The Hard Facts About the Second Life® Economy

The unelastic market

Having a fixed population that are active consumers means that there is a limit to how much they will spend (even if they tend to commit over time to more spending, but not in an exponential way!), and thus it curbs the size of the market. This is exactly the same scenario as in my Honest Joe The Car Dealer example. What it means is that those 100,000 are just providing services to the same 100,000 — and there is a limit on how much these people are willing to spend. Early in 2007, when the market wasn’t saturated, it looked like the 100,000 could continue to provide more and more services, sell more and more land, create more and more content — and since SL was always growing in size, it looked like you’d always get customers for your services and products.

But we hit a limit. LL noticed soon enough that the mainland is unable to grow and that empty plots pop up everywhere. So although the population overall is growing, they’re not buying more land. Why? My claim is that the overall population has grown, the number of people willing to buy land has not grown in the same ratio. In fact, it hasn’t grown at all — just the same people were willing to spend a bit extra here and there. And, of course, on a microscale, you got people eagerly joining SL, spending some money for a while, buying a plot, and quickly going away. While the number of these people was constant — for a land size three times smaller than today — it seemed that you’d always get a buyer for your plot.

After a time, however, all the 100,000 had their plots, and hit their own personal limits on how much further they were willing to buy new land. Once that limit was hit, land sales dropped abruptly. Now notice how my claim is completely at odds with what every land manager in SL is saying. All of them report “decreased sales” and assume that “people are leaving”. My claim is totally different: the market is saturated because all possible people interested in buying more land have done so, and are not willing to buy more.

In fact, they have done even worse: they have jumped out of the mainland and gone to their private islands instead. While LL managed to stop the mainland from growing, they cannot shoot their own feet and prevent people from buying private islands (after all, that’s their source of income!). However this leaves “holes” in the mainland which will not be closed down, even if, by miracle, 20,000 new users start entering SL on average per day. Again, on a microscale — a few weeks or so — people might get among those 20,000 a few that might buy a few plots. A very very tiny number will even be added to The 100,000, and will not go away (but old members of the 100,000 will also leave, so this effect will be mostly sporadic, uncertain, and definitely not long-lasting).

On the community management side, what this means is that new projects using the old models (“I just wanted a community where everybody would be happy, join us at parties at the club, participate in the events, look at the art gallery, and shop at our community mall. But nobody is coming any more! I cannot understand, I had the perfect community”) will fail. Dramatically so, because there isn’t a consumer market that can absorb new projects. In fact, due to the constant increase of new offerings in the “community” area, people from the 100,000 will hop away into the next one — specially if, responding to the market’s excess of supply, prices drop. And this will mean bad news for the community managers. If so many are offering exactly the same type of services, prices will drop — and dramatically so — until some communities will have no choice but to offer their services for free or go away.

Once they enter the “community for free” market, you know what it means: you open your community to the “freeloaders”, ie. everybody outside the 100,000. These will happily join any free community that appears. But… you cannot sustain a community financially (because LL will certainly not give their islands away for free!) for long. Community managers will quickly figure that out. Even worse: they will suddenly understand that no strategy to bring income to a free community will work, because nobody from the 100,000 will be on that community, or, perhaps even worse, if they are, they’ll be unwilling to spend anything (effectively “reconverting” one member of the Consumer Group into the Tourist Group — another one dropping out of the 100,000). Those projects will quickly die.

But again — it’s not from lack of users, or “everybody leaving SL”. It’s just hitting a saturated market, where the competition levels go from agressive to predator-style. Not everybody is able to manage to survive in there!

On the content creation side, the parallels are astonishingly similar. Launching a new fashion collection in 2004 was so easy. All you needed was a handful of shops on the major spots near the telehubs, and newbies with their stipends would buy anything in sight. Once you had enough money, you’d buy your own shop, and start promoting your brand more agressively — and target it to the Premium Account residents, which would allow you to sell higher-quality items for a higher price.

But these days it’s insanely hard to launch a new brand. It’s not only making sure that you’re well-known enough by all fashionistas and fashion bloggers and magazine writers — which is hard and takes time. It’s not enough to have the best quality products available in your collection. The problem is that there is a limit on how much the 100,000 can spend. They’re stretched thin across the dozens of thousands of brands in SL already, and every week a new designer pops up and wants a share of the market — another market which is also saturated! Put it bluntly: there is no room for more designers except if you’re willing to drive your competitors out of business. So there is no time to use soft silky gloves for fighting; the only way to survive in the fashion world is to eliminate the competition. The Armidi brand is trying very, very hard to do that, and perhaps with some success. Many others have understood that the market has stagnated — but still working under the wrong assumptions! — and are starting to put up a serious fight. Long gone are the days where you put up a shop and would have increased sales just from “being here”. Even long gone are the days where quality defined success, or marketing and promotion helped you to find out where all your potential customers were shopping and open your shop there. These days, we’ve hit the limit on how many different brands are able to survive in SL, because the market is only 100,000 people and they have a limit on how much they spend.

In despair, designers tried to give their content away as freebies, hoping to make themselves more popular (and show themselves as politically correct towards the “poor newbies”). Nothing could be worse. As Prokofy Neva put so bluntly several years ago, we’re flooded with freebies. Fashion comes and goes — nobody wears non-sculpty heels these days — and you can rely upon consumers to pay for new, fresh, innovative content. But you can’t fight freebies: they accumulate. Unlike content creators who retire products from the market (when they don’t sell, are out of fashion, or are replaced by better and improved products), freebies never disappear. And to worsen that, while in 2004 and 2005 wearing a freebie was considered hilarious — because they were of such poor quality! — the freebies of 2008 are of insanely high quality. In fact, whole communities have been popping into existence to help people to pick the very best among all freebies in the world — Fabulously Free in SL being perhaps one of the best examples. All these sites, these notecards, these people explaining where to get free things in SL are just increasing the magnitude of the problem. (And I know they mean well, that’s besides the point; none of them are Evil Communists Trying To Bring The Downfall of Laissez-Faire Rampant Capitalism in SL, but just happily giving out tips and ideas, to newbies, non-consumers, and even the 100,000, who are often amused at how good those freebies are these days)

So content creators in 2008 have to fight two battles. The one is against other content creators, because simply there is no room for all of them any more. Increasing the quality of their products might simply not cut it. Drastically reducing prices will leave them out of business. But the other battle is against the high quality freebies. If you get basically the same shirt for free if it costs L$250 in a shop, why should you go for the paid item, when the freebie is just as good — even if it’s not the colour you like? To make things worse, every time a designer leaves SL, it’s customary to give away all content for free. So the problem gets aggravating and aggravating.

Content creators shift the blame on the lack of newbies, people leaving, and, of course, CopyBot. Since the statistics don’t support the first two assumptions, they imagine that copied content is the main cause of loss of sales. It hardly makes a difference really, and for two reasons. First, it’s not as widespread as people believe, since mounting a full CopyBot operation requires a criminal organisation that sets up new alts, new shops, makes a few sales, go away, reappear on a new sim with new alts, puts up the content for sale again, and so on. A few rings have been exposed that actually work like that. LL’s benevolence in dealing with them encourages more and more “copycats” (pun intended!) to do the same, so, yes, from a moral point of view, and even a legal one, this needs to be put to a stop. And yes, LL is not sleeping over it, they have some plans to be announced.

But even when the CopyBot Threat is removed from SL, content creators will still fail to increase sales. In fact, ironically, CopyBot users are possibly the ones suffering more. They don’t target the 100,000 as customers (because these only buy from the legitimate shops!). They target the Basic Accounts with little money instead. What a silly strategy!… That group will never show up for recurring sales, no matter how low the price might be. At some point, what the pirates do is simply give away the copied content as freebies — and leave the business model once they fail to understand why an ever-decreasing number of people are willing to buy even cheap content.

You see, the question is that only the 100,000 will be willing to pay recurringly for high-quality content. The rest of the residents don’t want to pay anything, not even L$1 for an item that they can get for free elsewhere. Freebies are not items “on sale”. In the real world, you don’t have a freebie-oriented economy — you might get a free item as part of a promotion, or for being a good returning client, or for winning a lottery. But there are no shops iRL that give away half the outfits for free, expecting to sell a few of the others. If they did — they’ll soon figure out that the only people visiting those shops would only go there for the free outfits, and never buy a single one of the others.

However people expect SL to behave differently.

But of course they don’t 🙂 So, it’s a negative spiral, as more and more content creators give away their high quality products in hopes of attracting customers, then fail their business and flood the saturated market with even more freebies as they leave SL. Soon we’ll be swamped and flooded in freebies and there will be nobody willing to pay for content — not even the 100,000. Once that point is reached, it’s basically the end of the economy.

Don’t worry — we’re not there yet 🙂 But, granted, I’m very sad to see that a lot of highly talented content creators will have to learn the lesson the hard way — and in the process releasing a flurry of freebies and make it harder for all the remaining designers — until the market stabilises again, with the amount of “just enough” content creators able to still make a profit out of their content.

The rest, tragically, will have to go.

Unless — of course — something dramatically changes.

Print Friendly, PDF & Email
%d bloggers like this: