Second Life Maturing

By David F. Carr Print this article Print

Real-world companies such as American Apparel, IBM, Starwood Hotels and Toyota are exploring whether 3D virtual communities can be adapted to serve business—and whether they are an effective place to do market research and collaborate on projects, an


Second Life Maturing?

While most Second Life businesses aren't that big, many residents have learned to hustle up enough Lindens to cover their own expenses in the virtual world. And, of course, since that money has to come from someplace, there are also plenty of users who are strictly consumers, pumping in more U.S. dollars than they earn.

Linden Lab operates the main "currency exchange" where dollars are swapped for Lindens, and takes a commission on each trade. It also makes money by selling server space in the form of new "land" that's added to the world. At current rates, premium land in the form of a private island costs $1,675 to purchase, plus a $295 per month maintenance fee.

According to chief financial officer John Zdanowski, Linden's revenue will be in the range of $10 million to $12 million for 2006, once the books are closed, compared with $4 million in 2005. Linden also cleared its first profit in December, he says. About 80% of the money comes from land and land maintenance fees (the equivalent of selling site hosting and dedicated server accounts on the Web), while 20% comes from subscriptions. Although you can enter Second Life for free as a visitor, users must pay a $9.95 per month subscription fee if they want to own land. As of January, there were 57,702 premium account holders.

Revenue is rising at about the same rate as usage of the system about 25 cents for every hour a user is online, with more than 10.8 million user-hours invested during the month of January, Zdanowski says. So, if Second Life were to achieve the roughly fivefold increase in usage that Ondrejka is predicting for the coming year, Zdanowski would expect revenue to be five times higher as well. However, the real money to be made may still be years away, as the technology continues to improve.

"If in five years, the Second Life experience is as good as watching the movie Shrek, there will be uses for it that we don't understand yet," Zdanowski says.

Thus, Linden doesn't fear the competition that an open-source future (see "A Place to Stay?" p. 44) could bring into the Second Life world. "We view this as a $100 billion opportunity," Zdanowski says. "I'm not worried about how much of it Linden Lab gets because it's so large, there's no way we can get all of it."

There are several direct competitors to Second Life, including There.com and Active Worlds, as well as other software platforms like Multiverse from Multiverse Network of Mountain View, Calif., that can be licensed to create a private virtual world. There's also a more academically respectable software platform for 3D interaction, known as Open Croquet, which is backed by computer industry luminary Alan Kay, one of the originators of object-oriented programming and graphical user interfaces.

And, after waves upon waves of favorable, perhaps uncritical press coverage, a backlash against Second Life has started to appear. Late last year, Internet consultant and New York University professor Clay Shirky published a series of articles in Valleywag, the Silicon Valley online journal, arguing that Linden was publishing inflated statistics related to its membership and the economic activity within its world. Valleywag also quoted excerpts from an article that financial consultant Randolph Harrison published on the Capitalism 2.0 blog, showing how difficult it was to cash out Second Life wealth, since putting any large amount of wealth onto the market tends to rapidly depress the exchange rate between Lindens and dollars. He took this as proof that this is an economy where dollars flow in a lot easier than they flow out.

Questions about the liquidity of the Second Life economy also undermine the claim to fame of Anshe Chung, the avatar who kicked off a wave of press attention for Second Life when she claimed to be the virtual world's first millionaire, which she based on the value of her land holdings. Anshe is the avatar of Ailin Graef, who last year formed Anshe Chung Studios with her husband, Guntram. He insists his is a real business, which started when his wife learned to create and sell animations and clothing, shortly after she entered Second Life in March 2004. That, in turn, provided money to start a real estate business, and by June she was making serious money, he says. "About a year later, the business supported both of us," he says.

But the backlash may be almost as inflated as the hype that has surrounded Second Life the past couple of years. True, Shirky's heckling eventually prompted Linden to start releasing the number of distinct users, as opposed to residents. But Rosedale has been reasonably open about the fact that only about 10% of residents are active users who sign on at least weekly, and he has acknowledged the high attrition rate of those who don't like or never figure out how to navigate the virtual world.

As for the Second Life economy, it's not as vast as it has sometimes been portrayed, but there is something real there. According to Edward Castronova, an Indiana University economics professor who has studied the economies of virtual worlds for years, "It's just a market that is thinner than is being reported."

The surprising thing is not that cashing out Linden wealth would be hard, he says, it's that anyone would expect the Second Life economy to be as liquid as the U.S. economy. Given that only a few tens of thousands of people are active within it at any one time, it's more like the economy of a South Seas island. In other words, if you got rich on money denominated in coconuts, you really would be rich in terms of the local economy, but you might have a hard time converting your coconut wealth into dollars. Also, the Second Life economy is largely speculative, fueled by the land rush of people who think they can get rich on virtual real estate, Castronova says.

The economic statistics page on the Second Life Web site states that in January, 21,627 residents had positive cash flow, and 97 of them made the equivalent of more than $5,000 in Linden wealth. However, Catherine Fitzpatrick, the woman behind the activist Prokofy Neva, says those figures are deceptive because Linden excludes the cost of the monthly maintenance fees paid by land owners from this "profit" calculation. "I get a break on bulk discounts, but still it's a big bill something like $2,000US," she says. What's left over, after all expenses, is the equivalent of about $500 to $750 per month. So, Prokofy labors mostly to cover his own expenses, and Fitzpatrick directs whatever is left over to a few nonprofit ventures she runs within Second Life, including a land preserve and Tibetan monastery.

Making a true profit is possible, but it takes so much work that on an hourly basis it's not a very high rate of pay, Fitzpatrick says.

Timeless Prototype is another prominent resident who identified himself only as a programmer working for a British digital media company, Graphico, that is starting to do work in Second Life.

Timeless is best known as the creator of the MultiGadget, a scripted object that, among other things, makes it possible for users to fly higher and chat over longer distances than would be possible otherwise. It also includes a software update system of his own design. He sells the MultiGadget and other creations through his own Timeless Gadget Shop and a network of resellers. But he views these ventures as simply a way to pay for his hobby and generate enough cash for periodic home computer upgrades.

Although he is not extracting serious profits from his business within Second Life, Timeless has no doubt that it is possible. "If you run a good shop in SL, you can earn a good living and can trade that cash out for USD$ via LindeX or another currency exchange," he says during a chat conducted across the conference table in his workshop.

Charities have also found a home on Second Life. The American Cancer Society raised about $41,000 with a Second Life version of one of its Relay for Life fund-raisers, and the return on investment was pretty clear, given that the cost of a temporary server rental was about $1,200, says Randal Moss, manager of the society's Futuring and Innovation Center. For the event, avatars raced through landscapes created by volunteer designers and raised money through pledges of Lindens.

"We're treating the Second Life community in the same way we would treat any community we would enter into," Moss says. "We attempt to find people who are attuned to the mission, people that care, and we empower them to work and develop the society's mission in their community."

So far, at least, none of the major companies establishing operations in Second Life are looking at Linden profits as something that's going to boost their bottom line. Instead, many look at selling or giving away branded items in Second Life as a way of pursuing real-life brand loyalty.

From a business perspective, probably the most attractive thing about Second Life is that it is a ready-made platform for creating 3D content and interactive experiences.Starwood, for example, had no need to create a virtual world from scratch, and saw its Virtual Aloft experiment more as a way to engage the existing Second Life audience as a focus group for the new brand.

The Second Life environment is perfect for that kind of "rough prototyping," says Terry Beaubois, an architect who runs the Creative Research Lab at Montana State University. As he discovered while teaching a class in collaborative technologies for architects, the Second Life building tools were a good way to play at building a structure together. "We found we couldn't get the accuracy and tolerance real architects need to conduct their work," he says, but it was still a good way to brainstorm ideas for a building at the stage when it's not necessary to have a complete architectural specification for that building.

In much the same way that architects can invite Second Life residents in for a tour of a proposed building, IBM's Kearney suggests other companies can use this type of environment to preview proposed products. "If I were manufacturing an airplane, for example, I could invite customers from another part of the world to walk through the interior of the airplane and look at it, and change their minds about various design decisions before I ever 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 for Amazon.com, but he's confident Linden is up to the task. He enters Second Life regularly (as Jeffronius Batra) to give presentations on how Second Life applications can tie into Amazon's services. So far, the XML Web services support available from within LSL isn't sophisticated enough to tie into some of those services, such as the Amazon shopping cart. But Amazon affiliate Snowbooks has a Second Life bookstore where you can walk through the stacks; clicking on a book cover takes you to the bookstore's Web site. And if you visit the Echo Park Listening Lounge, which promotes the musical artists The Bird and the Bee, the music you'll hear there is streamed from Amazon's S3 storage service.

Says Barr: "They're doing some amazing things to make the physics work, and to stream 3D renderings out to all these clients. These are not easy things to do. They're pushing the state of the art in any number of dimensions simultaneously, and they seem to have a good handle on where they need to go.

This article was originally published on 2007-03-01
David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.
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