The Hard Facts About the Second Life® Economy

The Hundred Thousand And The Freebie Economy

Judging by the past performance, LL is doing well. The number of new private islands sold are “just right” for their business model. They had to shut down adding new regions to the mainland, since, according to the laws of supply and demand, when there is too much supply and little demand, the prices go down, and people were protesting. Also, LL introduces new regions on the mainland by auctioning them off wholesale on the Land Auction site, with a base price of US$1000, so if they remain unbidded for too long, LL has to take them down again. In the past few months they basically removed them from the auctions, thus effectively preventing the mainland to grow. People would have to make do with whatever parcels are still being offered on the mainland. Prices would probably rise that way, keeping the land speculators happy, but that has not happened to a significant amount. Why?

The root of Second Life’s economy really comes from the wild days of impossibly high exponential growth. With “impossibly high” I mostly mean unsustainable in the long term — there is a limit to the number of people potentially interested in Second Life. After all, it’s hard to learn, you need good quality hardware (and a lot of skill to tweak the performance on your computer), and enough time to spend. It appeals to a certain part of the overall worldwide market, but it’s not a full mainstream product — not yet. Not unlike Apple’s Macintosh computers, which are designed as a mainstream product but will only appeal to a small fraction of the overall market of computer buyers, Second Life is designed to be (or become) a mainstream product, but, at this stage, will only get a limited number of potential residents out of the 2 billion Internet users (this, hopefully, will change as SL becomes easier to use, runs on low-end hardware, and provides a more fulfilling experience — but all these things are as yet in the uncertain future). Obviously we haven’t reached that point yet — those 2 billion Internet users are not yet all aware of Second Life, after all, and this means that there is plenty of possible growth. Still, the Internet also has a limit on how many users actually will join a service. 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. The reason is hard to explain, but it goes deeply to the way we humans think and behave. Some of us are not wired in their brains to sign up for eBay and shop there, even if we read on magazines how cool that is. We might be aware of eBay but would never register for such a service — and much less use it. Thus, eBay has probably not more than 200 or so million users. It’s more than enough — it’s an economy with a population the size of Brazil, Indonesia, or Japan — but there will not be a day in the future where 2 billion users will register with eBay. (Even if the Internet grew to be planet-wide, ie. 6.3 billion people, this would not bring many more users to eBay; they have effectively hit the limit of “potentially interested people in the service”. They could conceivably add more users to their brand by providing different services, but not the current ones. That’s why eBay is innovating in their services as well).

For Second Life, it means there is still a lot to grow — I believe it could attract 100-150 million users as well, but not more. Right now it just has 15 millions. But… these are, as we know, registered users, not active ones.

How many active users does SL have these days? Depending on whom you ask, the answer is different, because “active user” means something different to different people. LL tends to define “someone that logs in at least in the past two months” or something like that. But that definition is just as good as any others — for example, I have accounts with Facebook, MySpace, eBay, PayPal, Flickr, YouTube, Twitter, Plurk, LinkedIn, WordPress, Plaxo, Amazon and another few hundreds where I’ve registered and that I keep reasonably updated… but I might not log in to all of them every two months. One could suggest perhaps a different definition — someone that spends, say, X dollars per month on a service (making all WoW players heavy active users!). This would make some economical sense, but still make me an active user of eBay, where I spend, on average, more money than on Second Life. Nevertheless, I log in to eBay perhaps a dozen times per year at most — but spend an average of 15 hours per week on SL. Also, one thing is “spending in-world time”. The other thing is spending time — professionally or leisurely — with issues related to SL. If we used the latter definition (one that, of course, is impossible to measure), I’d be completely out of the scale! I’m a full-time Internet user — all my time spent awake is in front of an Internet-connected computer. Almost all my leisure time is on the Internet as well — so I’d qualify at least to be a double-full-time Internet active user. But of all that time, perhaps two-thirds is spent in issues related to Second Life. When I’m logged into my company’s OpenSim grid, I’m not being counted towards “SL user hours”, but I’m certainly spending hours logged in to a SL-related ‘thing’!

So, taking the “active user concept” with a pinch of salt, I’ll stick to the official numbers — about 1.2 million active users in the past two months, or about 8% of the total number of registered users. It doesn’t seem much for an Internet service opened to the public 5 years ago.

The reality is actually a bit more tricky. What exactly are those 1.2 million users doing? One thing is certain: they aren’t shopping in SL. They’re just like page views on, say, eBay and Amazon: interesting to explain their relative popularity, but worthless in economic terms. A user that just visits but doesn’t shop counts certainly towards your running costs (a non-shopping avatar uses as much CPU power and bandwidth as a shopping one), but not towards your profit. You still have to support them, of course, because you will never know when you can turn a visitor into a consumer. This is the basic pillar of the old dot-com “New Economy” mantra: give people something for free, expect them to convert into paying customers, and go for the long tail.

In SL, at the beginning — and until early 2005 — LL had added a nice touch to things. Moving away from the traditional 7-days-trial-period-then-you-have-to-pay, they differentiated their users in two types: Basic Accounts, who would use the service for free, and get a tiny stipend (it used to be L$50/week, if they logged in that week) and Premium Accounts, paying a tiny amount of US$ per month, and getting a much larger stipend and the ability to own land.

The “stipend economy” actually kickstarted what I call the newbie exploitation economy — or, if you prefer, the “newbie tourist trap” model. Briefly explained, this meant that newbies became walking targets for residents to relieve them from their stipends. Even looking in the best flattering light, what this meant is that your success as a service provider in SL (either by selling content or land or other services) was in your ability to grab a steady influx of newbies with their L$50 stipends and put their money into good use — namely, in your pockets. To do that, people devised all sorts of cunning strategies. The most easy one for content creators was simply to forfeit innovation: you can always resell the same content every day a newbie comes in, since for them everything is new.

There were furious battles for gathering that stream of newbies, and in the olden days the winners were… Mentors and Greeters, since they were the very first residents newbies would meet anyway. It was deceptively easy to teleport them over to your shop and relieve them from their initial stipend (I think it used to be L$500 or even L$1000 at some point), and give them landmarks and group invites to make sure they’d get plenty of spamming opportunities to gently remember that your shop is awaiting them.   

Bad or wrong, the newbie exploitation economy worked wonders for the overall in-world economy. There was a regular stream of supply of available L$ that would circulate quickly. At a stage where almost all content was equally bad, newbies would buy it all. Newbie-specific products (like the very early rental facilities — they correctly figured out that newbies, as Basic Users, would look for cheaper alternatives than to go Premium and own their own land) quickly appeared, and that’s why there always was a big sub-L$50 market in SL.

Veteran Premium users quickly became rich in the process. But that’s not bad at all: by having more money, these people also had more money to spend. They were, however, reluctant to buy low-quality (“newbie quality”) items. So a new market niche was filled: the one addressing the needs of a population who would get, at that time, a L$500/week stipend. Now you understand why the next biggest market is for products in the range of L$200-500. This is what the “middle class” was willing to spend. And then, of course, you’d have a range of products which would be “luxury”. Skins is a typical example: while you might buy a pair of shoes every week, you won’t change skins so often — something that is in the price range of a month or two of stipends is quite adequate to be a “luxury item”. In the olden days, these were the products in the L$2000-5000 range.

The roots of SL’s economy go so far back that these days, although everything has changed dramatically (we’ll see how!), the price ranges are still in those bands. I haven’t done a thorough research — and “setting the price” is something quite hard to do properly! — but I still keep looking at the same old ranges for the same old types of products. Supra-luxury items — the ones above L$5000 — fall in the “once in a lifetime” category: things you’ll probably will only buy once. A typical example is, naturally, land; or the house on top of it. And perhaps a yacht or a car, if you’re not exactly a collector of those items; you might just have one of each in case you need them.

The exception to all those price ranges is for items addressing the service industry, ie. people setting up their own business in SL. These are the ones who know they need to invest first in some content, and then provide their services. So devices like club light systems or DJ tables or YouTube video projectors or even office/shop furniture can float widely above those “consumer item” prices. People setting up their clubs do not expect to pick up a prefab for L$500 and get away with it. So a new niche was explored: content creation for professional uses in SL, and these, ultimately, lead to Metaverse Development Companies, which charge RL hourly rates.

But the pyramid is still important to understand. If the vast majority of users are Basic users, you cannot have a working economy just based on products costing L$500 or more. A few content creators and land rentals will get away with it — but not all. So the largest offer of products and services would have to be on the sub-L$50 price range. Only by making sure that the vast majority (90% of all users) are able to participate in the overall economy (by consuming products they can afford), higher levels of the pyramid can be sustained. Needless to say, any efforts by LL to convert Basic Accounts into Premium Accounts would be seen as a blessing — allowing the market for higher-priced items to grow as well.

All in all, by early 2005, the economy was quite balanced that way, and it worked like a charm.

Except that in early 2005 Linden Lab cut the stipends to Basic Accounts to zero.

They still got “an initial amount”, so for a while, things were not so drastic. However, it was clear that the economy could not work any more on the assumption of a recurring income from low-stipend Basic accounts. Basic Accounts would shop — once — but never return (since they had no money left and no way to earn more). It became even more strategic to gather them as quickly as possible out of the Welcome Areas — since once you’d lost them, they’d be penniless and unable to consume any more products.

I don’t know what the best strategy would be in this case (I’m no economist!), but one thing was certain: the economy overall did not hurt much. And why? Because of exponential growth. So, although newbies would shop once and never return, there were always more newbies the next day. By assuring an ever-increasing rate of newbies per day, people would still survive under this economy model, employing hit-and-run tactics: get those newbies to come to your shop and don’t worry any more about them, there would be more tomorrow.

For land owners, however, it meant that rental services wouldn’t be so easy. But they still never felt a ‘recession’ really. After all, content creators also require shops and land for those; while the endless supply of once-rich newbies continued to flood the gates at the Welcome Area, content creators would continue to prosper and expand. This was the era of shopping malls near telehubs: land for placing shops to catch newbies was highly expensive, but worth every cent.

Linden Lab, however, continued to change the rules. Now Basic Accounts did not receive anything when starting in SL. And, to make matters worse for land owners, telehubs were totally removed. And a year later, newbies would not even come through “the” Welcome Area, but be randomly rezzed all across the mainland’s infohubs. This week LL even get rid of that: now a SLURL can be used for new user registration, and newbies can come in anywhere in SL.

But in 2006 what this meant was that newbie exploitation, as a source of regular income for content creators and land rental facilities, was basically over. New techniques had to be devised.

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