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The Hard Facts About the Second Life® Economy
Supply and demand!
This is such a simple rule… but so often misinterpreted. Or rather, people tend to interpret it according to their personal preferences (in the sense of what benefits them at the moment) and disregard the main rule of Economics when it doesn’t please them.
Join me in a journey across misinformation spread often around the Second Life® world, which I hopefully will attempt to debunk.
What people are complaining about
Look around and talk to your friends, specially the ones that are either content creators or landowners/landlords. The mantra so often repeated is that “nobody is buying anything”, or that “people are not buying/renting land anymore”, or the unavoidable: “people are leaving SL”.
If people are slighty more introspective about SL, they’ll say something different: “SL is not growing so much these days”. That’s a hint from a slightly different direction. We’ll see that in a moment.
But this is the overall, general feeling you get when roaming across the grid, bumping into strangers or old acquaintances — be they veterans of SL, former workers of Multiverse Development Companies (out of work since their companies failed to employ them on multi-million projects during the glorious days of 2007), illustrious thinkers and opinion-makers, SL bloggers or journalists, or just irregular users of SL, logging in every month or two and emitting opinions on what they hear and see.
In-world experts and journalists like Massively’s Tateru Nino also tended to flood the media with lukewarm articles about the lack of growth, fuelling a depressive outlook for the near future of SL. The optimists around us prefer to point at the usual curves and charts and shrug it off as a seasonal issue — everybody knows that SL grows much slower during the summer and that in-world sales have a boost at Christmas, something that content creators happily forget every January when they announce “massive drops in item sales”. But still, with the real world’s economy at a crossroads with big question marks looming over its incertain outcome, Second Life seems to imitate — once more — the pessimism of real life. “Economic cycles” are replaced by “doomsday predictions” every time the cycle is at the lowest, specially when trend analysts look at short-term data and try to predict the decades ahead. But no matter how much we shrug the numbers off, the fact is that land is left vacant on the mainland; projects shut down with lack of attendance; content creators are losing sales and shrinking their operations or even completely going away from SL; even RL metaverse development companies are closing up shop in SL and moving to develop Flash games or doing plain old Web sites instead.
We all have heard those stories from close friends, and they have become more numerous than usual. It’s hard to dismiss hard facts when everybody is telling the same thing.
There is obviously a typical psychological issue at work here. If you live in a fancy neighbourhood, but suddenly see people leaving, shopowners closing down, criminality rising, streets remaining unkempt as public funding to cover potholes is not enough, and friends and neighbours telling you that the imminent collapse of the neighbourhood is due and you should better pack and go, what should you think? You can look around yourself and see it’s all true: people are really leaving; shops are really closing. You’d be pressed to think that the end is, after all, nearby, and move along as well — specially if suddenly you’re out of a job because the local factory employing you shuts down their operations and move to China.
We humans tend to extrapolate global issues based on parochial (ie. local) issues. That’s normal, since our brains are built to deal with a “tribal” concept: if my tribe is hurting due to lack of food, I should better move it elsewhere. So we’re pretty good at evaluating what’s bad in our neighbourhood and deal with it.
It’s far harder to understand the big picture. The way we’re wired makes us jump to conclusions based on what we look and feel around our immediate neighbourhood, because that’s what we care about. Taking it into SL, if your community’s leader suddenly announces that she cannot pay the tier for the island you use and you have to leave — as have all your friends — you don’t really care if Anshe Chung or Azure Islands or SLNE or Caledon are making huge profits like never before. In fact, when was the last time you heard about any of those huge mega-communities? Probably — and this is also typical of the way people think — you imagine that they were the first to disappear, and that your tiny one-island-community was the last bastion of fun and entertainment in SL. So when your community goes, it’s only rational (and most definitely emotional!) to imagine that there is nothing left for you to do on SL.
There is also another subtle thing at work in our sub-conscience. If you’ve been long enough in SL, you’ve have gathered a long list of places and people you like to visit and meet with. You might never have appreciated the ratio of new places/people you have acquired in your past SL experience (usually it’s a hugely exponential curve at the beginning of your Second Life — everything is new! — and a healthy grow even after that, since more people will lead to meeting more people and visiting more places and meeting even more people… so it’s always exponential, even if over time it tends to be a very flat exponential curve). However, you’ll immediately feel the loss of a good friend that suddenly leaves; or a shop that suddenly announces a “last garage sale before shutting down”. How many of you have gone “No way these guys are gone from SL, they have been here forever!” and shook your heads as you took it at another sign of the dire times that SL is facing?
If these events occur over a long period of time, you tend to shrug them off (there are always new people to visit and new places to find). But if in a single week — or even day! — you get three or four comments that “this person left SL” or “this shop closed down in SL” or “I’m unable to sell my plot”, that will make you think twice. A “sudden rush” of bad news seem to be a sign that things are going terribly wrong, specially if there is a very short period of time between them. It’s typical of our behaviour.
Add to that the snowball effect of telling all your friends about the bad news — and finding out that they have “sudden bad news” to tell about, too! This becomes an exponential curve of bad news, too. One that might be so intense and high as the one of new experiences. Put it into another way: if every day in SL you meet on average one new person and visit a new place, if you suddenly, in a day, get the news that five people left SL and five shops have closed in SL, the perception you have is that the rate of SL abandonment is far higher than the rate of growth. Notice that for this to be felt even more it helps if you don’t get the news directly, but from your friends — by sharing conversations which might go like this:
“Oh, have you heard? Shop A has closed down, and Avatar X left SL in disgust. Poor X! She was losing so much money.”
“No way! X too? I’ve just come from Shop B and Avatar Y has the plot for sale! Fat chance, though, the way the land business is, she won’t make a good deal. I hope she doesn’t lose too much money though”
“Oh no, Shop B is gone? Gosh, I loved those boots; the best ever, since Shop C closed down last week…”
“Wait, do you mean it? Shop C has closed? I had no idea! Why, it was last month when I presented Avatar Z with a nice gift, they had such lovely cobra-skin designs…”
“What, haven’t you heard? Z has gone, too! She had this tiny live music bar and it simply didn’t work out for her…”
So in five minutes you get the sudden impression that everybody in SL is leaving and closing shop. Naturally… this will get passed on to your closest friends, and from there, to their own friends. Very soon this spreads out, and each time, people will add one or two examples of people who left or shops which closed down or plots left unsold for LL to claim back.
And very often these come to the attention of the media as well. Fashionista blogs, with their hundred thousand readers, announce to all of them when a shop closes down. Economy-related articles announce yet another community that fails to pay for tier, leaving their tenants without a place to call home. And then the ones reading these articles propagate the news at even a faster pace: “Have you read about it on Blog D? Wow, things must be going very bad, everybody is leaving — imagine, even Shop E closed down, and I haven’t even noticed that!”
Spreading memes that way — the meme that SL is at its end — is quite powerful and quick. It also reaches beyond the “usual suspects” — the “magic hundred thousand”, my bold claim of the people in SL that actually have an impact in the economy. I’ll explain that theory in a bit, but for now, the point here is to understand a few basic premises:
- Shops are closing down, plots are left unsold, people are leaving SL. These are all hard facts. They’re easily validated: just travel to old spots where shops used to be or people used to meet, and they’re not there. It’s not “badmouthing SL” or “being a pessimist”. People are really leaving; shops are really closing. This means that there is proof (ie. facts) of all these things happening in SL
- Memes travel fast. While most people do not read blogs or e-zines or even RL media — and so usually have no clue of what is being said in those — they are aware of the “stalling of the economy” and “of many people leaving”. They have friends who really left. They have friends of friends who told them they left SL. So they’re aware, even if they might not be informed.
- SL is hardly “a community of residents”, but several, interlocked, overlapped communities. We tend to extrapolate towards the global SL what happens on our parochial community. If everybody is talking about the downfall of SL in our community, we believe the same to be happening on any other community — specially if we belong to more than one (which is the most likely scenario), and we see people leaving on the other communities, too. That’s just the way we humans think, we cannot change it.
All the above, of course, can be supplemented with graphs and charts and statistics, either officially published, or retrieved by yourself (traffic measures or other metrics-retrieval mechanism). They tend to support the observed facts.
To be honest, I’m surprised you haven’t notice it till…. now.
I knew this was going to happen back in December 2007 because Linden Lab couldn’t do anything with copybotters and DMCA to the degree. SL Exchange (which is called XStreet now), refused to take any action to scan for scams and copyrighted items. Which left more people in disgusted with that happening.
With Linden Lab’s effort to push on open source sim and grid development… they are threatening to kill SL’s own marketing ground from within.
Soon in few years, videogames will stop being produced because of pirates, similar to MP3 cases. Muscian will still produce musics because they are what make them known for. However, for videogames… there’s a lot of money riding on those “cd” in order to be successful than some music band. So Videogame production will soon fall slowly.
Never mind those registration account & online counts on SL’s site. Idiots are enjoying themselves by grieffing, get banned, and get another account. Some idiots are changing account because of different names they wanted, they tend to changes once a while. And of course, with the downfall of SL’s marketing ground… most store & club owners are freaking out in panic to see their sales/traffic dropping for the first time for so. They would bring in bunch of lifeless bots to bring traffic back.
I fully declared Second Life is Second Depression.
Get your L$ exchanged soon as possible and get out.
You may not believe me but you always can put your money back in. You won’t know when it’s time to do that when you do see its value goes downhill. The question is, when is it the best time to sell? Right where you’re at the very peak before the downslide. We are on that peak right now.
Some of you people, even Gwyn might be thinking “Oh I’m sure Linden Lab can fix the main issue with the marketing ground against copybot.” Releasing an open sourced client is not the best way to fight against that… Supporting OpenSim’s Grids with SL’s Grid is not one of them either. Once They stablized the pathway between OpenSim’s Grid and theirs… Land Owners will drop out of SL’s grid, moved over to OpenSim for cheaper lands. Leaving most store owners on SL’s grid because they don’t want their work go unprotected and open on a Open Sourced grids. So they would remain on SL’s grid… However, not all Stores owners can afford a whole emtpy sim, even if they only wanted a small parcel. Sim owners would force any parcel renters to pay up more in order to pay off Sim’s maintenance monthly fee.
Most “popular” store owners/creators would leave sooner because they don’t want keep creating more product each time their old ones become another freebie from copybotters.
Most of them are even disgusted with what’s happening now.
From a technical programming and marketing wise… There are no cure for Second Life for the way it’s heading now.
Now believe me when I say this… I never liked Doomsayers on the day before November 16, 2006. Linden Lab had 2 years to fix this. They had done nothing, but revised their Term of Service against it. I know I do sounded like one now but I can’t be any more wrong.
October 13th, 2008 at 6:49 amGwyn, this is just plain goofy — and how do you get away with such LONG posts when I never do?!
I’m truly try to make sense of it. I read every word, but I truly don’t see your argumentation for claiming the peaking at 100,000, and the staying at 100,000. It doesn’t explain the growth in concurrency, for example. I’m not at all certain that amazon and ebay have their peaks, either. New people are added to the Internet every day.
I, too, believe that a good percentage of the people logging on are just selling to each other and the figures could be even lower — the concurrency number of 70,000, for example. But that number is steadily growing.
One of the reasons that people like you and me never feel like the world is growing, or that the numbers are fake, is because back when we were told there were 40,000 people by Hamlet and the Lindens, there were really only 5,000 of us. There were precious few. So we didn’t have an accurate sense of how few we were to start with, and our sense of slowness is a function of the inflation.
But don’t forget that the figure of all those who spent more than a dollar inworld is already up around 413,000 — it’s grown quite a bit. So that’s way more than your figures.
And inworld businesses at the $50-100/month profit level are substantially increasing — all categories are, after a dip a few months ago.
Mainland accounts are down to something like 86,000 because they no longer have stipends that cover their cost unless you shell out the $72 to buy the annual subscription, and that’s a lot to be laying out; at even the discounted 3-month subscription you lose even on the old $500/week accounts, and today they are only $300 a week — just not worth it.
Somehow, I think all these “power laws” and “Gartner cycles” and all of that just don’t apply to Second Life. I think SL is really like a country that steadily grows its population and GNP — but perhaps might stabilize that population due to various factors. It might become more productive and grow its GNP with the same people.
I think it’s true some of the stock churns, I also think now you can really talk about growth, even if slower than the hype. I look at these indicators, none of which you seem to take accuont of:
o traffic on infohubs, especially resident-made, and welcome areas
o traffic at major attractive venues
o attendance at live music and other events
o concurrency
o Lindex volume — higher than ever
o my rentals
o sales of my dumb little items, which are even more ridiculous than yours by far
The openspace sims have really ruined the land market in one sense — the Lindens have had to stop auctioning mainland sims in whole, and only auction off parcels now. Perhaps they don’t care, if they can keep selling those low-prim sims in bulk, they are producing more income than mainland sims. But it is good to remember that mainland sims on the auction can sell for $3000 if they are really good, and even today, with the glut, you find prime 4096 beachfront by say, the new Linden Highway 7, going for the price of $60,000 — whereas elsewhere inland on older sims, a 4096 can go for $5/m. So eventually the Lindens may be driven back to selling mainland again because it fetches more — and they are probably getting ready to roll out some zoned sims and really make a killing, because island sales are down the last few months.
While there’s a lot of land for sale and people demonstrively leaving all the time, I just don’t think your theories of saturation track because of different factors:
o new language sims, and growing language communities — you hear a lot about Australians failing, and the Australian press is filled with gloom and doom stories, which of course Tateru echoes, but that just shows you how much a few people can have a very large echo effect — there are other language groups thriving
o continuing entry from the old cohorts of North Americans
o new areas of sales like education and outworld business
We could get a better idea of what is going on if we could see what amount of money is spent every day. They used to put that figure up on the web page, but took it down for some reason — maybe it was fake.
But if you look at a category on the statistics page like expenditures of $1000-4999, which is the figure you’d need to have some basic cheap rental and/or a skin, let’s say, there is about $2.8 million in sales at that level per month. Of course, the problem of moving money to alts isn’t accounted for here.
The issue of “2 people per sim” (I think it’s more like 3) doesn’t really track. People buy big islands or rentals to have privacy and don’t even log on, it’s like buying X-country skis and keeping them in the garage, they make you feel sporty even if all you do is sit and watch TV and look out the window at the snow.
People feel SL is empty because they haven’t found the green dots. Open up the map, and I think you’ll be surprised how many green dot clusters there are, and they aren’t bots in every case.
October 13th, 2008 at 8:29 amThe statistics page is here:
http://secondlife.com/whatis/economy_stats.php
The $50-100 businesses are up to 4,115. These aren’t “profits” but “revenue,” some of which has to go toward tier in some cases.
October 13th, 2008 at 8:31 am[...] a bunch of whiners Posted on October 13, 2008 by Morris Vig So says Gwynneth - as it relates to the Second Life ™ [...]
October 13th, 2008 at 1:27 pmWhoah, long post is long
Interesting stuff, especially the early days of L$ analysis - didn’t know about that.
However.. I disagree with you on some points.
1. Cars vs. ink
My conclusion is totally different from yours: LL is, in fact, selling ink.
Their income derives from several sources:
A) sim sales
B) sim tier
C) L$ sales
If a sim costs 1000$ to purchase but 3600$ per year to keep, how can it be anything but ink? Furthermore, all new L$ sales are a direct profit. When the SL economy expands, so must the mass of Linden dollars in circulation. As in RL, these come from the central bank - supply linden, which sells them to the users.
And as for the land abandonment - is it best for the mobile carrier that I return my mobile phone to them and stop using the service? Of course not - the value of a customer over time is much greater than the phone (or a sim in SL) cost.
I agree that there are two basic business models - short-term sales vs. long-term revenue. The problem in 2008 is that LL has seemingly abandoned the long-term model by fireselling open sims. Want to bet on how much of those will be in operation in 12 months, ceteris paribus? Why they did it is a mystery, as they were (supposedly) in the green, so it’s anyone’s guess.
2. “With very few exceptions (Google Search or Microsoft’s Live Search being two good exceptions), it’s very hard to go beyond 100-200 million registered users on any product on the Internet. ”
Erm.. the majority of search users are not registered. Perhaps Google mail would be a better example?
3. “After all, as long as there is regular spending from a slice of society, the economy is happy.”
AKA the “Freemium” model, as Chris Anderson of the Long tail fame calls it. Free basic content and $ premium content. However, for it to work, new users should be encouraged to become premium users - but they are not.
I think the reason for this is fascinating (caution, theorizing ahead): in SL, it’s not the parent company that subsidizes free content to gain premium sales, as is everywhere else (ning, ..) - it’s actually the SL population. It’s they who provide freebies and cheap rent, in the hope that they will make money with premium content. For LL itself, it’s all good - the content providers pay tier and those few new users that start spending real money in SL have to buy it from LL. I believe it was this fact that made LL steer away from encouraging premium users - the obviously calculated that they can make more money from non-premium users.
4. “the current Third-World-type of economy that SL has only allows for 100,000 people to be active participants in it.”
I disagree completely. The “100,000 users” has been steady for some time because it’s the stabilization point between “leave SL because of boredom / drama / UI / HW requirements / platform issues” and “enter SL because it’s a cool new thing”. With better user experience and given the same influx of new users, the number can grow. And that is why M Linden is stability focused - he knows that better platform stability + UI = more users = more $
5. “My claim is that the overall population has grown, the number of people willing to buy land has not grown in the same ratio.”
Possibly - probably to do with the adoption curve. Early adopters are much more willing to invest; mass adopters are more likely to spectate.
PS: sorry for the potential double post, problems with OpenID sign-in
October 13th, 2008 at 2:35 pm@Nacon, I think you just read the first page of the article… there are eight others
Actually, pirated content (which is, indeed, a blight in SL — but so it is everywhere else) is not the major reason why shops are not selling as they used to. The major reason is that the market is not infinitely elastic, or, in other words, the number of people willing to spend money remains the same, while the number of content creators and new products and services continues to increase. At some point — which I argue further ahead in the essay — everybody in the market starts to hit the competition and fight for the same number of potential consumers. Needless to say, this will mean less sales for everybody, as more and more content gets produced, but the number of people willing to buy it is constant.
Content creators just shrug the issue away and blame LL, CopyBot, people leaving, etc. As the essay reminds, all these problems do, in fact, exist. However they’re just minor issues — the real issue is that the market is saturated. There is too much supply, and not enough demand for all those products. Once content creators (and land managers!) understand this basic aspect of economy, they will have three choices:
1. Leave SL because they cannot afford to compete any more (the easy way out: shift the blame elsewhere and go away) by investing in aggressive sales strategies, promotion, and similar sale-boosting techniques;
2. Drop prices (which typically is the result of demand being way below supply), and, incidentally, ruin your business model and go away;
3. Invest aggressively in brand awareness — and by “aggressively” I really mean it, it’s not half-hearted attempts of putting some camping chairs to get a little higher score in traffic, hoping for a slightly higher rank on Search — and push the competition out of business.
Oh yes, that’s tough, I know, and so many service providers in SL are reluctant to play “the bad, ugly capitalist”, when for years it was so easy to sell peacefully coexisting with your competition. Now, I claim, there is simply too much content for too few consumers — the competition either becomes far more aggressive (ie. RL-style aggressive) or they have no choice but to experience a huge drop in sales.
And trust me — somemerchants have a strong business sense and have no qualms of becoming aggressive enough to scare the competition out of SL. They will become the leading product suppliers in SL. The only alternative, of course, is if the market expands again. I however claim that it won’t happen — and if it does, it definitely won’t be at an exponential rate!
Your analysis, I’m sorry to say, is far too simplistic to be correct
@Prokofy, I agree with a lot of things you say. First and foremost, the number. 100,000 is actually just a magic number. The only hint that they should not be much more nor much less is really the sum of Premium Accounts plus private islands. The rest is wild speculation, based totally in indirect observation. For example, how many people do indeed read all the possible blogs, forums, e-zines, and websites about SL? About a year ago, a fellow from “my” community did send out requests to the major sites at the time to ask for advertising space, and asked them about how many people read each of their sites. The number, added up together, was around 150 thousand or so. Since he did not ask all the sites (of course; it’s impossible to say how many there are), and there is always overlap (people already reading one site will very likely read more than one!), I would say that the overall number might be, perhaps, 250 thousand or so. Nevertheless, I continue to claim that the important thing is to realise that the consumer market — the number of residents willing to spend money to buy content/services in SL — is not growing significantly, and did not do so for at least one year and a half. But in that same amount of time, the landmass grew three times and the population doubled (and so did the number of simultaneously in-world residents).
So the argument is not that the economy has stagnated, but that it is saturated, which is quite a different thing, and requires a different mindset to deal with. Mostly the whole purpose of the article is to understand a simple fact of economics: markets can be elastic (they grow as more products are released) or not. Understanding what kind of market SL has was not easy. Let’s assume, for the sake of the argument, that back in early 2007 everybody willing to spend money in SL would, on average, be willing to spend US$10/month (I could do the precise maths if I had the patience to look up the old statistics for early 2007). Since the market was not saturated at that time, it would mean that most of the people willing to spend US$10 didn’t, in fact, spend them all — because there were not enough supply of quality products and services for them to spend that much. They barely managed to spend, say, US$7/month on average, but would spend more if they could.
As time passed and 2007 progressed towards 2008, more and more products were released, more and more land was added, more and more services were launched. The ones willing to spend money started to spend more and more, in about the same proportion as SL’s overall growth. However, at some point, they hit their spending limit. Some might even have crossed that limit (I have seen quite a lot of them absorbing plots from neighbours which they never intended to do just because they felt sorry to get the land go to waste; my own recent experience showed me that surprisingly I’m spending more than I thought in SL buying outfits and gadgets, so that my own “limit” is often reached before the end of the month, and I run out of L$) — this is actually good news, since it means that the consumers are even stretching themselves thin and spending even more than what they’re comfortable with. But that “stretching” is not infinitely elastic, ie. the group of consumers — those mystical 100,000 — will not continue to spend more and more in SL all the time. They will reach their personal limits and not spend any more. Even if they do — or if those 100,000 become, say, 110,000 — that growth is not exponential but rather follows normal, RL patterns: say, 2-5% per year.
Now SL’s population and land mass has grown more than that. Way far more, in fact, in 2007! The consumers willing to spend are thus unable to cope with sustaining an economy that grows exponentially, even if it’s a much lower exponential curve than in 2006. And this is what market saturation means in this context: dumping more and more content and services and land in SL does not mean that people will continue to consume it at the same rate it is released. Supply by far grows more than demand, and naturally, service providers will feel that in their pockets. It’s not “people aren’t buying anything any more”; it’s “the same people that have always bought anything in SL are not growing and have reached their spending limits; they will not be able to absorb even more content/services at the rate the offerings continue to increase”.
Notice that this has nothing to do with the steady increase of simultaneous logins or in-world hours or even minutes of voice traffic or the constant adding of 10,000 new registered users per day. All these show just one thing, that SL is nowhere near “stagnation” as people continue to use it, and new people come in and also use it, even more than before. The problem is that, on average, almost none of these people are consumers of paid content/services. So the market for selling products and services is not expanding. This is the hard lesson that service providers need to understand: more residents does not mean more consumers.
(And, like you, I truly believe that the green dot effect is far less campers/bots than people would like us to think. Yes, people are really there having fun, and yes, there are lots and lots of clusters of people enjoying themselves in SL. However, they’re not there to consume but only to enjoy free content, be it land, outfits, or services).
The complaints about excess of freebies and copybotted content are just a minor issue because that’s what they see happening: the new users, the vast majority being unwilling to spend money in SL, turn to free content instead. “Free” as in “freebie” but also as in “pirated content”. This is sadly not an exaggeration or badmouthing SL, but I agree it’s real fact. I’ve truly seen whole sims dedicated to gangs of content pirates, full of bots to raise traffic, and all “shops” only have freebies and pirated content — there is not a single original item in sight. These are not really “real communities of pirates”, but they certainly attract a lot of the people from the group that is unwilling to spend any money in SL and are happy to just get the free/pirated content instead.
What content creators have to understand is that if by some act of magic all these people would disappear (say, because LL started to aggressively put them out of SL), their sales would not go up. The people unwilling to pay for content would not suddenly turn to paid content just because pirated content is unavailable. No, they would still refuse to spend any money — and, after all, they would continue to enjoy freebies listed on, say, the Fabulously Free website. The lesson here is that these people remain outside SL’s economy by choice and they will not “come back” just because of aggressive enforcement of removal of pirated content. (I should add that I’m all for strong enforcement, either LL-sponsored or community-driven, mostly on moral grounds, and because I’m all for ethical business in SL, which will only benefit us by giving a clear idea that SL is a good and honest place to do business. However, I have no illusion that removing pirated content will hardly increase sales for content creators.)
And no, I’m not suggesting that LL removes all items marked L$0 (ie. getting rid of the freebies), although I’m sure it would make a huge impact in the economy! After all, even if LL did that (ie. overnight all items marked L$0 would be marked L$1 instead, and the servers refused to accept setting the price of an item to L$0), it wouldn’t work: avatars can freely transfer content between themselves, and soon we’d see “freebiebots” giving content away and popping up everywhere. The issue about free (legitimate) content in SL is cultural and won’t go away by “coding” the platform to limit free content to be distributed. In fact, if there is a potential collapse of the economy ahead, it could be just due to the freebies, but I’m rather unsure on “how” and “when” that might eventually happen.
Instead, the focus of, say, LL should be not on how to get new residents — that’s working rather well, or they would not get 10,000 new users per day; these have to come from somewhere after all! — or even on how to improve the initial experience (which certainly would mean that more residents would remain in SL), but how to turn “freebie tourists” into content consumers. Put into other words, how to increase the Hundred Thousand. However, I think that LL is the wrong organisation to ask on how to do that. If they knew the answer, they would have an increased income from more Premium Accounts and specially even more private islands. So they’re clueless on how to turn a free account into a paying customer, and they’re perhaps not the best people to ask for advice.
I definitely don’t have any idea on how that’s done either. In my professional business life, I always ran away from markets where suddenly people said it would be a good idea to give things away for free just to attract paying customers. One of the companies I founded went almost broke with that attitude — which is not surprising, IMHO. I simply don’t believe in that. The Clever Zebra guys did, and see where they are now. So I have no answer. The only “advice”, if we can call it that, that I can give to current service providers in SL is just the following:
Don’t expect the market to grow elastically. Assume it’s saturated, and that the number of people willing to spend money on your services/products is limited and fixed. Assume that all your competition is starting to become more aggressive as they understand that paying customers are a limited resource in SL and all want a share of that. Assume that more aggressivity is needed to push your services — don’t assume that the market will become “exponential” again, because it didn’t in the past 18 months (or more) and it’s highly unlikely it will grow exponentially again. Start using aggressive promotion and sales techniques to put out our products and shut down your competition, by throwing them out of business. The days of easy sales are over; welcome to a small market that grows very very slowly over the years — but is nevertheless an interesting market to explore! — but which has far too much supply than demand.
Most service providers won’t care about that advice and will simply prefer to rant and vent their frustration at LL, at the world economy, at pirated content, or whatever excuse/scapegoat comes around. Everything is a better explanation than having to admit that to be able to provide services in SL in a saturated market (and not a stagnated one!) requires one to be ruthless. And most service providers do not wish to go that route — specially, of course, because it requires an increased investment in marketing, promotion, and handling sales.
October 13th, 2008 at 3:07 pmGood job Gwyn. The comments so far prove your point. Everyone has his point of view, their “community” or focus points, just like in RL! Isn’t that fun?
October 13th, 2008 at 3:35 pmExcept in SL everything happens a lot faster, not just 4 times a day like the days in SL, much more.
SL is alive, and will go through and have all the same problems with face in RL.
Wonderful place make social experiments, and LEARN, faster than you could ever do in RL.
A Human petri-dish.
Simple? Believe me, I wasn’t trying to be simple and debatable… I’m trying to pass out a general warning before it smack your cute bottoms.
I could be more clear and informative but it seem like a waste of time when I’m 100% about it.
I’ve created my own chart graphic and scripted data-board to run its own simulation based on those data that Linden Lab published on their website at every 2 hours. I’ve used a few marketing theories formulas what is actual type of crowd doing what, breaking down more percentage of defined type of sim/land owners. Ever since then, my results were dramatic between December`07 to until today. Not a single sign of improvement nor a positive rate in SL’s marketing ground. Bail!
And no, I will not release my data because I don’t want to get into more debate about my “marketing” formula script because everyone is an idiot to understand how does the real economy works in SL than it does in RL.
PS: I did read the whole thing, btw… I think you kinda carried away too far.
October 14th, 2008 at 3:50 amGwen… took me a few hours on and off to get through it all, but your overall idea is what I’ve been saying about the Live Music scene in SL on my blog, and what Ive noticed even in the relatively short time I’ve been here, nearly 2 years..The amount of gigs being played in Prime time has gone through the roof! the influx of musicians both non professional and professional has gone up, the market is saturated! but the Audience numbers has not increased by comparison. So not only are the audience numbers not rising, the Tips for Musicians are going down accross the board, with a few Musicians still getting good tips but they are playing a lot less ….I see that the usual top earning Musicians that used to play 8 times a week or more are playing a lot less!
Mass media is also picking up with new magazines coming on the scene everyday trying to get a share of the advertising dollar and the readers, but how many people are reading them or the blogs….And these are the places that your content providors will be looking to advertise…but the numbers of people reading those mags and blogs is no where near what the Lindens can provide with Classifieds.
Have a look at Classifieds the competition to get on that front page is so big the cost of the advertising on Classifieds is ridiculous if you want top ranking.
Don’t forget the lIndens get money for Classies as well and the competition for top ranking serves them well.
October 14th, 2008 at 9:55 amPaisley
The only thing that’s stopping me spending is RL income which unfortunately is affected by world economics. Not too long ago the Aussie dollar was nicely comparing to the USD around 80-90 cents. Now it’s dropped significantly, I notice a dent in my SL pocket which is funded by my RL income.
In SL I still shop constantly - I just have less to shop with. I have a level of brand loyalty, shopping with content creators I’ve found to be of a consistent quality and who have provided good service - and with friends and residents I know through my networks.
While I don’t think SL is going through a crisis as such, I think that it might be fair to say that like all economies, SL is being affected by world economics.
October 14th, 2008 at 5:21 pmDoes it not all come down to this: people will only spend money in SecondLife if what they get back in terms of value is worth more to them than anything else on which they could spend the same amount of money? People will spend money in order to make more money, of course, but that money has to come from somewhere, and it cannot come only from others spending money to make money, because all the money would just be going around in circles and the transactions not achieving anything.
Ultimately, the economy in SecondLife is based on people (whether 100,000 of them, or more, or less) spending their ordinary liquid capital in-world because the value that they are getting in-world is, they believe, greater than to them the value of anything else on which they could spend that amount of money. In other words, people will only spend money in SecondLife if, and to the extent that, there are sufficiently interesting/entertaining/worthwhile things to do in SecondLife that justify that expenditure. The more interesting/entertaining/worthwhile things that there are to do, the more people that there are who will spend, and the more that existing people will spend.
Currently, a great proportion of what people value in SecondLife is entertainment based (usually in a social way): people buy clothing, visit dance clubs, musical concerts and art galleries, furnish their houses, visit (and party at) all the top builds (Greenies, etc.) and make friends (most of whom also like the same things). SecondLife is less like a third world country than a giant virtual retirement village: it is all about casual, social entertainment, not, for the most part, about serious work.
There is only so much money to be made in casual, social entertainment because people are only willing to spend so much in being casually, socially entertained. Outsiders join SecondLife no doubt because it is unique and interesting, but many of them, I imagine, believe, and quite understandably so, that their money would more efficiently be spent on other forms of casual, social entertainment. People might think, “Do I really want to spend $X on making my computer simulated avatar look better (but, ultimately, still like a computer simulated avatar), or do I want to spend $X on going to the cinema and watching a new film?”. The marginal improvement in their SecondLife experience from what can be experienced for free to what can only be experienced for a fee may well be worth far less to a large number of people than some other deployment of an equivalent amount of capital.
One reason that people might spend money decorating their virtual homes and improving their avatars’ appearances is to acheive a higher actual or perceived social status; but social status is relative: one first has to value one’s social status in a virtual world to begin with in order to want to spend money on enhancing it. People who make substantial amounts of money in SecondLife will have an obvious motive to enhance their social status, as will those who run projects or are so closely involved with one or more communities that their individual reputations matter to them. Given that the number of people who make money from SecondLife must always be fewer than the number of people who make, in purely financial terms, a net loss, the second group are of particular importance for status items such as clothing, avatar customisation and furniture. It is only the people who are involved enough with SecondLife to care about their social standing or appearance who would part with money to buy these items, and these items constitute the bulk of commercial transactions in SecondLife aside from land, which is also partially a status item itself (although can have other uses, such as commercial exploitation or expression of creativity).
So, the total size of the economy in SecondLife depends ultimately on the number of people who value their social status in a virtual world in which casual, social entertainment is the main thing to stay for, and who have enough time, money, hardware, internet access and techincal expertise to use SecondLife in the first place. That number is inherently limited - there are, after all, lots of other, more conventional, ways to obtain casual, social entertainment, although there is a certain allure of being able to do it from one’s computer screen at home while sipping a nice cup of tea after a long day at work, without then having to take the time and effort to travel home afterwards, etc.
One of the peculiar features of the SecondLife economy is that its internal economy is directly pegged to the external economy through the medium of its internal currency being directly pegged to an external currency. This is, of course, the feature that enables people to earn money, in sometimes significant quantities, from exploits inside SecondLife. It also means, however, that each potential expenditure of money in SecondLife is competing not just with other potential uses of money in SecondLife, but with other potential uses of that money in the external economy. Whereas in a multiplayer computer game, the in-game currency is (to varying degrees on occasions) separated from external currencies, such that one’s in-world wealth bears little if any relationship to one’s general wealth, in SecondLife one’s in-world currency is just one aspect of one’s overall economic net worth. Playing Monopoly, one never has to think, “should I buy the house on Mayfair, or should I buy a pair of socks?”, because that choice never arises. If it did, Monopoly would be a very different game.
Thus, in order to attract people to spend money in SecondLife, the products/services must be more valuable to their potential consumers than anything else available to those consumers for an equivalent value, either in SecondLife or outside it. Given the techincal limitations of a computer simulated platform, that is not easy to achieve: there are simply far more ways in which a product or service in the external economy could be of value to a person than something available in the in-world economy.
For as long as the main focus of SecondLife is on casual, social entertainment, there will always be a limit - a very low limit - on the number of people willing to choose the SecondLife product over the external economy product. Whilst, therefore, enormous numbers of people might place some non-trivial value on the sort of casual, social entertainment offered by SecondLife, only a tiny proportion of those will value it so much that the marginal enhancements to that that they can obtain by spending a given amount of money exceeds in value anything else on which they could possibly spend that sum - hence the saturation of the market for in-world content.
The only thing that can unsaturate the market is a great increase in the core functionality of a virtual world: in other words, a strong reason or reasons beyond casual social entertainment for people to invest time (and, ultimately, money) into a personal virtual world presence. (At one time, for some people, gambling was such a reason: the elimination of gambling in-world might well have contributed to a contraction of the overall core economy).
One such reason is external work (that is, the provision of products and services that have an existence, and a demand, independent of the virtual world itself). There already seem to be some movements in this direction, albeit at this stage tentative. I have heard it suggested by an experienced SecondLife content creator that the recession might hasten this trend because a virtual office would be far cheaper than a real one: whether that is borne out remains to be seen, but it should be interesting to watch over the next three to five years. Another possibility is education: if people could obtain qualifications in SecondLife far more cheaply and conveniently than elsewhere, they would have an independent reason to be economically active. One can only imagine the possibilities, for instance, of large scale teaching of English to people from developing countries, using voice, and paid for in Linden dollars, themselves earned wholly or mainly by in-world economic activity (perhaps including external work).
If SecondLife were to broaden its core functionality in such a way, the effects would likely be exponential: if people log into SecondLife every day for work, then they are likely to be people who develop a circle of friends in SecondLife, value their actual or perceived social status, and want to engage in entertainment with those friends, and are far more likely, since SecondLife would be an important part of their social environment, to be willing to pay to do so. A business would do far better to open a shop in a thriving town centre than in the middle of a remote retirement village.
However, for all the emphasis placed on the economically active participants, the economically inactive participants ought not be ignored: if the core functionality of SecondLife is extended, current economically inactive participants are far more likely to become economically active participants than current non-participants are likely to become economically active participants. By familiarising millions with virtual worlds, SecondLife is making it far easier to capitalise on the more serious use cases when they reach critical mass. If there ever is to be a 3d internet revolution (and, realistically, it is still impossible to tell one way or another whether there will be one, or, if there is, what form that it will take), it will have been preceded by a lengthy proto-adoption phase, in which a significant minority of people use it casually without spending any money, and a significant minority of those are economically active. The pattern is one familiar to anyone with knowledge of the history of Web, whose serious commercial applications nobody now doubts. Whether history will repeat itself in three dimensions, however, remains to be seen.
October 14th, 2008 at 11:38 pmIYan, you’re totally right, LL is selling ink. I made a serious mistake: at some point while writing the article, I got the figures from the completely wrong year! Unforgivable! In fact, there was a period of time where LL did, indeed, rely only upon exponential sales, but those days are long gone. In fact, they would be far better off these days selling private islands for US$0 and just get tier.
(Now such a statement will make the land speculators tremble with fear!)
I really should correct that bit of the article. My fault; my apologies.
Paisley, what you describe worries me a lot — because it will discourage new live musicians to enter SL (or, perhaps even more worrying: it will prevent even better and more talented artists to remain in SL, when they see they cannot really make a profit). Now, live music has been one of the major reasons attracting people to SL, and for a year or so, it has been one of the most fantastically growing areas — in all senses — and the one providing quality entertainment beyond what SL had offered so far (sorry, but Tringo doesn’t cut it any more — and gambling is forbidden, so…). But, alas, I guess nobody would believe that the market could get saturated so quickly. It seemed just the other day when people roamed the grid in search of decent music, and often in vain!
Excellent analysis, Ashcroft. You spotted exactly the issue. Second Life is a “substitution product”, ie. it replaces spending money on other entertainment/social forms, from TV, DVDs, games, to going out to a RL club or watching a movie. I totally agree that this will definitely limit the number of active participants in the economy. And your point is even better made: it definitely explains that it’s far more difficult to convince someone to spend, say, L$400 on an outfit than US$1.50 on a cup of coffee, because the latter is viewed as having some value to most people, while the former doesn’t.
You’re also quite correct in assuming that few people (although definitely millions of them!) are easily persuaded to spend money on buying virtual products on a Web site (say, a new set of icons for your Windows computer, or a new template for WordPress). So the same difficulties of those business models will definitely be found in SL. Nevertheless I also agree that just because it’s difficult, it doesn’t mean it’s impossible.
My point was slightly different. Although I totally agree that it’s way harder to sell outfits than to sell coffee, SL managed to attract some 100,000 people who are willing to buy virtual goods — but that market is not growing. It’s always the same people. Dumping more products will not change the number of consumers, just switch them over to new products, while leaving some content creators out of business.
So… the big question, which I did not attempt to answer… how can you turn residents into economically active participants? LL failed to address the issue on how to convert Basic Accounts into Premium Accounts, and is toying with the idea of dropping Premium Accounts altogether. So we can’t turn to LL for help, can we? I agree that innovation — “extending the core functionality” — will probably switch some people over, but how soon can that innovation be converted into an expanding market?
Perhaps M Linden should worry far less about making the “first hour in SL” more easy (because at this stage this will only mean more and more people — at a larger cost of sustaining them with servers and bandwidth — but not more paying customers) and focus instead on deliver good reasons for people to spend money in SL.
Individually, at the resident level, of course, this question is easier to answer: to make sure your products and services attract customers (and not your competition!), you have to be far more aggressive. In a sense, Paisley pointed out what is already happening: the prices of classifieds are rising to absolutely insane levels, because there is a limited number of ways that people know how to attract customers. Once again, the laws of supply and demand are ruthless: if the number of ways to attract people is limited, and the demand to attract people increases (since the number of people remains constant), the prices for advertising increase. All predictable!
So what do I believe that will happen? In the next few months, we’ll see lots of content and service providers to disappear. They will (not unlike Ashcroft’s reasoning) expend too much in SL to get too little in return, business-wise, and move elsewhere (or remain a consumer but not a producer). This will ease the pressure on the ones remaining. So what this means is that a new balance will be met: there will be less live musicians — just the right number that are able to make a profit from it. There will be less land for sale, and less land speculators — just the ones that are able to still make sales and keep consumers happy. There will be less outfit brands — only the best will survive, and the ones that managed their brand well in the past.
Surprisingly, while this is all happening, there is one thing we will not see in SL: a decline on L$ transactions. They will remain constant over the period, even though there will be less things for sale. In fact, there are so many interesting metrics and statistics that I’d like to see — like, for instance, how many items are for sale today, and how many will still be for sale in 6 months. I predict that this number will dramatically decrease — but the number of L$ in circulation will continue to be the same. Right now, these are just products being offered without customers willing to buy them.
And a side-effect is that the surviving entrepreneurs will be the ones having just the right mix of quality/promotion and awareness/aggressive pricing. This does not mean that “only the best” will survive, but probably only the most business-like will. The era of selling snake oil might be over soon. What worries me at this stage is that during this shift, the content pirates will enjoy a temporary boom (since they can afford not to promote their services and have zero costs in labour; as legitimate content producers fail to attract more sales — mostly because they’re unwilling to turn themselves into aggressive businesspersons, they’re really mostly creative people — and abandon SL, their content will continue to be for sale through the pirate networks). Ultimately, they will disappear (or be so insignificant as to be worthless) as the only businesses surviving in SL will be the ones able to raise a strong brand awareness around a community of faithful clients — and pirates simply cannot afford to do that (they have to avoid exposure).
But on that subject I have a few ideas for Linden Lab to implement, which I’ll address on a further article (which will be smaller, I promise!).
October 15th, 2008 at 3:26 amMy brain is smoking now, but I read it all. It makes sense the way you present it, and I can share some insight from my own experience.
I am one of those “drags on the grid”, as non-premium users are sometimes referred too. In fact all I ever spent ON Second Life was 15 EUR. All I ever spent IN Second Life equals several hundred thousand L$. First, my RL conditions would not allow me to become Premium. I make ends meet in RL and that’s it. Second, I don’t see the value in becoming Premium. I discovered an entrepreneurial talent in my, and from what my businesses generate I can have a better SLifestyle than from the stipend. Plus, I hate mainland (which might be mutual as Prok suggested on one of her comments on my blog) and don’t see the need to become Premium to get a mainland plot.
As you may or may not know, I run the premier translation agency in SL, so I work in the service part. Prices there vary from the amount of work to be done. I saw no sign of a recession - on the contrary.
My SL partner is a content creator. She designs jewellery, and I am involved in the sales and marketing side. She also experienced a good growth once we started to implement marketing tools and basic accounting. However - and this is something you neglected in your post - there is a clear correlation between new releases and sales. I think a lot of business owners expect to get a constant stream of sales. It does not work that way though. When my partner does not have a new release for 4 weeks, sales drop significantly. When she is not featured on one of the major publicity channels, sales drop significantly. So the distribution of work - she creates and I do the marketing - is actually what works. She has more releases than before AND more sales.
Another point you did not mention is that SL is a very female environment. I don’t find the source by now, but I saw a statistic that showed that the older the residents become, the less males there are. This is because SL is predominantly a social platform, and males often have a hard time “getting” the social aspect. The top shakers and movers in SL, the content creators longest in the business, consist of a very huge percentage of women - this makes the SL economy unique, and certainly different compared to a 3rd world economy.
Given more time there would be so much more feedback I would like to give. But you certainly gave me food for thought.
October 15th, 2008 at 3:32 pmbtw - your blog gives an error message when I have the field “website” filled out.
October 15th, 2008 at 3:51 pmGwyn,
thank you for the interesting reply
Does Paisly’s correction of your ink/car calculation make a difference to your overall analysis?
As to the stability of the economically active participants, the saturation of the market might undermine that, might it not? Suppose that a certain percentage of the economically active participants are only interested in being economically active participants in so far as they make a net profit in SecondLife or break even (in other words, getting more out of the LindeX than they put in, not being Premium account users, or even, perhaps, never using the LindeX while not being premium account users, but gathering all in-world income from in-world trading); if the market becomes saturated such that competition becomes more intense, a number of the profit only economically active participants might well drop out of economic activity (or even SecondLife) entirely. In other words, the current level of economically active participants might be unsustainable: as people realise that the market is saturated, existing economically active participants might drop out, and fewer people become economically active in the first place. That may then have a cascade effect on other profit only participants, as a reduction of demand in an already saturated market is likely to lead to an increasing numbers of loss-making enterprises and therefore business failures.
I do not think that focussing on early user experience - or encouraging more users - is a mistake: after all, every user of SecondLife has just as much potential to become economically active as every other user: the more users that can be attracted overall, given a fixed percentage of economically active users to total users, the greater the number of economically active users will be. Moreover, if SecondLife is to become a platform for things other than casual, social entertainment (a prerequisite to the expansion of economic demand in-world), making it as easy to use and as welcoming as possible is imperative. The necessity is to make SecondLife attractive to people other than those who are so loyal or so keen on the idea that they are prepared to put up with all manner of techincal problems, inadequacies and design flaws in order to participate in SecondLife. I suspect people who are prepared to put up with such things are a minority of all of the people who could be economically active in-world.
October 15th, 2008 at 8:25 pmummm Ashcroft I’d love to take credit for the ink/car correction but it was not me, I believe it was IYan Writer?
That confused me too I would have thought that Tier and Classifieds were very much the ink…
As well as saturation Gwen, the way the music Industry is set up in here, with the American tipping model,( the main way most average musicians get money, very few musicians get a set fee) and because there is still probably only 20% of people who even know about live music in SL (based on a 2007 survey) and where to find it…second life starts out for musicians as a “look see” venture.
If you are a RL professional musician, with Cd’s to sell, and you’