July 23, 2010 Leave a comment
When I left on holiday last month I was half-expecting Second Life to have vanished into the ether by the time I returned. That may not have happened (yet), but there are still plenty of reasons to be gloomy about the future.
Predictably enough, Mark Kingdon was forced to fall on his sword in the wake of the Lab’s severe downsizing, a pretty clear sign that the company’s investors had lost faith in in the management. (This event prompted an amusing post by Hamlet Au, in which he solemnly informed us that he had known all along that the Lab was on the wrong track with its enterprise strategy, though, rather like the financial experts who claimed to have seen the crash coming, he didn’t explain why he hadn’t told us about this before). Philip Rosedale is back in charge, and talking about a “back to basics” strategy, but it may be too little, too late.
Much has always been made of Linden Lab’s solid revenue stream and profitability, but there is more to business than profitability; profitable businesses are shut down every day. What’s more relevant to Second Life is the question of the rate of return on capital, and the company’s position in the investment cycle. The venture capitalists who have their money tied up in the Lab are not in for the long haul; they will be looking for a liquidity event at some point in the not too distant future. An IPO would seem to be out of the question in the current financial climate, which leaves two options – further private equity, or sale to a bigger company. Attracting the former would depend on convincing investors that the Second Life business has enough growth potential to underwrite a decent return on their capital when they cash out in a few years, which would be no mean task.
So that would seem to leave a sale as the only way forward. The Lab has two main assets: its technology and its customer base. The former, for all its faults, may be ahead of the field; the problem is that no one wants to be in that race any more. The future doesn’t lie in a big downloadable client that needs a high-end machine to run on; what people want now an experience they can access through their browsers and on their smartphones, and Second Life isn’t that world.
So the only thing that Linden Lab has that is worth a damn is us, the residents. They have worked out how to monetise us, through subscriptions, tier fees and Lindex commission, but if they are going to market us as a saleable asset they will have to figure out how to securitise us too. The only way I can see of doing that it to follow the social-media model.
Philip may be promising a return to the old Second Life, but the reality of the situation may force him to continue with Mark’s plan to turn SL into a 3D Facebook, though obviously that hasn’t worked out too well so far. Like I said, the virtual future looks bleak.