I was one of the land owners that cried foul when LL dropped their prices – and made a couple of comments to that effect on a few forums and blogs – but it was more of a spinal reaction than a thoughtful one. Having considered an ordered withdrawl from the land business – I was disappointed by the announcement. Although overall my land business has been profitable, my little “nest egg” suddenly dropped in value by 40%! 50% if you consider the first month’s tier included in the price.
However, I am in a specific situation – someone wanting to slowly sell off my holdings in order to move onto something else in Second Life.

However, after some sober reflection on exactly the issues that you outlined – I’d have to say that I have come around to your way of thinking on the issue of land and prices. Overall, the price change IS a good thing – it makes it possible for people to get their own sim more cheaply – which is good – and it had only a marginal effect on profitability since rents are typically linked to tiers (as opposed to setup fee), which did not change.

Still, I have seen a number of large renters leave in the last six weeks – they have purchased their own islands and moved on, or have taken advantage of one of the Openspace sims to build their dream home.

But, as you say, the basics of a free market are supply and demand – and the demand for land in Second Life, particularly as you say, land with added value, is still high. The vast majority of people cannot afford $1000 any more than they could afford $1675, and want to find a small place that they can call home or build their dream. So, in the end, I have shelved my plans for a withdrawl, and have in fact antied up and increased my holdings at the lower price – in effect doing some dollar cost averaging so that the average price I have paid over time for my islands has dropped – and in fact on the new ones, the “payback period” – the time it takes to recoup the setup fee – has dropped significantly.

Your comments to the effect of “adapt or die” are spot on. I spent about 48 hours moaning and feeling sorry for myself, before seeing the possibilities that were opened up by the new pricing policies implemented in April. So, I have adjusted my plan – and have spent more time keeping my finger on the pulse of the land market. I had become complacent – my islands were mostly full and I had no reason to keep pushing the envelope to remain competitive. The new prices have simply changed things – not made them worse.

In fact, it has been quite energizing – running a business in Second Life has always been about the challenge for me and not the money – I have never actually taken any money out of SL – just kept reinvesting and seeing what I could build.

And it has taught me a lesson – one which I seem to have been quite slow to learn – that change is inevitable – and in the SL context, somewhat unpredictable. If I am not prepared to roll with the punches, then I should probably get out of the fight. I have to build a business based on the fundamentals of customer service, honesty, and sound financial management. Then, it has a fighting chance no matter what comes.

dd

LL’s pricing model is indeed a bit problematic. I think some of the point with land as a value rather than a service is exemplified with the class 4/5 issue. Class 5 offers better technology, but its worth isn’t tempting due to the grandfathered tier prices. Not many people are going to be tempted to upgrade.

I’m not sure how LL can address that issue. You have to give something else in value to tempt people to upgrade.

I’ll save my comments for communication for the appropriate entry.

That is, indeed, the major issue.

As for viewing servers as an asset, well, there’s a lot to be said about it. You really don’t “buy” a server, you pay a setup cost — a practice that is slowly fading out of fashion on web hosting.

Perhaps Linden Lab is planning to reduce setup costs to zero and just have people pay leasing costs (“tier”), and this is one of the first of many steps to do that. How can we tell? They’re so bad at communicating what they intend to do — we can only speculate.

In any case, I view “buying an island” as exactly the same thing as “buying a car”. The moment I drive it out of the stand, its value has gone down by 30% immediately. But it’s worse: a new car might come out the next week, with more features for a lower price, and people will not be interested in my second-hand car, unless I sell it for even less. Sure, private islands are not cars, since newer private islands don’t have “more features” but exactly the same features they had 6 or 36 months ago.

But I agree with you. Poor communication from LL, badly addressing customer’s needs and ignoring complaints, will be bad for everyone — in the short term and the long term. And there’s where the crux of the matter lies. Price cuts are just another of several badly announced things lately.

I own estate and mainland, my mainland rentals are naturally cheaper, because mainland tier is cheaper.

I had to adapt when VAT arrived. Prices had to change, but not to existing renters, that would have been a bad business move. There are also ways and means of tempting your returning customers with discounts and offers. Valuing your existing customers is a very important factor in any business, in the rental business it’s extremely important because returning customers lower my overheads (no need to keep advertising plots for example).

Poor customer service lasts a lot longer in the memory than good customer service, it’s a lesson LL need to learn.

Plots at twice the prims have to be more expensive. You get the same amount of prims per sim. The books have to balance.

LL should have a responsibility on both the economy and land to ensure that the economy reflects service, not that Johnny come lately can undercut existing customers because he gets a better deal on his purchase. That’s simply the rocky road to ruin.

Hosting deals generally aren’t lifetime deals. If I were paying LL every year to own my land then you’d be right about infrastructure costs, so it cost me say $500 to own land in 2007 and due to lowered costs it costs me $300 in 2008, there would be no issue there. I paid more in 2007 like everyone else, now I’m paying less in 2008, like everyone else.

I went to Jack’s office hour and someone claimed their land was devalued, Jack asked why? Was this person buying and selling islands? No was the reply, it was an asset value issue. LL simply do not have seemed to have considered that people value their assets, but people do value their assets.

The bottom line is LL should have been more creative in passing on price cuts, they should have taken into consideration their existing customers. They could have cut the entry fee to new customers by $200 and then offered existing owners a $900 sim. Some people would still have complained but quite simply the discounts on expanding would have meant that it appeared like they were taking into consideration existing customers. Quite simply that would have meant a lot less criticism of LL’s practices.

Let’s not forget that the original blog said that those with existing orders would have to pay 1675 for their islands, how on earth did they think that was going to go down well? They of course made changes to this policy after receiving complaints but it was yet another example of LL not thinking things through.

When VAT was introduced the first I found out about it was when I checked my account page, I discovered the increase before LL had the courtesy to inform me they had jumped over the threshold whereby VAT had to be included. LL seemed surprised that we were complaining because hey it was the law, but we were complaining at how it was introduced, not that they had to charge it.

Of course if LL allowed me to pay tier inworld by L$ I wouldn’t have to pay VAT at all, but that’s a whole different story.

You see Gwyn the issue is with customer service, you keep saying that service is an important factor, time and again LL’s is lacking, they alienate their customers at their peril and that’s bad for everyone, you, me and Dupree :p

From: Digital Trends Second Life Career Fair Offers Real Jobs Quote from the site – At Working Worlds, the desk, chair and avatars are all computer-generated, but the jobseekers and employers that use them both hope to hammer out real-life jobs.
From: …

Oh, and Prokofy’s article (which predates mine) is here.

To make it perfectly clear, I’m not against “land barons” who buy wholesale and split parcels to sell them to newcomers and call that a service. I was in that business once, too — only in 2D, not in 3D! So, obviously the business is valid, important, and necessary. Not everybody is able to buy their own servers and can only pay to have a tiny bit of it.

There are, however, as I pointed out, two different types of services here. One is the pure slice & dice land speculator — the person who buys wholesale and reaps a profit by selling slices of a simulator. They’re not different from people who just buy a server in a rack and provide access to it to several users, possibly through some cool-and-easy-to-use web tool. Of course they’re “service providers” too.

And then there is a different class of business — the ones that don’t simply give you access to a slice, but add services to it. On the web, they might, for instance, give you access to applications (example: Flickr, MySpace, YouTube…). You’re still getting the same thing: access to disk space, bandwidth, and shared servers. But you’re paying for the service, not for the disk space.

Is that clear?

When I say that lowering the prices can lead to higher margins is that successful business owners on online services will try to lower the costs of their infrastructure as much as possible but keep the price of their services as high as they can. If the service is good, people will pay for it what it’s worth — and not what your costs actually are.

Naturally competition will tend to make prices fall down. The more people are providing the same service, the less likely you are to be able to charge your customers the same thing, specially if they perceive that your costs are going down — and if your competition drops prices accordingly. You can, however, refuse to accept the price war. Instead, offer more (or better) services for the same prices. Some customers are more sensitive to price changes; other to what services they can get for the same amount of money. Juggling between the service-vs.-price issue is where a business manager will be making their qualified decisions.

Now, I see you’re shaking your head and saying: “but Second Life is not the Web, everything is so different here, we’re a community of users, we are LL resellers, and we’re being undercut with our wholesale provider!” I’ll maintain my claim. This only happens because you wish so. In fact, if you’re providing a service that is not seen as “valuable”, since you’re stating that when LL drops prices dramatically, landlords have no choice but to do the same.

Why?

The answer can only be one: because tenants don’t value your service at all — they only value price

Now I agree that this is naturally one way of making business as a landlady — basically, adding little value to the service, because “every other landlord is doing the same”. But that’s a choice. It’s not “ignoring in-world economics” (which are, btw, the same as any kind of economics — just with less variables to play with). It’s claiming that just “because everybody else does the same I have to do it too, or lose money”. Not at all! Innovative services will be able to fill in the gap nicely.

I can give just one example of many possible. Let’s assume you refuse to drop the prices on your sim. Tenants will complain, since they know that sims are cheaper, and that everybody else is dropping their prices. What will you answer them? “You’ll have to face griefing, ugly builders, no urban planning, no events, and no technical support from the other landlords. I provide all those additional services for you — for a price. The choice is yours.” Sure, a few will always go away and search for cheaper land. But the ones that stay will be the ones interested in buying a better service and pay premium for that.

You might also claim that this is simply not how it works! In fact, I know that high rotativity is good for landlords that charge an upfront fee — the more quickly people leave their lands for others to buy, the more you gain. I’ve seen some landlords offering plots for below-average pricing, thus attracting new customers quickly, then actually ignoring griefers deliberately (or, who knows, hiring them) to quickly buy the land back (or even reclaim it when the resident simply quits SL in disgust) and sell it again as fast as possible. It’s not nice, but it’s also an alternative way of running a business.

And then again, I know of communities where the price of land remained stable over three years, no matter what the actual price of the original islands was. They’re profitable. They even offer things like plots at twice the prims. They get their tenants in, paying the same values, above what others are doing — just because they’re better at providing services that their competitors. They’re not happy; they’re jubilant that they can grow their offerings at almost twice the rate as before!

They are, of course, very few. If I could hazard a guess, based only on the comments I’ve heard, it’s about one in hundred. Then again, these landlords do not usually vent their opinions publicly. They’re silent and plod on, gathering more and more customers — slowly.

If the one in hundred ratio is correct (and I hope it’s not!) this is actually a very bad sign. It’s impossible that these few service-oriented landlords are able to absorb all the tenants vacated by the people that are complaining now and will very likely cut their costs and leave SL — dumping their sims in the process. And this, of course, is worrying.

Finally, a last comment on the content creators. First, they are far many than the landbarons — their major investment is mostly in labour, not money, although at some point they’ll also need to figure out the costs of paying for their shops’ rent, licensing costs for the software they use, and promotion. Still, granted, it’s a lower cost of investment.

Content creators have short memories? Oh sure, they have. You’ll see that the biggest complainers are the oldest creators, who are still stuck with the “glory of the past”, where competition was small and they could set the prices they wish — and get a moderate income from 3 or 4 year old designs, thanks to the influx of newbies. These were naturally the ones worried when prices started to drop — since they had no patience (or time) to continue to produce a steady stream of new, fresh content, and relied on “established sales” on existing content. Again, we’re talking about a type of business that relied on building up a reputation when SL was young and get a regular income from that past effort.

Those were the content creators that were scared off the “competition”. New, talented designers have an incredible energy in producing content weekly — and all of it is very high quality. These don’t worry about Anshe’s announcements — they know they can produce more, better, and probably even faster than Anshe. If you’re good in what you do — and have a solid model based on constantly exceeding your customers’ expectations — you don’t need to “fear” competition from the cheap copycats.

Speaking of which, there I see a major problem — pirated content. It’s more a question of principle than an issue of losing sales. Your established customer base knows who you are and where your legitimate shops are. However, the pirates can hurt your reputation — they might illegitimately claim they’re your agents (which they aren’t). They can sell lower-quality products — and the customers will complain to the original creator, not to the pirate. They can dump and flood the market in certain areas, pushing your content as “freebies” or at very low prices — transforming an otherwise high-quality product into one that has no value. And this definitely hurts reputation — and through it, it hurts sales. Worse than that, there is no “technological” solution for the problem, only a social one — either LL forbids piracy through a rigid enforcement of the ToS, or you, as a content producer, need to file lawsuits against the pirates. A complex, morose procedure, that will hardly have a successful outcome, wasting your time and money, and dragging your issues into the public sphere.

In conclusion (this is a long comment!), I’m really not convinced by your arguments, except in one major point:

Linden Lab is not good at communication.

And they haven’t learned to get better at it.

I think this is the root cause of all evil, and I hope to address it on a new post…

Markets change, good business adopt, bad businesses blame someone else. Is it really worth spending spending 5.000 words of self reflection and generalizations to say SL has a lot of bad businesses. What’s the news here?

Let’s deal with where you’re right, technology prices do indeed fall. My day job includes this and I know that my half a million pounds goes much further these days than it did five years ago.

However whereas you say lower prices will lead to higher margings, hell no, not unless they drop tier.

When you say that land speculators don’t add a service, you’re incorrect. I know it’s fashionable to dislike land speculators but if they didn’t buy whole sims, chop them up and resell then people wouldn’t be buying small parcels. LL traditionally sell full size sims, new people can’t afford those generally, first land went the way of the dodo.

However I’m not a speculator, I’m a landlord. I buy to let. Price fixing? LL fix prices, they just fixed island prices, that devalued my island by around 40%. Your focus only on tehcnology costs is completely ignoring the inworld economics of this fact. I’m not looking to sell and anyone with half a brain knows that land costs are going to decrease, but 40% overnight? My island asset is worth 40% less than it was at the weekend.

Of course this does teach one a valuable lesson, you can’t make medium to long term plans in the land market in SL, you have to ensure a return of investment asap.

People who purchased islands recently have every right to be miffed and what about those who purchased open sims, the new ones, it looks like their pricing structure will change soon too. This doesn’t actually inspire confidence that LL know what their doing and being surprised that people complain about a 40% decrease in their assets beggars belief.

This isn’t like the stock market, estate land’s benchmark is the price LL sell their islands for. People who add much value get LL price +, people who have standard type estates get LL price -.

I viewed (incorrectly it would appear) my island as an asset that would depreciate slowly over time, snowballing if you will into a steady and ever increasing decrease. I did not expect, and nor did most of the people complaining, to find my asset devalued by 40% by LL themselves.

The majority of the people complaining are complaining about the devaluation of assets. I don’t see why you as a business woman are missing this point.

If stocks fell by 40% overnight, you can rest assured that people wouldn’t be happy with the CEO of that company, even though they know stocks are a risky business. If the price of your house falls by 40%, you’re going to be unhappy with someone for such a rapid decrease. You know the risks, but it doesn’t make it any easier to swallow.

LL’s action on this was rash and short sighted. They could have been much more creative in passing on price reductions, offering better deals to existing estate owners than new estate owners. Extending the free tier period, offering free island after you’ve purchased three new islands, bundling in an open space sim, having a limited offer sale yadda yadda yadda.

LL’s move has made people angry, undermined confidence and created bitterness due to a rash action.

I fully support your call for people to adapt, when the dust settles estate owners will adapt, but they will adapt in a fashion that casts eyes of suspicion at Linden Lab’s actions in fixing the economy.

As for content creators, some of them have short memories. Plenty were positively outraged when Anshe announced items were overpriced and she was going to sell quality cheap items, why were they outraged? They were outraged that they felt their items would be worth a lot less.