Is Business Ready for Second Life

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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
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