Five Billion Dollar World? Recent purchase suggests Second Life more valuable than World of Warcraft (Updated)

I'm not a financial expert, but this passage from TechCrunch astounded me, then got my gears spinning:

Jed Smith, the Catamount Managing Director who sits on the board of Second Life’s parent company, Linden Lab, confirmed today that they did sell part of their holdings - 10% - to a third party eight months ago. But he would not comment on the price of the sale. A source with knowledge of the company has said it was well above half a billion, but declined to name a specific price. [emph. mine]

Simple arithmetic suggests that if 10% is worth half a billion, then 100% of Second Life is worth... $5 billion.

To put that figure in perspective, consider: in 2003, French media conglomerate Vivendi attempted to sell their Vivendi Universal Games division, which includes, among many other assets, Blizzard Studios, enormously successful producer of World of Warcraft, which launched in 2004.  According to Games Investor, here's what the market offered for the entire thing, despite Vivendi's own suggested valuation of $1.6 billion, and despite high expectations for WoW:

Although numerous interested parties had conducted due diligence on VUG, few formal bids were thought to have been submitted and none that reached Vivendi's minimum $800m let alone $1.6bn.

Of course, four years and nine million WoW subscribers later, that valuation is sure to be much higher.  But even if it were 300% more than Vivendi's 2003 asking price, Second Life would still be worth more, at current market rates.  Open question to readers:  Do these economics make sense?

Update, 11/7: Yesterday a Linden PR rep wrote to point out that the 10% sold for $500 million represents 10% of Catamount's holdings in Linden Lab, and not 10% of the company.  So once again, simple math suggests that half a billion bought less than 10%-- and therefore, if Techcrunch's source is reliable, Second Life is worth considerably more than that half billion.  As to how much of the company Catamount owns, the Linden rep declined to answer.

Update 2, 11/7, 4:00pm:  I should add that I'm hearing skeptical rumblings from several insiders over the $5 billion figure.  Perhaps, for example, the Techcrunch report is inaccurate, and the $500 million figure refers to a valuation of all Linden Lab.  I'm attempting to check with Catamount now.

(First image of a future Second Life by Torley Linden.)

Comments

[Gwyneth Llewelyn]

Oho! Who's the lucky "third party"? :)

[Tateru Nino]

I think that these days 51% is considered to be as good as 100% (and considerably cheaper). That's still 2.5 billion plus change.

[Elfod Nemeth]

This could simply be a long term investment. They could have simply leveraged an investors rabid? desire to be part of SL/LL before the explosion of adoption (virtual world event horizon?) and if Linden weren't actively looking for any investment/divestment they could have asked an outrageous price if an inquiry was made.

[Tenshi Vielle]

Wow, do you think they could spend part of that to give us some customer service, beyond sims and sales?

[Takuan]

The amount of money spent seems to me to be way out of proportion to the amount of value I see in Second Life.

Second Life has a lot of potential, and could be something very much bigger than it is now, but I'm starting to have very serious doubts that this potential will ever be realized.

[Simone Brunozzi]

Hi there,
I also calculated a total of 5 billion, but I think that this is exaggerated. Here's why.
Consider number of REAL users (not 10 millions subscribers, but about 1.5 million active users), the value of objects created in SL, the hype, and the investments from big firms to small companies... All together, this can't really be 5 billions, but something probably between 2 and 3 billions.

[Joey Seiler]

I think the valuation could be higher than that, Hamlet. I spent a while trying to figure out if I was reading it right, but I think it's that Catamount sold 10% of its holdings in Linden Lab, not 10% of Linden Lab. Catamount was one of the earliest investors, and there's only 21 (I think) equity holders overall, so Catamount probably has a significant stake in Linden. But the $500M still sounds like it was for less than 10% overall.

I'm also not a financial expert, though, so I'd love to hear anyone correct me.

[CyFishy Traveler]

Well, keep in mind that just because somebody PAID that kind of money, it doesn't necessarily mean that it's WORTH that kind of money. It's simply what one (as yet anonymous) investor was willing to pay. Surely anybody who remembers the dot-com boom and bust (or, for that matter, the more recent real estate boom and bust) should know something about the risks of overvaluation.

I think that Second Life needs some serious stabilization before it can be considered worth that kind of money, but that's merely my ground-level opinion.

[ragenomore]

Regarding the "worth" of Second Life... If everyone stopped "playing" it would be worthless.
So much for the billion dollar investment.

[Mick]

Maybe they paid in Lindens.

[Vint Falken]

Ragenomore, the same goes for all companies. If everybody would start to dislike dark colored sugered soda's, what would happen with the value of Coke?

If everybody started to dislike watching television, what would happen to the value of CNN? And some major electro corps too.

Neither of those are 'needed' to live either. I think LL has a good chance at staying interesting & in business, although some things should change... But that's with all good products, they constantly evolve. (Or at least the way they are 'sold' to us evolves.)

As for Mick: LMAO. =d

[Dirk Singer]

Just by way of comparison, remember that Murdoch's News Corp paid "only" $580 million for the whole of MySpace two years ago.

At the time, MySpace had 22 million odd registered accounts, more than double the number of current SL residents.

[csven]

Surely anybody who remembers the dot-com boom and bust (or, for that matter, the more recent real estate boom and bust) should know something about the risks of overvaluation.

Overvaluation is, by default, risky... for someone. One doesn't need to pay attention to anything to understand that logic. Good thing considering that anyone who's paid recent attention to studies of the so-called "dot-com boom and bust" is aware that quite possibly it wasn't nearly as bad as generally perceived and often cited:

"the survival rate of dot com firms is on par or higher than other emerging industries" - Was There Too Little Entry During the Dot Com Era?

As the rest, I think Vint does a good job pointing out the lack of consistency in people's thinking (and attitudes). That gives me time to go bid on a $3 baseball that just happened to be in the right place at the right time. Just hope it doesn't wind up in six figure territory like Bonds' 715 home run ball. I might have to sell some organs then. But at least I won't have to explain myself.

[Tateru Nino]

The busting of the "dot com" boom mostly wiped value off of existing telecommunications and media companies, as I understand it - with most of the new dot coms having about the same success/failure rates as regular startups.

[csven]

That's also how I understand it. But the general perception ("conventional wisdom...") often seems to be that the dot com overvaluation was corrected through a much more serious collapse; including a higher business failure rate ("...about the pervasive failure of internet firms"), thus making the "risks" seem more ominous and somehow especially worth remembering. According to this report, they weren't. The risks didn't really change. What appears to have changed was the general acceptance that a GBF strategy was *the* path to success.

In this respect, our results support Hendershott (2004) who, analyzing the financial performance (as opposed to survival) of a portfolio of over 435 Dot Com VC investment targets, finds that $1 of VC funds invested in Dot Com firms from 1995-2000 is worth $1.8 at the end of 2001. ... However, by analyzing a broader range of startups and looking at survival as opposed to returns, we find Fact 3, which together with Hendershott's results, suggests that while the opportunities pursued after 1997 were inappropriate for the GBF strategy, many were still viable.

So there were avenues and opportunities available to investors. That they weren't pursued is, according to the authors, partially the fault of the popular press.

Finally, we also suggest that it is unlikely that such large bets would have been undertaken if conditions under which academic theories of increasing returns to scale and preemption had been more accurately and thoroughly represented in the popular press.

Given the extraordinarily poor coverage of Second Life and the abundance of uninformed comments I read on a variety of websites, I think it's better we remind people that rather than remembering the dot com bust, they instead remember the fundamentals. Because afaic, the biggest risk is relying on the main stream media to inform us instead of doing one's own homework.