Business and Technology in Second Life

Linden Lab interferes

Linden Lab is no charity (says Theia Magic with a lot of reason) but a business operation. Since they bought XStreetSL, they had to pay for the running costs, its maintenance, and future upgrades. That takes money to pay developers as well as leasing co-location facilities for server space and the associated bandwidth costs. They recoup those costs by charging a tiny fee, and also by selling some ads and listing enhancements. Web-side e-commerce for Second Life is tiny (1% or so), compared to in-world transactions, but the more items are placed on XStreetSL and sold there, the more LL earns from fees, which allow them to improve the site’s connectivity, scale it up, and add more features. Now earnings from freebies are, obviously, zero. This means that an item selling on XStreetSL for L$0 (or a handful of L$) takes as much bandwidth/database space as an item selling for a few hundreds of L$. If the majority of all content on XStreetSL is severely underpriced, this means that the few sales from market-price items will have to bear the burden of all costs. In a sense, professional content creators listing on XStreetSL are paying the costs for others to sell free items there. So effectively, professional content creators are shooting their own feet twice: they not only get less sales (because the sales of freebies outnumber the sales of market-price items) but they are effectively paying for the “freebie competition” to be able to corner the market and drive them out of business!

No wonder, thus, that Linden Lab suddenly realised that this is all wrong and that something had to be done — namely, making sure that freebie content creators share the burden of the costs of displaying their products. LL is not forbidding freebies to be sold on XStreetSL, but they’re discouraging them by placing a minimum, fixed fee for listing freebies. The reasoning is simple: if you’re giving out freebies due to pure generosity and the urge to give poor residents a chance to get some items with reasonable quality without paying for them, well, then, if your motivation is good, you ought to be willing to spend some money to contribute to the costs of your listings. Consider it as effectively giving out money to poor residents — in the sense that you’re paying for them to be able to enjoy free content.

This is pretty much in line with some rules of market economy (the Tragedy of the Commons might also apply) where some resources are effectively finite and restricted, and that you ought to pay for them to guarantee a fair access to those limited resources. The “limited resource” here are the costs of running, maintaining, and upgrading the XStreetSL platform. Until now, only the so inappropriately called “greedy designers” would bear the burden of paying for all costs — allowing the “freeloaders” (who only have listings for freebies) to avoid sharing the costs. As more and more freebies get listed on XStreetSL, the burden of paying for its infrastructure falls more and more on the professional content designers — while at the same time, the sheer number of available freebies will completely eclipse the sales of market-price items, to the point where they don’t cover the costs of running XStreetSL any longer. Linden Lab has thus just two alternatives: shut down XStreetSL or make sure that the listings for freebies also pay a fair share of the costs. They picked the second choice.

This naturally was not well received by the vast community of residents that only acquire freebies. Remember again that there are only 133,000 “hard core residents” — most content sold at the market price will be bought by these. They’re pretty much indifferent to LL’s policies regarding XStreetSL: sure, they get the odd freebie here and there (who doesn’t? ), but they mostly buy from professional content designers anyway. But, again, these are a tiny minority. At least a million users still sign to SL regularly enough, but they’re not very active economy agents — they rely on the underpriced and free items so readily available in SL. And, of course, they’re the ones that are the most furious about LL’s change of policy. And they’re very vocal, following their threats with acts, by unlisting their items on XStreetSL. Tateru Nino reports:

Within hours, vendors took down thousands of products, many abandoning the service entirely in favor of alternative services.

It’s unclear just how many vendors have abandoned the Xstreet SL system, but it apparently was enough to temporarily overload the Web-sites of third-party sites such as Slapt.

New World Notes ran a survey showing that almost 80% of the residents who replied are totally against this change [poll consulted at the time of writing this article].

Hmm there is this magic number again, 80%. Oh, I don’t believe in numerology, and I do believe in coincidences, but it makes one think…

The interpretation of LL’s policy is curious. From a strictly business point of view, LL is simply trying to “save” XStreetSL from collapsing under the burden of listing too many items that don’t generate enough income to pay for the costs of maintaining it. But if 80% of all residents are unhappy… they will also remove their content, if any, from XStreetSL and go elsewhere (there are a few alternatives). Competition is good for XStreetSL — although the site runs relatively fast, it shows its age (5-year-old technology with a slightly improved web design), searches are next to useless, and the overall concept is difficult to navigate — all things that might get improved by the competition. On the other hand, if everybody moves away from XStreetSL, the professional content designers will have no choice but to leave too — and prematurely pushing XStreetSL to a close, which will at the end of the day not benefit anyone.

But a lot of the most vocal residents see this policy change as just a ploy by Linden Lab to push out the “small businesses” out of SL. They point at Second Life Enterprise and similar initiatives and believe they see a trend in SL towards “big corps”, and everything that gets announced by Linden Lab — from the policies around adult content, requiring registration/validation for SL merchants, to charging for listing items on XStreetSL — as being part of the “evil masterplan” to drive all “small businesses” out of this virtual world.

I can understand some of the arguments. Still, it’s an undeniable fact that Second Life is mostly a residential market — about 99% of it, in fact, and there will be little that LL can do to change that. And frankly, I really don’t believe that LL would be willing to destroy their cash cow — residential users, small merchants who actually become famous and prominent content creators — in order to displace them and get the corporations in SL. Those will come, yes, but just because it is a residential market. There are tons and tons of competing virtual worlds out there. None has such a huge market for content that is driven primarily (or almost totally!) by the “small merchants”! That’s one of the major attractions of Second Life that makes people still join — and eventually, capture the attention of the “big corps” that wouldn’t glance twice at SL at all if it weren’t for it’s half-a-billion-US$-internal-economy that grows every year, all driven by content sales from all merchants in SL, big and small.

No, I believe that this policy change, as well as many others, are just motivated by one reason: to continue to ensure LL’s future as a profitable company — something so uncannily different from all the techy, glitzy, shiny Web 2.0 companies out there, who still haven’t managed to understand how they can make a profit out of their service. I’m always amazed at how a company that runs at a loss of several dozens of millions US$ year after year can be “valued” at US$ 10 billion (!), while Linden Lab, making a profit of US$30-35 million or so annually, is “merely” valued at US$700 million or so. To keep showing such nice numbers, Linden Lab has not only to find ways to get their residents to pay more for using their services, but, more important at this stage, it needs to do some policy changes that guarantee that content creators continue to feel safe and trust the virtual economy, so that they keep it happily growing. This means protecting content (dealing better with content theft issues), protecting the merchants themselves (guaranteeing fair access to resources), guaranteeing the trustfulness in merchants (which might require some sort of validation/accreditation or a rating system with an associated dispute resolution facility), and expanding the market (i.e. finding new opportunities for content creators to deploy more content, like on Second Life Enterprise).

This is not really about greed, but about survival. A virtual world based solely on user-generated content with a huge economy of digital goods requires careful handling. Linden Lab has already toyed with left-wing economical libertarianism (no currency!) and the opposite, right-wing economical libertarianism (laissez-faire capitalism, totally unregulated). Now they seem to be willing to interfere a bit more and try to curb the excesses, as something like self-regulation has totally failed to emerge in Second Life (much to the contrary to LL’s hopes).

The question, of course, is how far they’re willing to go when meddling with the economy — again — and how much an impact this will have. Judging from the extremely low number of transactions happening on XStreetSL, I’m quite sure that the impact will be next to zero, no matter what Linden Lab does with their e-commerce shop.