Electric Sheep Company To Change Core Business?

ESC LogoThe SLogosphere has been busily trying to “interpret” the meaning of the Electric Sheep Company’s layoff of about a third of their workforce and since some of their projects are being shut down, there have been all kinds of wild speculations. There isn’t a real official press release about the layoff, just some comments from some of ESC’s representatives and an explanation by a former employee, so this is a good background for rumours, on a week where all we read is how companies are leaving SL or other virtual worlds are growing like crazy.

So it’s time for a new round of metahype and doomsday predictions? You bet!

Let’s get back to the facts. The media doesn’t know what to report about SL. 15,000-25,000 new users registering every day is not news. SL having more registered users than World of Warcraft is not news — but Kaneva doing a stress-test of their grid to reach 750 simultaneous users shows that “all other virtual worlds are growing”. A hundred new companies and organisations entering SL per week is no news — but two leaving, after their one-year-project finished, makes the headlines. A tiny not-for-profit organisation opening up 25 sims for some social and cultural work gets mostly unnoticed; but if supportforhealing, an in-world support group with a single sim which is around since late 2004 or so, announced that they’d leave SL, that would be on the front page of the New York Times or on prime time on CNN.

What this means is that the perception of what has become “news” in SL has changed. Nobody gets “media splash” any more — at least, not massively — if they announce anything interesting. On the other hand, if you have bad news to give, they’ll spread like wildfire.

Taking that into account, let’s move to the next item on the list.

The Sheep are not a tiny nano-company any more (they’re larger today than LL was when I joined SL!). They do massive projects at long time scales — several months or years. They have huge customers with complex projects. They have hired some of the biggest names in content creation, software development, and event hosting in SL. And they’re hippy, trendy, chic, cool. All put together means that they were the first Metaverse Development Company that attracted a multi-million investment (from CBS), in what might become a trend in the near future, as more and more companies begin to come close to the Sheep’s own abilities and skills.

CBS, as a major investor in ESC, is very likely pulling the strings. They might have some indpendence when making daily decisions — ie. on whom to hire, or how to address a customer’s request — but when it comes to quarterly results, CBS will be on the listening end. And if they don’t like what they hear, they’ll demand either strong measures, or someone’s head. I can hardly imagine that CBS will be happy to see their investment go wasted.

So one might think: “aha, so, the Sheep’s business plan showed planned revenues coming from an increase of companies joining SL, and since that didn’t happen (because everybody is leaving SL), they went broke. It figures.”

Very likely, that’s completely and utterly wrong.

The first thing that might have eluded the Sheep is how quickly new, emergent Metaverse Development Companies are popping up and getting customers to join. So let’s assume that they figured out that they would get 20-30% of all new companies coming to join SL (100-1000 a month). In early 2007, when there were perhaps a hundred MDCs, this would probably mean that the bigger, more interesting customers would really just pick one of the leading MDCs. But in late 2007 that has all changed. “Creative talent” is not any more in the hands of a selection of hand-picked names with 3-4 years of experience and reputation in SL. In fact, utter newbies (but highly competent professionals) pick SL up, and after a few weeks are offering high quality content, at the level of the Sheep. Nobody has heard about these newbies — but they bring contacts with them. They have connections and a network. So a huge number of those 100-1000 companies per month come already with “their own MDC” to make the work for them. They never “shop around” for a contractor — they already come into SL with their own contractor.

This is not only happening at a global scale, but everywhere. Tiny start-ups come to SL with huge projects, coming from their RL connections. The builders are less than a year in SL; the programmers are often outsourced out of SL. This means that any prediction of “growth” in revenues made in January did take into account an increase in the number of potential customers (which was very likely far surpassed by anyone’s expectations), but very likely not the thousands of MDCs that have mushroomed all over the place to support those potential customers. While MDCs in early 2007 — since they were few — even collaborated together on megacorps and international customers, these days they’re being fought in their own cities with micro-MDCs who just have far better contacts.

What this means for the Sheep (and other MDCs) is that while their predictions of the growth of SL were probably even surpassed by the real numbers, their market share has diminished quite a lot, as all these new customers have been dealt with by the micro-MDCs. Which, in turn, are growing and getting more and more customers of their own, which would never consider shopping around for another content developer.

Then, the Sheep are well-known for their other development projects, beyond 3D content creation. Under the OnRez brand, they put a viewer and a shop. We can quickly see that the OnRez Shop does not even come close to SL Exchange (even if they’re growing fast), and commission sales on the items delivered by the OnRez Shop will not pay even the tiniest fraction of the alleged salary cost of US$100k a month. The ad network seemed to have been dropped — no wonder, since all previous attempts at doing those kind of networks have utterly failed to capture any interesting traffic driven by ads. And what about their infamous Search engine? As a libsecondlife-based technology for the crawling, and a rather good search engine, it seemed to be unbeatable. Then Linden Lab released their new in-world search, using a Google Appliance Server. Suddenly, all these search engines for SL became obsolete. A few, like SL Browser, are cleverly switching their core business, but also trying to convince residents to change the in-world search to their own engine. Still, I’m a bit skeptic — why should anyone pay for ads on a search engine that is used by “a few thousand” when the LL search is available to “several millions”?

All these are consequences of an evolution of SL. Now, good businesspersons know the drill, and when market conditions change, the company has to adapt (or die in the attempt). We’ve seen on the LL blog how people (without a clue about business) whine, gripe, and complain when LL changes anything — they can’t adapt, so their last resort is, well, to complain.

Not so with the Sheep. Every subtle change in SL is immediately explored with an innovative solution; “changes” become “business opportunities”. So what this means is that the Sheep did not stand still, but looked ahead and saw what would work for them and what had to be discarded to continue their growth.

That’s what you would expect from any normal company in a highly competitive market. Why shouldn’t you expect it from one of the leading examples in the MDC arena?

In fact, the Sheep’s major investor, CBS, very likely doesn’t merely “expect” it, they demand it. And so, when ultimately they ask of the Sheep’s CEO what he will do to put the Sheep back in the black, the answer is simple: drop all projects where there is no hope of a return; don’t “compete” with LL on search engines; forget about ad revenue; oh, and we’re not really picking up the companies that have been brought into SL by the micro-MDCs, so we don’t need as many content creators as we planned. And they “cut some corners” to put ESC back into shape, and continue to make a profit and expand.

Sure, the timing was bad — both the Christmas season (emotionally) and the subtle hint that some employees would be getting a bit of ESC’s stock at about this time, as part of their contracts (business). Handling the press was also not in the best way: since the media only picks bad news these days, picking another case that can quickly be construed as being “bad news”, at this time, was bad.

There are also a lot of PR-friendly ways of dealing with the issue of getting rid of 20+ employees. Encourage them to create their own company and even give them some starting money for doing so, and an agreement with ESC that they would commit to hire that new company’s services first before outsourcing it to anyone else. Many would be disappointed, and leave of their own will (thus they wouldn’t be technically “fired”…). The others, having as the single other option being unemployed, might have gone for that. Thus, their announcement wouldn’t have been “1/3 of our workforce was fired” but “The Electric Sheep Company announces the launch of ‘Replicators Unleashed’, their new MDC for SL-specific content creation” or something. This would give a clear message that they’re not “dumping SL” (which they aren’t), but rather restructuring themselves internally (which they are), and instead of “firing employees” they would be “giving them an opportunity to grow as a subsidiary of the ESC Group”. At the same time, ESC, as a company, would be leaner, and make CBS happy.

So what would the remaining employees at ESC do? Hiro Pendragon seems to have hit the nail on their future:

Does this make any sense?

At the last minute, e-sheep decides to lay off 22 employees and focus on their software suites. Essentially, they are no longer a MDC.

Oh yes. Consider their positioning. Right now, they’re a one-project-company: their major customer, worth several million USD, is CBS. Getting new customers means fighting the micro-MDCs, who might not have the same talent for hire, but have much better contacts (at the very least, internationally).

On the other hand, they’ve shown to be quite good at web-based software development, and several of their core programmers are in fact part of the libsecondlife teams. They’ve done several complex interconnections between SL and external servers (OnRez Shop, the search engine, the ad network) and their own SL client. That’s quite a lot — in fact, one might claim that more than “talented content creators”, the Sheep are very strong on providing services on top of software that runs “with” Second Life.

So… with the strong competition at the MDC level… with thousands of small companies providing services in that area, almost all of those actually delivering very good content… ESC has to outshine and outdo them all to keep afloat and bring good value to CBS. The alternative seems to be obvious: get rid of the content business (mostly), and change their focus towards providing different kinds of services that nobody else is currently offering. So if a customer wants their own client, or run their own grid, or do very complex things that require libsecondlife and a very close interaction with the SL grid… well, who are they going to call? The Sheep are possibly the only ones available for that specialised jobs. So they’re exchanging the everybody-is-a-content-provider-service, leveraging on their excellent team of developers and uncannily good reputation, and enter a completely different — and totally unexplored — market.

To me, that’s pretty solid business thinking.

On the downside, of course, it means that they don’t need event hosters and planners, or so many content creators — just the required amount to keep the CBS projects afloat. Thus the layoff, or “rightsizing”: keeping the team they need for their change of business model and preparing for a 2008 where they’ll have less competition and a vast market demanding things that only them can provide.

For now!… Perhaps in 2009 they’ll change again — running their own grid and competing against LL directly? 🙂

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About Gwyneth Llewelyn

I'm just a virtual girl in a virtual world...

  • Gwyn,

    I think the story is simpler: they ran out of money. You keep mentioning CBS; they only got so many millions from CBS (was it $7 or 8?) and there wasn’t another round. They couldn’t live forever off VC infusions, they have to start showing profit or potential somewhere.

    I view CSI:NY as a flop, having been at its roll-out in San Jose at VW07, where they bragged that a million people would come in the door and burn down the servers. They got 120,000, many who didn’t come back. But I’m told by those closer and more knowledgeable to the scene that it wasn’t viewed as a flop because *they got the old media hits they needed, and that was that*.

    However, that is a one-trick pony.

    And Gwyn, you’re not making sense. If the Sheep drop their main content and events people, because corporations like AOL and Pontiac quit and others weren’t in the pipeline, that’s rational, but then…why spend development time and dollars on a shopping site for avatars that will be of absolutely no interest to something like CBS or Pontiac? That just sounds like double talk.

    And wait…they are working on AI and bots and such…yet they are giving up the search bot? Again, doesn’t make sense.

    It’s not clear where these more vaunted “software suits” would find a home, if not in SL, and if in SL, who will pay for them.

    To be sure, they have their hooks into Metaplace, and perhaps that will be interesting.

    I think the most important point you’ve made is that the MDCs aren’t needed as much any more because companies are able to put their own staff in, and they ramp up pretty fast. If you are already clever at PSP and 3-D modelling, it isn’t such a big deal to adapt to SL. The complexity of SL is often overstated by those who need to make a buck off the steep learning curve.

    I remember saying a year ago that when these RL corporations got smart, they would put their own people on the art work and building and such. But…they didn’t because it was actually more expensive, and more of a ramp-up, I guess. I’m not persuaded they are doing it now. But I’d recommend it just because it is part of learning the environment.

    We’re told that the people who remain in the Sheep are the top content makers and the sales force. So they have clients that still need hand-holding by a sales team — but they don’t need big builds for that to be taking place in, if they’ve gone over to the teen and pet worlds.

  • I don’t think they ran out of money. They have always been profitable as far as I’m aware. They were profitable when I was hired, and they hadn’t received the CBS money yet. (Which was $7 mil, $2 mil paid off some early investors, and $5mil went in the bank for a rainy day)

    It looks to me like 1. They fired a bunch of people that were about to qualify for their first vesting of stock, which I explain in more detail at my blog. And 2. They just freed up more then $100,000 a month in expenses with these firings.

    These two things add up to one very likely result. They are showing more profitability so they can sell the company, and the founders get to keep a bunch of stock they almost lost to those employees. It’s a win-win for everybody involved. (everybody being the founders, long time employees, and investors)

  • I think that the sheep thought hard about what they did before they did it. Changing with the market is the only way to survive in this semi-virtual economy. I’m still a bit confused on the whole ad-revenue thing, since the onrez storefront is trying to sell adwords/frames for product listings. The storefront is pretty limiting compared to SLX with its features. However, they have lasted this long where other web-storefronts failed (MySLShop, SecondServer to name a couple).

  • Ranma Tardis

    Looks like Electric Sheep is run by a group of snakes after all. Also shows they need to work on their Public Image.
    Jeremy these are people that EC screwed out of stock. I suppose as long as it is in the firms best interest everything is ok, right? I do not see their former employees working with them at all. Also there is the possibility of court action by former employees. I see the whole event as a lose/lose for everyone.

  • Amilie Anatine

    I won’t speculate about the ‘sheep’s layoffs or business practices, but im very disgusted by the way the media is using this event as some kind of litmus test for the future of SL business. Just because a famous developer is going through reorganization doesnt mean SL is affected. Since when did SL rely on the success of CSI:NY or Sheep for that matter? CBS and ‘sheep can thank hundreds of SL volunteer mentors for bringing their guests in the SL door round the clock for 3 days.

  • Amilie Anatine

    CBS can thank hundreds of SL volunteer mentors for bringing their guests in the SL door round the clock that whole weekend. CBS and Sheep are not litmus tests for the direction of SL, they are guests at the party.