For the longest time, Linden Lab's health as a company seemed certain. Even after the hype wave of 2006-2007 had passed, Linden executives claimed the company was profitable, and said so as recently as last October, doing well at the height of the recession, earning it a spot among Silicon Valley's top 25 start-ups. "We're reinvesting our profits to further enhance the Second Life experience," Linden CEO Mark Kingdon told Computerworld then. "We currently have 330 employees and are actively recruiting for 70 positions over the next 4-6 months."
Eight months later, however, after some ominous hints, 30% of Linden Lab's labor force was suddenly gone.
What went wrong, and where's the company going now? I've talked to a number of inside sources on background, done a lot of research on my own, and a general picture has emerged. Perhaps ironically, no one I've talked to has pointed any blame at Second Life's internal economy, or the state of user-generated content in SL. Second Life's dedicated community of users remains strong, and the best, perhaps last hope for the company that serves it. If Linden Lab is to regain its luster, it will only be through the talent and dedication of the Residents who have made Second Life among the most remarkable and inspiring user-generated content platforms on the entire Internet.
So what brought Linden Lab to this point? I see five key factors, which are actually symptoms of a much larger, overarching problem:
Failure of Viewer 2 to Increase Adoption
While Second Life has grown its userbase since Viewer 2 came out in February, the additions have been extremely modest, perhaps less than 50K active uniques. (And in any case, the Lindens attributed last quarter's growth not to the viewer, but to advertising and James Cameron's Avatar.) This despite what must have been a sizable investment of resources to develop the software (which I admired at launch, but believed would not contribute to mass market adoption.) Probably in direct consequence, Chief Product Officer Tom Hale, who led development on Viewer 2, left the company last week.
Failure of Second Life Enterprise to gain traction
As evidenced by the shuttering of the Enterprise division, sales for a "behind the firewall" Second Life solution have been modest at best. (Many of my readers and I were skeptical a substantial market for that service existed in the first place.)
Probable Loss or Waning of Company Profitability
As journalist Mitch Wagner noted, Linden execs have claimed company profitability for many years, but last week, Kingdon declined to say if that was still the case. In all likelihood, this is because the revenue gone into developing Viewer 2, Second Life Enterprise, and Linden's rapidly expanding labor force have deeply cut into earnings.
Frustration by the Investors (For All of the Above)
Looking at these blows on the company balance sheet, Linden Lab's investors almost certainly clamored for drastic action to staunch the hemorrhaging. Any plans to launch an IPO in the near future (and there are rumors one was originally planned this year) were now off the table, which meant preparing for other alternatives. Which brings us to the final point:
Cost-Cutting Plan Implemented by the New CFO
A new CFO, Bob Komin, was hired in January, roughly nine months after John Zdanowski left that position in March '09. As it became clear that Linden Lab's investments in the new viewer and Enterprise were not yielding great results, the CFO was probably tasked with making drastic cuts to return the company to a more solid revenue base. My sources also believe Linden's management and board is grooming the company for eventual acquisition by another company, which would give Linden Lab's investors a liquidity event that an IPO (now highly unlikely any time soon) would have provided.
I've contacted Linden Lab to get their feedback on all this analysis, by the way, and believe a response from Mark Kingdon, which I'll publish here, is forthcoming. [Update, read it below] In any case, when you consider all the five factors above, what's clear is that Second Life as an internal economic system remains relatively strong, and the shortcomings lie with external company decisions. (It would be ironic if the latter negatively impacted the former.)
But as I said at the start, these are five symptoms of a much deeper, more pervasive problem, one that is not just Linden Lab's alone. I'll talk about that in a follow-up post.
UPDATE, 3:00pm: I sent my analysis to Linden Lab CEO Mark Kingdon yesterday, who just sent this reply in response:
"We too have heard these interpretations but in truth this restructuring was entirely strategic in nature, and was the result of our desire to be more nimble, operate more efficiently and be able to focus on our core consumer business. As we mentioned in the press release, the efficiencies mean consolidating our software development in the U.S., combining product and engineering teams which were previously organized functionally, and streamlining our customer support.
"The fact is our underlying financial health is very strong. We’re on pace this year for record revenue, record user numbers and record user-to-user transactions – among other positive indicators.
"Linden Lab is 100% focused on delivering an extraordinary virtual world experience and all of our work is pointed in that direction."