Immersion or Isolation?

No business plan? Riding on the Bubble again?

As a survivor of the dot-com bubble, it wasn’t very hard to see what projects would ultimately fail, and to see which ones would last through the bubble and grow beyond it. Some were surprises — Google’s reliance on a single business model that nobody believed in: web-side adverts — but many, many failed because the whole concept was wrong, and companies with a similar concept simply had to shut down.

The typical example was the “Internet for free” idea, which started to appear by 1998 everywhere. Internet Service Providers thought they could give their service for free and get an income from advertising on their web portals, since most of the people didn’t know how to change their homepage once the ISP’s software was installed (remember, Google was only founded as a company in 1998, and they weren’t selling ads… yet). Giving Internet access for free was one of the silliest idea ever, but it had two important effects: it completely removed all small-sized ISPs from the market, who had to survive on customers who paid. The second effect, of course, was that the notion of getting-money-from-web-ads was dropped as the silliest possible notion — giving Google the opportunity to establish a de facto monopoly when all other companies failed (or, like DoubleClick, were bought by Google).

Business models like Amazon’s or eBay’s did survive the dot-com bubble almost with no scars. Why? Because they had business models based on getting a share of the income made by third parties. They simply had completely different business models than the usual hey-I’ve-got-a-techie-idea-but-no-clue-on-how-to-make-money-out-of-it-so-please-buy-me-Mr-Business-Angel companies. Their idea was that a community of buyers and sellers, if they have momentum, will generate enough interest to make the company providing a service to put buyers and sellers in contact with each other become lucrative just for the small fees. People are very reluctant to give their money away to Internet-based companies, since so much is for free — unless the service is valuable, and they see an advantage in using that company over others, mostly because they have a large user base, a product that is really used, and worth paying for.

So we come now to this new generation of web-embedded virtual worlds, and we should be asking the same question: how will those companies make money? What is their business model? Why will their customers pay for having those services? What are their advantages over the competitors?

We’ll quickly see that we can divide the current crowd in three groups:

1. The techie gang

These are the visionaries who understand about technology but have no clue about business. But they don’t have to. Venture Capital companies and Business Angels are always looking for some clever ideas to invest on. They simply need to evaluate how good these people are, how interesting their project sounds, how likely the company and their product is going to be talked about in the media, and, well, how cool they are. Innovation is the important thing here, specially if the technology is unusual, radical, or simply well done. VC funders will provide business knowledge as part of their services anyway.

On this group we have mostly three subgroups. On one side looms Google: they have the worst possible product of the whole group, but, well, they have by far the best brand. They’ll survive just because they’re Google — unless, of course, their CEO decrees that the project is not worth pursuing further. Until that happens, they can keep Lively up for as long as they wish. Google does only make money from a single product: Google AdWords/AdSense. The rest is, well, experimenting and R&D, the important thing here is knowing what the reasons to leave adwords to the pros are. None of the other Google services will probably make a single cent (or if they do, they will not ever be profitable), but that’s irrelevant. They have vast hordes of money to spend, and can afford to absorb the costs of failure. They also have a policy of innovation and good engineering: launching new products, even ones that might not be successful, motivates the shareholders to keep believing in Google’s ability to innovate.

Then we have the “buy me!” wannabes, the legacy of the dot-com era. They announce products in “closed beta”. The word “cost” is never mentioned on their websites — everything is to be had for free. The technology ranges from the moderately cool to pure awesomeness, but they only have a single fixed purpose: like the ISPs in 1998, they want their product to be free to attract the largest possible amount of “beta users” (early adopters), and push off their idea to a VC, business angel, or even an IPO (if they’re bold enough). “Money” to pay for the product is secondary; it’s the “fire and forget” approach. If the bubble told us any lesson, it’ll mean that most — if not all — of those projects will, indeed, be forgotten in 3-4 years, after their owners are fired. 

2. We’ll get money from content/virtual currency

This group is fortunately a bit more reasonable. They very likely show their funders the statistics published by Linden Lab and say: “look how much content is sold every day in the Second Life® world!”. Their sales pitch will very likely be something in the lines of “if we sell that content exclusively, it means that all the money transacted in our virtual world will come to us“. In fact, that’s a rather good argument. Closed content is what made AOL and MSN grow in their pre-Internet days, and I’m pretty sure that they want to ride on top of that.

An interesting twist is the emphasis on controlling the virtual currency. The notion that the business model is to provide currency for a virtual world is quite novel. If you remember SL’s 2004-2005 history, you’ll see that Linden Lab just provides that service “accidentally” — the LindeX is an unforeseen and unplanned event in the history of Linden Lab. Sure, by paying a few L$ every week to Premium accounts, one can point the origins of the “virtual currency” business to Second Life, as back as 2003. But it was not deliberate. In 2008, however, whole business models are created on the notion that the company running the virtual world will only provide currency, not content (Metaplace being by the far the one with the largest emphasis on that).

Now the problem here is, again, critical mass, in both the userbase willing to spend money (and buy virtual currency), and the content creators “allowed” to develop content to be bought. IMVU, for example, has the largest catalogue of items with user-generated content — I’ve counted over a million — and they have a healthy content-based economy. Google Lively started with a handful of items (but with “millions of combinations!”, they claim). Meez is probably second to IMVU on available content, or perhaps There.com — both are hard to count — but the other models are all closed-content. So this means that the amount of content they can produce per unit of time is necessarily limited.

Compare that to the billions of items available in Second Life. There is simply no possible comparison. SL has way too much content when compared to all of these put together, and since SL continues to grow, and content creators are getting better and better, the sheer creative output overwhelms everything the industry of 3D digital content has ever seen. 200 developers at Google cannot ever produce a tiny fraction of what around 100,000 content creators do every day in Second Life. Not even Google is able to afford 100,000 designers — and even if they did, Second Life has a five years head start. So by 2013 Google (or Microsoft, or Yahoo, or Sun, or IBM, or anyone with enough money to hire 100,000 designers from one day to the other) might slowly come to the same point as SL is right now in terms of content production, but… SL will not be exactly asleep during the same period, and probably have trillions of items for sale by then.

The issue is, if you want to enter the content production business on your own virtual world, how can you compete with the huge and vast amount of available content of Second Life, which is, indeed, based on a solid business model — high-quality content is mostly paid for, but it’s insanely cheap?

How do you replicate that, and convince your funding partners that you can do it better than Linden Lab? (Specially because Linden Lab does not do anything — “it just happened” — and, in fact, dropped the content production business altogether, relying exclusively on third parties — the residents — to create content.)

3. We provide services for others to make money

Here is, at last, something that has a solid business plan, one that any VC company or business angel will be able to read and understand. In a word — underlying technology is not relevant. What you sell is.

Once more it’s interesting to see what all these virtual world companies are offering. There.com might have the best business model, closely followed by Multiverse: they simply license their development tools to create closed virtual worlds. In the case of There.com, they might just need to sell one or two licenses per year (and they certainly made enough licensing the technology to the US armed forces). They don’t even need to cover content production — companies like the Electric Sheep Company will gladly create the content for their own customers. They just need to sell licenses. Multiverse has a shared revenue model: try your virtual world with your own content for free if you wish (they’ll provide the tools and the hosting), but once you start charging a bit for it, Multiverse wants a share. It’s a very fair and reasonable model. Probably one that targets the low-end companies producing content, but the long tail effect will certainly work for Multiverse: capture the attention of enough small companies, and the revenue will still sum up. Also, they’re cost-oriented: they only need to host more virtual worlds (and increase their running costs) if they get more customers. I’m personally very, very fond of cost-oriented business models, since they’re very clear to follow, and there are no hidden surprises — things that investors and funding partners will naturally appreciate.

There is only a catch, of course: you have to be good at selling your product. That requires an exemplary salesforce, a couple of visionaries and evangelists, a marketing campaign, and good PR with the media. However, all these are part of any regular business: they’re the major risk in any business area. Most people fail to appreciate that “technology” hardly plays a role here — being good in promoting your services will always work out in the end, no matter how good your bad your technology is; a lesson that both Microsoft and Apple have taught us.

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