Virtual Monopoly
January 23, 2009 3 Comments
The buzz around the SL blogosphere this week is all about Linden Labs’ unexpected takeover of XStreet and OnRez, the two biggest and best known of the web-based Second Life marketplaces.
Blogger opinion seems fairly unanimous in regarding this development as A Bad Thing, though reaction varies from mildly disapproving to apoplectic.
Regular readers of SLS will know that we have long been sceptical of the idea that it is possible to make serious money through in-world commerce, but the existence of services like XStreet and OnRez presents a challenge to our doubts, since they provide a route by which cash can be extracted from the grid without showing up on the official Linden Lab statistics. Perhaps sellers in these marketplaces are turning over significant sums, enough to make a living comparable to having a real-life job. Even if this isn’t true, the markets themselves may be handling enough transactions that a commission of even a couple of L$ a time would be enough to make running them a lucrative business.
Does the fact that the Lindens have bought into the action provide any support for the theory that the web-based marketplaces were making money? One might speculate that L-Labs is worried about a fall-off in the subscriber base due to the recession, and is looking to secure other revenue streams. On the other hand, if XStreet and OnRez were profitable it seems strange that their developers would have sold out, unless the offer was irresistible. Throw in the fact that OnRez was owned by virtual world cheerleaders-turned-jeremiahs The Electric Sheep Company, and it begins to look like the picture wasn’t so rosy after all.
Linden Labs may well have taken advantage of the economic crisis to increase their stranglehold over Second Life commerce by snapping up two companies that, had they had time to develop further, may have grown to challenge L-Labs’ dominant position as the people who actually make money from the grid.
Second Life Shrink 
I feel so special now.
You seem to be forgetting what the purpose of Linden Lab is. And that’s to make a profit for the shareholders. It is not to make other people rich or, indeed, to make people happy. [1]
First, you say have been skeptical of making money in Second Life. What I suspect you really mean is you don’t believe lots of people can make money. That is true of real life. The over-arching aim of SL is for Linden Lab to make money, and if a small number of others can profit from the platform, then that’s great. If one-in-a-thousand residents can make a significant return on their SL investment, that’s a success. So you don’t need to be skeptical – it works out fine for a small minority and that is no different from how things go in the real world economy.
Second, you wonder why if XStreet and OnRez were so profitable, why did they sell to LL? Well, individual, the margins for each company may suck, but the margins for the two – along with some savings (for “savings” read “redundancies”) – may be much better. You can buy two of three under-performing companies and combine the best bits to make one good enterprise.
Another reason for selling may be that the respective companies need to raise capital for other ventures they want to pursue; ones that they feel are more profitable. So you sell your assets and use the cash generated to buy your new stuff. Happens all the time.
Finally, you use the word “stranglehold” in your last paragraph, which is a beacon into the subconscious; rather ironic for a site that purports to be a “Second Life Shrink!” Freud said, “Betrayal oozes out of him at every pore” and you Freudian slip is showing 🙂
This is not a “stranglehold” but a legitimate business move to facilitate expansion. When Mark Kingdon took over the helm at LL last year, one of things he pledged to do was to expand the company. When you have venture capital cash to spend, one of the fastest ways to grow is through acquisitions. If the figures are correct – and there is no reason to assume they are not – SL residents traded $360 million in virtual goods and it doesn’t take an Warren Buffet to see that snagging a percentage of that is a good thing!
It’s a curious phenomenon that many of the people who are involved with Second Life become tremendously emotionally vested in all aspects of its operation. There is an almost religious fervor generated when LL does something – as if the Olympians had decided to interfere, once again, in the affairs of mortals. Stepping back and trying to see LL as “just another business” becomes a stunningly hard task. And as you pointed out, the majority of the posts currently being tossed around are pretty negative. It is much harder to find a sober assessment because for the Second Life blogging pundits, the affect clouds the analysis.
Siggy
Notes:
[1] Of course, this doesn’t mean you can ignore your customers or not make them happy. After all, the customers are the ones who stump up the cash for the paychecks when all’s said and done. However, from the corporate perspective, keeping the business going is fundamental. This sometimes means you can’t always do what the customer demands and you make them unhappy. If you gave all your customers your product for free, you’d have the happiest consumer base in the world – just for a few days before you closed your doors!
Hi Siggy, thanks for taking the time to leave a considered response.
I agree with your main point; that the Lindens are in the virtual world business to make money, and developments like the XStreet/OnRez takeover and the hike in fees for Openspace sims make perfect sense in that context. I think I’ve always acknowledged that it is possible for some people to turn a profit in Second Life, just not very many people – and, as you say, that’s not unlike any real-life economic niche. I think the jury is still out on whether Linden Labs will see enough return on their capital to keep the thing going, especially in a recession, but I guess that will become clear in the next year or so.
What interests me from a psychological point of view is why so many SL residents – or at least so many SL bloggers – have difficulty grasping the seemingly obvious fact that they are merely customers of a media corporation, and seem to think that they are citizens of some sort of virtual republic who should have a say in how the thing is run.
I think it is due in part to the way Linden Labs have marketed Second Life as a virgin land of free-market opportunity, with their role being limited to benign administration, rather than presenting it as what it really is – a theme park where they collect the gate money, regulate the rides, and take a cut from the hamburger stands.
I also think though that within a subsection of the SL community there is a strong willingness to believe that Second Life is something more than a simple entertainment, that it really is a way of escaping the dispiriting reality of everyday existence. We’re still waiting for someone to do the definitive study of the personality traits of regular SL users, but the evidence I’ve seen so far suggests that people with lower self-esteem are more likely to be drawn to virtual environments, and to idealise their online experience. If that’s true then it’s understandable why something that seems to disrupt the ideal, such as the unsubtle intrusion of naked capitalism, should be perceived as threatening, and elicit a defensive and angry response.
You’re likely to be right about my use of the term “stranglehold” – I had thought that I had consciously chosen the word to ironically highlight the fevered pitch of blog discussion, but it was probably my unconscious warning me that I was getting a bit more attached to Second Life than I can bear to admit. 🙂