For those of you living in a cave, virtual gaming is on fire. People are spending hours, days, months of their lives in virtual worlds like SecondLife. These are truly virtual worlds, complete with their own currencies that grease economies in which participants build virtual businesses and bring home real bacon.

So, it's interesting to read about a lawsuit brought about by two founders of such virtual worlds. The accusations essentially revolve around a plan to make money running the virtual economy of one such world and make massive profit by essentially "printing" infinite currency to sell to participants. Obviously, not Harvard PhDs in economics (although they also often say silly things).

I read about this whole incident on TechDirt, a great website for lots of news and insightful analysis of technology. TechDirt ran an article, More evidence why virtual world economies are risky yesterday that discussed the ins-and-outs of virtual economies and then extended some lessons to something more tangible for many of us: the U.S. economy.

Says TechDirt's Mike Masnick:

While this suggests the folks in question had little sense of how basic economics works, it also highlights a pretty serious risk in these virtual worlds. At the same time that we're seeing Ben Bernanke struggling with managing the monetary policy of the US economy, for virtual worlds where there really is no scarcity at all, the temptation to simply flood the market without recognizing the consequences is just too great.

Well said, Mike.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author is also a member of the TechDirt Insight Community.

This post is part of our Hottest Products of 2007 feature. Check out our other Hottest Products of 2007 posts and let us know which product you think is the greatest thing since sliced bread.

If you find life a little boring, stifling and basically bland, then you may be a prime candidate to check out one of this year's hottest properties. Second Life is for people who wish to expand the boundaries of their life experience. Second Life opens up opportunities (albeit virtual ones) that most people would never encounter in their own personal daily grind. Much of the "news" that surfaces in mainstream media regarding Second Life is just dicey, sensationalist spin. What we want to know about are the things that make Linden Lab's Second Life worthy for consideration as a product of the year.

A good place to start investigating is Second Life Insider, a blog dedicated to tracking that constantly changing virtual environment. For instance, did you know that Second Life has an economy of its own, which actually maintains an exchange rate against real American dollars? It's true, and according to Second Life Insider, on November 1, Second Life membership invested U.S. $1,372,000 into Linden dollars (the site's virtual currency) at an exchange rate of L$268.7 to one U.S. dollar. In fact, there was quite a moan put out by the IRS at the beginning of this year when they again realized that people do generate significant income in virtual spaces.

CNN Worldwide, a part of the Time Warner Inc. (NYSE:TWX) franchise, is expanding its staff of correspondents by 10% as it looks to increase its original content. The investment is said to be under $10 million and will add about 16 correspondents to its staff of 150.

About two months ago, CNN announced it was abandoning the relationship with Reuters Group PLC (NASDAQ:RTRSY) and would instead bolster its own news capabilities. The idea is to capture more advertising by owning the content as the content can simultaneously be pushed out over multiple distribution platforms.

What is interesting here, is that the focus is in the United Arab Emirates, where CNN operates CNN.com Arabic. It will use some of the investment for a digital production unit in London, as well as to increase its staff in Hong Kong. Mexico City and Johannesburg. Additional staff, and news operations are being planned in Belgium, Poland, India, Afghanistan, Nigeria, Kenya, Malaysia, the Philippines, and Vietnam.

In an attempt to put "knock-off" imitators out of business, high-end furnishings designer Herman Miller Inc. (NASDAQ: MLHR) will unveil a number of its famous designs on Second Life. The designs will be available at no cost to consumers who were duped into purchasing knock-offs from unauthorized vendors, as long as the buyers agree to get rid of the unauthorized inventory. For other consumers, the designs will be available at a reduced price. Consumers can find Herman Miller's entire collection within Avalon Island in Second Life. Herman Miller intends to expand its virtual world presence in order to provide detailed depictions and descriptions of its designs.

Recently released 1Q FY 2008 earnings support Herman Miller's bold expansion into the virtual world. Sales for the quarter were up 9% to $492 million, net earnings increased 17.5% to $33.4 million and diluted EPS increased 25% to $0.54. Simply put, operating earnings are up while operating expenses are down. Herman Miller has posted 15 straight quarters of YoY sales growth, driven in large measure by a 17% sales increase in its international markets, primarily Asia and the UK. International orders are up 6%, which helps to counteract a 5% decline in North American orders. Perhaps Herman Miller's expanded virtual presence will inject some energy into the North American market.

Senior management expects 2Q FY 2008 sales of $475-$500 million, with diluted EPS of $0.51-$0.57. The company has already repurchased 1.9 million shares of its stock for $60.8 milion, and recently authorized repurchases of an additional $300 million. At under $30 per share, the stock could be worth a look. Certainly its virtual show room is.

Update, 5/11: In the wake of this controversy, Linden Labs has purged Second Life of those responsible for the behavior described below. Kudos to them.

More than six million people worldwide have found a way to live a second, more fulfilling life online in the virtual world of Second Life. Now some of the same seamy behavior that bedevils the real world is showing up in that world as well.

Now, according to The Guardian (registration required), German prosecutors are investigating virtual pedophilia, in Second Life, as some players have taken to engaging child prostitute characters in sex within the virtual world. Sex with e-animals, they write, is also increasingly popular.

The issue of legality in the U.S. of such activities was muddied in 2002 when the Supreme Court, in Ashcroft vs. Free Speech Coalition, struck down a law prohibiting the sale and distribution of virtual child porn as a violation of First Amendment rights, as long as the porn is not based on a real child.

The issue of illegal and/or immoral behavior of avatars in video games such as Linden Lab's Second Life came to public dialog with the release of Grand Theft Auto III in 2001, in which a player can steal a car, pick up a hooker, have sex with her, then kill her and steal her money.

A number of related cases are working their way through the court system today, one or more of which may eventually establish the boundaries for this and other virtual content.

At the moment, however, I suspect the question will be, what will the public tolerate? Certainly, a child e-porn scandal will invigorate a great deal of opposition to unchecked virtual privileges. The controversy presents a huge challenge to Linden Lab's franchise game.

By some estimates, the economy of World of Warcraft is worth $200 million, while Second Life's economy has been recently valued at $64 million. Everquest generates so much in the way of economic value that its GDP has been rated at around $2600 per capita. Lots of that value comes from real-life buying and selling of virtual-life assets, like skills and items for characters, or the characters themselves. Many gaming aficionados make a modest living doing just that -- the IRS has even opined on the subject, so it must be worth something.

Wherever that economy takes place, it won't be on eBay anymore. Starting this week, eBay Inc. (NASDAQ:EBAY) has been delisting auctions for virtual property, in a move that many say is a ploy to avoid legal battles with the games' owners. They're using the IP excuse: the auction site already has a policy in place that sellers can't trade in a product unless he is "the owner of the underlying intellectual property, or authorized to distribute it by the intellectual property owner." While game players may be in possession of a certain skill, or have spent their good money and countless hours to develop a character, they don't "own" that in the legal sense -- all the IP rests with the company which created the game.

So auctions like this and this will soon be ended. Many game players don't seem too concerned, though; as Eliah Hecht says on WOW Insider, "all this will probably do is stop individual users from selling their accounts. Gold farmers, powerlevelers, and other secondary industries have their own sites, and presumably will not be hindered much by this." I'd love to have seen eBay's cost-benefit analysis on this one!

In a sign of the 'virtual' times IBM will be "building" virtual stores inside the "Second Life" virtual world for the nation's second-largest consumer electronics retailer, Circuit City Stores, Inc. (NYSE:CC).

If you've ever heard of "Second Life", it is virtual, computer-generated world where actual lives go on about their business, commerce is carried out, and professional and personal relationships are made -- all without physical contact (hence, the term "virtual").

Why would retailers want to enter the world of virtual commerce instead of focusing on "real-world" commerce? well, with "Lindens" (aka, dollars), residents of the virtual world can actually buy real-world goods from retailers and others -- hey, margins are margins, right?

Wrong -- the product margin to have a customer buy goods from a website or a virtual world costs quite a bit less than taking that same transaction in the physical world, where electricity, employees, machinery and other costs can crimp your profit. In the virtual world, making that same sale -- without paying all the heavy-lifting costs -- is quite a smart move indeed. More retailer should be doing this.

Second Life -- the virtual world that only exists online but which features real money and commerce -- has set up a shop on the world's most popular retail shopping site, Amazon.com. Second Life wants to use its virtual environment to actually sell physical goods via Amazon.com.

This is an unprecedented linkage between one of the largest online virtual worlds and the world's largest (physical) online retailer. Inhabitants of the Second Life online universe will now be looking for real-world money by setting up stores powered by Amazon.com, Inc. (NASDAQ:AMZN).

I have to imagine that anyone savvy enough to reside virtually in Second Life and build a community in that environment probably already knows about Amazon.com's role as a real-life provider of goods. But that's not what's at stake here.

Turning a "browser" into a "buyer" requires the right combination of mood and environment -- and Second Life inhabitants are by nature more tuned in to this than most.

As for Amazon, the 1.3 million citizens participating in Second Life ain't no small potatos. That a demographic ripe for mining. Now whether it becomes a fixture in Second Life will be left up to its members, as they are the ones who will continue to build the revenue-sharing virtual stores and write the scripts needed to integrate with Amazon's web services for third-party retailers.