Tuesday, January 20, 2009

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Linden Lab Acquires Virtual E-Commerce Sites XStreetSL and OnRez: The Numbers, Strategy, and Controversy

SL acquisitionSecond Life developer Linden Lab will announce tomorrow that they've purchased two e-commerce services which enable the buying and selling of Second Life content via the Web: XstreetSL, formerly owned by Jay Geeseman (Apotheus Silverman in SL), and OnRez, formerly owned by metaverse developer the Electric Sheep Company. To make an early Web analogy, this is a bit as if Netscape acquired eBay in the late 90s.

Here's the main details, gleaned from a conversation I had earlier today with Tom Hale (T Linden in-world), Linden's new Chief Product Officer: The purchase sum was not disclosed; however, in this acquisition, Geeseman will become a full-time Linden, in which capacity he'll continue to handle SL-based e-commerce. (Eight of his former XStreetSL staffers will work for the Lindens on a part-time basis.) For the near future, at least, XStreetSL will remain a standalone site, though it may be redirected to Second Life's official site later on. OnRez will be subsumed by the Lindens after Feb 11.

Why the acquisition? And will this disgruntle current XStreetSL/onRez users? Hale tried to address those points while explaining the Lindens' strategic thinking, along with offering some very interesting user data:

XStreetSL currently has 600,000 goods for sale, and recently counts 416,000 monthly unique visitors who are very heavily engaged, turning an average of 20 commerce pages per session. (54% are outside the US.) Curiously, though it's backed by the Electric Sheep, which produced CBS's "CSI in SL" and other prominent corporate campaigns, Hale said onRez's usage numbers are much smaller than Geeseman's grassroots operation. From a strategic perspective, the Lindens hope to encourage what they classify as "heavy users" to engage in more Second Life e-commerce, while offering an easy way for lighter SL users to shop on the web, even while not logged in SL. (I.E., from their office over lunch.)

Rumors of this acquisition surfaced in the SL community as far back as last weekend, many worrying that the sale would mean drastic changes to XStreetSL, both for its employees and users. What happens, for example, to all the adult content (attachable genitals, sex animations, etc.) sold on XStreetSL? "Uh, well, that's a great question," Hale told me. He pointed out the site already has an opt-in adult content filter, so consumers can avoid it if they choose. However, he added, "There's always a possibility that it can evolve over time."

I told Hale about reports that some XStreetSL staffers were laid-off as a result of the acquisition (as here, via Radar Masukami) and thus irked. "I'm not privy to all the details," Hale answered, but said, "laid off is kind of a strong word." He said the "vast majority" of XStreetSL staffers would transition to working for the Lindens in some capacity.

Before I got off the phone, I made sure to ask Hale, a very newly minted Linden, if he was familiar with the term "GOM-ing". He chuckled and said he was, sort of. It refers to Gaming Open Market, a very small company which used to operate a third party L$ exchange site-- until 2004, that is, when the Lindens announced the launch of the LindeX. (In broader terms, it refers to Resident-made products and services that are subsequently acquired or made irrelevant by a new Linden service.)

That term may apply to other SL e-commerce sites, but evidently, not to XStreetSL, at least in the negative sense. Jay Geeseman, as Hale put it, "is a very happy man. He's going to do wonders here [at Linden Lab.]"

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Geuis

This is sudden and unexpected. Almost all of my sales for Filming Path come from SLexchange. I'm not sure how comfortable I am having *all* of my revenue streams centralized in the company that runs that platform. There's potential for good things, but there's also room for abuse. Linden Lab will be able to set all of the fees and pricing structures for all commerce going on in Second Life. One of the strengths of the system for years has been the open and distributed nature of commerce in SL. That era has now come to an end.

Tateru Nino

"will announce tomorrow"? They already jumped the gun on you.

Chenin Anabuki

This acquisition is a concern as control of SL's economic sphere seem to be converging even more towards Linden Labs. Perfect competition creates incentive for better products. In a way, OnRez and SLexchange as separate entities kept each other on its toes. Now that there will be one web-based market for SL products and owned by Linden Labs, who will even attempt to create a competing online marketplace? More importantly, what will LL's incentive be to improve this combined product now that they have a monopoly?

I'm also not thrilled that they are giving users only 21 days to make this transition. They might not realize how cumbersome it is to list in-world products online and update vendors. Geeseman might be happy. But, I'm not.

Gwyneth Llewelyn

The GOM story was always misrepresented in the media, and always will be, since LL did little to discourage it. GOM was going to go away anyway, because of several internal issues, and LL tried to save it by buying it. When the deal failed, LL had no choice but to create their own service instead.

OnRez Shop was very likely going to disappear after the Sheep's phasing out of their work in SL — the OnRez client was to be discontinued in February as well. Just take a look at their blog aggregator — the last comment about Second Life was in September, and only because of a movie that was produced with avatars created by one of their leading designers. The Sheep did not even bother to announce the sale of OnRez Shop. It was very likely just a handful of dollars to allow LL to do whatever they please with the design and legally allow them to switch over to XStreetSL.

XStreetSL is owned mostly by Anshe Chung, who, as we know, is making her second fortune selling content in IMVU — where the webshop is fully supported by IMVU and has no running costs. Very likely she thought it wasn't worth her money and time to continue to support Apotheus and his team, and Apotheus panicked and got hold of a friendly Linden's shoulder and cried for help. LL has this altruistic touch in them, and I can very well imagine that, seeing two major resident intitatives fail at the same time — one doomed to be closed for indifference, the other because the revenue stream is not worth to keep it going — they simply helped them out to survive, and, at the same time, introduce webshops in SL.

After all, SL is the *only* platform that doesn't have a company-sanctioned webshop, and this was an excellent opportunity to get one. It's not for the revenue stream, which is negligible for LL. It's because they couldn't afford more third party services to simply disappear without explanation. So they thought to allow them to survive, and reap one benefit — get the whole technology to integrate it into the SL client.

It might surprise to us who read blogs and participate in forums and go to Linden office hours that *over 99% of all residents have no clue that webshops exist*. This also means that the income from those webshops is, currently, around 1% of the overall transactions in SL. They are little worth, except for the 1% that actively engage in selling and buying content there — which is certainly my case! Almost all my feeble in-world income comes from sales on XStreetSL so I'm *very* happy to see it continue (we already lost Gigas a few years ago).

So short term LL is introducing a new concept in SL: lagfree shopping, fully integrated into the SL client, which is going to be an immediate success. But... this also means that in the long term, in-world shopping in laggy areas will simply be worthles. And that in turn means that the Big Brands will drop their tier, sell their islands, and just focus on webshopping. The whole concept of a shopping experience — going with friends, chatting with owners and attendants about the things you see, trying things out, hanging around on the events that drive traffic to the shops — will be pretty much meaningless, since the alternative (at least to most things) is so much more convenient! So I can imagine that in the long term what this will mean is — less tier for LL, as the brands close their sims down...

I'll be really sorry to watch that happening. Granted, there is a way out, keep XStreetSL out of the SL client, and nothing bad will happen :) But I believe that the temptation will be too great not to resist...

T Linden

@Geuis - If Linden Lab can make Xstreet more successful for merchants and shoppers than it already is, most merchants will be happy. Our goal is a successful, growing, vibrant marketplace where sellers and buyers can connect and that is aligned with the goals of merchants.
@Chenin – our incentive to improve the marketplace is to keep the creators and merchants and shoppers who actually comprise the marketplace engaged and profitable. The first order of business is to send more shoppers towards the web marketplace. As Gwyneth notes below, the vast majority of users don’t know web shopping exists.
@Gwyneth – “Lagfree Shopping” is a nice coinage. But I don’t believe that inworld shopping will go away. Amazon didn’t kill the retailers. And every brick and mortar store has a web presence. The social experience (people love to ask “where did you get that?”) and immediacy of shopping inworld (trying on clothes before you buy them) is very compelling and unique to inworld shopping.
@everyone – a few facts.
1. We approached Apotheus. He was not panicked. We were surprised and happy to learn that he was looking for capital to expand his business, which was growing rapidly.
2. It’s not perfectly accurate to say that 99% of residents are unaware that webshops exist. Many people do not know about Xstreet or OnRez, but it’s more accurate to segment Residents. For residents who own land, buy classifieds, etc, the number is closer to 80%. For Residents who a less economically active, in world it’s closer to 97-99%. The implication is that we can help merchants get more exposure via the web shops
3. Today, Adult content is an category on Xstreet and will continue to be so. Google, Ebay, Amazon and others have set best practices around how to present this kind of information, and we’ll align with those.

Check out our faq https://support.secondlife.com/ics/support/default.asp?deptID=4417&task=knowledge&questionID=5809

Ann Otoole

3D shopping is one of the primary strengths and core competencies of Second Life.

I think anyone that thinks Linden Lab will try to downplay the 3D shopping experience is very wrong. That would actually be a form of future potential merger suicide.

Ann Otoole

Oh and hey T! Why not go ahead and create the shopping.secondlife.com URL? Isn't it time?

Galena Qi

If the purchases lead to better product search capabilities, I'm all for it. My most frequent experience with shopping for SL products is frustration because neither the in-world or external search engines provide: 1. multi-word search, 2. ability to sort on more than one dimension (e.g., price and keyword), or 3. adequate pictures of the products. A good visual search engine would go a long way to improving the user experience.

FlipperPA Peregrine

What confuses me is that Linden Lab is asking OnRez users to spend thousands and thousands of person-hours manually moving their items over. To write a script to move all the account, item, transaction, balance, and image data over really wouldn't be that difficult; accounts can be easily merged keyed off of the avatar key for people with accounts on both systems, I'm betting both stored passwords as MD5 encrypted 32-character hashes so new XStreet accounts could be created for people who only used OnRez, and item names can also be matched.

It really wouldn't take long to do, and isn't all that difficult. For that reason, this does look like quite a bit of a kick in the crotch to OnRez users (like me!) who haven't set up on XStreet. It would probably take me about a day to do this; I just don't get it.

Dedric Mauriac

If I understand that fourth paragraph correctly, you are stating that the electronic sheep company was backing XStreet SL. Is this a misprint?

Chenin Anabuki

Assuming for a moment that this acquisition was "altruistic" in nature and that LL's incentive is [to improve profitability for merchants]. Then, shouldn't Linden Labs adopt the OnRez policy of no listing fees and drop XstreetSL's percentage commission charged to merchant sales?

Aliasi Stonebender

I have to say I disagree with Gwyn that in-world sales have any chance of vanishing - as it is now, I'll browse items on The Site Formerly Known As SLExchange because their search function is STILL better than the in-world one and then look for the vendor's in-world shop so I can hopefully see the item in person. You can't do item demos or have mannequin-bots on the web nearly so well.

It does mean that a lot of the scammier stuff might go away - how can you sell freebies when a simple search (integrated right into the SL client) will show you every free item on the grid?

Nexus Burbclave

@FlipperPA, as someone who has done my share of database work, I would submit that data migrations are rarely as simple as people would like for them to be. It is highly unlikely that the database schemas are similar enough to make importing one site's data into the other a task that they could accomplish by 2/11 if at all. At best it would be a long process rife with potential data integrity issues.

I am a bit concerned about the OnRez acquisition. If they are just planning on shutting the site down, it seems like anti-competitive behavior. Hopefully there is some additional technical advantage to acquiring both codebases that isn't readily explained in a press release.

AlterEgoTrip Svenska

Nexus, That was definately ANTI-Competitive behaviour!!!

The death of OnRez is a hardship, not just to me in a fairly minor sence, (although I was really emotionally attatched to it)-

Someone sugested that the aquisition of OnRez was a stratigic move to not have to answer to a flock of people who would possibly migrate from SLX after this aquistion.

This was capture and kill, this was avoiding the conflict that one may have with even an illusion of choice.

I wish there was a place within LL to allow OnRez to flurish, and to allow for both sites to give an illusion of choice rather than the pure vision of the totalitarian.

Isn't odd how pure capitalism in action ends up being a kind of communisim for the consumer? One great way is to kill all competion IS by aquisition... we see it all the time here.. one shop bought up by a chain only to be closed.

Its not fair and limits choice, and the worst part is, one never sees the "treasure" of a unique idea bloom.

Imagine if that happened to LL early on?

Perhaps it did, and I am just fooling myself.

FlipperPA Peregrine

Nexus, typically I'd agree with you. I was on the team that had to migrate accounts after a fairly large acquisition during the dot-com era, when CDnow bought N2K. However, in this case, there really are only so many ways to skin a cat. I'm not talking about migrating every last bit of data or feature, but I can not imagine the critical data being very difficult. This is because the same fields are required to process these transactions, and are unique. It isn't like any fuzzy matching on address will be necessary: avatar keys do not change.

This can not be looked at as a typical data migration would be from one company to another, because in this case, the two companies share primary keys between their databases. :)

Tycho Beresford

Now we see why Linden Labs pulled their bait-and-switch on OpenSpace sims and raised their prices - to pay for Xstreet!

FlipperPA Peregrine

Tycho, you're reading too much into it, my friend. Linden Lab is profitable. In this economy, they're a success story. They employ many brilliant people, but need to find a new organization that scales - and that doesn't even mention the tech issues they face.

The cash on hand required to acquire XStreet and OnRez are pennies to them.

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