The battle for the future virtual world environment is on!

The teacher_001

I’ve tried to write a comment on the latest article on High Fidelity posted on Technology Review. But I’m long-winded and their system didn’t accept my comment. So here it is:

Rosedale’s latest attempt at designing a virtual world from scratch shows that he has learned a lot of lessons in the past 15 years. The article neglects to explain Rosedale’s background in physics; Linden Lab actually started by being a VR gear company, doing the hardware first, and designing a virtual world in order to test their gear, simply known as ‘The Rig‘, and which is allegedly still stored somewhere at Linden Lab’s premises. It was never commercially sold.

Thus, Rosedale’s vision continues solid. The difference is that others, in the past 15 years, have developed much nicer gadgets, and now all that HiFi needs to do is to provide the ultimate virtual environment to play with them. As far as we can see, they’re progressing quite nicely, and should have an awesome product by the time the Rift is finally on the shelves.

Nevertheless, Second Life®, even without gadgets, thrives. This is what the post-hype press has completely failed to capture. The so-called exponential growth curve in new accounts back in 2006/7 might have been mostly due to a huge increase of spam bots — a thesis that was proposed a year ago to explain why Second Life continues to have 10-15k new signups every day but few new users actually appear in-world. Because Linden Lab’s community portal is known by forum spammers as showing an active community of millions, using an expensive software which is only employed by huge communities (or it wouldn’t be worth the cost), it’s not unusual to claim that most new registrations are attempts from automated registration ‘bots to desperately try to get access to that community portal. Obviously, they never appear in-world as actual avatars.

As Linden Lab started to review their numbers and post information with much more care and reluctance, few metrics are currently known by the population at large. However, it’s interesting to notice that, although there certainly was an increase of actual humans inhabiting the virtual space in 2007, there is much less ‘decline’ than the post-hype press likes to admit. They were fooled (like we all were) by the automated spambot registrations. But actual users of Second Life back then were also fooled. We seriously believed that humans were joining Second Life by the millions. We increased development of everything — products, services, virtual goods — because we expected all those millions to be actual human beings willing to engage in a virtual world.

It turned out that all of those were probably nothing more than spammers. But this was carefully ignored; in fact, past CEOs of Linden Lab have tried to address the issue of user retention and blame their own difficult-to-understand interface to explain why so many registered but so few actually used the virtual world. I still think they’re completely on the wrong track: the lack of users is not really because of lack of appropriate technical skills to navigate the virtual world, but because… virtual worlds are not a mainstream product, but just a niche product.

Niche products are comfortable to live in. Apple started as a niche company. They still refuse to lower prices and compete on the low-end mainstream; that never prevented them to become the largest company in the world. BMW, Harley Davidson, the exquisite watch manufacturers in Switzerland, the top fashion designers, and even companies like Oracle or Adobe — all of those operate on niche markets and will never expand to the mainstream. They are all successful companies. They grow, surely, but very slow.

Second Life, in spite of the lack of hype past 2009, has grown, and grown, and grown. It’s several times the size it was at the peak of the hype, and virtual good transactions have steadily grown from a few millions of US dollars during the hype to a staggering half billion US$ per year. And it continues to grow. It just fails to attract the interest of the media, even if it’s a market of a million people willing to spend $500 per year (on average) on virtual goods. That’s not bad. That makes Linden Lab profitable. It continues to grow. Just not exponentially.

Second Life has of course a lot of shortcomings. This article illustrates them well: navigation controls are really hard to understand. Translating gestures to the virtual world is hard and they are ‘detached’ from your real gestures. It’s not easy to ‘see the world through your avatar’s eyes’, in spite of a very flexible camera (which, however, is also hard to control). Conceptually, Second Life presents a view more common to typical 3D games and less similar to an ‘immersive environment’, which is what HiFi is all about. And, of course, HiFi already supports all the latest VR gadgets out of the box, while Second Life just slowly progresses towards incorporating the Oculus Rift, 3D joysticks, and little else besides. No wonder, then, that Linden Lab is also developing a new virtual world platform to address Second Life’s shortcomings; this will be a product competing head-to-head with Rosedale’s HiFi, and will suffer from precisely the same limitations: when it starts, it will have zero users and zero content, compared to the massive wealth of Second Life’s own environment.

What will differentiate both? Mostly, the business model. Back in 2007, during the hype peak, Second Life released its viewers as open source, but failed to leverage on that aspect: instead of having a community of users contributing to the viewer, each contributor forked the code for its own viewer, and little wa scontributed back — a terrible way to open source the code. Second Life’s server code was reverse-engineered and became a popular alternative environment, OpenSimulator, which emulates almost all functionality of Second Life while still being compatible with the same viewers. Of course, it means starting with zero users and zero content — and that means that OpenSimulator’s growth has been tiny, users being aggressively sought by a constellation of wannabe ‘grid operators’, who are here one day and disappear the next, for being unable to capture enough users to become profitable in the long term. It’s hard to beat Linden Lab’s ‘game’ by emulating them — when the niche market is so small.

We know actually quite a lot about HiFi’s business model, in spite of your claims. In fact, Rosedale’s new company is rather open about the way they expect to make money. It’s not merely through listings in a directory. It actually does something more clever. If you contribute with CPU, memory, and bandwidth to add resources to the overall virtual world, you deserve to be paid by visitors to the areas you host; by contrast, if you wish to visit areas being hosted by others, you pay to access them. HiFi, the company, provides not only the software for all that, but also a micropayment engine which supports this business model, smoothly and transparently dealing with steams of cents going from hosters to viewers. HiFi gets a share from that. But the more people contribute with hardware to extend the platform, the more money they might be able to make. That’s a good incentive. Will it work? Maybe, maybe not; it’s a novel way of thinking about resource allocation, and, while in a less abstract form, this is what happens in Second Life as well, it’s clear that the ‘we pay nothing’ generation is the mainstream. There are exceptions — Apple’s iTunes Store, in spite of just having half the users of Google Play, and a sixth of the market share of the mobile platforms, actually generates twice the income of Google Play. Why? Because Apple has been able to capture the interest of those few people who are willing to pay to access virtual goods, and excel in doing that. The mainstream, however, doesn’t want to pay, and that’s why Google struggles to keep up, in spite of having six times the number of users. This the challenge that HiFi (and Linden Lab’s next-generation virtual world platform) needs to overcome to become a very lucrative company.

To recap:

  • Virtual worlds are actually a tiny niche market. A very profitable one, but it’s not a mainstream product, and will never be. That’s the tough reality.
  • It’s not a question of more or less gadgets, or more or less sophisticated interfaces. Because it’s a niche market, the amount of people who will be drawn to product X or Y is small. Not tiny — enough to sustain a company with profits over several years — but small. People will eagerly switch over to a more shiny and bright solution, but they won’t be many. We have seen this happening over and over again.
  • HiFi and Linden Lab’s next platform will be competing for exactly the same people in 2016, with similar products, and with similar handicaps: no users, no content, tiny market. Who will survive? We know about HiFi’s business model and it makes sense for a slice of the market (the people willing to pay for online services). We have no clue about Linden Lab’s business model for its next platform, and not enough data to speculate about it, since, unlike HiFi, they have provided us with nothing we can evaluate.
  • Facebook will also launch their own virtual world, along the same lines, and probably also in time for the Oculus Rift to be on the shelves. However, Facebook is also in decline (and thus Zuckerberg has been very clever in expanding and diversifying its operations). Will something tagged with the Facebook brand make a difference by 2016? Remember that we’re really talking of just a few million people here. By 2016, they might already be happy in either HiFi or Linden Lab’s next platform and unwilling to move.

In spite of everything I’ve written, I’m not a pessimist. I’m a strong believer in niche markets. They have faithful users, and often are quite willing to spend money. Almost all luxury brands are niche markets and all companies operating in them are very successful and quite profitable. For the niche market of virtual worlds, the future seems quite bright indeed, as never before in the past 15 years, and I’m obviously as excited as everybody else, and quite intrigued about the possibilities. But I’m also a realist and understand the limitations of a niche market: at some point, it won’t grow, but just deliver a steady stream of income. And having three competitors for the same consumers — HiFi, Linden Lab’s next product, possibly Facebook — means that the current revenues enjoyed by Second Life, which has 98% of the overall market, will be split among the three players. Facebook has unlimited funds and can hold on while the competition dies out, and it can also engage in a dumping strategy until HiFi and Linden Lab are ruined. Linden Lab can still fall back to Second Life, if their new platform is a flop. What can HiFi do? On other technology related news, take a look at themarketingheaven.com for your digital marketing service needs.

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