Video gaming

How Stephen Bannon guided Hong Kong firm running ‘virtual sweatshops’ in China that made millions helping gamers cheat

Start-up used players in China to earn virtual treasure in video games which it sold to wealthy, time-short gamers in West; Bannon came on board to find investors and ‘try to legitimise the business’, a former executive says

PUBLISHED : Tuesday, 08 August, 2017, 1:04pm
UPDATED : Tuesday, 08 August, 2017, 1:24pm

Stephen Bannon had already been successful in Hollywood and on Wall Street when he flew to Hong Kong in mid-2005 to learn more about a promising new opportunity.

A start-up called Internet Gaming Entertainment, or IGE, had found a novel way to make millions of dollars each month in the exploding online video game industry. Working from the 19th floor of a skyscraper in Taikoo Place, Quarry Bay the company sold virtual goods for real money – magical swords and capes and other accoutrements that granted video game players power and access in more than a dozen popular online role-playing games.

There was one problem, though: the companies that owned and operated these fantasy games prohibited what IGE was doing, and even considered it illegal. Several IGE executives told The Washington Post that they thought Bannon could help change that. Bannon agreed to become the company’s vice-chairman.

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“The whole reason Bannon came on was to try to legitimise the business,” says David Christensen, who was hired as the company’s vice-president of business development about the same time as Bannon. In the end, it didn’t work.

The story of Bannon’s six years with IGE and its successor companies has remained largely unexplored, even as Bannon has become one of the most influential political figures in the White House.

His affiliation with the company cuts against his current image as a crusading champion of blue-collar manufacturing jobs and as a fierce opponent of globalism. It also shows Bannon’s willingness to be part of a company that operated in what one legal expert called “a classic grey market”.

Bannon helped persuade private equity firms, including his former employer Goldman Sachs, to invest tens of millions of dollars in the venture, which relied partly on labour from low-wage video game players in China to earn the credits that IGE then sold to gamers around the world.

IGE is effectively stealing part of the game assets from their rightful owner, Blizzard, and turning this theft into a profit
A Florida prosecutor in court filing

In 2007, however, IGE faced pressure from gaming companies, a class action lawsuit, an investigation by authorities in the US state of Florida and financial stress. Bannon soon steered IGE away from its virtual goods business.

Interviews with a half a dozen former employees and executives of IGE, and hundreds of internal company documents, reveal for the first time how the company worked to avoid detection by gaming operators – for example, using the identities of unwitting US residents to create gaming accounts and connecting to proxy servers so its activities would be harder to trace to its Hong Kong office.

It is not clear how much Bannon knew about these tactics, which were in place before he started and continued afterwards. He did not respond to requests for comment or an e-mail with detailed questions.

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IGE was the brainchild of Brock Pierce, a former child actor in Hollywood who had roles in the 1990s family films The Mighty Ducks and First Kid.

Precocious and quick-witted as a teenager, Pierce was also an avid gamer who had an entrepreneurial streak. In 2003, at 22, he and a partner opened an office in an industrial district of Hong Kong. The small office was a round-the-clock operation, its 15 employees taking orders from gamers around the world, former employees said.

Pierce, reached by phone, asked a reporter to e-mail questions to him but did not respond to subsequent e-mails or multiple messages on his cellphone.

For wealthy gamers, IGE offered an alluring proposition. Instead of toiling for days, weeks or months to advance beyond the early stages of an online role-playing game, they could simply buy the virtual goods that granted advanced powers or unlocked new virtual realms.

“It wasn’t unheard of for gamers to come to our website and spend US$10,000” on a fully outfitted character in a video game, says Greg Jelniker, who joined the company in 2005 as its vice-president of operations but said he was later pushed out by Bannon.

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In April 2004, according to internal company records, IGE took in more than US$2.7 million in revenue for virtual goods in four popular online games, including EverQuest and Lineage II. A year later, revenue for that same month rose to US$6.7 million, those records show.

Flush with cash, IGE snapped up competitors in the emerging industry. It moved to the Oxford House skyscraper in Taikoo Place that also housed CNN’s Hong Kong office. It began recruiting seasoned executives from gaming and other industries, who were dazzled by what they saw in the cash-for-credits business.

Most of the companies that owned the online games prohibited trading virtual goods for real money – IGE’s core business – and they worked to stop the practice, closing down accounts by the hundreds. These companies charged gamers a monthly subscription to access and play the online role-playing games.

Players in the West didn’t have time, but they had money. The reverse was true in China
Lars Lien

IGE executives thought they could persuade the game companies to support the practice and Bannon became a key part of that effort in 2005. At the time, he was a Hollywood financier and former Goldman Sachs banker who had branched into documentary-film making.

Michael Angeles, an operations manager in Hong Kong at the time, says Bannon was introduced to him in mid-2005 as “a big investor who would come in and start to help with the company”. At the time, Bannon was touring the Hong Kong office, sitting in on management meetings and introducing himself to the senior management, Angeles says.

Bannon visited the Hong Kong operation every few months, former employees say, sometimes bringing businessmen that employees imagined might be the big investor IGE needed.

The month Bannon joined, IGE opened an office in Shanghai. The new office became an important hub in the network that supplied the virtual currency that IGE sold, often referred to as “gold”. That supply chain was also part of what made IGE so controversial.

“Gold farms” were popping up across China at the time. Low-wage Chinese workers accumulated gaming credits by playing around the clock and selling the credits to brokers. The “gold farms” paid young workers as little as 25 cents per hour, according to a 2005 New York Times story that examined conditions inside what it said had become known as “virtual sweatshops”.

While these “gold farmers” were not under the direct employ of IGE, it was an open secret inside the company that IGE bought credits from them, former employees say.

IGE’s growth, its entire business model, rested on a simple truth. “Players in the West didn’t have time, but they had money,” says Lars Lien, who joined IGE in 2004 as head of customer support and worked there for about a year. “The reverse was true in China. People didn’t have money, but they had plenty of time.”

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Employees in Hong Kong handled the retail side of the business, a combination of customer service in both the real and virtual worlds.

IGE employees were instructed to conceal their activities both inside and outside the games, according to two former employees and company documents. They did this by taking steps that would shield their locations in Hong Kong and China, as well as their identities, from gaming companies.

In February 2006, IGE and Bannon celebrated a major coup. A group of private equity firms, led by Goldman Sachs, agreed to invest US$60 million, according to former IGE employees.

Some of the investors had doubts given the prohibition from gaming companies but decided to jump in after seeing the explosive revenue growth, according to a person familiar with the investment who spoke on the condition of anonymity.

The person said that Bannon gave the Wall Street investors confidence, especially given the relative youth of Pierce, the company’s chief executive. “Bannon was the adult in the room,” the person said. “You’re dealing with the gaming community, you’re dealing with kids. He did inspire confidence.”

But the company was finding little success in its most important task: persuading game operators to accept real-money transactions inside their games. The biggest of their targets was Blizzard Entertainment, maker of the game World of Warcraft, which had become the largest moneymaker for IGE. Christensen met executives at Blizzard, but they demurred.

“They felt this isn’t the right thing for us to be doing,” Christensen says.

These virtual worlds had their own calibrated economies, designed around the vagaries of supply and demand for virtual goods within the game. Gold farmers upset this balance, much as a real-world government might by printing excessive amounts of money.

In May 2006, Blizzard got more aggressive against what it called “cheating”. The company issued a news release saying that it had banned over 30,000 accounts.

IGE and its suppliers suffered a “huge loss” after the crackdown, according to a notice posted on IGE’s website. Many of the shuttered accounts had accumulated virtual stockpiles that vanished when the accounts were closed.

By January 2007, IGE’s virtual-currency business was in free fall, losing more than US$500,000 a month, according to a lawsuit filed later by co-founder Alan Debonneville in a dispute over compensation. IGE was struggling to pay its suppliers, prompting unpaid gold farmers to protest outside the Shanghai office in late April, according to Chinese news reports.

The turmoil convinced IGE to abandon its core business. It sold its virtual-currency trading arm to a competitor called Atlas Technology Group in April 2007, according to court documents. The following month, a gamer in Florida lodged a class action lawsuit against IGE alleging that IGE had violated subscriber agreements for World of Warcraft.

The suit alleged that IGE had “received tens of millions, if not hundreds of millions, of dollars by selling World of Warcraft virtual property or currency . . . generated by cheap labour in third world countries”.

The lawsuit was later settled, with IGE promising not to sell virtual currency in World of Warcraft for five years. In June 2007, Pierce stepped down as chief executive, and Bannon took his place.

In August of that year, Blizzard Entertainment asked the Florida attorney general to investigate “companies attempting to profit illegally from” the video game, according to documents released to The Washington Post in response to a public records request.

About four months later, the attorney general issued a subpoena to IGE as part of an investigation into whether the company was violating the state’s Deceptive and Unfair Trade Practices Act, records show.

“IGE is effectively stealing part of the game assets from their rightful owner, Blizzard, and turning this theft into a profit,” a Florida prosecutor wrote in a court filing justifying the subpoena.

Authorities ultimately dropped the investigation after IGE turned over documents showing that it had got out of the cash-for-credits business. The case was closed in September 2008.

Bannon steered the company, which had changed its name to Affinity Media Holdings, away from its controversial core business, focusing instead on internet chat rooms and forums for gamers, some of which IGE had acquired before it got out of the virtual-currency business.

Bannon became fascinated with the collective power of the gamers who gathered on these sites, according to journalist Joshua Green, who wrote a book, Devil’s Bargain, about Bannon’s rise in the Trump administration.

“These guys, these rootless white males, had monster power,” Bannon told Green.

Bannon said he hoped to harness that power with Breitbart News, the website he ran starting in 2012 until he joined the Trump campaign last year. He remained chief executive of Affinity and an affiliated company called IMI Exchange until 2011.