Why does Second Life need Facebook integration, point-and-click movement, and other features that much of the existing Residents resist, even though they might help grow SL’s userbase? After all, a counter-argument runs, Linden Lab is profitable now, so the company should just devote its resources to serving and retaining the existing userbase, rather than chasing after a new audience. That might make sense, but here is the harsh reality:
There are not enough paying users now to sustain Second Life in the medium to long term, and the customers who pay the most are the most unsustainable.
Here’s why. Take a look at this very rough estimate of Second Life’s existing yearly revenue:
How do we know this? In a recent press release, Linden Lab reported it had "revenues exceeding $75 million a year." To make an educated guess on where that revenue is coming from, I turned to Tyche Shephard and her invaluable website Grid Survey, which gathers publicly available data on Second Life land. Her site reports that revenue from private estates (i.e. islands) now represent about $5 million a month, while mainland land revenue represents about $1 million a month. If you annualize that out, it comes to $60 million a year from private estates, and $12 million a year in mainland revenue, for a total of $72 million a year from land tier payments. So that suggests the remaining $3 million of Linden Lab’s $75 million in revenue comes from Linden Dollar sales commissions, Premium account payments, etc.
Now again, this is just an estimate based on what Linden Lab has publicly reported, and the data Grid Survey has gathered. (And my extrapolation of Tyche’s data is mine, not necessarily hers.) I welcome corrections/expansions in Comments. But I think this is a fair guess at Second Life’s revenue base.
Now let’s break down how many people are paying that $75 million:
- About 5,500 Residents pay Linden $60 million a year for private land
- About 67,000 Residents pay Linden $12 million a year for mainland land
- Less than 485,000 Residents pay the remaining $3 million a year
The 485K number comes from Linden Lab’s last SL fiscal report of Residents who participate in the in-world economy. I got the estimates of land owners from Tyche; read below for how she makes that calculation.
So the vast majority of Linden Lab’s current revenue comes from about 5,500 Residents. That averages out to around $11,000 per private estate owner, some paying more, many paying less. It should now be clear why this revenue is unsustainable. There are all kinds of reasons for these private estate owners to eventually stop paying this much money for virtual land. Among them:
- Stagnant In-World Economy, i.e. “I’m not making enough L$ to cover my tier.”
- Natural Attrition, i.e. “I’m too busy and spending too much money to keep owning a Second Life island.”
- Organizational, i.e. “Our company/school/non-profit is making cutbacks or changing its direction, so we can’t maintain our SL presence any longer.”
And so on. More concerning, it’s highly unlikely these departing landowners can be replaced. As server costs continue going down and cheaper alternatives like Kitely and others appear, the market for people willing to pay thousands of dollars a year for virtual land in Second Life becomes vanishingly small.
So this is the slow lingering death by a thousand cuts I mentioned last month. (Or more precisely, death by 5,500 cuts.) Every loss of a Second Life sim represents a huge, irreplaceable loss in revenue for Linden Lab. (“The NET loss of private sims last year was 46 regions.” Tyche tells me.) It’s not public knowledge how much profit Linden Lab currently makes from Second Life, but a reasonable guess is $5-12 million a year. And when the attrition of private landowners begins cutting into that profit, and if that revenue is not replaced by other streams, it’s likely Linden Lab’s corporate owners will begin taking drastic measures.
And this is why I worry so much about existing Residents’ resistance to change. Every day I read a Resident blog post or forum comment complaining about Linden Lab’s pursuit of new users, when the existing Residents are the ones who keep the company going. But the hard fact is there’s not enough of those Residents now to keep Linden afloat two, three years into the future.
So yes, Second Life needs mass growth to replace the inevitable implosion of private island revenue. And getting mass growth almost surely means a radical re-invention of what SL is, and who it’s for. A Second Life that looks less like a user-created platform populated only by anonymous avatars, and more like a game with social media integration that resembles The Sims or even, yes, a Facebook game like Pet Society or YoVille. That doesn’t mean Second Life needs to stop being a user-created platform with anonymous avatars -- just that we need many, many, many more users for whom that aspect of SL is a distant or even unknown feature. (At least when they initially enter.)
But here is the good news: Linden Lab is already moving in this direction. The current emphasis on virtual pets is a smart bid to get more non-land revenue and new users who are more familiar and comfortable with casual Facebook games, than a virtual world. And here is the better news: If Linden Lab can find millions of new users, and stabilize its revenue base, we’ll probably see a slow movement back to Second Life as it was originally conceived, and what most of us want: A world where people can be or create whatever they want. But the first goal now is getting enough people in that world -- and paying enough money, to make that world sustainable for years to come.
Tyche Shepherd on Second Life land revenue (and again, my interpretations of her estimates are mine alone):
“US$5million per month is a good estimate of Private Estate Tier assuming List Prices and known Grandfathering rates. It doesn't take into account any Educational Discount still left or any special deals... The Margin of error is +/-$61,000 so it could be as high as $5.1M . It also excludes any private grids left over from projects like Nebraska.
“There is also another US$1.01M covering Mainland Tier per month for the 66813 separate accounts who own Mainland (that's a combination of groups and individuals) - this is just the land tier above their free allotment and includes any Linden home ownership but doesn't include any Premium Subscriptions.
“Unlike the Mainland figures which are exact as they are based on a census - the Private estate figures are based on my monthly surveys of 5000 regions so have a margin of error . Actual number of individual owners is hard to judge but a top figure is around 6000 (My estimate makes it no more than 6300.) However this really is a maximum figure. Taking into account various factors such as the 13% of the grid closed to the public being weighted towards Educational regions and various other figures an educated guess would be about 5000 to 5500.”