Economics | Second Life Shrink

I want to spin my little watch right before your eyes

September 4, 2009 by johnny Leave a comment

My Twitter feed is gradually accumulating a small band of adherents, all of whom, I am sure, are keen to digest my scintillating prose, rather than just following people at random as part of a Twitter-spam operation or SEO scam.

Quimbe, one of my new buddies, has been especially keen to share with me an amazing opportunity he has unearthed. Do I want to ” Discover A Rebel Psychiatrist’s Amazing Secret?” One that will let me “Put People Under Your Control Quickly & Easily … and Get Them to Do Anything You Want?” Well, who doesn’t? This arcane knowledge can be mine for only $197, thanks to the amazing generosity of master hypnotist Igor Ledochowski.

Actually, what Igor is peddling is not particularly new, drawing as it does on the work of the fairly well-known American psychiatrist Milton Erickson, pioneer of hypnotherapy back in the ’50’s. Erikson had a somewhat idiosyncratic concept of the unconscious as an entity whose therapeutic power could be tapped by entering into a hypnotic trance, which he famously could induce in a subject using only his secret handshake. Erikson’s ideas were always on the fringe of respectability, and his modern-day followers, most notably practitioners of Neuro-linguistic programming, which draws heavily on his work, are largely confined to the life-coaching and self-improvement industries.

Igor may not have much clinical credibility, but he does show some appreciation of modern business trends. He used to charge thousands of dollars for his seminars (he says), but there was a physical limit on how many of these he could do, and also a small pool of potential customers, for whose attention he had to compete with all the other gurus out there. With the advent of digital distribution channels he has been able to benefit from a new, and much more lucrative, revenue model – mass circulation and (relatively) micro-payment.

All this came to mind today when I read about the travails of the Second Life music scene. Apparently musicians and venue owners are struggling to get audiences to pay anything at all for their live music experience. Mankind Tracer, alter-ego of musician Seth Regan, is proposing that venues start charging a cover, and he feels that L$500 would be about right for one of his performances, though comments on the thread suggest that people think this would be too much for the market to bear.

My first thought was that if punters won’t pay US$2 to see your band then you probably need to practice a bit more. I’m not out much these days, but back when I was an avid gig-goer I would regularly pay US$10 or more to get into a club without even knowing who was playing. I guess the difference is that in real life even if the band sucks you can still have a good time, because you are in a bar, with your friends, but in SL if the act is no good then the night is a washout.

Even if we take the stinginess of virtual audiences as a given, it should still be possible to make good money if you put on show that is good enough to draw a big crowd. If you played to ten thousand people you’d still do OK even if 90% of them paid nothing at all and the rest coughed up a dollar apiece, and even better if you dropped the suggested tip to 25c and half of them put their hands in their pockets.

The problem is that this mass-audience/micro-payment plan requires a scalability that Second Life currently does not provide. Full sims can theoretically support up to 100 avatars, though on the rare occasions when I’ve been somewhere with more than a couple of dozen or so other people (which have all been music events, interestingly) the experience has not been particularly enjoyable. So even if your band could pull in a five-figure crowd (which is not entirely unrealistic, given the potential world-wide reach), the sim would crash long before you started making money.

Blue Mars, which has (finally) gone into public beta this month, promises the capacity that could make this model work. If that turns out to be true, virtual musicians on that platform might get the rewards they deserve.

There are certainly some bands I’d pay L$500 to virtually see…

Filed under Culture, Economics, Psychology, Second Life Tagged with Culture, Economics, Music, Psychology, Second Life, Social Media

Forward to the past

July 28, 2009 by johnny Leave a comment

This time last year I was just starting to rekindle my interest in the US presidential elections, having gone off the process a bit after my favoured candidate, Hillary Clinton, failed to clinch the Democratic nomination. At that time it looked as though the race could be uncomfortably close, but that was before the Republicans unveiled their secret weapon, VP-nominee Sarah Palin, and the world breathed a sigh of relief, safe in the knowledge that Obama had it in the bag.

Ms Palin has been back in the news this month, having decided that staying on to complete the job she was elected to do in Alaska would be the “quitter’s way out”, and that she would show she was no quitter by, er, quitting. Now that she no longer has the tiresome responsibility of looking after the wellbeing of her constituents, she is free to start building her campaign for 2012.

It amazes me that anyone in the US, even those on the right, could think that Palin is the best shot the GOP has at regaining the White House, especially after the drubbing they received back in November. The one thing sure to keep the coalition that swept Obama to power together is the sort of intolerant social conservatism that may play well to the ever-shrinking right-wing base, but just alienates the rest of the population.

The Democrats would be much more vulnerable to the sort of fiscally conservative/socially liberal approach that’s being peddled by David Cameron and the Conservatives here in the UK. In a depression no one cares too much about gay marriage or abortion; they’re too busy worrying about losing their jobs and their homes.

I guess the Democratic and Republican strategists will be waiting to see how the election here works out, when it finally comes. It seems sure to be fought on economic rather than social issues. I think that there will be a real divide between the main parties this time around, with Labour proposing a continuation of deficit-funded government spending, which will, theoreticaly, kick-start the growth that will eventually pay off the national debt, while the Conservatives will be offering painful public sector cuts now with the promise of better times in the future. It’s difficult to see a Labour victory though, since the mood of the country, like the US last year, is for change, unsurprising when one considers the economic mess we are in.

Obama doesn’t seem to be making much headway in tackling the financial crisis; there’s every chance that come 2012 he could lose to a Republican candidate promising small goverment and a balanced budget. With Cameron in charge over here it will be the Reagan/Thatcher years all over again.

On second thoughts, maybe a Palin candidacy wouldn’t be so bad…

Filed under Economics, Politics Tagged with Economics, Financial crisis, Politics

Unrewarded talent

May 7, 2009 by johnny 3 Comments

In a thread over at Metaversally Speaking headed (surely ironically) “Entitlement”, various luminaries of the SL fashion scene muse once again on the inexplicable reluctance of the public to pay more than token sums for their virtual creations. The problem is identified as an unwarranted sense of “entitlement” among consumers, who fail to recognise the importance of rewarding creative types handsomely, lest they take their talents elsewhere. Freebie culture is the villain of the piece; the remedies suggested include a price-fixing fashionista cartel, and state (or Linden) intervention to maintain price stability. (Regular readers will recall that I have my own theory about the determinants of value in SL; if you don’t like that one then I’ve got another).

I might find all this a little less ridiculous if I believed that the distressed designers were the sort to visit their local farmers’ market rather than Wal-Mart, drink nothing but fair-trade coffee, and make sure that their clothes don’t come from sweatshops. Maybe they are, but I can’t help thinking that the these virtual entrepreneurs are more likely to be the type who worship the free-market (except of course when it works against their interests).

There is also some irony in the fact that virtual worlds like Second Life could never have come into existence without the collapse in hardware costs over the last decade, which in turn has depended on wholesale exploitation of workers in developing countries. If the SL fashion crowd want to know about being inadequately rewarded for their labour they should talk to the people who inhale toxic fumes in Chinese factories while producing the cheap computers, routers and flat screens that we in the west feel “entitled” to.

It all raises the question of why people are getting so bothered about something that seems fairly inconsequential. The figures from the Lindens, backed up by a survey reported in the Herald last week, show that only a very few people are earning more than a pittance from virtual commerce, so it’s not as if anyone’s livelihood is at stake.

What is at stake is self-image. Are you really a fashion designer, or are you just playing the part of one in a game? If you’re happy to accept that it’s all just role-play, then the in-game pay-off of L$ and attention from other players will be reward enough. If however part of your real-life identity is invested in your virtual activity, then you will want something more tangible, like crisp US$ bills, that you can show to your friends to convince them, and of course yourself, that your Second Life status is actually worth something in the world beyond the SL blogosphere.

When the material recognition of your virtual talent is unforthcoming, as it generally is, you have two choices – you can get angry with the world for failing to give you due respect, or, more productively, you can reassess your goals, ask yourself if it’s really worth getting so bothered about a game, and redirect your energy into something that is more likely to make you happy.

Filed under Economics, Psychology, Second Life Tagged with Economics, Psychology, Second Life

Gimme Gimme Shock Treatment

April 21, 2009 by johnny Leave a comment

Bloomberg are reporting that Taser International Inc. have filed a trademark-infringement lawsuit against Linden Labs, alleging that the sale of virtual copies of the corporation’s stun-guns in Second Life is damaging the firm’s reputation.

What’s interesting about this is that it is Linden Labs that is being sued, rather than the creators of the knock-off weaponry. Anyone who has ever shopped in SL will know that there are plenty of fake Gucci bags and other designer merchandise in circulation, but until recently there has been little incentive for trademark owners to go after the counterfeiters, since the chances were that they wouldn’t have enough money to pay any substantial damages.

That’s all changed now that Linden Labs has taken over XStreet, and, as Tateru Nino notes in her coverage of the case over at Massively, effectively become the retailer of the dodgy goods. Suddenly the lawyers have a profitable corporation in their sights instead of some penniless hackers, a corporation that will probably settle out of court to avoid the nuisance of ongoing litigation.

This could open up a whole new career path for SL entrepreneurs; virtual patent troll.

Whatever, here at SLS we’re still happy, happy, happy, all the time.

Filed under Culture, Economics, Second Life Tagged with Culture, Economics, Law, Music, Second Life

Career Opportunities

April 12, 2009 by johnny Leave a comment

Further to my last post, I’ve been doing some calculations based on the figures in M Linden’s “State of the Economy” report.

The survey quoted had 2645 responses, which is said to be 15% of business owners, so the total number of enterprises must be 17633. Of these, 64%, or 11285, report that they generate positive net income – 52% generate up to 20% of their total income from Second Life, 5% generate 20-40%, 2% generate 40-60% and 5% generate 80-100%.

If I was a statistician I could probably use this data, along with the US$100 million cashed out figure, to construct a model that would show how many people were earning the big bucks, but I’m not, so I’ll just engage in some idle speculation.

Let’s generously assume that when M says that “a good part of [the US$100 million goes] into Residents’ pockets”, he means that half of it does. That’s US$50 million split 11285 ways, or an average of US$4430 plus change each. But clearly some people are creaming off more than others. We don’t know what the top 5% (of the whole 17633) are earning, but, for the sake of the argument, let’s say they are fairly modest types, for whom US$50K is a good living, so the 881 of them collectively take home a little over US$44 million, or just about the whole pot. If we lump together the 7% (1234) who are getting 20-60% of their income (nobody seems to get 60-80%) and say they average US$15K, then that’s another US$18.5 million, which leaves less than nothing for the bottom 52%.

Of course statistics can be made to prove anything, especially when you just make up the figures like I have, but I would argue that, if anything, I have been too optimistic (from the point of view of a potential SL entrepreneur) in my assumptions. About a year ago Hamlet Au at New World Notes calculated that land fees added up to US$6 million a month, plus more for land sales, so it seems likely that much more than half of the US$100 million that is cashed out goes straight back to Linden Labs. In a more recent article Hamlet noted that a few of the top-grossing businesses were taking out more than a million US$ annually, so even in the top 881 there must be a heavy skew, with a handful of big earners and a mass of also-rans, and in the lower reaches of the economy the average income can’t be much above double figures.

None of this is necessarily a problem – I’m sure that most business owners see their SL enterprise as a self-financing hobby, and won’t lose too much sleep if it doesn’t make them rich. Linden Labs should perhaps embrace this spirit, instead of continuing to peddle the myth that there is serious money to be made (by people other than themselves that is). Statements like “In the current real-world economic climate, I think the additional income generated from a business in Second Life must be a welcome addition to our Residents’ personal budgets” (from M’s report) look at best ridiculous, and at worst dishonest.

Still, I guess “SL entrepreneur” just about beats making tea at the BBC.

Filed under Culture, Economics, Second Life Tagged with Culture, Economics, Music, Second Life, Statistics

M is for Pangloss

April 12, 2009 by johnny Leave a comment

There’s an interesting post over at the official SL blog this week, wherein M Linden considers the “State of the Economy“; if you don’t have time to read it and the many responses it has generated I’ll sum it up for you:

M Linden: Everything is just grand! The future is rosy!

Residents: No.

I’m exaggerating, obviously (though not much; the picture accompanying the post shows a virtual tree, but instead of leaves it has, like, dollar bills! So even the illiterate can tell that the economy is booming). M seems to base his optimism on a couple of headline figures – 2008 user-to-user transactions of US$350 million, and US$100 million cashed out via the Lindex in the same period – and a rather vague survey of business owners showing 64% claim to generate positive net income and 61% are optimistic that their revenues will grow.

US$350 million may sound like a lot of money, but for a place with around 1.4 million active residents (according to the latest statistics) it’s small beer. For comparison, in San Francisco, with a population of a little over half that figure, the city council alone has a budget of over US$6 billion. Furthermore, it’s unclear how much of the spending actually takes place in commercial transactions, as opposed to people moving money around between their alts, or other such transfers.

The US$100 million figure has already been debunked by Urizenus Sklar at the Alphaville Herald; I can’t add much to his analysis. M claims that “a good part of [the money] went into Residents’ pockets”, but when asked in the comment thread what Linden Labs’ share of it was his answer is a not particularly forthcoming “We do indeed have accurate and up-to-date figures about how much comes back to us for land fees. It’s not a number we publish which is why I didn’t publish it.”

The survey had a response rate of 15%, giving a sample of 2645; I have no idea if that is a respectable figure for these sort of things, but I would want to see some comparisons between the responder/non-responder groups before I accepted that the results were generalisable. Even if they were, the figures are essentially meaningless without a lot more context. 68% of enterprises are maintaining or increasing their investment compared to the last six months, 15% “significantly”, but how much is significant, and what is the base level? 5% of business owners say that they generate 80-100% of their total income from Second Life, but is that their total household income, or just their personal income, and what are the absolute figures? The guy you pass in the subway every morning may make 100% of his income from panhandling, but that doesn’t mean he has hit on a viable revenue model (or maybe it does).

I long ago concluded that I would never make any money from Second Life, so I shouldn’t really care about any of this flimflammery, but I can’t help but feel that the Lindens should stop trying to pretend that SL is something that it is not, and concentrate on maintaining their income by looking after the people who will be around for the long haul, those who see the virtual world as an opportunity to explore new frontiers, rather than a venue for disposable entertainment, or a place to make a quick buck. Prime mover advantage doesn’t last forever, and there is always something newer and shinier just around the corner, ready to tempt the disaffected away. I’m quite attached to the old place now, and I’d miss it terribly if it disappeared.

Filed under Economics, Second Life Tagged with Economics, Second Life

Girl from Mars

April 7, 2009 by johnny 1 Comment

After a prolonged gestation period, the virtual world of Blue Mars has started to recruit beta testers, and will, if you believe developers Avatar Reality, go live sometime in the summer.

The visuals, which utilise the CryENGINE2, certainly look pretty, and A-R are promising that users will be able to play without having to buy the latest graphics card, though they are keeping the details of the minimum hardware specifications a secret for now. Windows Vista is required though, so my old linux box definitely won’t work.

It’s claimed that the platform will be able to support thousands of simultaneous users in each region, which would be a massive advance on the paltry number Second Life can manage. It appears though that this will be done by a process of sharding, which I’ll admit I don’t really understand, except that it involves running separate instances of the same location on different servers, with new ones being spawned as necessary. I would have thought that this meant that if you had arranged to meet someone at a popular place then you might miss them because they were on a different shard, but there might be some technical way around this.

There will be a content generation system, but this will be limited to developers who have paid to sign up with A-R, leaving no space for amateur creativity. A central item registration system will protect IP rights, and, presumably, allow A-R to prevent the manufacture of the sort of things that have generated all those lurid stories about the perversity of Second Life. Some sort of virtual currency will exist, but ordinary users won’t be able to cash it out into real money.

So is Blue Mars a Second Life-killer? The graphics are a lot better, the scalability sounds attractive, and there does seem to be plenty to do. I can’t see too many current SL residents being tempted away though, since they would surely miss the freedom to produce their own content, and the potential, however illusory, for making some money.

Hard-core SL fans are unlikely to be the target demographic for Blue Mars though (but then, judging by Linden Labs’ recent actions, hard-core SL fans aren’t even the target demographic for Second Life). Avatar Reality will have their sights set on the corporate and educational markets, as well as new VW consumers who have graduated from places like Habbo and Club Penguin, and are more interested in the metaverse as a place to be fed entertainment rather than an outlet for their creative urges. These of course are exactly the clients who, we are told, represent the future for SL. If A-R are successful in stealing away this potentially lucrative business, they might just end up messing things up for those of us who do stick around in Second Life.

I was originally going to go for the obvious Bowie track as the title for this post, but I like this tune better.

Filed under Culture, Economics, Second Life Tagged with Culture, Economics, Music, Second Life

Brave New World

March 13, 2009 by johnny Leave a comment

As readers will no doubt be aware by now, in an almost unbelievable development Linden Labs have announced the creation of a new “adult-themed” continent, to which all mainland businesses dealing in such merchandise will be required to relocate in the very near future. As it is worded the proposal seems to indicate that all adult-orientated activity will be confined to the new landmass, though various Lindens, contributing to the debate on the SL forums, have sought to reassure residents that the regulations will be interpreted in a way that will not affect what individuals do in the privacy of their own homes.

To say that reaction to this announcement has been negative would be somewhat of an understatement. I gave up reading the comments on the forum after 15 pages, but the feeling among residents was unmistakable – almost universally this is regarded as a terrible idea. Objections range from opposition in principle to the limitation of free expression, through doubts about the workability of the scheme (particularly the age verification element), to concerns from retailers worried that they will be forced to exchange their established prime locations for undesirable plots on the new continent. Just about everyone expects in-world trade to take a hammering, mainland land prices to collapse and a mass exodus of disaffected residents.

Linden Labs seem to be taking a massive risk with this move. At the moment they have a solid if limited business model – collecting subscriptions from a core of residents for whom the freedom to do what they want in SL is the main attraction. They may or may not actually engage in “adult” activity, but they like the idea that they could if they so desired – it’s a transgressive edge that is missing from their real lives. The Lindens are betting that the income they will lose as a result of alienating part of their current user base will be more than compensated for by new money from corporate and educational customers who are currently, so the theory goes, scared off by the reports of Second Life’s rampant perversity. I guess they have done some sort of research to back this up, but even so it’s a brave enterprise that will forego a proven revenue stream in pursuit of what may turn out to be an non-existent market.

Filed under Culture, Economics, Psychology, Second Life Tagged with Culture, Economics, Psychology, Second Life

On the margins

March 11, 2009 by johnny Leave a comment

I don’t expect that my last post, in which I proposed that the value of virtual objects is effectively zero, will have caused a great deal of consternation in the SL commercial community, since I’m guessing that not many of them are overly impressed by Marxist economic analysis.

What if we take a look at the question from a more capitalism-friendly economic viewpoint? In general, non-Marxist analysis tends to reject the idea that commodities have intrinsic value (as is proposed by the labour theory of value) in favour of a more subjective formulation; the exchange-value of an object is what it will fetch in a free market, which in turn is dependent on the level of demand and supply.

This kind of theory is popular in financial circles, since it implies that value can be generated purely by the process of exchange, and that bankers and their ilk are actually wealth-creators, rather than parasites who have grown fat on the the toil of the labouring classes. (Though we’ve been hearing less of such triumphalist talk recently).

That aside, does a supply/demand model of value give us hope that Second Life commerce can be viable in the long-term? Sadly, no. The problem lies in the concept of marginal value. According to the theory, exchange-value is determined dynamically by the balance between the prospective buyer’s desire for an item and the level of supply. That desire is not constant though – it decreases as the buyer’s stock of an object increases. A man who has no oranges might be willing to buy them for a dollar each, but by the time he has bought ten he will probably be thinking of spending his next dollar on something else, though he may be persuaded to buy another if the price drops. The marginal value of an item is what a customer is willing to pay to get one more than he has already, and always trends towards zero. It may even go into negative territory if there is a cost associated with having too many items, such as storage charges.

The marginal value of most real-world items is maintained by their perishable nature. In Second Life though items last forever, so as residents age, and accumulate more stuff, their willingness to buy new things tends to decline. Even the most fanatical fashion-victims will eventually have enough clothes, shoes, or whatever, and retailers will have to drop their prices to tempt them into further purchases.

New avatars will still need to buy things of course, but since the percentage of people trying SL who go on to become long-term residents is quite small, it seems likely that the demographic will gradually mature, and the economy will stagnate. (There will be a subsection of the population for whom shopping is an end in itself, and for them the marginal value of new items will remain consistent, but I don’t think there are enough of them to maintain a growing economy).

So there you have it. Communists and Capitalists agree: the Second Life economy is doomed. People should stop wasting time trying to run businesses that have no future, and concentrate on exploiting the real potential of virtual worlds; the chance to create new kinds of art and entertainment, and to experience the myriad different forms of interaction that the grid gives us access to.

Filed under Economics, Politics, Second Life Tagged with Economics, Financial crisis, Politics, Second Life

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