Is Business Ready for Second Life

c a s e d i s s e c t i o n : s e c o n d l i f ewhere they buy and sell virtual real estateor hawk virtual clothes, houses, vehiclesand furniture.With more and more avatars fillingthe same virtual space, the simulationsoftware that tracks the movementsand position of individuals and executesanimation scripts starts to fall behind.Time seems to slow down, with avatarsmoving as if through molasses. Somepeople blink out of existence as theviewer software on their own desktopscrashes. Others find themselves in oddpredicaments as the laws of physicsseemingly break down; while trying tograb a spot in the standing-room areaat the back of the auditorium, they findthemselves sinking through the floorup to their necks and getting stuckthere—disembodied heads, unable tosee what’s happening onstage.It’s not the first time for such problems,but audience members grumblethat this time the whole system maycrash before the event even gets started.In fact, one of the four simulators thathave been clustered together to supporta bigger audience does go down, ejectingeveryone within it.These types of problems, however,don’t seem to be deterring people—andbusinesses—from entering Second Life.Indeed, real-world companies suchas Toyota and American Apparel areexploring whether this 3D world can beadapted to serve real business purposes,similar to the way the Web evolved froma medium for academics and hobbyists toone that supports corporate commerceand marketing. Already, your avatar cantest-drive a Toyota Scion or buy clothesin a virtual American Apparel store. Sofar, however, it’s not clear how muchthese efforts are doing to sell real-worldcars, clothes or any other merchandise.But Chris Holdren, vice president ofWeb services at Starwood Hotels, whooversaw the construction of a hotel inSecond Life—a prototype of the newAloft brand hotels scheduled to appearin the real world in 2008—says SecondLife presents enough opportunities thatcorporate technology leaders should payattention to it. “I definitely think theyshould learn about it and understand it,”he says. “Whether they invest in it is amore complicated question.”And if this really is the start of somethingbig, those companies that explorethe technology now may be in a betterposition later, much like the first companiesto grasp the importance of theWeb in the early 1990s—back when itwas an immature technology tricklingout of academia.Sandy Kearney, director of the virtualworlds program at IBM, says the transitionis coming, and “you may not haveas much time as you had with the Web”to adjust to its impact. In addition tousing it as part of a program for keepingemployees connected with each otherand with IBM alumni, and as a virtualmeeting place to talk with customers,IBM has built a Circuit City and a Searsappliance store in Second Life as demonstrationprojects (which means IBMdidn’t charge them for the work).“Based on the history of the Internet,we think this is a stabilizing period forthe 3D Web,” Kearney says. A true 3DWeb would have to be based on opentechnologies, with some means ofpassing between virtual worlds hostedby different organizations. And just asnew types of businesses were born onthe Web, new businesses will be createdaround the 3D Web, she says. “But rightnow it’s very early, and the technology isvery, very young.”Yet the entry of businesses has createdopportunities for experiencedresidents to set themselves up as consultantswho help newcomers create theirown Second Life experiences. AlyssaLaRoche entered Second Life as AimeeWeber while she was laid up with a tornknee ligament and couldn’t do muchother socializing. She became a regularat Second Life nightclubs, decked out inclubwear of her own design and a pair ofbutterfly wings.A former computer consultant tofinancial services companies who wasthen working as a Web programmer,3 Philip RosedaleFounder & CEORosedale is a pioneerin the development ofstreaming media technology.After developinga low-bandwidth videoconferencingsystemcalled FreeVue in 1995,he sold his company toRealNetworks in 1996and became its chieftechnology officer, overseeing the developmentof RealVideo and other products.In 1999, he joined venture capital firmAccel Partners as an entrepreneur-inresidence,and began researching ideasthat led to the creation of Second Life.Mitch KaporChairmanA computer industry leader for the pasttwo decades, Kapor rose to prominence asthe founder and CEO of Lotus Development.He was also an early investor in UUNetTechnology and RealNetworks, and was apartner in Accel Partners when Rosedalewas there. In an interview with Reuters, hecharacterized the market Linden Lab ispursuing as a $100 billion opportunity—but only in the long run, once the technologyhas a chance to mature.Cory Ondrejka6Chief Technology OfficerOndrejka leads the team developing theSecond Life platform, including simulationof the virtual world on distributed servers,3D streaming media,and the in-world toolsthat allow avatars tocustomize their ownappearance and collaborativelycreate objects.He championed thedecision to allow usersto retain intellectualproperty rights to theircreations. He has beena computer game programmerfor Pacific Coast Power and Lightand for Acclaim, but has also programmedelectronic warfare systems. A former lieutenantcommander in the Navy, he earneddegrees in computer science and weaponsand systems engineering at the U.S. NavalAcademy, graduated from the Navy NuclearPower School, and worked at the NationalSecurity Agency.Joe MillerVice President,Platform & Technology DevelopmentSince joining the company in April 2006,Miller has concentrated on extending theSecond Life platformto reliably supportvery large membercommunities. Hisresume includes 30years of experienceat gaming companiessuch as Atari andSega of America.In the computerlearning field, he wasa founder and CEO ofavatars Courtesy of Linden labWWW.BASELINEMAG.COM

LaRoche became proficient at designingitems for sale to other avatars and soonestablished a clothing store calledPreen. Other users bought her clotheswith Linden dollars, or Lindens, the“in-world” currency, which trade onexchanges operated by Linden Lab andothers at a rate of about 250 to 300Lindens to $1US.When American Apparel, a realworldclothing store, decided to create aparallel boutique in Second Life, Aimeewas hired to design it. Her company,Aimee Weber Studios, a Second Lifedevelopment company, now employs11 full-time employees and another 10part-timers. But she also continues tooperate in-world businesses such as herclothing stores, and to develop her ownreal estate in areas such as MidnightCity, where she rents out storefrontlocations and lofts.The Second Life system runs on 1,800Debian Linux servers dedicated to simulatingactivities in the virtual world, withmultiple copies of the simulation softwareon each server. As of mid-February,there were 6,400 simulators—softwaredevices that track activity—in production,with each of them representing 16acres of land. Linden has another 200servers for supporting systems, includingMySQL databases, Web serversand test simulators. These numberscome from vice presidentLinden Lab Base CaseHEADQUARTERS: 1100 Sansome St., San Francisco, CA 94111PHONE: (415) 243-9000BUSINESS: Develops and operates the software simulation system behind theSecond Life virtual world.CHIEF TECHNOLOGY OFFICER: Cory OndrejkaFINANCIALS IN 2006: The privately held company expects to record revenue of$10 million to $12 million for 2006, up from $4 million in 2005. The company said itposted its first profitable month in December, but did not release figures.CHALLENGE: While continuing to grow and improve its own virtual world platform,Linden Lab is pursuing an open-source initiative that it hopes will set the standardfor the 3D Web, which it sees as “a $100 billion opportunity” (only part of whichLinden will be able to capture for itself).BASELINE GOALS:4Support a peak load of 150,000 concurrent users by the end of 2007, accordingto an unofficial prediction from Cory Ondrejka’s blog. The peak number ofconcurrent users surpassed 33,000 in mid-February.4Achieve profitability for full-year 2007.4Grow the number of Second Life residents. The 2006 goal was 1 million. Althoughno specific target has been set for 2007, the company surpassed its 2006 goalof having 1 million residents by more than a million; in the first quarter of 2007,the virtual world had surpassed 3 million residents (although the number includesinactive accounts, as well as multiple avatars controlled by a single user).of technology Joe Miller, who notes thatLinden is currently adding three racks ofservers per week, with 41 servers per rack,in an effort to get ahead of a backlog inorders for new land.Meanwhile, Linden’s viewer software—effectively,the equivalent ofa browser for this version ofthe 3D Web—must downloadall the object geometries andthe images used to provide them with“texture,” and display them and theirmovements on screen.But there are limits to how muchthe simulators can simulate and theviewers can display. As the JanuaryTown Hall meeting demonstrated,Second Life events often turn intoinadvertent stress tests.Ultimately, whether Linden Lab 4the Knowledge Universe InteractiveStudio and president of MindQPublishing, two companies focusedon lifelong learning services andapplications. Perilux Group, whichhe founded prior to joining LindenLab, designed products now offeredby LeapFrog, Bright Things, Appleand Fitniks.Robin Harper6Vice President, Community and SupportHarper is responsible for shaping the evolutionof the rapidly growing community of SecondLife users, working toresolve social and economicissues that arisewithin the virtual world aswell as listening to concernsabout Second Lifetechnology. Before joiningLinden Lab in 2002,Harper was vice presidentof marketing at Maxis, a division of ElectronicArts, where among other things she helpedestablish SimCity as one of the most recognizedbrands in entertainment software.PROMINENTRESIDENTS3Gwyneth Llewelyn(real name withheld“for personal reasons”)In real life, Gwyneth is a veteran ofInternet startups who sees some ofthe same potential in Second Lifethat she saw in the early days ofthe Web, when the technology was clumsy,connections were slow and it took someimagination to see what the future wouldbring. She is an active Second Life citizen, promotingexperiments in democratic governancewithin the virtual world, and keeps a blog atGwynethllewelyn.net.Timeless Prototype4(real name withheld“for personal reasons”)A programmer working inscripting language used to manipulateobjects within the SecondLife world, Timeless created asoftware distribution system tosupport updates to his creations.He’s the creator of the MultiGadget (effectivelya bundle of several useful scripts, such as onethat makes a chair and table set materializeout of thin air) and proprietor of the TimelessGadget Shop. While he prefers to protect hisidentity, he identifies his employer as British digitalmedia company Graphico (graphico.co.uk),which is starting to do Second Life consulting.Prokofy Neva(real name: Catherine Fitzpatrick)Prokofy is a Second Life political activist, oftenchallenging Linden Lab on its policies and campaigningfor more democratic governance of thevirtual world. “I take them seriously when theysay it’s a country,” says Fitzpatrick, the womanbehind Prokofy, who in real life is a Russiantranslator and human rights activist from NewYork City. As a dealer in Second Lifereal estate (sort of the equivalent ofbeing a reseller of server space forWeb sites), she has also protestedLinden’s move toward open sourcingits system, which could in the futureundermine “land” values if the numberof servers operated by other organizationsgrows too rapidly.Baseline March 200733WWW.BASELINEMAG.COM

c a s e d i s s e c t i o n : s e c o n d l i f eGROWING PAINSBaseline March 2007he news that drew a crowd to SecondLife’s Town Hall meeting on Jan. 9 wasthe announcement from Linden Lab, thecompany that runs the virtual world, thatit would release the Second Life viewer as opensourcesoftware. This means programmers outsidethe company’s employ will have a chance toimprove the graphics rendering, fix bugs, improveperformance and develop specialized versions ofthe viewer for specific audiences, such as professorsteaching courses within the virtual world. Ifthat goes well, Linden is talking about also opensourcing the server software that simulates theexistence of the world these avatars share.Now Second Life “residents,” as users of thesystem are called, want to know exactly how theopen source plan is going to work. Many are excited.Some are upset. Prokofy Neva (the creation ofCatherine Fitzpatrick, a Russian translator and humanrights activist), who’s in the virtual real estate business,is concerned about the long-term impact ofopen sourcing, particularly the idea that it couldundermine land values and property rights.That is, if anyone can run their own Second Lifesimulation server, won’t that mean that the supply ofland will explode and prices will plummet? And evenbefore that happens, the open sourcing of the clientraises the possibility of alternate viewers that won’trespect the restrictions that content creators placeon whether their objects can be copied, modified ortransferred to other users. Protecting property rightsis important because some residents have learnedhow to make money selling their digital creations.Others are worried that releasing the sourcecode will make it easier for hackers to create rogueviewers indistinguishable from the official one. Sucha tool would allow them to create robot avatars thatpose as real users, undermining the online society, orto overload servers with denial-of-service attacks.When the event begins. Cory Linden, a.k.a. chieftechnology officer Cory Ondrejka, explains thatreleasing the client software as open source wasa surrender to the inevitable, since independentdevelopers had already created a series of softwarelibraries that duplicate functions of the official SecondLife client. That software was created independently,without the use of Linden source code, through a processof reverse engineering (working backward fromthe known functionality of the official client to producesoftware that behaves similarly), Ondrejka says.That’s exactly why some are wary. In November,a program called CopyBot was released into SecondLife that demonstrated the ability to create multipleclones of avatars, including all their clothing. Amongother things, that demonstrated how the copy protectionthat normally applies to digital objects couldbe undermined.Ondrejka doesn’t deny that there will be problems,but says the challenge of preventing unauthorizedcopies of digital content is no different than thesituation that exists on the Web, where users caneasily swipe articles, source code and images. Andhe says the company is looking at the future andtaking it step by step. “We’ve only open sourced theclient, so fully [open source] discussions are premature,”he says.The server-side component of the Second Lifesystem that would make sense to open source is thesimulator software used to host regions of the virtualworld and track the actions of avatars within it.Linden Lab senior developer Andrew Meadows saysthe main challenge here will be to create a clearSecond Life residents come deckedout to Linden Lab’s virtual Town Hallmeetings—they’re the place to be seen.separation of responsibilities between simulatorsand other components of the system. For example,additional security barriers will have to be erected sothat simulators hosted by outsiders are treated witha healthy degree of distrust, preventing them fromgaining inappropriate access to the database systemsthat run the virtual economy, Meadows says.And yet, within a couple of weeks after Lindenannounced an open-source client, a primitive, independentlydeveloped server compatible with thatclient was released. So, the future may be comingquicker than Ondrejka expected.After the Town Hall meeting, Linden Lab CEOPhilip Rosedale materializes as spiky-haired avatarPhilip Linden. He tells his admirers, “The mostrewarding thing is just that at this point, the fire islit. Whether Linden continues to lead or not, we gotthings started.” —D.F.C.Courtesy of Linden lab34WWW.BASELINEMAG.COM

c a s e d i s s e c t i o n : s e c o n d l i f eBaseline March 200746are also plenty of users who are strictlyconsumers, pumping in more U.S. dollarsthan they earn.Linden Lab operates the main “currencyexchange” where dollars areswapped for Lindens, and takes a commissionon each trade. It also makesmoney by selling server space in theform of new “land” that’s added to theworld. At current rates, premium land inthe form of a private island costs $1,675to purchase, plus a $295 per monthmaintenance fee.According to chief financial officerJohn Zdanowski, Linden’s revenue willbe in the range of $10 million to $12million for 2006, once the books areclosed, compared with $4 million in2005. Linden also cleared its first profitin December, he says. About 80% ofthe money comes from land and landmaintenance fees (the equivalent ofselling site hosting and dedicated serveraccounts on the Web), while 20% comesfrom subscriptions. Although you canenter Second Life for free as a visitor,users must pay a $9.95 per month subscriptionfee if they want to own land.As of January, there were 57,702 premiumaccount holders.Revenue is rising at about the samerate as usage of the system—about 25cents for every hour a user is online,with more than 10.8 million user-hoursinvested during the month of January,Zdanowski says. So, if Second Life wereto achieve the roughly fivefold increasein usage that Ondrejka is predictingfor the coming year, Zdanowski wouldexpect revenue to be five times higheras well. However, the real money to bemade may still be years away, as the technologycontinues to improve.“If in five years, the Second Life experienceis as good as watching the movieShrek, there will be uses for it that wedon’t understand yet,” Zdanowski says.Thus, Linden doesn’t fear the competitionthat an open-source future (see“A Place to Stay?” p. 44) could bring intothe Second Life world. “We view this asa $100 billion opportunity,” Zdanowskisays. “I’m not worried about how muchof it Linden Lab gets because it’s so large,there’s no way we can get all of it.”There are several direct competitorsto Second Life, including There.com and Active Worlds, as well as othersoftware platforms like Multiverse fromMultiverse Network of Mountain View,Calif., that can be licensed to create aprivate virtual world. There’s also a moreacademically respectable software platformfor 3D interaction, known as OpenCroquet, which is backed by computerindustry luminary Alan Kay, one of theoriginators of object-oriented programmingand graphical user interfaces.And, after waves upon waves of favorable,perhaps uncritical press coverage, abacklash against Second Life has startedto appear. Late last year, Internet consultantand New York University professorClay Shirky published a series ofarticles in Valleywag, the Silicon Valleyonline journal, arguing that Linden waspublishing inflated statistics relatedto its membership and the economicactivity within its world. Valleywag alsoquoted excerpts from an article thatfinancial consultant Randolph Harrisonpublished on the Capitalism 2.0 blog,showing how difficult it was to cashout Second Life wealth, since puttingany large amount of wealth onto themarket tends to rapidly depress theexchange rate between Lindens and dollars.He took this as proof that this isan economy where dollars flow in a loteasier than they flow out.Questions about the liquidity of theSecond Life economy also underminethe claim to fame of Anshe Chung, theavatar who kicked off a wave of pressattention for Second Life when sheclaimed to be the virtual world’s firstmillionaire, which she based on the valueof her land holdings. Anshe is the avatarof Ailin Graef, who last year formedAnshe Chung Studios with her husband,Guntram. He insists his is a real business,which started when his wife learned tocreate and sell animations and clothing,shortly after she entered Second Lifein March 2004. That, in turn, providedmoney to start a real estate business, andby June she was making serious money,he says. “About a year later, the businesssupported both of us,” he says.But the backlash may be almostas inflated as the hype that has surroundedSecond Life the past couple ofAimee Weber Studios, a Second Life developmentcompany, has set up a clothing store in the virtual world.years. True, Shirky’s heckling eventuallyprompted Linden to start releasing thenumber of distinct users, as opposed toresidents. But Rosedale has been reasonablyopen about the fact that onlyabout 10% of residents are active userswho sign on at least weekly, and he hasacknowledged the high attrition rate ofthose who don’t like or never figure outhow to navigate the virtual world.As for the Second Life economy, it’snot as vast as it has sometimes been portrayed,but there is something real there.According to Edward Castronova, ancourtesy of Aimee Weber StudiosWWW.BASELINEMAG.COM

courtesy of Aimee Weber StudiosIndiana University economics professorwho has studied the economies of virtualworlds for years, “It’s just a marketthat is thinner than is being reported.”The surprising thing is not that cashingout Linden wealth would be hard, he says,it’s that anyone would expect the SecondLife economy to be as liquid as the U.S.economy. Given that only a few tens ofthousands of people are active within it atany one time, it’s more like the economyof a South Seas island. In other words,if you got rich on money denominatedin coconuts, you really would be rich interms of the local economy, but you mighthave a hard time converting your coconutwealth into dollars. Also, the Second Lifeeconomy is largely speculative, fueledby the land rush of people who thinkthey can get rich on virtual real estate,Castronova says.The economic statistics page onthe Second Life Web site states thatin January, 21,627 residents had positivecash flow, and 97 of them madethe equivalent of more than $5,000 inLinden wealth. However, CatherineFitzpatrick, the woman behind theactivist Prokofy Neva, says those figuresare deceptive because Lindenexcludes the cost of the monthly maintenancefees paid by land owners fromthis “profit” calculation. “I get a breakon bulk discounts, but still it’s a bigbill—something like $2,000US,” shesays. What’s left over, after all expenses,is the equivalent of about $500 to $750per month. So, Prokofy labors mostly tocover his own expenses, and Fitzpatrickdirects whatever is left over to a fewnonprofit ventures she runs withinSecond Life, including a land preserveand Tibetan monastery.Making a true profit is possible, butit takes so much work that on an hourlybasis it’s not a very high rate of pay,Fitzpatrick says.Timeless Prototype is anotherprominent resident who identifiedhimself only as a programmerworking for a British digitalmedia company, Graphico, thatis starting to do work inSecond Life.Timeless is bestknown as the creatorof the MultiGadget,a scripted object that,among other things,makes it possiblefor users to fly higher and chat overlonger distances than would be possibleotherwise. It also includes a softwareupdate system of his own design. He sellsthe MultiGadget and other creationsthrough his own Timeless Gadget Shopand a network of resellers. But he viewsthese ventures as simply a way to pay forhis hobby and generate enough cash forperiodic home computer upgrades.Although he is not extracting seriousprofits from his business within SecondLife, Timeless has no doubt that it ispossible. “If you run a good shop inSL, you can earn a good living and cantrade that cash out for USD$ via LindeXor another currency exchange,” he saysduring a chat conducted across the conferencetable in his workshop.Charities have also found a homeon Second Life. The American CancerSociety raised about $41,000 with aSecond Life version of one of its Relayfor Life fund-raisers, and the return oninvestment was pretty clear, given thatthe cost of a temporary server rentalwas about $1,200, says Randal Moss,manager of the society’s Futuring andInnovation Center. For the event, avatarsraced through landscapes createdby volunteer designers and raised moneythrough pledges of Lindens.“We’re treating the Second Life communityin the same way we would treatany community we would enter into,”Moss says. “We attempt to find peoplewho are attuned to the mission, peoplethat care, and we empower them towork and develop the society’s missionin their community.”So far, at least, none of the majorcompanies establishing operationsin Second Life are looking at Lindenprofits as something that’s going toboost their bottom line. Instead, manylook at selling or giving away brandedi t e m sin Second Life as a way of pursuingreal-life brand loyalty.From a business perspective,probably the mostattractive thing aboutSecond Life is that it is aready-made platform forcreating 3D content andinteractive experiences.Starwood, for example,had no need to create avirtual world from scratch,and saw its Virtual Aloftexperiment moreas a way to engage the existing SecondLife audience as a focus group for thenew brand.The Second Life environment isperfect for that kind of “rough prototyping,”says Terry Beaubois, an architectwho runs the Creative ResearchLab at Montana State University. As hediscovered while teaching a class in collaborativetechnologies for architects,the Second Life building tools were agood way to play at building a structuretogether. “We found we couldn’t get theaccuracy and tolerance real architectsneed to conduct their work,” he says,but it was still a good way to brainstormideas for a building at the stage when it’snot necessary to have a complete architecturalspecification for that building.In much the same way that architectscan invite Second Life residents in for atour of a proposed building, IBM’s Kearneysuggests other companies can use thistype of environment to preview proposedproducts. “If I were manufacturing anairplane, for example, I could invite customersfrom another part of the world towalk through the interior of the airplaneand look at it, and change their mindsabout various design decisions before Iever get to full fabrication,” she says.Granted, as a development platform,Second Life has some growing up to do,says Jeff Barr, Web services evangelist forAmazon.com, but he’s confident Lindenis up to the task. He enters Second Liferegularly (as Jeffronius Batra) to givepresentations on how Second Life applicationscan tie into Amazon’s services.So far, the XML Web services supportavailable from within LSL isn’t sophisticatedenough to tie into some of thoseservices, such as the Amazon shoppingcart. But Amazon affiliate Snowbookshas a Second Life bookstore where youcan walk through the stacks; clicking ona book cover takes you to the bookstore’sWeb site. And if you visit the Echo ParkListening Lounge, which promotes themusical artists The Bird and the Bee, themusic you’ll hear there is streamed fromAmazon’s S3 storage service.Says Barr: “They’re doing someamazing things to make the physics work,and to stream 3D renderings out to allthese clients. These are not easy thingsto do. They’re pushing the state of theart in any number of dimensions simultaneously,and they seem to have a goodhandle on where they need to go.” 3Baseline March 200747Aimee Weber is the avatarof Alyssa LaRoche.WWW.BASELINEMAG.COM