No, Second Life Isn't Losing Virtual Landowners Because of the Real World Financial Crisis

Commenting on the latest report of dwindling virtual land ownership in Second Life, Daniel Voyager offers his opinion for why this is happening, and it's a common theory we read often:

The main reasons I think is due to the global financial crisis which i’m sure is having a huge effect on spending money etc and the other reason is that tier level in Second Life is still high from what I’ve been hearing from friends during the first part of 2013.

I've talked about tier prices before, but with respect to my colleague Mr. Voyager, the theory that the global financial crisis is a direct reason for Second Life's woes is simply not true. How do we know this? Because if you look at the broader economy for online interactive entertainment, virtual goods sales are at an all-time high.

Let's just take one example:

Last year, a single social game company, KIXEYE, earned revenue from virtual goods to the tune of $100 million -- about $25 million more than Linden Lab makes annually. And that's not even the biggest example; several mobile game companies make revenue from virtual goods sales 2x, 3x, even 8x that amount. If the global financial crisis was hurting Second Life's own virtual goods revenue, why are all these other companies doing so much better on that front? And notably, these companies' best customers, known as "whales" in the industry, typically spend thousands of dollars a year on virtual goods -- about as much as private sim owners in Second Life pay.

That said, it's true the financial crisis when it hit a few years ago probably caused a lot private sim owners to reevaluate whether it was worth paying $300 a month for 16 acres of land that doesn't strictly exist. But that was 4-5 years gone by. In the interim, other companies with better virtual goods revenue models have come to the fore, and they are doing far far better than Linden Lab ever has. Only when Second Life gets new growth and new activity and above all, a new revenue model not dependent on land, will we see a turnaround. And even if we suddenly had another financial boom tomorrow, that reality is not going to change.

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Comments

[Rin Tae]

The question how much the financial crisis has contributed to the loss of sims in SL has never been fully sufficient to explain it since the crisis hit everyone differently. It has for sure lead to the closure of some sims but I don't know if we will ever know the exact number of them.

The expamles about the other companies making so much money however is more interesting when looked at from another angle. That is, do they have a product that cost 300 USD per month to keep or do they make all this money from microtransactions and selling large number of small things in games?
The website of KIXEYE (I have never heard of it until now so I had to look it up) does not seem to indicate that they sell 300 USD per month items .. and since there are many free to play game companies that make astonishing amounts of money I would rather ask .. once more .. if the 300 USD per month pricing model is a problem. People (many people when looking at free to play gemas or one-time-buy and play MMOs) are obviously willing to spend money on them but how many of them really spend 300 USD per month? And if they spend 300 USD in one month, will they spend 300 in the next month too? (some are for sure since there are those who spend insane amounts of time in such games - but that is another problem)

Also, even when theyspend such money, they does not have to spend it month after month like those have to who wish to have a sim in SL.

So what I take out of the facts shown in the article above is that virtual goods are very profitable ... when not tied to a pricing model like LL still hang on to. Microtransactions not tied to monthly repeating payments seem to offer more profit.

So I would answer the question about why those companies are doing so much better with .. first: they offer a totally different product that follows different rules and interest patterns then SL .. and second: they profit on every single coin dropped into their pockets instead of hoping that enough people show up who can pay 300 USD a month (however LL does also profit from the marketplace and I always felt that the importance they put into it instead of inworld shopping is at least a partial move to get into the same sort of profit the others enjoy)

But as always that is all nothing but interpretation on my side and all guess work since I lack the numbers to actually have proof of anything.

[Iggy]

Having just got off the phone with someone in the industry, I'd cite what she called "virtual worlds fatigue" as a factor.

I'm sure some SLers who could afford tier in 2008 lost jobs or other sources of income in the downturn, but I'd more likely attribute the slide in SL to the increasing availability of other compelling content in our homes or, via smartphone, in the palms of our hands. Only so many hours in the day.

Meanwhile, what has Linden Lab done to improve their platform?

Except for improvements to SL's avatars and their inventories--created by users, not LL--SL has not changed much since the '08 Crash. It speaks worlds that the most popular SL viewer is not even made by the Lindens.

They should have rolled out sever-side baking and other improvements to SL's infrastructure years ago. Now it's a tad late.

The perception I have of Linden Lab is not far from Matthew McConaughey's in Dazed and Confused. As he remarks about high-school girls, "I get older and they just stay the same."

[Rin Tae]

Now of course, I have missed one important part of the article somehow:

"Only when Second Life gets new growth and new activity and above all, a new revenue model not dependent on land, will we see a turnaround"

This one. What is a bit strange since I read it and then wrote the same kind of conclusions *silly me* .. but then the part about the push on the marketplace being such a move to create this different revenue stream becomes more important. But sadly ... I am not sure there is any way to find out if marketplace sales have grown and how and how the money changing hands over it relates to the money LL makes from land. Since given the options that SL has, I think the marketplace and those transactions there offer the best opportunity for LL to get away from land.

And finally make it cheeper!

[The Whiz]

While the real life economic downturn may not be the sole reason, it has to be a factor. I have seen many people give up their online gaming habits, particularly buying Facebook game tokens and Second Life virtual items more than I ever have. Many people have cut back, including the sims that were not commercial sims in Second LIfe, obviously those sim owners gave up the sims for financial reasons in most cases. There are many factors for Second Life's decline and we cannot ignore the fact that the real life economy is at play also.

[Metacam Oh]

Just saw I can lease a brand new Chrysler 300 for 299 a month, I also wouldn't have to pay a yearly membership fee to lease the Chrysler either.

[Metacam Oh]

Sorry if that previous comment wasn't clear enough. Second Life is just a ripoff, plain and simple. Overcharged has a new meaning.

[Ezra]

There's nothing wrong with charging for server resources + labor + service value. Just because Linden Lab calls all of that 'land' doesn't make it a radically new business model that happens to be failing. That business model succeeds as the internet succeeds.

Linden Lab's issue is they charge too much. A lot of leisure, entertainment, non-essential things on the internet would fail with a $295 a month price tag.

[Orca Flotta]

I was just about to voice my opinion here as well ... when a question popped up in my mind: WHY SHOULD I BOTHER?

Am I the only bitch around SL forae and blog comments to notice the simple fact that we are turning in circles? That we are discussing the same arguments over and over again? Since I entered any SL forum for the first time, in 07, I'm hearing the same stuff. On one hand we have the fanboys and -girls, on the other we have the doomsayers, and on yet another hand we have the concerned residents, the ones that feel ripped off by the lab.

And we all have different theories, expectations and experiences. And all of us have grown into specialists on giving advice to the lab or our fellow residents. Well, I'm not ashamed to admit that I have no idea how to get SL out of the downward spiral ... if there even is a downward spiral.

For me the consequence is quite easy and straightforward: I will just go on bearing LL's stupidities and play SL until I lose interest or don't wanna afford it any longer.

[Eric]

That is just Black-and-White-Thinking. The average virtual good costs almost nothing, just take all the virtual goods in the Second Life Marketplace. Marketplace is very successful. But land is totally different and a much more expensive item. It can be compared with renting a very very expensive high end server. But it cannot be compared with virtual goods. ALL people that I know that have given up their sims, and I really mean 100% of them, did that because they did not have the money to pay for it anymore, often because of job loss in RL. Absolutly nobody did that because they lost interest in SL. I recall many crying when they lost their land. They are still part of SL, but naturally without your own land, no place to build and create something, there is less incentive to log in. So the declining concurrency naturally is a consequence of the land loss, which is a consequence of the lack of money to pay for land.

[John]

How would you know, Hamlet? You did never own any significant piece of land?

[ZZ Bottom]

Loved that 1 john:)

[Cisop Sixpence]

I think the tier price of land is to high and has been so for some time now. I'm aware of some organizations that used to get the 50% discount, but when that ended, they started dropping off. They can only rally funding and find grants for so long and then those sources dry up. I'd love to rent or own a homestead sim, but for crying out loud, the tier prices are too high. Even if the RL economy was doing well, I still couldn't afford that. So I guess what I'm trying to say, it's the tier that brings me to tears.

[slutrix]

*Really*. The fact that the austerity policies imposed on the entire world after Reinhart-Rogoff published their notorious (and discredited) paper that was based on erroneous and forged data (and also had a poorly and wrongly-written piece of Excel code that produced wonky results that no other scientist could reproduce) slashed people's (including SL users') incomes by up to 70% has absolutely *nothing* to do with region loss.

I'm sorry, but this post is - once again - seriously flawed, if not entirely lacking in logic.

When you have money to spare, you'll indulge in luxuries such as owning a full region in SL. When you lose this money and end up having to struggle for your survival and it's either putting food on the table or running the region, you'll ditch the region. Plain and simple.

[A.J.]

I think that Eric hit upon a great point.
To sum it up in one word is "loss".

In RL we have to face our losses, in SL we don't.

LL should have seen this one coming a long time ago. You can't have virtual reality where people will be content to lose their land and business on a massive scale and desire to come back and grieve failure and hopelessness and school themselves with very difficult tools to remain competitive in their fantasy.

Yuck. SL needed to be an escape, not America II.

No matter what their ideological beliefs may be, no consumer is going to pay $25, $50, $100, $300 a month to be a loser. They want to be coddled and they should be. Anyone who pays $300 a month for s sim should be treated like a winner.

[Ilsa Hesse]

the "cost" of a server farm is pathetic when compared to the cost of a sim.
SL has some things going for it, but it needs to take advantage of them...
1) Non Profit discount... any good businessman will tell you that ANY increase in intelligence or artistic ability is good for a community... so what does LL do? drive them out...
2) lower tier to a more realistic, user friendly level. it is silly that they can afford to give you a house wiht cheap prims, but cant just be honest and lower the tier price across the board.
3) we are quickly reaching a point where there will be an online currency of some sort (it wont be bitcoin), LL needs to push for the Linden to be that coin of the realm.
4) stabilize the environment... does anyone think that the lag/inventory issues, etc can not improve?
5) give me something new. they need an "expansion" of some sort, to pull back older members that left, and people that never gave it a try before.

[Ilsa Hesse]

also,
how stupid do they think we are? why would I buy a sim in SL to build on, when I can do the same thing for far far cheaper elsewhere?
I am here for the social setting, and outside of a small bit of land for housing, I dont require a lot...
make it cheaper, and people will buy it.

[Savoree LeDesir]

There are a variety of factors contributing to the ebb and flow of the financials on this and the other virtual worlds...several valid ones of which have been mentioned in this post and the comments. I would like to add two more to the growing list:

1) It's a mistake to believe that those who have dropped out of (or reduced their activity in) Second Life are automatically opting for other virtual worlds. Second Life's environment has attracted a lot of creative types in the fashion, fine art, and educational communities who have explored its use in their daily work - some with more success than others. The artists, designers, and educators who found Second Life lacking have not necessarily moved to other virtual worlds, but simply back to other mediums and methods.

2) Part of the appeal of Second Life was that it promised to fulfill that lifelong dream of many - the ability to "reinvent oneself," and, at least for a moment, to escape reality and experience the fulfillment of one's ideal self. After several years of dealing with trying to deal with constant technical difficulties, in-world politics, relentless cyber-bullies (as it turns out, a lot of people reinvented themselves into the kids they hated in high school), and a "community" of people who are all trying to be something other than who they really are, many have become disillusioned with the whole premise of this type of virtual experience...or perhaps they've simply outgrown it.

After much trial and error, I think I've found a level of participation that works for me...I rent a small parcel of privately-owned land so that I'll have a "home" in-world in which to do the things I love to do: explore and create. But I avoid interacting personally with anyone in-world, because I've learned the hard way that it's a huge waste of time and energy.

I don't imagine I'll ever directly pay Linden Labs for tier again, because they do absolutely nothing for the average user besides provide server space. They do not provide technical help (even for premium users), and they do nothing to monitor or police the activity of the cyber bullies and spammers in a way that makes any sense at all.

[Krinkles Q Klown]

The reason for dwindling land ownership is directly attributable to Linden Research Inc.'s questionable ethics and repeated failure to live up to the lofty goals the company sets itself.

Nearly every major function within the Second Life™ virtual world *fails* to work as intended, designed, or expected. Their code base is crap. Come on, James, you were a Linden. You know the truth of that. You just can't discuss it because you're afraid you'll lose your inside track into the Lab or you're under an NDA.

I defy anyone to name a single thing in SL that works in a consistent manner. And let's not forget the 4+ year old bugs that their own customers still ask to be fixed. That's called "Hiding behind your 'AS IS' clause, failing to deliver reasonable service."

They tried to sell this to business. Business told them to pound salt.

Their code base is fragile. Bugs that disappear and reappear tells anyone who develops software that! It's buggy as sh*t.

In my opinion, the company is greedy with the ethics of a horde of locusts. The Board is just out to suck SL dry before the gravy train sails of the cliff that it's destined to.

They're leaving because they realize realizing Linden Research Inc. doesn't give two hoots about their experience. LL just wants your money while they blow sunshine up your *ss.

[David]

When the cost of land in SL per month, costs more than what you pay for Internet per month especially when you get more value out of paying for the Internet, then you know there's a problem.

[Hamlet Au]

"So what I take out of the facts shown in the article above is that virtual goods are very profitable ... when not tied to a pricing model like LL still hang on to."

Yep, exactly. Though like I mentioned, free-to-play games like those from KIXEYE do have whales paying as much as sim owners do on average, it's just that the virtual goods they buy are purchased in variously priced microtransactions, so these buyers can moderate their consumption per month as needed. If companies like KIXEYE *required* their whales to pay $299 a month every month or incur serious in-game penalties, they'd quickly start losing them.

[Daniel Voyager]

I know there are many factors to the decline which is still very concerning.

From what I have been hearing recently from friends the main reasons were the following..
* People had less money to spend
* The tier level was too high.
* Many think Linden Lab don't care either with fewer communications than in previous years.

It's sad to see on a weekly basis the region level dropping further via SLUniverse Forums/Grid Survey. I agree on what you said about a possible turnaround which i hope will happen at some point...

"Only when Second Life gets new growth and new activity and above all, a new revenue model not dependent on land, will we see a turnaround. And even if we suddenly had another financial boom tomorrow, that reality is not going to change."

Hopefully in the near future things will start to pick up again.

Any ideas where Rodvik has gone because he's been very quiet lately?

[Phantom Republic]

I can't imagine with the increase in computing power, cloud space, etc., that it still costs as much to run a sim as it did five years ago. I can also remember when PC's first came out, and in real dollars, the price back then would still be a fortune now. Interesting that a PC explosion took place when manufacturers lowered the cost substantially.

50% off is still too much. If LL were serious about investing in their crown jewel, they would find a way to reduce land costs by 90%, which would create the explosion even Philip Rosedale once dreamed might happen.

A whole sim for 30 bucks a month ... sure, some land titans might go under (poor Anshe), but it might just be the virtual equivalent of opening the western lands (without the requisite indigenous genocide).

[Iggy]

Here's news for some of you: 50% edu and non-profit discounts are back, but one must request them.

Very LL in how they did this. The Linden running the effort is a nice fellow, but the Lab made NO official announcement. When I asked if my school's long-defunct sim would be eligible, I was told "yes, if you ask."

That's no way to run a business. At times before the 2010 exodus began, other schools could not even get a proper invoice from the Lab or file a state-mandated purchase order because of how the Lab set up its accounting.

In any case, my school had enough of the Linden business model. So have many others burned by the 2010 tier-increase fiasco. While I am done teaching with virtual worlds for several years, if not forever, my colleagues from other schools have moved on to hosting our own grids, sharing space in SL, or just working with other collaborative technologies that are not related to virtual worlds.

[Ezra]

@Phantom "I can't imagine with the increase in computing power, cloud space, etc., that it still costs as much to run a sim as it did five years ago."

It doesn't. But a lot of people, most prominently Hamlet, refers to Linden Lab's revenue model as selling "land" rather than selling web hosting.

A lot of people don't stop to think that everywhere else the past ten years of Second Life's life, bandwidth, storage, CPU and memory has only gotten more powerful and cheaper. Because of this web hosting today from companies like Amazon and the plethora of copycats that've popped up is measured in pennies where web hosting 10 years ago was measured in dollars.

Linden Lab still has a 90's-esque, flat-fee, overpay hundreds for part of a physical machine model.

So long as those concerned with pricing are arguing about "land", an abstraction with made up value that anyone can sprout off made up limitations for such as "it can't be cheaper", real economic concepts such as lowering prices in response to lowered demand can't come into play.

But I'm sure those who decide the prices at Linden Lab prefer it this way, everyone arguing over the value of "land" and not being challenged by the community on why the whole rest of the internet has figured out how to sell web hosting much more flexibly and cheaper.

[Archangel Mortenwold]

Ohhhh yes it is. It's basic economics. Since the crash, fewer and fewer people have less disposable income, and what they have left they're less likely to spend on overpriced virtual worlds.

[DD]

They would lose an absolute fortune even if they took 50% off tier prices. 90% would cause panic attacks. So they won't do it.

But if they had the balls they would do, speculate to accumulate... take the losses as long as they know for sure LL can remain sustainable and watch as Second Life undergoes a new spring and people buy up sims. You'd have people buying 20-30 sims for their RPG projects at $30/month, more outside interest, newbies buying full sims just to live on.

But it won't happen. They just don't care, they just aren't listening, and it's sad because we all want SL to flourish and thrive.

[JTW]

According to many sim owners I've met (and now being a co-owner myself I can attest to that), a major reason for them to give up or downgrade their land is financial.
And it's not their own bank accounts, but donations.

Many sims (not counting stores, and even some of those) float largely on donations and renting out stores and skyboxes.
Income from those has dropped severely. Several sim owners I've spoken to noticed a drop of over 90% in income from donations over the last year or so alone, and it hardly started there.
Similarly, many businesses have reduced or eliminated their number of subsidiary storefronts, instead opting for the SL Marketplace and where available adboards and temporary events to spread their name, this too seriously hurts sim owners/operators that depend on income from renting out stores (a sim having a 10 fewer rental stores each bringing in 250L$ a week now sees a deficit of 12000L$ a month, or roughly $50US, just from that.
Doesn't sound like a lot, but on top of seeing donation income drop from a few hundred to a few dollars a month, and it could drive you over the edge.

Those same visitors still spend that money, at least in part, but they now spend it on other things. Clothes, toys, etc.

"and it's sad because we all want SL to flourish and thrive."

Seeing a lot of idiotic and unfounded complaints about SL all over the forums and blogs, I'm under the very strong impression there are people (I guess a relatively small number with a very large incentive and many accounts) who want SL to fail, maybe because they're being in the employ of a competitor who thinks to benefit by such a failure.