How Much Is Linden Lab Making From Second Life, Anyway? (Updated)

For a rough guess, how's somewhere in the range of $40-50 million this year sound?  [10/29: See update below-- WJA] During a recent broadcast of the Metanomics show, company CFO Zee Linden (John Zdanowski) made an impromptu appearance (part one here, part two here) to refute downbeat analyzes of Linden Lab's financial prospects by insisting that the situation "is far from dire", describing the Lindens as profitable.  (A claim often made by outgoing CEO Philip Rosedale and many of his staff.)

But how profitable?  The company is privately held, and thus under no obligation to publish its earnings.  But the thing is, Linden is transparent enough with its core revenue sources on its Economic Stats page, its usage stats, and its pricing guidelines to make an educated guess.  (And I stress this is just a guess based on known variables.)  I welcome corrections and amendments, but here's where that very broad $40-50 mill calculation comes from:

Linden Income

There's currently 14,597 islands, and they make an average of $1200 for the sale of each; they charge $295 per island per month for land use fees. (I say average, as island pricing has fluctuated recently.)  So about $17,500,000 for the island sales, but that's a one-time fee. 

Recurring income is around $4 million/month in island land use fees.  The Lindens also charge land fees on the cheaper, Linden-controlled mainland continents, and that's maybe 30-40% of the total land mass, so say $2 million/month more. Add the island sales and commission revenue from L$/US$ transactions, plus the 92,000 Premium account holders paying $10 per month for another $2 million total a month.  All that tabulated, $8 million a month gross seems like a safe (if very sloppy) guess. 

Add that all up and you get around $96 million total gross income this year.  But how much of that goes into expenses?

Linden Expenses

There's currently about 250 employees, so at an average of $100,000 a year each, that's $25 million.  There's five offices (San Francisco, Mountain View, Seattle, Boston, and Brighton Dover, UK), so let's assume rent and related building/infrastructure expenses come out to $5 million. 

The next big cost, of course, is running the Second Life grid, and last March, that was embodied on 2000 servers; the land mass has more than doubled since then, so let's assume it's about 4000 servers now.  How much does it cost to maintain a grid of that size where user concurrency goes from 20,000-70,000, with each user streaming, say, about 50 megs of data per hour?  I ran those back-of-the-envelope numbers past a Silicon Valley veteran, and he estimated $10-20 million.  Since the company also has a co-location presence in Texas, let's go with $15 million. Toss in another $5 million for other various and sundry company expenses (publicity, legal, insurance, etc. etc.)

Add all the expenses together, and we're looking at $50 million per year. 

Subtract that from gross income, and you wind up with $46 million, hence my $40-50 million estimate window.

As I say, this is an extremely rough guess, and I'm far from an expert on company management, and it's very possible I've miscalculated and/or omitted important variables.  I'd love to see alternate estimates in Comments, and invite other bloggers and journalists to do so, too.  As Zee Linden notes, Linden Lab is one of the most transparent private companies out there, and seeing as how many Residents depend on its success for their own livelihood, it's crucial to begin thinking about those bottom line terms.

Update, 10:30pm:  Bumped up.  Simeon Brunozzi of Second Life Pros thinks the profit margin is more like $40 million a year.  She may be right-- in Comments Prospero Linden notes that there are now almost 5000 servers running the Second Life grid, not the 4000 I assumed in the tally.

Another thought:  Given that land fees and Premium subscriptions are the lion's share of the Lindens' revenue, and assuming the $96 million gross is accurate, that means 92,000+ users are paying the company an average of $1000+ each per year.

Update 2, 10/29:  When I put this $40-50 million profit figure to new CEO Mark Kingdon in a July interview, he told me, "I won’t say [how much], but it’s not that high, although we are profitable and generating positive cash flow."

Comments

[Simone Brunozzi]

Hi Wagner,
my extimate says 40 M$ per year; I explained everything here:
http://www.secondlifepros.com/linden-lab-earns-about-50-millions-usd-per-year-or-40/

Let me know what you think about it.
Thanks!

[Hal]

Philip Rosedale just claimed in an interview with The Guardian (UK paper) that SL currently runs on 18,000 cpu's - i think they're mostly 4 cpu's per server? So you're maybe slightly short - it would be 4500, but certainly close enough to make the point.

The full interview (complete with yawns!): http://www.guardian.co.uk/technology/audio/2008/may/04/philip.rosedale

[Prospero Linden]

I don't think this is a secret -- and, if it is, can I have a job -- but the number 4500 running servers is pretty close to reality at the moment, but 5000 is even closer to reality. We do have some spare machines out there, as we're selling land all the time, and want to have some spare capacity to handle it.

Don't ask me to confirm or deny profit or loss numbers though, because (a) I know better than to say, and (b) I don't even know the numbers... I'm too busy keeping track of servers.

[CyFishy Traveler]

I think you may be running a little high on the Premium membership income, though, since not everybody does the month-to-month $10 rate. You might want to round down to account for folks who pay quarterly ($7.50 a month) or yearly ($6.00 a month.)

[ArminasX]

And don't forget the weekly stipend to premium members! I suspect this is a typical scenario: user pays an annual membership of $6/mo (as CyFishy points out above), and receives a stipend of L$300/week. If we assume the L$300/week is approximately USD$1.12, then the real cost of premium memberships is USD$72 minus USD$58.65 = USD$13.35, or a mere USD$1.11 per month! So, the 92,000 premies could be generating as little as USD$102,000 per month, far less than the USD$2M above. Of course, this depends on how many people pay annually or quarterly. Let's just say that the premie income is going to be less than the USD$2M.

Great analysis, Hamlet!

[Tateru Nino]

Way too high on the staff. Some staff earn as little as about $12,000, based on what we've been told by Linden Lab.

As far as we know, the lab pays well below market.

[steveclark]

Interesting article; thank you. One suggested amendment - in the UK, Linden are based in Brighton, not Dover. Brighton is hip and expensive; Dover is the opposite.

[Hamlet Au]

Ack, thanks, fixed!

[Erasmus Hartunian]

I get paid to be a paying member! (US$72 per year - old stipend of L$500 a week = profit) in addition, the referral L$ I receive are greater than the stipend and I am sure I am just small fry referral. So, total commissions paid to members has to amount to a few millions per year.
Average employee cost is probably about right at $100K per year considering social costs (they do offer a decent health plan, right?).
All told, I would agree with the $40-50M ballpark figure.
... Thinking about referrals: With the new trademark rules in effect, that could drop significantly in the future ... along with the associated income.

[Wordfromthe Wise]

I think you have to add some US$ for all those texture uploads (which are each 10Lindens).. But i cant estimate a number for that. Anybody wants to throw in a number ?

regards
Word

[Dep1050]

Hi Wagner.

I think that you, but also Simone, forget the monthly expenses from "Unique Users with Positive Monthly Linden™ Dollar Flow (PMLF)".
Simply, consider, the users with PMLF > USD 5000 that are 156,155,165 in 2008Q1.
Therefore, at minimum limits...

5000 US$ x 150 users = 750.000 USD.

Is impossible to know how of this is reinvested in the internal economy,
but if is only 1/3, this means that you must consider ad additional US$ 500.000 monthly cost for LindenLab. In this rough approximation, US$ 6 million in one year....

Regards.

Dep1050 Plasma

[Nexus Burbclave]

That is an interesting back of the envelope calculation. I don't have a better estimate, but this does give me pause regarding the IPO rumors. Wall Street is notoriously short-sighted. If your numbers are indeed in the ballpark, the street will want to see triple that number by year two or the stock would likely free-fall. If LL wants to give the company and the platform the long term focus that is needed for an emerging technology and an emerging company, I believe they would do well to stay private for a while.

[T_S_Kimball]

I have to agree with Tateru's statement - you should probably cut the staffing figure by at least a third, from what I've heard (if this has changed, they should be blasting that on the employment page front and center - but the fact that positions posted well over a year ago have not been filled ring much louder).

Erasmus - If I realized that was the case (even at a paltry $24 profit) I would not have dropped my account to Basic. Note that figure of L$500/week only applies to older members (as of Nov-06 it dropped to L$300, which comes out to US$59 in L$ for the year).

Before anyone considers upgrading old accounts, they count the time you last upgraded (so today I would get L$300 instead of L$500 - which isn't worth it).

--TSK

[Patch Lamington]

Giving out stipends doesn't cost Linden Lab anything. Residents with postive monthly linden $ flow doesnt cost the lab anything (it is other residents buying those Linden$ - and paying them to the PMLF winners).

But the income source missed are sales of newly minted L$. In April Supply Linden sold 159ML$... at market sale prices that is US$0.5 Million.

So another 6 million US$ income a year... ca-ching!!!

:-)

[Annon]

It's not that much. The lindens are seeking investors. If that's the case, they're not "banking" like you all think.

[Bettina Tizzy]

Just came across this. To the chatter regarding employee salaries, don't forget that it costs a company a good deal more per employee than the salary, though I have no idea what LL's benefits package looks like. We can assume health insurance, and possibly a 401K plan. The average in the U.S. oscillates between 30% to 40% over salary.

[401k advisors]

Bettina, are you sure about 30 to 40 percent? I always thought it hovered around 25 to 28 percent, but...I suppose my information might be a touch out of date, lol. Whats your source? I might have to go diggin...