed.
 
Given my understanding of how Blizzard has made it very expensive to actually get money out of the system (by putting a rather high fee and making sure you have to withdraw money on a per transaction basis, which will generate a ton of profit-destroying fees for the full time trader), people planning on making boatloads of cash are off their rocker anyway.
 
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