Innovation, yes, but wrong turn

These days, I have to humbly admit that I cannot keep up with the whole of Second Life. So I just read what others, who still can, write about SL, while remaining at my little corner of the virtual world and do my own things which nobody cares about 🙂

But there is something I have noticed in the past few months. Like a crescendo finishing at SLCC, Linden Lab has been rolling out a lot of features. Some are very innovative, like meshes. Others are curiosities which we still don’t know what they will be used for, like the new profiles integrated with a “social stream”. Others still, like the Havok upgrade, or the new communication layer that deals with Group Chat, are “improvements” that we have waited for half a decade and that were finally implemented. And then there is what I call “pure research” — like the new user experience — which are “experiments” to see what works and what doesn’t.

I feel I’m back in 2006 again.

Now don’t get me wrong. During the Philip Linden days, LL had been very criticised when they started to roll out too many features and didn’t fix bugs. Then Philip announced a whole year of bug fixing, and no innovation: the end result was that not all bugs were fixed, and the virtual world sort of lagged behind in innovation. My own definition of innovation, in Second Life, means mostly new features that can be used by residents to create completely new things that were not possible before. Gestures were perhaps the most innovative thing back in early 2004 — it created a whole new industry for dances and Animation Overriders. Then we got XML-RPC, which allowed objects to interact with web servers — that gave us GOM (the first US$-to-L$ exchange) and SL Exchange (allegedly the first web-based shopping experience), among trillions of other services. Later we got flexies, creating whole new opportunities for fashion design, and finally sculpties, which gave us the best-looking shoes ever — as well as a lot of new avatar design and much more realistic-looking content. I’m sure I’m skipping a lot of innovative features which changed SL’s landscape, but I wished just to give an example of a few that completely shifted the way we perceive SL.

That was… 2007. After that, we really had little innovation. Sure, the rendering engine got better, and with that, we got much better-looking machinimas. We eventually even got shadows and a new illumination model — more realism, which in turn also encouraged content creators to increase realism (in buildings and avatar accessories). But these are “improvements” — like Havok getting upgraded — and not truly “innovation”.

2007 was perhaps the highest peak of the so-called Golden Age. Ironically, we have grown 5, 6, 7 times after the “peak”. The economy has grown like crazy; the landmass has grown even more; but because concurrency calculation has changed (no more bots!), and some users have actually left SL since 2007, we tend to see SL in 2011 as being much worse off than in 2007. I think that everything that happened in 2006/7 was incredibly premature. And LL struggled hard to deal with infrastructure designed for an exponential growth.

The major reason that exponential growth was so enthusiastic for everyone involved in SL was that demand vastly outnumbered supply, and to such an extreme level, that anyone with a newly registered avatar could call themselves “expert content creators” (or “expert virtual world consultants”) and get away with it — and even make a lot of money. I won’t get back to this point; I’ve written about it thoroughly before. Let me just summarise it that back in 2006/7 pretty much everybody put a lot of expectations in a constantly, exponentially growing virtual world, which, except for infrastructure problems, makes pretty much everybody happy.

Exponential growth gives one a false sense of security. Because there is so much demand and so little offer, low-quality content and services are in huge demand, and while the exponential growth lasts, everybody can get away with it. This, in turn, encouraged more and more people to do exactly the same, and thus foster even more exponential growth. The problem — as we have seen during the dot-com bubble — is what happens when the growth stops being exponential but becomes a much more sensible linear growth.

In that case, what happens is that the exponential revenues tend to hide the fact that the business model is simply broken. Let me give you a simple example. Imagine a land leasing operation during exponential growth. Everybody wants some land, but the supply is limited, so you can charge high, expensive “setup fees” — because there is demand for it. Then the leasee starts paying their monthly fees, but you’re not interested in those, but focus on attracting new clients for the next parcel — charging them high for selling the land again. During exponential growth, since there is so little supply, you can base your whole business in just the high “setup” fees and forget about the monthly rent.

So in effect your business model is based on how many new customers come in. Existing customers are little worth. Under this model, which we had in 2005-2007, buying land was expensive, but tier fees were low — sometimes even forfeited. Linden Lab also did something similar, and some calculations done back then showed that LL was making a whole lot of money out of the silly “setup fees” — specially after they got fully automated and didn’t require manual intervention (which came at a cost) — but couldn’t care much about tier fees. That’s why they so nicely gave discounts.

When you’re basing your whole business on the number of new users that come in every day/month, and that number is growing (which is the case during exponential growth), this means that the right strategy is to get as many people to join every month. But to make it even more attractive, the point is being able to get, say, twice the customers in a month than on the month before. During those years, some tended to see Second Life as something very similar to a pyramid scheme. Well, we know it isn’t, but during highly exponential growth, it certainly looks a lot like one!

What happened in late 2007 is that the exponential growth started to slow down, then was replaced by linear growth. Suddenly everything was upside down! New users were starting to become rare. In business models where you place all the focus on “getting new users” and charge them a lot for content/services in high demand, this means a catastrophe is ahead. Suddenly, the only working business model is the one where customers are retained and pay a monthly fee because they understand the service is worth it.

Something new then happens: competition. In a model with exponential growth, competition is not really important, when demand outstrips supply. But during linear growth, only the best, fastest, or cheapest (or better: all three) will survive. The next stage is one of quality: the ones successfully selling a product or service that is consistently good, quick to be deployed, or comparatively cheap, will have an edge on the others who will have to work more to achieve similar results. We have seen this happening first on land sales: suddenly, all the small-scale land barons simply couldn’t compete. At some point, they preferred to sell their land below cost, because keeping it for longer than a month worked at a loss. As less and less new users came regularly in, the demand for land stagnated, and this means that only well-established land barons could still make a profit. There simply was no market for “newcomers”.

In content creation, the same happened, although with a twist. Demand was so high that anyone with Photoshop could create something quick and still expect to make a profit. Then, with linear growth, and low content prices, consumers just wanted to buy “the best of the best”. Newcomers with little talent were simply shut out of the thriving market; and among the high-end content developers, quality increased to staggering heights — with prices remaining about the same — as designers fought aggressively to get more and more sales. The first years of linear growth brought to us things like special groups or blogs to keep in touch with existing customers.

The “new economy” thus changed the whole way we thought about SL — now it’s a highly competitive market with little margin for errors, dominated by professionals and individuals with high reputation and some sort of business sense. And they all understood where the money is: upselling to existing customers. What this means is that instead of betting on hordes and hordes of newbies flooding into SL, they all focused on their existing customer base and tried to improve their offerings in order to get repeated sales. This is common for pretty much everyone who is still serious about business in SL.

The scales can be tipped, though. When sculpties were first introduced, there was exponential demand for them, since few were able to create them. For a while, content creators with the required knowledge to design 3D models and export them as sculpties throve, as they could have an edge over the competition, and this meant more sales than possible with linear growth. I believe that sculpties were the last trend in SL where content creators enjoyed the benefits of exponential growth again. But it was in a completely different market, one where the amateurs had already been cast out.

We might see that happening again with meshes, but perhaps not with the same impact as when sculpties were first introduced. I have some reports from professional 3D designers that are so incredibly busy with constant demand for meshed content — and meshes are being rolled out officially on the grid as I write this — that they certainly are blessed with unexpected income. This will last for a while, specially in the early stages, when content creators are yet to discover the “killer application” for meshes (I’d say that shoes — and then hair — were the “killer application” for sculpties, until they became widespread everywhere). Then, when all avenues of application for meshes have been exhausted, Linden Lab needs to be innovative again.

Spending almost four years without any true innovation from LL, during a period where exponential growth was replaced by linear growth, hurt the economy very badly. Still, we have not only survived, but content is looking incredibly good these days, and more and more ideas have been put into practice. The result? In spite of the lack of LL-fostered innovation, the economy has grown, even though more and more users leave, and the ones that don’t, tend to use less hours. But nevertheless the introduction of technological innovations will make a lot of difference to the economy, in a positive way. Sooner or later, everybody will be running a SL 2.X or 3.X viewer or derivative, which are able to see the full range of technological innovation that LL has put into it. That’s not limited to meshes: it also means access to the destination guide or the “social stream”. How these will be put to good use remains to be seen, but I’m sure that it will be exploited very successfully by a few. And even some things that have been neglected will very likely attract new businesses. Let’s take Windlight as an example. We had Windlight for eons (does anyone remember the name of the company which developed Windlight and that LL bought to get the technology?), but since the settings were not shareable, there never emerged a serious business around it. But now Windlight can (finally!) be set on a sim by the sim owner. This means that besides content, sim owners will soon wish to want personalised settings to give their sim the proper atmosphere, and this will create a small business opportunity for a few.

As LL is rolling out more and more innovative technology here and there, all this will have a positive impact. Here and there, demand will outstrip supply once more, for a specific product or service making good use of the technology, and, for a limited time, the few embarking on that business will enjoy exponential growth again. The good news is that all of a sudden, Linden Lab under Rod Humble has been aggressively pushing out lots of new features. And I mean lots. I have five LL-compiled viewers installed, each with a different aspect of some new technology they’ve been experimenting with. The rate of innovation and experimentation is now pretty close at what it was in 2007. The good news is that the reports of “lack of innovation” have sort of been dying lately, and even though people will always complain about lags and bad teleports, the number of those reports have also decreased — at least, on the whole SLogosphere. I don’t mean that everybody is “excited” (some certainly are) but it seems rather unusual to be going through a period in time where there isn’t a massive riot against LL and its policies.

Even on the policy side, LL has been careful. To the ‘nymwars,  Rod Humble sort of explained that LL was on the side of privacy and pseudonymity — a solitary stand against giants like Google and Facebook. Google and Facebook will ultimately win, of course — they’re rich; LL is not — but this will only mean that LL will be seen as the Last Bastion of Pseudonymity and attract a few more users. Not many, but a few.

The way Linden Lab is also really considering to outsource some of its work to in-world communities shows how Rod is slowly steering LL back to their pre-M Linden days. In fact, to its “very early Philip Linden days” — the days LL seriously encouraged projects, from Mentors to self-sustainable communities, and which were all abandoned under the umbrella concept of “favouritism”. I don’t know how LL is going to deal with that ugly word nowadays. Probably they will just wisely ignore it, and really go ahead with more tight collaboration with the residents willing to work with them. I, for one, am all for it: it’s a vision that I wholly subscribe to. I’d certainly would like to have some kind of governance with resident participation, but, alas, that might be too early: Rod is testing the waters first and not taking huge steps. But the ones they are taking have been encouraging so far; if anything, the only complain at this time is about how much LL is really going to allow residents to get involved in “our” virtual world again. Will it be “Your World, Your Imagination” again? It’s early to see, but it looks like it. I’m crossing my fingers 🙂

So what are people really complaining about?

OpenSim-based grids are a viable alternative these days, even though not all can provide the same kind of robustness that LL can. The reason is simple: the OpenSim software has been designed mostly with the goal of replicating LL’s functionality and allow it to be extended on an experimental base. If anything, it’s “research-quality” software: excellent to tweak and change, fantastic to play around with, and always surprising to see how well it performs in controlled conditions, but it’s not “industry-grade” — not yet, even though a lot of operators claim the contrary. They can very well claim that, since, on average, their grids are just a tiny fraction of LL’s own. The increasing complexity wreaks havoc with the infrastructure model, and OpenSim, while ever-so-resourceful, is still not at the stage that it can seaamlessly provide service on 30,000+ regions with 50-100,000 simultaneous users.

But the point is that it doesn’t have to. It can work as a standalone grid or as a federation of grids, interconnected via HyperGrid (although as an operator grows, the tendency is to shut HyperGrid down); this means that in theory at least, OpenSim grid operators can “keep it small” — and operate large numbers of interconnected grids, but each one being relatively small in size, thus effectively dealing in a different way with scalability problems that Linden Lab does with its own Second Life Grid. The major difference is that some products and services can only cross grids with some difficulty. Nevertheless, we have now money exchanges that work across grids, and we also have web-based shops that can deliver to different grids. Whatever OpenSim’s future is going to be, it already shows that it might very well be a large, federated metaverse.

In the mean time, it provides an opportunity to contrast it to Second Life. And what operators have found out is that the biggest complaint is really how much it costs to be a resident owning land in SL.

Now I’m not going to do the calculations again to show that LL is not really “ripping us off”. Every year or so I do the calculations again and post it as a comment to some blog, and then immediately forget where I wrote it 🙂 The short of it is that LL is profitable, yes, and will continue to be so even with a slightly declining landmass, but they’re not really making huge profits. The overall price structure for Second Life is actually adequately indexed to the costs of operation.

So how can OpenSim grid operators actually deliver similar (not the same!) service for a fraction of the cost — sometimes as little as a tenth of the price, sometimes even for free? The answer is very simple. It’s not that OpenSim is incredibly more efficient and can be deployed at extremely high densities (of number of simulators per server). No, the simple reason is that OpenSim grids have absolutely no software costs. Linden Lab, by contrast, has to maintain several teams just for the viewer, and another set for the four simulator “channels”, plus a host of web developers which work on the “glue” between the grid and some services (like the full range of web servers operated by them). Plus, of course, technical support, an engineering team, and all the associated operations staff. This ads a lot to the service they run, and I’m not even considering the administrative costs. While OpenSim grid operators usually can get away with one network/infrastructure/system administrator, one programmer (to provide “glue” as well), perhaps a content designer or two, all of which may double as technical support, and little else. Even though Linden Lab benefits from reduced costs for having so much infrastructure — there are huge savings due to scale — they cannot compete with a tiny operation running a few hundred regions with perhaps a staff of a dozen people, most of which might not even require office space.

Most people, even seasoned web developers, just figure out how much it costs to rent a good server on a high-end facility, and knowing that such a server can host a lot of sims (well, at least one per CPU), they figure out that LL is “robbing” with their high prices. Well, they forget the huge staff that LL actually has to keep.

Nevertheless, even if some residents “understand” business costs (few actually do), they still compare prices. With such a huge price difference, and linear growth stagnating (which is bad for the ones still believing that the 2005-2007 kind of exponential growth is still possible somehow; more on that in a moment), it’s obvious that residents start asking why they are spending so much, and what real benefit they’re getting from their investment in SL. I think this is a natural question to ask. And the answer is actually honest: the cost is paying for a lot of privileges. But the problem is that Second Life’s economy is not up to the expectations of many land owners. They miss the days of exponential growth. It’s not really about “what do I get for US$295/month”, even though that’s the kind of questions that get asked. It’s a bit more convoluted: “Back in 2007, I would pay US$195/month and get cartloads of residents on my location, shopping either for land or goods. This has all stopped. Now I’m forced to pay US$295/month for next-to-zero visitors and almost no sales. Why?” And then we get people blaming Linden Lab for the lack of new users — lots of new users!

Pan to the next scene. Linden Lab still believes that somehow, by some trick, they can tap again into that powerful exponential curve again. They figure out that everyone who was not impressed with SL in 2007 will have newer, faster computers. There is way more high-quality content these days, too. The grid is far, far more stable. Even group chat works again! So, having solved most of the more pressing technological issues, and adding a lot more features, a new viewer, and so forth, they guess that this should be enough to drive more users in.

And guess what? The number of new registrations per day almost doubled with the “light” version of SL 2.X being available, plus a more streamlined sign-on process, with a better orientation area. This was exciting news for LL. Maybe SL can reach the mainstream after all? A few tweaks here and there, zero advertising, and the gates seem to be flooded with newbies again.

But no. All these people just sign up, log in for a few minutes, and never try SL again. Something clearly disappoints them. Puzzled, Rod Humble announced a certain degree of gamification. Rod’s background is in game design, so it’s obvious that he knows what that’s all about. He reasons that if SL’s initial experience looks “more like a game”, gamers will be more familiar with it from the start, and might not log off immediately, but stay around for a bit and see what’s all about. The new sliding panel on the Basic Mode, which shows destinations, and helps new users to pick an avatar very easily, is also a very easy way to get people familiar with SL — just point and click, and you’re going to see fantastic things you never dreamed that were possible! To make sure that lag is not an issue, I believe that Basic Mode will, by default, run at the lowest possible settings for the graphics card. And as I’ve come to notice, these days, even the lowest settings are impressively good. Being cursed with a almost-6-year-old-iMac, which doesn’t even support anything beyond OpenGL 2.0, I’ve been delighted to see SL running steadily at 30 FPS at next-to-lowest settings, but which look so extraordinarily good on SL 3.0.3, that I don’t mind at all (sure, for taking pictures, I might throw in a shader or two, but, in general, why bother? SL looks hot even on the lowest settings!)

However, I still think that LL (and not only Rod; he’s just starting to think like the rest) is working from a totally wrong assumption: that virtual worlds with user-generated content are somehow a mainstream product, if only “done right”, and that the trick is how to figure out to “do them right”. To be very honest — and you can check it up on my blog — I used to think like that as well. But the more time passes, the less likely I believe this is going to happen. I can imagine that a lot of improvements will bring more people in. A mobile version, a Web-based version, an iPad version — all those will bring more users in. But will they stay? I don’t think so. Second Life is simply too different from any other online experience, and you cannot “turn Second Life into something that Second Life is not”. Sure, LL can close SL down and start developing mobile apps or embedded apps for Facebook (and become one in a million companies to do the same). They could, if they wish, diversify their product line, as some have hinted that Rod is planning to do. A Blue Mars-inspired appliocation for the iPhone and Android which shows your SL avatar, allows you to change clothes, use some gestures, and chat with other residents — even if that’s all it does — could be interesting, if it’s sold for a dollar or so. That (and similar thingies) might give LL some new income sources.

But it’s not the crucial issue. My point is that LL — and most residents, too — are still emotionally attached to the illusion that Second Life (not the one we have now, but possibly one in the future…) is going to be a mainstream product (like Facebook or Twitter), and that they will once again enjoy the benefits of exponential growth, as soon as LL discovers the right combination of features that enables SL to become a mainstream product.

Well, I think that’s completely the wrong attitude. I’m quite convinced these days that Second Life (and these days there is nothing else that compares with SL; I’m considering OpenSim to be just a variant of SL running under open source software, of course) is simply a niche product. And the longer it takes to Linden Lab to realise this, the worse it will be for us all.

What does that mean, “be a niche product”? It’s not like it’s a bad thing. Just take a look at another niche product: Adobe Photoshop. It’s a rather expensive product. It’s designed for specialists who require the whole set of features it has. Regular, mainstream users don’t really need to use Photoshop, there are tons of cheaper and simpler alternatives. Nevertheless, this never stopped Adobe from making millions. In fact, you can take a look at all the specialised applications out there, designed with niche markets in mind, and see how immensely successful they usually are. Think about Autodesk (AutoCAD, Maya, 3DS); or about software for DJs, for movie producers, and so forth. All these have “hundreds of thousands” of users — sometimes “a few millions” — and never complain because they’re not “mainstream” products like, say, Microsoft Office.

There is this huge fallacy that every product or application launched has to be mainstream or be doomed to failure. This is hardly the case for tons of products out there. Even, in a sense, some “mainstream” products can be targeted to niche markets as well. Think about luxury cars, for example. Or Apple, the world’s most valuable company. You can even think of extreme examples like companies manufacturing satellites, or components for oil platforms. None of these are mainstream products but highly specialised applications for a relatively small market. And many are among the most successful companies in the world; they don’t need to be Proctor & Gamble with their mainstream products to be rich!

What is so different about companies specialising in niche markets? Well, first of all, they are in constant touch with their customers. Since they recognise from the start that their clients have special needs — because they’re in a very small market! — they need to know exactly what they want and deliver that — not more and not less. Unlike mainstream products, which have to deliver one-size-fits-all products which make the most amount of people happy, niche products need just to address specific market needs, but do them very well. Good examples are how niche markets become “brand cults”; examples are Harley Davidson or BMW, and most certainly Apple as well, but there are thousands more. Outsiders — “mainstreamers” — cannot even understand the appeal of the product or why it is so successful among the community of its users. More to the point, they might not even understand why a BMW fan will pay premium for a BMW bike, when a common Yamaha or Honda also has two wheels and a motor 🙂

Niche markets saturate quickly; they expand, if at all, very very slowly. That’s just because the number of people willing to be consumers in that market is always small. Sometimes, it’s just because they require special skills — Photoshop, for example, appeals to graphical designers, but it requires a lot of talent and skill to put Photoshop to good use. If you don’t have either, but still need to do some photo editing, you don’t need anything as complex as Photoshop. Similarly, if you’re not an architect but want to jot together the plan of your future home to discuss with an estate agent, you don’t need to learn how to use AutoCAD; SketchUp will do the job much easier — and much cheaper too. The number of people that actually need to use the product is not big, and, more to the point, doesn’t grow that much. Eventually there might be some sudden growth because of some sudden, unexpected, market change. Take a look at Photoshop again. It existed well before the Web was popular. But suddenly the Web was “invented”, and graphical designers now needed a tool that also allowed them to create Web designs. Photoshop was a natural choice for them — it was something they were already familiar with. So Adobe launched new functionality to make Photoshop more appealing to graphical designers who also did Web pages. But by chance they also got a completely new market, of aspiring web designers, which didn’t exist before, and started shopping for tools to help them do their job better and faster. Similar “sudden growth scenarios” happen often, when there is a market change, and a company suddenly retools their product to address that quickly, and reaping the rewards until the market saturates again (I guess that web designers are not “mainstream users” but their number grows so quickly that the exponential growth hasn’t stopped yet…).

But usually that’s not how niche market companies exploit their market. What they do is upselling. In the software world, this used to mean licenses: release a new version with new features and get all your existing users to pay extra for a tool they already owned. The big software industry names addressing niche markets still use that model. Others are a bit more clever: they just launch more and more tools, that work with the original product but extend its functionality. This is a bit more honest — clients pay just for the features they need, not to constantly upgrade what they already have — but both models are frequent (just try to look at Adobe’s product line with its complexity of different packaging the same set of tools together in completely different ways to see what I mean!).

Upselling is always easier than getting new customers. To draw more new customers, you need a marketing strategy that reaches out, does advertising, finds where the potential consumers are, do market analysis, and so forth. It’s costly. It pays off if the market is big enough. But on small markets this might be pointless to do. Just ask your existing customer base what kind of tools they cannot live without and tag a price to them. Keep in touch with them — after all, you already have their addresses! — and invite them to participate in testing, discussing, and collaborating in new releases. Adobe was very clever with the Photoshop plugins — I’m not sure if they have been the first to develop that concept or not — and even cleverer by providing a marketplace for them as well.

This is also a side-effect that is common on niche markets: the companies tend to encourage their customers to participate in the niche economy as well. Everybody benefits! The company will be seen as “friendly” because they support their customers by helping them to sell their own work; and customers remain loyal because they know they can also make a bit of extra money if they continue to work closely with the community around the company. Just to give you a different example, take a look at Myriad Software. They’re a tiny French software house which has been around for a decade or so, and which has close ties with universities. They develop something very specific: a software to compose music, for professional and amateur composers. This is not something easy to use like, say, Apple’s GarageBand. But it’s something where you can orchestrate a symphonic piece in the traditional way, and play it on your computer. The number of composers world-wide is tiny, but still, there are quite a lot of software that accomplishes the same thing (Sibelius being probably the market leader). So to effectively compete, Myriad Software developed a community of composers, by encouraging them to contribute music and arranging some contests. Many participants are actually composing students which join the community and submit university assignments 🙂 The software is also extensible. New features are implemented thanks to a feature voting tool. Now these guys are not “industry giants”, and they know that they cannot compete with massive advertising on specialised magazines. So instead they focus on the community and keep closely in touch with them. And they try to help any community projects as much as they can: for instance, if you  decide to ask them to sponsor a composition contest, they will gladly give some free licenses, so long as they can post some articles about it and make an announcement on the forums and newsletters as sponsors — which in turn will spread the news to potential contestants.

Obviously there are many, many similar examples. BMW also holds meetings together with bikers and let them participate in some design projects. They sponsor community events and have a marketplace for used bikes and spare parts. At the same time, they also license the brand for inclusion in merchandising. And occasionally they sponsor community events and send a few representatives there — speakers, evangelists, even some managers. All are seasoned bikers as well, so that the community is comfortable in having the “suits” around.

I suppose you’re seeing a pattern here. By focusing on a niche market, perfectly understanding that the product will never reach the mainstream, a company can completely change their strategy to be fully committed to the existing community instead of “dreaming” about a potential mainstream market that doesn’t exist. That commitment has lots of aspects, but it means mostly listening to what existing users want and develop just that. It means enabling current customers to somehow make some money out of the community, and sponsor that endeavour. And, of course, it means releasing new tools, upgrades, kits, or whatever is appropriate for the kind of company, to upsell to the existing customer base. Sometimes they get lucky — like Adobe did, thanks to the Web — and the market can suddenly increase dramatically for a few months or years, and they can seize the opportunity. But most of the time the market remains at a small size and grows very slowly.

Adobe, AutoDesk, Apple, BMW — all are successful companies addressing niche markets, but so is the tiny, unheard-of Myriad Software. All follow some variations of that rule. Sometimes they are lucky, like Adobe was — and sometimes they have the touch of a genius like Apple with the iPhone, which pretty much turned an Apple product truly into a mainstream product.

Now let’s switch our focus back to Second Life and its relation with Linden Lab. They’re actually not too bad: Second Life is mostly a community tool (so, unlike other companies, LL doesn’t need to create a new tool just to get the community together) and it already has a built-in economy. Clients — residents — make money out of LL’s product, and, in return, buy products and services from LL. LL has more than one way of allowing that to happen: land resale, LindeX, and the SL Marketplace are some good examples. So we residents are not “merely customers” but we also become participants in the overall economy, of which Linden Lab gets a slice. In fact, LL gets the smaller slice (according to their own numbers, at least), because, except for the SL Marketplace, they don’t charge anything for a L$ transaction. They are also doing something for the community, and Rod’s recent announcements show that they are possibly going back to the “old days” where Lindens and willing residents worked closely together to create a better (virtual) world. This is an important step, but one that is shared by many mainstream companies as well.

No, the biggest problem — one that is crucial for LL — is that they’re not capitalising on the existing user base, but dreaming about a user base that doesn’t exist yet. Instead of thinking “what should we offer land managers more, so that they buy extra services from us?” Linden Lab is just thinking “how do we attract more users and make them stay?” Instead of improving the services they offer to paying customers, they want to make the experience for free accounts better. To a degree, that is not completely silly: a free account that is happy with the service is more likely to move to a paid service. But only if it’s worth the extra cost. Let me give you an example: voice morphing. LL launched that service in 2009. I have no idea if it’s popular or not — or if it pays for itself — but I found it very strange that, for example, Premium accounts don’t even get at least a discount. Voice morphing is subscription-based and is the perfect example of an “add-on” that would make sense as an “upselling feature”, but it has to be something that makes sense. Most people don’t need voice morphing anyway, and it’s so much cheaper to buy an external tool. If you have a Mac and GarageBand installed you don’t even need LL’s voice morphing, you can assemble it on your own using Soundflower. So there is really not much interest in that solution, except for residents with little technical experience or causal users.

A better solution would be to have a pack of extra features for special accounts, and allow residents to upgrade if they felt the need for more services. We have a bit of that in Premium accounts. Supposedly we have access to technical support, while regular users don’t. We get — hooray! — 512 m2 of “free” space every month. We get a weekly stipend in L$, which is way less than simply exchanging a few US$ every month. There is this strange feature that allows Premium users to log in to a congested grid will free accounts remain out — to the best of my knowledge, this was only put into practice once. Premium users, because they pay so little — and LL is still after the heavy sim setup fees which made them wealthy during the days of exponential growth — don’t get barely nothing in return.

All this requires serious rethinking. What Linden Lab needs is not more users, which log in one day and disappear forever. Instead, they need to persuade existing accounts to upgrade. But that requires giving them what they need and want. And first of all that means asking them what they wish. It’s obvious that the target is to squeeze land owners dry with the US$295/month. But between that and paying zero is a huge gap. There should be a tiered approach, leading to different price structures depending on the set of features that people actually require. Prokofy Neva has suggested long ago that one possibility was to give rezzing rights just to Premium users; LL somehow captured that idea with meshes, i.e. you need to have bought something from LL first to be allowed to upload meshes. The idea that having “payment info on file” is a class of users should really be taken into account by LL. These are LL’s customers: the ones that pay directly to LL. It doesn’t matter if they’re buying land, L$, or classifieds, or even just shopping through the SL Marketplace. What matters is that these are truly LL’s customers. And, as such, they should be their more valuable assets.

Of course I’m fully aware that some of the best artists and community managers are actually free accounts, and that SL would be so much poorer without them. I fully agree. This requires to be addressed by the next level: encouraging volunteers. So who cares if you’re not spending money in SL and making LL wealthier — but are instead updating wiki pages, answering support questions, filing bugs, or running whole in-world communities? That is crowdsourced labour and very valuable. LL’s task is to capitalise on that as well, because it’s as important as directly getting a revenue from them. Some might say it’s even more important (since it builds a community, and some users, thanks to a solid community, might be willing to upgrade their payment level).

Now I’m not saying that LL — specially in the recent months — is not supporting all these ideas and projects. Surprisingly, and thanks to Rod Humble, they actually are back in supporting community projects and encouraging more volunteers to “officially” contribute their work for the benefit of all (a change of policy). The issue for me is that this is not their main objective, but it should be. They are still dreaming about new users.

Well, let go of that dream. Those “new users” don’t exist, they’re just smoke and mirrors. I’m sure that a few will obviously come if everything is simpler, faster, and easier — and more fun. There are possibly a few more millions around the real world which haven’t yet found Second Life, and, when they find it, will immediately be part of it — so I’m not saying that the efforts to reach out to them are wasted. It’s just that bringing them in to SL requires a lot of effort, a lot of time, and, ultimately costs a lot — for little return, specially because almost all will be free accounts that will hardly upgrade.

Instead, all the time spent in pursuing those inexistent users should be invested in making the current users more willing to spend money with LL. And that means increasing the quality of the service and offer more services that residents are truly willing to pay for them.

Alas, at this stage, even sim owners think that the service is overpriced (and so do Premium users!). Even before Linden Lab starts to explore other avenues of income, they will have to “catch up” to make the current services worth the money we spend on them.

So my wish is that Rod Humble quickly gives up on the focus on new users and starts really thinking about his existing customers instead. Let’s give the “new user experience” a try for, say, six months. That’s good enough for some serious evaluation. In the mean time, content creators will have a lot of fun with meshes, and programmers might do amazing things with the forthcoming API for SL Marketplace and the social streaming feature on profiles. And in 2012, hopefully Rod finally realises that he already has all the customers he needs, and it’s very unlikely that he will be able to get much more. Instead, he should focus on increasing LL’s revenues with the existing user base.

After all, we have been around for eight years or so, and will not leave so soon. Few companies can boast of having customers waiting for almost a decade until some of their needs are actually fulfilled 🙂 We’re all very, very patient,

Specially because in a niche market there is nowhere else to go.

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