Is Linden Lab Losing Land Revenue Due to the Recession? Only Like It's Causing AOL to Lose Dial-Up Subscribers

Linden Lab has lost over $1 million in annual SL land revenue so far this year, as I reported last week, but Inara Prey of Living in a Modem World doesn't think this is as much of a concern as I think it is, because she believes the real world recession is a chief culprit:

Right now, we’re in the midst of a prolonged global economic downturn... the recession is responsible for at least some of the shrinkage we are currently seeing. One sees little sign of this in the NWN article.

There's a very good reason for that: Attributing the loss of virtual land revenue to the real world recession would be like blaming the recession for the decline of AOL dial-up subscribers. Here's why:

Both virtual land and dial-up are fundamentally outdated revenue models in a current economy where there are so many cheaper, freer, and often better alternatives. In 2004 when Linden launched its land-based revenue model, server prices were costly, and cloud deployment wasn't commercially feasible. That situation has drastically changed since then. You can now run an OpenSim grid on the Amazon cloud for $100 a month, versus $300 for a private SL sim, and looking in general at OpenSim grids, which are far cheaper to own and operate, they are rapidly expanding while SL land declines.

To be sure, it's true that the recession is a catalyzing factor for land loss, but it's not a necessary or sufficient condition. After all, if Second Life were still rapidly gaining users, as it was in 2006-2007, there would be more paying customers to offset tier prices. However, even strong user growth would only slow down the land loss, because the fundamental contradictions with the revenue model would remain. In 2004, there were no huge social networks, no iPhone, no Xbox 360, no free-to-play Lord of the Rings online, very few interactive entertainment alternatives for a potential SL land owner to consider. Now you can own a whole farm estate in Facebook... for free. (Not exactly the same thing as an SL estate, of course, but comparable enough for many. And, you know, free.) Were the recession to magically end tomorrow, this reality would still not change.

But here's another problem: Some economists believe we won't see a full economic recovery until 2017, and I believe even the most optimistic forecasts are in the 2013-2014 range. So if you believe the recession is the source of Linden's land loss, then that loss is likely to continue for many more years.

Interestingly, AOL gets 80% of its revenue from dial-up subscription, which is also the percentage Linden Lab gets from virtual land. Both companies are pivoting away from their respective models: AOL is trying to become a media destination site, while Linden Lab is trying to get more revenue through monthly subscriptions, and presumably, revenue from a new product. (As Inara rightly notes.) But make no mistake: It will take massive new users to replace that land revenue, and stabilize Second Life for the future. To think otherwise is like assuming people will keep paying for dial-up.

Comments

[Dirty Land Secret]

Land is virtual; we paid for all the servers already, so now all they have to do is cover the cost of electricity. Evidently there is plenty of electricity to support empty mainland still...

[Ehrman Digfoot]

This a playful, productive, and accurate analogy. I do wish they would reduce tier. I would be willing pay $100usd per month for a region . . .

I was also thinking about the post the other day concerning adding game mechanics and found myself wishing that if LL chooses to keep the land metaphor for pricing, in lieu of adopting a more graded data based payment system, that they at least consider adding elements that could increase the sense of contiguity between regions.

The new random landscape generation in minecraft 1.8 is amazing and gorgeous, why don't we have randomly generated world elements bridging regions, navigable oceans, creatures, land formations? Remember the 7 seas scripted fishing games that people had on their sims a couple years ago?

[Alberik Rotaru]

You could test the theory by surveying Australians because we did not go into recession. Anecdotally, I know a number of Australians, including me, have moved to other grids. SL will always be special but that is not enough any more to justify the level of tier charges.

[Hitomi Tiponi]

From a report on Edge in July 2011:
"Market research firm the NPD Group has released its report on the US retail videogame market for last month, and once again it makes for depressing reading: declines in every sector saw overall spending fall 10 per cent year on year to $995 million.
Hardware sales fell 9 per cent, to $366.6 million; software by 12 per cent, to $469.5 million; and sales of accessories slumped 11 per cent to $158.9 million."

The whole sector is declining, but just like EA has with the The Sims Social, LL is diversifying into other sectors. Changes in the revenue model may come, but I see no signs that SL is suffering more than anywhere else because of it.

[Ignatius Onomatopoeia]

/me gets out the salt shaker. Show me that wound, mister.

Glad to see you don't see we members of the SLexodus as "floundering in the free but pre-Beta shoals of OpenSim" any longer, Hamlet.

OpenSim grids, except the closed ones, lack a lot of stuff I took for granted in SL. Yet where I do my work now is good enough for my latest project. And I pay out of pocket for the service, something I never could have done for that many prims in SL.

My car payment for a Mini Cooper runs about the same as monthly tier or an SL region: Mini Cooper for the win.

That said, even my favored OpenSim Grid is not quite a world...more like a nice little college campus where a bunch of us have set up projects and have this wonderful guardian angel.

Our world and our imagination. That was what SL was once about. Can we keep that metaphor alive? No one would call AOL, Farmville, or even Facebook a world.

[Ezra]

Kill the abstraction of "virtual land" and what you're left with is simple web hosting, certainly web hosting isn't an outdated revenue model.

What IS outdated in the world of hosting providers is forcing customers to pay a once a month lump sum for every feature they need and don't need, for every hour they need and don't need.

With Second Life it doesn't matter if a private island has 10 visitors a month with only 1,000 prims used, it will still cost the exact same as a popular region constantly at peak concurrency, with everyone using voice and all 15,000 prims alotted.

I think you know your analogy doesn't stand up because you point out yourself that when "virtual land" is offered at a more affordable price (OpenSim on EC2), there's growth instead decline. That's nothing at all comparable to the fact we've been throwing away AOL and NetZero discs for a decade because we simply don't need or desire dial-up anymore.

Linden Lab isn't an ISP, they're a hosting provider very much like Amazon Web Services except instead of charging by the hour of CPU usage, GB of bandwidth or storage, Linden Lab still charges like a hosting provider from the 90's with 1 price point for a dedicated server.

There's no need for analogous business models. Use hosting provider business models to describe "virtual land" because that's all it is. The simulator is not unlike Apache and the avatar is not unlike an open connection lasting as long as a visit takes.

So, since you pointed out there's growth in less costly, less feature-filled offerings of "virtual land" (OpenSim on EC2), why not advocate Second Life be priced more like Amazon Web Services rather than try to push the idea that "virtual land", or rather web hosting is an outdated business model?

Fifteen years ago it wasn't odd that if we wanted a high traffic website we'd rent a dedicated server. Whether we needed all the CPU, storage or memory or not it was going to run us several hundred dollars a month at a fixed rate. Regardless if we ever saw a single hit on the website the price was going to be the same.

The way tier is charged today is EXACTLY the same. We get one CPU core for our region, shared storage with the global asset server, and whatever else composes the reality we're just paying for renting hardware.

What Linden Lab needs to do is not charge for renting their machine resources (virtual land) as if its the 1990s. Whether it's Amazon's Web Services, Windows Azure, RackSpace's Cloud Hosting or etc, we're now able to pay ONLY for the resources we need and ONLY when we need them.

What that should mean for a tier payer for example is if an event owner knows they only throw all day events on Friday and Saturday, they should have the option to shutdown their region and not be billed at the end of the month for the hours the region wasn't in use. That means if a sim isn't on at all during a month it costs 0 but could be spun online any time. That change alone would put an end to this site's "Sim Deathwatch".

Even for sims desirable to left open 24/7 like stores, if one of us as a sim owner never, ever uses Vivox's voice servers, we should have an option to reduce tier by ditching the option to ever check voice on. The same goes for physics, or scripts even. Anything with a checkbox in the Estate Manager that adds to the tier price due to presuming we're ever going to need them and so we we're given, and forced to pay for the CPU and memory necessary to use them despite never doing so.

"Virtual land" or web hosting isn't an outdated business model at all. The style of it of charging a fixed rate, fixed to a non-virtual all-or-nothing hardware configurations however is.

All Linden Lab has to do is charge the most only for the most use, and properly charge least for the least use. Not lump every tier payer in as the same. At the moment they aren't coloring the gray areas of actual usage and are forcing overpayment by everyone except maybe the top 10 adult sims.

So, hopefully they can fix that and offer more flexible and affordable "virtual land" offerings in the future.

[Orca Flotta]

Both virtual land and dial-up are fundamentally outdated revenue models in a current economy where there are so many cheaper, freer, and often better alternatives.

Are there? Really?
There is OSG, BM, Inworldz, a few other half baked copycats, but they all miss some thing or the other that makes SL so much more special and better than all of those "alternatives". There is no functioning economy in OSG, there is no 'create as you go' in BM, there are hardly any ppl in any of those grids. They all lack the other important part of SL, there are no communities!
They are like campuses where geeks and nerds meet to play around with new physic models and whatnots, but not real worlds.

All LL is providing us with is basically virtual land, it's at the very core of SL, it is what SL is made from. So in the context of a virtual world in my eyes it's the only feasonable revenue model. They have servers and renting out those servers to us, the users. Of course we all wish land prices would decline to an acceptable level but changing the very system, the basic idea of SL is still no way to go. There is no viable alternative in sight for this model.

And I gues owning/renting land in a top notch virtual world, which rides the wave of available hi tech, is a high demand for many if not most SL residents. So LL's business is vastly different from selling totally outdated dial-up connections. Comparing apples to pears again, Hamlet?

[Kim]

Why IS the tier so high? Has anyone ever explained that?

[Troy McConaghy]

Linden Lab's revenue from sales on the web-based SL Marketplace has grown substantially this year, simply because the total volume of transactions there has grown (and they get a cut of each one).

[Johnny alt]

@Troy
The Marketplace revenue is only growing because it's canibalising sales from inworld shops. Overall the SL economy is shrinking.

[Johnny alt]

With or without the recession Tier prices are seriously over the top. But with the recession these high Tier costs are truly rediculous.

Secondlife is not a Niche product. It's the current Tier costs that are making it a niche product.

If you price a product incorrectly for a market, it will not attain it's potential. And Tier costs are SO wrong, it literally is smothering what should be thriving, booming, new medium.

Secondlife is amazing. It has the potential to be the 3D web itself. We should have 20miliion active users by now.

I'm sure The Lab must be wondering why none of the good things they are doing makes any difference to concurrency and land ownership. The answer is so simple, everyone can see it apart from the shareholders of Linden Lab, or whoever the heck it is at the lab who's keeping Tier costs so high that they're constantly churning over and burning out their core user base, the people who love SL

The most important customers that Linden Lab are losing with their RESIDENT KILLING HIGH TIER COSTS are the already engaged, loyal, long term users - seriously interested fans of the platform themselves, who eventually just can't bare or justify the high cost any more.

It's all about perceived value.

Linden Lab are pricing themselves out of their own market.

[Alazarin]

Ezra, on the surface your suggestion vis-a-vis sims and tier costs seem to make sense. For island estates only. However it could not be implemented on the mainland for obvious reasons. What I think might work is a system whereby sims that are empty are relegated to a 'powered-down' status where they're visible on the grid [and you could visit at a moment's notice if you so desired] but not consuming as much cpu power [and electricity] as a fully occupied sim.

This would mean going from a static allocation of resources [as in full sim or homestead] to a dynamic model where the amount of server resources applied per avatar present would depend on the pricing plan. I wouldn't know how to implement such a feature but if possible it would reduce costs to LL and, hopefully, SL residents.

[Melissa Yeuxdoux]

Second Life desperately needs to get away from "one sim = one (possibly virtual) CPU". CPU cycles should be used where they're needed, rather than having lots of unoccupied sims tying up resources while elsewhere sims are being lagged into unusabilty. Google virtual world load distribution and you'll see that lots of people have ways to do it. LL's current setup is wasteful and, I suspect, a big reason tier is as high as it is.

[Ignatius Onomatopoeia]

@Melissa, Philip Rosedale's dream was to create a world made of continuous land, on 24/7/365 and parallel to ours. I recall that from Hamlet's book and interviews with the first CEO.

LL still lives under that utopian burden.

And as others point out here, LL cannot turn off the servers for the mainland without breaking the continuity of their "land" and, to quote Neal Stephenson who inspired Rosedale, "breaking the metaphor." I reckon the tech exists to turn sims on and off with each sim-crossing. Let the technically skilled discuss how to manage that. In Metaplace, there was non continuity but "places" came on with each teleport.

Kitely nicely accomplishes an "sim-on-demand" model, but it runs contrary to Rosedale's Big Idea. Question is: do bill-paying SLers still believe in his dream?

[Melissa Yeuxdoux]

@Ignatius: load balancing wouldn't violate that save in extremely rare cases, just as most of the time you don't care that your computer doesn't have one processor for every single program you run, and most of the time you don't care that the phone system wouldn't work if everybody decided to make a phone call at the same time. It's not what Ezra is talking about (totally shutting down a sim whose owner doesn't want it up 24/7).

[Maria Korolov]

Second Life is facing the classic "Innovators Dilemma" problem. It can't lower prices because the company is designed around the $300/month regions. Hardware, software, staff salaries -- everything is focused on that. And, so far, customers want that and are willing to pay for it.

Until the day that they don't.

[Johnny alt]

@Maria,
Linden Labs can lower prices,the company is not designed around 300USD per month regions and the core customers don't want to pay 300USD and people are not willing to pay for it, that's why SL lost 650 sims this year.

Secondlife will never grow with this price model.

With the proper pricing structure we could have hundreds of thousands of sims on the grid and an ecconomy that would be astounding. It would make Linden Lab hundreds of millions of dollars.

The price structure for Tier is so wrong it's amazing there is NOT a Linden Lab project to reduce the cost of Tier.

[anotherdeadavatar]

Hey now, don't dream it's over.....

[Carla]

@Ezra: very good argument .. makes a lot of sense to me

@Ignatius: i don't see a problem with "sim-on-demand" against "Philip Rosedale's dream". Does a tree when crashing down make a sound when nobody is there to hear it? ... does a sim has to be online when nobody is there to notice it? when sims activate when someone is accessing them then they are up 24/7/365 per definition.

[Ciaran Laval]

@Troy McOnaghy Linden Lab only earn revenue from marketplace commission if the sale is via Paypal, if it's in Linden dollars it's a sink, the money is destroyed. Sinks are needed to keep the wheels turning but it's not a like for like transaction.

@Hamlet you're being a tad misleading with the USD$100 claim, as your linked article reveals:

"If you want your server to be always on, the cost of the server alone is ~$60/month. Add to that the I/O and network traffic, and this number can easily go well above $100/month if your world has a lot of action."

It can go well above USD$100, I looked at these figures when Kitely arrived on the scene, for my roleplaying sim it would more than likely be a higher bill than I get in Second Life because you're billed for how many people visit. Anyone who has a sim that gets a few visitors all day long would be well over USD$100.

[Casper Jideon]

tier fees are not granular enough, they won't survive with the present scheme

[Jack Pitts]

It is simple, LL needs to lower the price of the tier ... there is no reason for it to be 295.00 and no reason for the start up cost to be 1000.00 in this day and age.

Servers are a dime a dozen and bandwidth sure isn't cheap but it still doesn't justify the cost of 300.00 per month for a virtual piece of land.

I owned to regions in the 5 years of being in SL and both times it just got to be too expensive to maintain.

But I bet if they lowered the price they would see growth again....

[Tara Yeats]

Nobody seems to be incorporating the fact that last year's pricing changes for nonprofits and educators is a definite factor in this year's sim count reductions, as various one-year contracts have expired over the last 9 months. And I hear from various sources, some of those same educators, after attempting to use open sim alternatives, are drifting back to SL... none of which is to defend the stratospheric range of SL tier pricing compared with alternatives (if your only interest is virtual real estate and not community).

[Arcadia Codesmith]

To my mind, the ideal pricing target is, at most, $30/month for an island region. That's double the monthly subscription fee for most MMOs that give you land for free (or for in-game gold), so it's probably far too high, but it would be a start.

Or I can go play Minecraft and get eight times the surface area of Earth to build on for a one-time flat fee of $10.

[Johnny alt]

If LL reduced tier and let anyone buy a Homestead. We would see massive growth.

Until they do reduce tier sim ownership will continue to decline and concurrency will keep slipping

I'd say the sweet spot is 49.99USD per month for Homesteads and 200USD per month for full sims

People want the SL land product badly but these current high tier price are a real blocker. It's just too much

[Arcadia Codesmith]

The internetz ate my epic post :(

I'll boil it down: the alternatives are gaining ground, fast. Second Life is slipping. It's already more profitable and sensible to start a new business or expand an established business in InWorlds or parts of the OpenSim network, and the social aspect of several worlds is approaching (or has achieved) critical mass.

There's no way to maintain the status quo and survive even the medium term, much less the long term.

In fact, if you like Second Life Classic, your best bet may be to relocate to an OpenSim grid dedicated to preserving that flavor. For Second Life itself, the game is "evolve or die". Staying the same isn't an option.

[Emperor Norton]

Hmm if anything Second Life tier goes against the model of technology - teir gets more expensive over time. $300 full sim used to be a $195, $120 homestead used to be a $75. It's also been clear that Linden Lab wants to raise tier (see the non-profits) but knows its' customers will refuse to do it. Several times the Lab has said if it wasn't for that darn recession tier would go up and up.

My only conclusion is Linden Lab's fantasy of ever increasing tier has to be based on some cargo-cult equivalency with real life San Fransisco Bay Area housing.

[Ignatius Onomatopoeia]

@Emperor Norton, when was tier that low? $75 per month for a group of RPers wanting a Homestead sim would be ideal. It would be an ideal price-point for education, too. At that price, we'd have never left SL.

I'd love a direct quotation from LL to show that "if it wasn't for that darn recession tier would go up and up." It's not that I don't believe you, but it would be juicy to have those words from a Linden mouth.

If they really think that they can pull that off, before SL collapses from the tier-based Catch 22 of its economy, I'd love some of whatever they are smoking out there by the Bay.

[Lain/Pan]

I don't think you necessarily need to drop tier (would help growth but I can't see LL doing it).

I would like to see a private sim split into quarters with a very low setup fee. Each quarter could be priced at $80 a month, and once a month you could specify how many quarters you wanted to rent for the following month. That way, it would make it more affordable for someone wanting a private space, surrounded by water, to just take a 1/4 and still be a "landowner" and feel invested in SL. Someone starting out a business could have a nice looking spot with optimum rezz times for shoppers to hang out at and slowly could grow the amount of quarters they paid teir for as their business grew. Someone could also downsize a full sim to the basic quarter if they were going away for the summer, say, or grow and shink their land as and when traffic calls for it eg: it is usually busier in winter than summer for a shop. Educators could rent a half sim, it would probably still be big enough, and private enough to cater for student teaching needs etc and raise that to a full sim for a special event. A group of friends could place their quarters together and when someone left SL, it would just mean that plot would vanish, instead of everyone panicking that they couldn't make up the shortfall in rent. It makes land versatile and affordable, without asking for the moon on a stick from LL. There would be a lot more admin work, but limiting to once a month could help that.

I know there is mainland, but the majority of people I know in SL wouldn't consider it, think it is ugly, and lacks privacy. Being able to terraform a plot of land, have management rights, be surrounded by water and have a private space, everyone wants to be King of their virtual castle don't they? It is just out of reach for a lot of SL fans as it stands at the moment and renting comes with the anxiety of "will it still be there when I login tomorrow".

Speaking personally, I've grown my business from a 1/4 to a full sim over a year, and I could now do with another 1/4, but there is no option for me to increase the land unless I opt for another full sim (out of the question) or a Homestead (no good for me I need it to hold traffic). I've had to resort instead to asking renting friends to leave, and retiring stock that still sells.

[Emperor Norton]

@ Ignatius Onomatopoeia search the whole Homestead/ Openspace tier protest in this blog.

http://nwn.blogs.com/nwn/2008/11/mark-kingdon-on.html

When introduced homesteads were like something like 80 on the not unreasonable idea that as a 1/4 of full sim they only cost 1/4. Homesteads were selling like hotcakes but in 08 M Linden jerked the tier to first 100 and then 120 claiming the scumbag residents were abusing poor little LL. The price supposed to go up to 160 but the resident rage was so bad LL back off. That was the moment the gird started imploding. For example the estate I was renting at went from 12 sims to one in three months.

Except for this year every spring since then Linden lab does announcement saying in so many words "the economy sucks so we won't shaft the scum homestead owner they deserve."

My own personal cynical opinion is LL management doesn't want its customers. We're not middle class enough. So in fit of hubris they jacked the tiers to drive us off, make SL look more white, the something that wasn't ever clear and corporate win. It nearly killed LL so that's why they got Ron Humble in as CEO to try and make peace with its own customers.

[Penny Patton]

There's a lot of issues at work here, and if you try to narrow it down to any one, someone will jump in with an objection.

The economy is certainly a part of it, people just have less disposable income to waste on land in SL.

But then you need to look at the price of land, as Hamlet does in this article. It's absurdly expensive and there are cheaper alternatives in Open Sim. OS still has a long way to go to match the features and reliability of SL, but people are more willing to overlook that when they're hurting in the pocket book. As Tara Yeats mentions, LL also cut out education and non-profit pricing discounts, forcing a lot of paying customers out the door.

Then you need to look at the value LL provides, both in product and service.

I've harped endlessly on LL's poor development of content creation tools. Problems any competent game developer would consider a "showstopper" LL dismisses as "trivial" or not even an issue at all! More than "user generated content" this is why SL looks so poor compared to modern games.

This goes for LL's poor presentation of their product as well. Have you ever seriously looked at the starter avatars? Even the most recent ones! If you took their proportions and applied them to a real human being you'd see them as a grotesque mutant! LL's welcome areas and infohubs are poorly made, underutilizing what tools we do have!

Then there's the social side of things. LL is making improvements here, but they're slow in coming and 9 years late already.

And how about the viewer? Features most residents will consider basic, necessary features are entirely absent from LL's own viewers and can only be found on third party viewers. Like client side AOs, certain radar features, etcetera. I'm using a TPV right now mainly due to performance. LL's own viewers have become unusable, constantly freezing up until a memory leak crashes my entire computer! This problem is absent from TPVs!

Of course there's also the quality of service. "Premium" provides little incentive and big problems (like having your account frozen and inventory deleted because LL made a billing error on their end), the lack of response from their customer service agents, having serious issues directed to the SL Jira where they fester, ignored.

Last week a bug was introduced to the server code, breaking certain physics based items. LL was immediately aware of the bug, but dragged their feet on fixing it, despite the protests of some Lindens, even! Now, the bug itself is not the problem, these things happen, but the lack of speed on prioritizing and fixing it is inexcusable! Some residents even wound up getting banned as a side effect of the physics bug.

All of these issues, and almost certainly more, contribute to SL's decline in paying customers.

[shockwave yareach]

LL's decline is solely the fault of LL.

LL has repeatedly refused to listen to the customers. When we screamed that teens in mainland would cause people to quit. When we said creating an adult ghetto would cause people to quit. When we said that the broken contracts regarding ownership and forcing people off their legally acquired and owned property would make people quit. Surprise, people quit just like they said they would. You promised one thing and then delivered another. If you pay for cable and they unplug you one day for a DSL line, do you continue to pay for that cable?

Now we are telling LL that since we don't own the land anymore and SL is merely a website hosting group instead of a virtual world, the tier prices are way too high for what we get. There is little doubt LL will pay attention to us this time either, except to note how concurrency keeps dropping through no fault on their part.

Yes, we are in a recession. Yes, people have less money to spend. But if LL doesn't act on lowering the tier and purchase prices at least 1/3 to reflect the fact that we don't own the land we purchase anymore, then those of us who are fed up with LL's gross incompetence and bait/switch tactics will leave. And as you have all seen, we are taking our filthy money with us.