Kategorie: Business

Today Lindenlabs dropped the bomb: there is going to be a new continent in the east! Not only that, they are adding the new regions at a higher speed than earlier (which was 4 regions per day) and putting up some mechanisms to avoid the buying of the parcels through bots.

This sounds like a nice move. Ok, the people seeing land as an investment are going to cry if the prices drops significantly, but in the end it’s better that way, because so more people are able again to get new land and for Lindenlabs to generate more income, of course.

If LL would not have taken this step, it could have been that many people were leaving the game or just not buying land anymore, so that LL would have been on quite a stock of unused land sooner or later. Now, there is a new force in the land business, a new motion and I am thrilled to observe in which direction this might leed us!

Darius Lehane did it, again. This time he wrote an article about the land bubble in Second Life. Quite an interesting read and he got some critical points absolutely right.

He’s right: land prices are out of control, taking off to unseen heights and are prone to crash sooner or later. Why? Well, what are you buying actually? Not really. Actually the partition of computation time of one server. One server normally hosts two sims and consists of a dual-core CPU. And servers can get added day by day, a fact unseen in the real world. So you theoretically can add as much land to the grid as you like.

Why is it going to burst? Because sooner or later the point of no return will be reached when most people are unwilling and/or unable to pay the prices. That’s why, and the fes are eating up he owners.

And if this point is reached most are going to sell their land – even with loss – just to get it away.

Another possibility, of course, would be when the Lindens are opening up the server side part of SL and you can host your region everywhere you want. This would also ruin the land prices immidiately.

So, investing into land is perhaps a short time investment in SL, but no long time investment nor a good investment at all.

The German magazine "Der Spiegel" (English translation via Google) has opened up an own avatar for media coverage in Second Life. This is after "The Avastar" and Reuters another major media player – well, at least in Europe – joining this world. The main usage seems so far to report Second Life and make some entries in a blog actually.

The avatar him(her)self is named Sponto; no surename given in the article so far. It’s a rather nice read about the impressions a newbie can get out of SL and seems to be the first in a series of entries. They even opened up a German forum on their website to discuss SL, well, we’re going to see how it is going to develop.

In this article I am referring to a posting from today in the blog Valleywag about the virtual economy in Second Life. Actually Valleywag themselfes are referring to a bigger article from Randoph Harrison. It’s not the first nor surely the last article Valleywag is posting against Second Life, but one of the more interesting ones. And since it was featured today on the front page of Slashdot, thousands of people of not even more read it.

The article in Valleywag is a very opioniated piece of writing, again. The article from Mr. Harrison itself is more serious written, but they are both referring to the same fact and most of the article in Valleywag is just a big quotation from Mr. Harrison, anyway.

So, to cut it short: Mr. Harrison thinks that the economy in SL is just some kind of big, overhyped pyramide scheme. Why that? Because on the ond hand it’s simple to make Linden dollars in game but he thinks it is real hard to convert them again into real dollars after that.

To cite Mr. Harrison himself:

What should have been a relatively small SLL/USD exchange trades given media claims about millions of dollars flying around per week in 2006, in reality caused the exchange markets to distort tremendously. We could not effectively move sums of more than a couple thousand dollars out of SL without the exchange market confiscating most of our returns (through rate reflectivity). Example: in July 2006 USD/SLL was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade resulted in settlement bids of more than 350. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.

This didn’t make sense. After all, the liquidity supposedly existed to support these simple, smallish trades. Well, when the guys running the banks and the exchange trading floor are the guys with most of the SLLs, it’s no surprise that outsiders are not permitted to extract any significant returns.

We concluded that we weren’t playing in a market at all. We were suckered in by a classic pyramid scheme, albeit one with a pretty new user interface. New entrants plow real money into the game. Only the guys at the top can extract that money with any volume (and in excess of the risk-free rate of return). Attempts to move anything more than token amounts out of the game generally result in real-returns of almost exactly the prevailing USD deposit interest rate.

And here I disagree with him, strongly.

When you have an economy you can only convert some sums into another currency before the market reacts. Given the nature of SL, the number of concurrent players who visit frequently is importang, not the number of existent accounts after all. If you take this into account, you have the economy of a small city, not more. Therefore the market of course reacts very strongly on high bids.

For example, the today’s activity at the LindeX was 182.507 US-$, the money spend in world actually 1.021.595 US-$. So if you want to sell 10.000 US-$, which is about 1/18 of the normal flow of a day at the LindeX, it of course has a serious impact at the exchange rate. No surprise here. Also no surprise that most money stays in game actually.

Mr. Harrison concludes his writing with the words:

Even some corporations have dedicated marketing budgets to creating a presence in SecondLife. While few will shed a tear for the frivolousness of these companies’ spending, such adds a false legitimacy to SecondLife. Interestingly, no legitimate, real world corporation has earned net profit from SecondLife activities.

That’s because there are but a very tiny handful that profit off of the SecondLife economy. A handful of casino owners, large scale virtual land flippers, and brothel owners are responsible for nearly all of the real money extracted from the game. And they continue to attract new recruits to the bottom of the pyramid.

After all, Anshe Chung herself started out as a virtual whore, so you too can become a SecondLife millionaire, right?

And guess what? Again he’s wrong in some serious points.

First: most real world corporations entering SL don’t want to earn direct profit in SL. Some use it for teaching, others for experimenting, or to get good public relations. So your company wants to have a good feedback in the blogosphere? Well, make an event in SL, all big magazines and many blogs will cover it up. The costs? Minimal, much less than one commercial in the TV. But the coverage in the media? Very, very good. That’s the way it works and how it actually makes sense for many companies!

Also about the economy and pyramide scheme: haha. Hahaha. It would have indeed been very good if Mr. Harrison would have taken the time to actually take a look at the homepage of Anshe Chung Limited before writing about her as an example for milking of the SL economy. Why? Because Ms. Chung charges for her land in real life currencies only via PayPal, mostly US-$ and Euros, but no Linden dollars whatsoever. Period. So, of course, she knows about the problems of the LindeX and just circumvents them by charging via PayPal. Clever, that. But this shows also she cannot be an example for this so called „scheme“, because she simply is not participating at it the way Mr. Harrison describes in his article.

Also of course many builders actually charge directly in US-$, because how should they make an invoice for the hiring companies in Linden dollars…?

SL is actually more like in RL itself: some make the big bucks, the rest – well, has to see, but no pyramide whatsoever. It’s actually perhaps being a little overhyped, but when this is over it’s here to stay.

Last example: what would happen if the People’s Republic of China decided to sell 700 billion US-$ at once at the exchanges? Of course, the dollar would go down and down and down…

Today I want to write a little bit about the difference between building things in real life and in Second Life.

Building things in real life, for example a simple chair, can be hurdlesome. First you need the materials to build it, namely wood and at least some glue. Second you need the right tools to achieve your goal. Third you need knowledge and experience how to do it and a certain amount of time to actually build one chair. The more chairs you build, the more time you need. Please notice, that the important fact is that this is linear. For example, if you need in the average 45 minutes to build one chair, then you would need 7*45 minutes in the average to build seven chairs. And last, but not least, if you never build a chair before, you need to make some research first actually how to build it and of course the time it actually takes to build it has also some value.

How to gain profit of it? Well, you must reach the break even point, of course. Only if you have reached it actually you are making profit with your good; if you never reach it, you will make only a loss, plain and simple.

Since SL is virtual, we are now in the wonderland of software production (actually the same rules applies to other software, e.g. Windows from Microsoft). Costs for building materials and tools? None. It’s all in the client, Luke. Costs for building many products? None, it’s just simply copying on the server in a fraction of seconds. It doesn’t matter if you actually only sell one or one million pieces of it. So what costs are left in SL to reach the break even point for a product? Simple: research and labor costs.

So if you do it right, it’s actually from this point of view easier in SL to reach break even. But, and please consider this also, the potential crowd of customers is in SL of course drastically smaller than in RL, so you need some to make your product popular by all means. (All of this does not always apply to custom builds, of course.)

And this is also how Microsoft makes so much money with Windows. Actually the production costs per unit are constant low (burning DVDs is mostly automated, anyway), the research costs are constant and only happened once, so it’s easy to turn it into a cash cow, when many people buy it.