Thursday, January 12, 2012

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Second Life Lost 879 Private Sims and $500K to $2M in Revenue in '11 -- I.E., Why Tier Costs Won't Likely Lower

AM Radio Second Life

Second Life lost 879 private sims in 2011, according to Tyche Shepherd's indispensable Second Life economic analyses. I double-checked this data with her, and this amounts to a drop in total land revenue for Linden Lab from about $62 million in 2010 to about $60 million in 2011 -- or, accounting for other factors, a likely annual revenue loss between $500,000 to $2 million.

I checked these figures with Linden Lab, and spokesman Peter Gray told me this:

"As a private company, we don’t disclose financials, so we're not able to go into details for questions like this. The change in private estates last year represents only a minor portion of total land in Second Life, and land revenue itself is only a portion of our total revenues. As a result, the impact of changes like this is diminished and can also be offset by changes in other revenues." Likely that would include monthly Premimum subscriptions, which are probably rising (though the company hasn't released figures on that.)

In any case, this again emphasizes two interlocking points I brought up in 2011:

  • Linden Lab's land revenue model is not sustainable, and needs to be (gradually) replaced. And to fully replace it, SL and Linden Lab probably need mass growth far beyond its existing userbase.
  • While SL landowners complain about the existing land tier they are paying now, it's very unlikely Linden Lab can lower tier prices, without jeopardizing their profit margin. About 500 SLers -- i.e. the largest SL land barons -- are paying 73% of SL's total land revenue. If they were to receive a tier discount, the total revenue loss for Linden Lab would be drastic.

Read all of Tyche Shepherd's report here. And be sure to follow her Twitter account for updates.

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Ann Otoole InSL

Eventually the addicted creators wake up and close. Why bother when 100% of income goes to LL for tier? LL knows the end is coming which is why they are bailing out to mobile apps.

Johann

Right. The end is coming. The sky is falling. Heard it all before.

Dartagan Shepherd

"The change in private estates last year represents only a minor portion of total land in Second Life, and land revenue itself is only a portion of our total revenues. As a result, the impact of changes like this is diminished and can also be offset by changes in other revenues." Likely that would include monthly Premimum subscriptions, which are probably rising (though the company hasn't released figures on that.)"

How much loss is part of the issue, that it's a constant, slow and steady decline is the other part of the issue.

And they've already been raising prices over the last years steadily and more are coming. These are called sinks.

Most people are ignorant of the fact that sinks "are" revenue. Linden dollars are bought, go into a pool and all sinks combined are the amount that LL gets to keep in the name of "economy".

Sinks when you put money in, take it out, advertise your parcel, upload an image/animation/audio file, advertise your parcel in search, classified ads, etc.

The two newest ones are pushing everyone toward the Marketplace and then taking a 5% cut from all sales, and higher upload fees for mesh.

More sinks are likely to come in 2012.

Add up all these sinks combined, assign them the USD value that it cost for people to buy those Linden Dollars that the sinks come from, and you will have your extra revenue stream that is probably far greater than premium account revenue.

It's amazing how many people don't get that.

You pay real money to get Linden Dollars, LL finds as many ways as possible to keep those real dollars in sinks from that global pool.

The mesh sink is a double bonus, not only do they get to keep the money bought that get spent on mesh uploads, but they get to penalize content by mesh being more costly for larger size objects, and penalized more if they have scripts in them.

So mesh not only sucks money (new revenue stream) from a fake economy, but imposes calculations that can then later be applied to regular prims, thereby reducing LL costs for content and hardware resources.

People really don't get that sinks are a revenue stream and one of the largest ones. Sinks are the money you get to keep after you charge them to buy tokens with real dollars.

Ciaran Laval

Right, lowering tier without engaging in other income streams is a recipe for disaster, but they need to start getting creative here, whereas the drop in the number of sims is far from a disaster, tier costs themselves are a barrier to widening appeal.

They don't even need to change existing tier models, they could add more land options, change the way tier works for a second mainland sim, at the moment if someone with a full sim wants 1024m, they get dinged for a half sim tier increase.

They could also look at introducing shared billing for land, allowing people to donate their tier free land to private estates or add more levels of premium membership for differing fees and differing perks. Whatever they do, standing still is not the way forward.

Maggie Darwin (@MaggieL)

"The change in private estates last year represents only a minor portion of total land in Second Life"

Yeah, there's a metric butt-load of vacant and abandoned mainland, along with land owned by lifers that haven't logged on in two years.

Ciaran Laval

@Dartagan sinks only work if the other shoe drops, that's people buying Linden dollars, land tier is straight, direct, income.

Ezra

Without providing the math of what 1 simulator costs to host, you'll never convince anyone $295 is the absolute minimum Linden Lab can charge to retain profit.

There's other reasons Linden Lab won't lower tier costs, and I think its because they still foolishly believe region counts can grow again and maybe one day a big company like Microsoft will find it appetizing again to rent clusters of sims for hundreds of dollars a day.

Pretty soon though, Linden Lab will have to turn an eye to their true customers, the average jills and joes that just want to create at price points crafted for them and not Intel or IBM. Or well, the bleed will continue and Second Life will fail.

Marianne McCann

Me, I would point more at issues with Governance/Support and Community Management. These departments have been largely gutted, it seems. I can point to (admittedly) minor Governance issues that have sat for months, after scores of abuse reports. Communities that used to get regular attention now are told to use those same channels (leading again, to reports that sit for months) and are given only the Destination Guide as an avenue for promotion. It becomes frustrating to work with the lab to try to improve things when the lab just isn't there. As such, i really can't blame people for bleeding off.

Dartagan Shepherd

@Ciaran ... I know that's kind of off topic in land, but going to show that sinks are also a direct revenue stream.

Which also shows that yes they have enough revenue streams that most people don't even realize.

Sinks are one reason that shows the enormous amount of money they take when you combine all costs.

Given that, they most absolutely can afford to lower tier. They get millions from land, millions from sinks, who knows how much from premium, less I imagine.

They're not paupers, they're greed riddled at this point and taking more each year in one form or another.

And all that from a demographic that they know contains a pretty high ratio of low income and free users.

Someone made a comment recently that LL is a just a predator for low income, the rural and the unemployed. While that's a bit harsh, it's also not far from the truth.

They could cut costs literally in half and make a profit if they were willing to do so. They aren't. More costs keep coming, and the perceived value continues to erode in these REAL economic times.

Ann Otoole InSL

@Dartagan Bill Gurley will carve LL up and dump it for pennies if it is not turning a worthy profit. LL must be making some serious cash if Gurley is not shuttering it. The moment LL fails to pay Gurley's sushi bills is the day LL disappears.

Dartagan Shepherd

@Ann That one I've never done much homework on, but will do.

Agree though, that there's not an interest on the investment level unless the reward is as substantial as it is today.

One can only wonder how much Will Wright bought in for. Ah well, another mouth to feed for users.

Henry

I think there is a simple reason for the loss of land: The Second Life Marketplace. A huge amount of creators sees just no reason for having a big shop anymore. I myself sized down from 16.000sqm to 6000sqm. About 80% of my sales are in Marketplace now, where the Lindens charge a commission, so the earnings might not be lost, but just shifted. What is lost, is the shops of many resellers and affiliates. This comes not only from changing shopping habits, but also from the uselessness of the new classifieds.
Another reason for the loss of land is OpenSim. I know a lot of people that have not left SL, but sold their land in SL and bought land in OpenSim worlds.

Rusalka Writer

Why I own a sim in InWorlds. $75 a month I can manage. Especially for 45K prims.

Ann Otoole InSL

oops! http://www.washingtonpost.com/business/technology/us-video-game-sales-drop-21-percent-in-december-as-consoles-reach-end-of-cycle/2012/01/12/gIQA7pAjuP_story.html

Looks like the money tree has begun to die. Now what will the big game maker players do for free cash?

biffingbiff

I just really hope that LL figures it out. It would be a real shame to see them fail after all of this time.

Alberik Rotaru

Let's see a company with very high prices and a shrinking customer base is convinced that lowering its prices would not expand its revenues. It is obviously better to maintain the high prices and lose more customers. After all there are so many happy precedents for this like the US auto industry which does so well against Japanese and Korean competitors that adopt the foolish strategy of lower prices. Oh wait...

foneco zuzu

And in fact what all this matter after 23th of january?
Right now im just trying to start a region on os grid, My server is out of USA so as soon as i figure how to make that happen (damn software refuses to let me tlpo to my region even if alreay shows in world:(, i can just forget about SOPA, USA crazyness if their citizens allow this to pass, and LL all together!

shockwave yareach

The problem is, LL is ALREADY giving discounts on tier -- but only to its closest bosom buddy land barons.

If they can afford the Atlas program for the land barons, then they can afford it for all of us. Otherwise we regular land owners are subsidizing the land barons who compete against us. And I for one don't care for paying Anshe's bills for her -- I have enough of my own, thank you. If LL can run Atlas and discount tier to the big outfits then your argument about "losing profit margin" is a nonstarter; it's already underway and somehow hasn't hurt the lab any.

Either give all of us the same discounted tier, or watch us take our losses and go. And you know perfectly well once someone eats a few K in loss, they will never be back again.

Ezra

"Losing profit margin" isn't even important.

It's common sense that if you reduce the price of something that costs the same amount to provide, the profit margin will shrink. So what? What about TOTAL profits?

Right now Linden Lab's profit margins are the same but total profits are down due to losing customers...why guard profit margins?

If their profit margins were for example 20% right now with 30,000 regions, what's the worth of retaining a 20% profit margin when there's just 5,000 simulators?

If anyone actually believes protecting profit margins is a good idea in this situation, how about actually INCREASING profit margins by hiking tier prices? Who cares about the amount of customers that will say screw it and drop their sims? Who cares if total revenues and profits drop? The profit margins are higher!

Come on. Citing "profit margins" is silly. I can resell a can of Coca-Cola and get a higher profit margin on it than Coca-Cola can. Doesn't make me Coca-Cola.

Linden Lab has to be of the opinion that if more people could afford land, they'd buy it. Lucky for them its evident by all of the customers the land barons have.

If tier was cheaper, renters of 1/4ths or homesteads would more likely become new owners of full regions. No harm would be done to land barons, because their costs would be reduced and they could double their offerings and provide current 1/8th owners opportunities to afford 1/4ths. It's an effect that'd reach all the way down to the new Second Life user that thinks L$800 a week is too pricey for a skybox but L$400 they're willing to do.

And with a lot more land being present, there'd be a lot more do and a lot more reason for new users to stick around.

But Rod and company refuse to connect such dots. Or maybe they're starting to. Dropping the ridiculous "setup fees" for a weekend was a start. Linden Lab will have to buckle further and stop pricing so archaic for server resources. They'll have to get in line with every other server host of the year 2012 and price customers fairly.

Pussycat Catnap

Having 500 people paying 73% of the tier bill is a problem. Its a disaster waiting to happen.

That's why they -do- need to lower tier, but at the low end only.

Cut the cost of the first two tier bumps in half. Cut the third by 25%. Leave anything above it untouched. Cut basic premium by 10%.

This will have the effect of the first tier bump - up to being able to get 1024, being just slightly higher than today's 512. So you'll get a spike in bump ups. Once people start bumping up they are more inclined to keep doing so.

Cutting premium by 10% also encourage that many more people to try it.

That would help shift the support away from 'Tiffanys' and over to 'Wallmart' as the model... Much better to have 1000 people give you $10 each than 10 people give you a $1000 each...

Pussycat Catnap

"Looks like the money tree has begun to die. Now what will the big game maker players do for free cash?"

Put out a new generation of consoles, and release 'Super Mario Brothers, the rehash, in true 3D this time, honest guyz, buy nao!'

Not to mention Link is due to get rescued by Zelda this time around...

That is until the SOPA freaks sue Nintendo for IP violations in using elves which are the IP of Santa's Village theme park. ;)

Pussycat Catnap

"Someone made a comment recently that LL is a just a predator for low income, the rural and the unemployed. While that's a bit harsh, it's also not far from the truth.

They could cut costs literally in half and make a profit if they were willing to do so. They aren't. More costs keep coming, and the perceived value continues to erode in these REAL economic times."

As someone who came from a ghetto... if they were predators on the poor, they -WOULD- cut costs in half or even more.

You get the poor by being cheap, suckering them in en-mass, and removing their ability to easily select alternatives. Just look at how fast food restaurants work and position themselves.

The poor don't shop at Tiffany's, unless they win the lottery... (another sucker's game to trick the poor into paying yet even more taxes than the wealthy do).

Pussycat Catnap

"at the moment if someone with a full sim wants 1024m, they get dinged for a half sim tier increase."

Or they get an alt and make it premium. ;)

Emperor Norton

Sounds like LL is still wrapping their heads around this basic equation.

Second Life is a game and people pay around $15 to play a game.

So get a $295 a month sim you need about 20 people willing to pay into the tier everyone month. like that's going to really happen.


Ener Hax

Doh! it was all good when SL was the only option. while OpenSim is not SL (and never can be), it's an option that suits many just fine and continues to slowly, but steadily improve

from 19 sims at $2,920 a month to 16 regions at $160 a month - that's one real customer's story

Sparks Racecourse

SL needs to offer the sim owners more regions, which will lower a sim owners overall costs. Second Life's competition (Open sim and blue mars) offer 32 regions size for the same price as 1 region in SL. Here is Linden Labs logic for mesh. Let's increase the Prim Equivalent for mesh, so people will buy more regions. Their next plan is to apply that streaming cost to sculpts. Oh, Linden Labs, I just sold my region today. I might reconsider if you adopt the same business model as your competition.

RobsterRawb Jaxxon

"Linden Lab's land revenue model is not sustainable, and needs to be (gradually) replaced. And to fully replace it, SL and Linden Lab probably need mass growth far beyond its existing userbase."

Agreed, I think linden labs should outsource land rentals to registered servers running closed source code and act more as a virtual world DNS. I think this would help solidify the company's foundation by having users invest in its relevancy.

With the boom in sheer numbers of registered sims on the grid following the change, the dynamically loading nature of sl and the developments in opengl compatible browsing I could see secondlife paving the way to the start of a 3D web. - Am I a dreamer?

Shockwave Yareach

@sparks; Yeah, our little island chain is about to lose another island. Not enough folks to cover the costs. Another loss of money for LL because they still haven't returned the fun to SL after attempting to turn it into a powerpoint presenter, and they still haven't grasped that the land costs too much. The deep pockets have been driven out by LL's incompetence and those of us who are left or entering won't pay top dollar for stuff we don't own and for a grid that only partially works.

Perhaps it is time to create a brand NEW grid while maintaining the old one. A new grid which fixes the serious problems of the old one and needs either a new viewer (for creators) or a web interface (for most users). A grid where sims can handle more than 100 users. A grid where sims are 512x512. A grid which when things go live are copied over from the existing grid. A grid where three continents are G, M and A entirely. A grid where the land is only 2/3 the current price. A grid where you leave the customers alone to enjoy their purchases. A grid where a simplified TOS doesn't scare people away. Where you actually deploy some of the lessons you've learned the past 8 years -- assuming you've learned any lessons of what works and what doesn't work.

What works is our having fun and enjoying ourselves. Unaffordable land and uberrestrictive rules about what we can't do with our own purchases don't make anyone want to hang around and do nothing in 3D space. We can do nothing in reality and do it for less. And we can also do more in Inworldz for less too.

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