Sony Online Entertainment Inc. is developing an online auction site that would once again put eBay Inc. and its PayPal Inc. at the forefront of low-value transactions and may have ramifications for the payments industry.
The unusual relationship would break payments into two stages; Sony Online would process consumer credit card payments for auctions but would remit the final settlement to the sellers through PayPal. The deal is a win for PayPal, which has tried, and largely failed, to promote its funds disbursement services. It may also be the second time that PayPal has updated its fee structure to drive up the volume of e-commerce micropayments, though this point could not be confirmed.
Online merchants have long complained that it is not profitable for them to accept credit card payments for low-cost online purchases, and Sony Online’s still-in-development system appears to have done little to address the problem. Because Sony Online plans to add its own fee for maintaining the auction service and processing transactions, the total fees to sellers should increase.
Greg Short, the director of operations for Web presence at Sony Online, said it expects its StationExchange auction Web site to go live at the end of June for people to buy and sell virtual items used in Sony’s popular EverQuest II game.
The winning bidders would have to pay for the items with a credit card, Mr. Short said. Sony Online, a unit of Sony Corp. of Tokyo, would process the transaction and then forward the funds to the seller, minus the Sony Online fee and the card interchange. Sony Online has not yet determined how much its fee would be, he said.
Sony Online cannot permit the sellers to process the card payments, because its privacy agreement with its game customers bars it from giving card information to third parties, Mr. Short said. Instead, Sony Online would handle the card transactions and assume the risk associated with the payment.
“In our current design of Station Exchange, in order to sell goods, you must have a PayPal account,” he said.
Gwenn Bezard, a research director at the Boston market research firm Aite Group LLC, said the arrangement is rare, because Sony Online would be using PayPal “only as a disbursement mechanism and not as a payment mechanism.”
PayPal has been trying to promote similar disbursement services for years but has found few takers, he said. Though it has appealed to employers who need to issue reimbursements for expense accounts, and to law firms that need to pay out winnings from class actions, these payments make up less than 1% of PayPal’s volume, he estimated.
PayPal’s disbursement operation is still “experimental,” Mr. Bezard said. “EverQuest is a big deal,” because “it’s a money machine.”
To encourage small-value transactions, PayPal announced a discounted rate tier for online sales of digital music in December 2003. Mr. Short would not say whether a special price had also been negotiated for Sony Online, and PayPal executives declined to be interviewed.
To discourage transactions that are too small to be profitable to process, Sony Online is hoping sellers will offer higher-value digital treasure; Mr. Short said the auction fees would probably dissuade players from selling under-$5 items in the same way card interchange fees have discouraged online merchants from doing so.
But Chris Kramer, Sony Online’s director of corporate communications, said that the auction operation is a work-in-progress, and that there is a chance for “future games to revolve around more of a microtransaction model.”
For example, he said, one online game provider in Korea has incorporated small-value sales into its games — some objects cost only about a nickel, and the “really low barrier” has spurred high-volume sales.
Station Exchange would function much like eBay. Sellers would list their goods, such as flaming swords, gold coins, and invisibility cloaks, for a predetermined period of time.
About 350,000 people play EverQuest II, and there is a huge market for virtual items used in popular online games. The goods are typically sold through eBay or other Web sites, despite game companies’ rules barring such sales.
John Smedley, Sony Online’s president, has said the size of this “gray market” is about $200 million, but his company speculates that it could be as much as $800 million.
Trading of these virtual items is common, though generally frowned upon by game developers. By shifting its stance and creating officially sanctioned sales channels, Sony Online hopes it can prevent fraud — which is also common — and capture a share of the transaction fees generated by this market.
Mr. Smedley said as much as 40% of its calls from customers are complaints about unsanctioned sales of EverQuest items that were never delivered. (Participants typically arrange a time and a virtual location for their online characters to meet and complete the transaction.) The StationExchange site would include a mechanism to automatically ensure the delivery of the goods.
Joe Laszlo, a research director with the Jupiter Research division of Jupitermedia Corp. of Darien, Conn., noted that “eBay has whole categories set up now for the sale of virtual in-game items.” The $200 million market estimate is probably accurate, but “it’s a tough market to size,” because of the restrictions on the sales, he said.
Sony Online is following the lead of Microsoft Corp., which is also including a store component in the upcoming upgrade of its popular Xbox game system.
J Allard, a Microsoft vice president, said in a March speech at the 2005 Game Developers Conference in San Francisco that his company wants to sell such items as virtual tattoos that players can use to personalize their online characters. Though Microsoft has not disclosed the full details of its microtransaction system, it said it would involve a digital currency that customers could use to buy items online.
Other game developers are taking notice. Tom Nichols, the vice president of marketing for Turbine Entertainment Software Corp. of Westwood, Mass., a Sony Online rival, said, “We’re taking a good look at what Sony Online is doing and seeing how they fare.” Turbine is not currently developing anything similar.
