Editor’s Note: This guest post by Gwyneth Llewelyn, “a blogger, philosopher, activist, and entrepreneur in the Second Life® world,” is part of the Second Life Bloggers first annual Mix ‘N Match blogging event suggested by Vint Falken of vintfalken.com and ArminasX Saiman of secondeffects.com.  (Check either blog for more details about this event.)  Each participating blogger suggested a topic, which was then randomly assigned to a second blogger to be published Nov. 12 on a third blogger’s blog!  By the roll of some virtual dice (shaken by Vint and ArminasX), I am pleased to share Gwyneth’s fascinating look at the content crisis, vs. the money crisis, affecting SL business, a topic suggested by Stuart Warf of The Insane World of Stuart Warf.  My suggestion for a topic (”Biggest Life Lesson Learned in Second Life”) is being blogged by Rik Riel of The Click Heard Round the World at Wildstar Beaumont’s blog Wild Worlds. And my contribution to this Mix ‘N Match (”Drama and Neighbor Wars on the Mainland”) is on Ann O’Toole’s Unique Needs blog.

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The Future of Business in Second Life

by Gwyneth Llewelyn

All financial crises are half psychological (usually driven by the ever-present media) and half due to real issues. With real life’s crisis settling in slowly, the question about how it will affect Second Life®’s business is also in every resident’s minds.

Polls and surveys have informally shown that residents expect to spend less in SL now that their financial outcome in RL is not clear. SL’s commerce in the near future seems to be threatened.

This is, of course, the psychological side of economy. We become more careful with what and how we spend because the media tells us to do so. SL is just a part of RL, after all, so it’s reasonable to submit that people will behave sensibly in SL as well and not spend as much as before. Although, granted, a few surveys also show that during a financial crisis, people tend to stay at home for getting entertainment, and that means watching more TV, playing more video games, and … connecting to virtual worlds.

But that’s just one half of the story. Right now, businesses in SL face a more pressing issue: there are too many choices!

At the Armidi mall in SL, designers have congregated into a “content empire” for marketing and sales.

This might come as a surprise for many eager merchants, happy to sell their digital wares. Second Life boasts about 2.2 billion unique items — far more than any other virtual world or digital art shopping site, by several orders of magnitude. One of SL’s appeals, for digital artists (or programmers!) is the huge consumer base, not found on any other place. And a significantly high number are also very eager to spend a handful of US$ per month to buy digital content. This has been going on since at least late 2003, when SL was way smaller than it is right now — so why should things suddenly change in late 2008, with a population that is 2,000 times larger, and with a million US$ changing hands every day?

The reason is not obvious, but it comes down to demand and supply, like we hear about in Economics 101.

Although the supply has grown dramatically — nobody can keep track of how many clothes designers are around, for instance — the number of people willing to spend money in SL to buy digital content has not grown that much. Actually, it has grown at a much slower rate than SL itself — to the point that I claim that although we might have 15 million registered users, and more than a million regular residents, the number of people willing to buy content is probably not more than a hundred thousand (some people even think it’s way lower than that). And while SL grows by about 400,000 to 500,000 new users every month, most don’t stay for more than a couple of hours, and very, very few are willing to spend anything in SL.

On the other hand, the content creators are not giving up, and launch more and more content to be bought. But now … they have reached a limit. The old SL mantra of launching new products every week or so is hitting a ceiling: the SL economy’s ability to “absorb” more content. So shops, although they offer an increasing number of novelties, find that their number of sales has actually decreased.

The old rule for making money in SL — focus on novelty — doesn’t seem to be working any more. And there is no surprise there: people have a set limit of L$ they’re willing to spend, and with so much choice, they tend to pick among a larger number of content creators. Thus, individual creators are losing sales to the ever-increasing competition, because SL’s number of willing customers is not growing at the same rate as new content (and new content creators) is introduced in SL.

So what does this mean for the future of business in SL? It introduces a new concept to creators: aggressive competition.

This was not obvious in the past few years, where the number of unique items for sale was under the threshold of the residents’ ability to buy it. These days, however, only the “known” brands are able to successfully (and aggressively!) compete in the marketplace.

And for many content creators — mostly designers and artists, not business people — this is new and they don’t know how to cope with it. It feels “bad” for them to try to shut down the business of their fellow content creators just because not everybody can survive in a saturated market (a market where there is more supply than demand). Many went the easy route — dropping prices and offering freebies. This, however, even aggravates the problem: people will stick with freebies (which never go away and just accumulate over the years, while at the same time they increase in quality) and spend even less.

So, although from a statistical point of view, more items are “distributed” around SL, they are of an increasing lower price — and, overall, content creators are not earning as much as they did before, even if they have more “sales.”

Less sales, of course, means less money to invest in buildings (so builders will see a reduced income as well) and new land for further shops (so real estate agents will see fewer people willing to buy their plots). So the market tends to get back to an equilibrium: many content creators, disgusted with the way things are going with SL, leave in frustration — thus allowing the remaining ones to increase their sales to earlier levels. This is naturally very sad for the very talented people in SL who don’t manage to make an income in SL any more and have to leave — but a bliss for the ones remaining.

What are the more aggressive content creators doing? Not unlike what happens in RL, they congregate together into “content empires.”

The Armidi brand is a good reply to the competitive market; other examples are Mystical or Hairspray: whole sims where talented creators pool their efforts together under the same brand (or the same “megashop”), and together have enough strength to drive the competition away. It also means that more business-savvy content creators are able to push a common brand (or a “shopping experience”) ahead, and leave the shyer content creators happy doing what they do best — joining the “big brands” and producing content without worrying about how well sales are going.

In a sense, it’s a return to the old days of 2005/6, when most shopping in SL happened in malls and “shopping islands.” These were usually starting places for new content creators, since at the very beginning, they weren’t able to attract customers on their own, and benefited from the traffic driven to the malls (specially when these were mostly around telehubs and similar high-traffic areas). Later on, individual brands, once achieving some recognition, started to move away from malls and develop their own shopping experiences in isolation — it was easier to drive traffic there. In the future, however, there will be no place for so many brands.

Like in RL, where the huge brands drove the individual tailors and stylists out of business (or simply “absorbed” the better ones), the same will happen in SL as well. Expect mega-brands to become increasingly more powerful, drawing from common resources to increase their awareness, and simply push the individual content creators out of business.

The battle for content creation in SL will thus move from individual talent and artistic creativity towards aggressive business and ruthless market domination.

Content creators who have seen this coming have already joined forces and work together under the same umbrella organization — either under the same brand (like Armidi) or the same location (like Mystical or Hairspray) — and become the next wave of commerce and business in SL. The search features in SL are unable to give the talented, individual content creators any edge over this. Pooling resources together, the mega-brands will dominate, by being able to buy ad space on the content-related e-zines and blogs, by doing the best events to attract new customers, by being able to spread the word about their businesses more effectively.

SL will once more imitate RL that way, although for slightly different reasons.

And we’re going to see a large number of talented content creators leaving SL in frustration, blaming the worldwide financial crisis, Linden Lab’s change of prices, the grid’s instability, or the way newbies are unable to figure out SL on their own (again, LL’s fault). They will be missing the point: content creation in SL has become a business like any other, and that requires a completely different set of talents and skills. Product quality will be way less important than successfully being able to manage marketing, sales, promotion, and raising brand awareness.

And SL commerce will find its equilibrium once more, in spite of the RL financial crisis. But at the cost of losing some of their more talented creators.

“I’m not building a game. I’m building a new country.”
—Philip “Linden” Rosedale, creator of Second Life, interviewed in Wired, 2004-05-08

Here’s the most recent list (as of 11-15-08) of articles posted as part of the SL Bloggers First Mix “N Match:

1. Once Upon a Time by Radar Masukam
2. How real is SL? Harper Beresford
3. Second Life as an exploration of culture by Young Geoffrion
4. The Funniest Thing That Ever Happened To Me In Second Life by Bone Mosten
5. Segregation in Second Life by Samantha Pointdexter
6. Religion in Second Life by Danni Ohara
7. Second Childhood by Kanomi Pikajuna
8. Is Second Life Truly a Second Life or an Extension of the First by Eladrienne Laval
9. Second Life Theatre by Peter Stindberg
10. How to write a good profile by Chestnut Rau
11. Spitting out the Landscape by Alphonsus Peck
12. Creator vs. Consumer by Vint Falken (co-organizer of the event)
13. Digital Suicide by Noelyci Ingmann
14. The deeper meaning of Philip Linden’s hair by Merrick Thor
15. To Voice or Not To Voice by Ganymedes Costagravas
16. What have you learned about running your SL business by Jordyn Carnell
17. True Mentoring by Otenth Paderborn
18. Why do public-facing Lindens seem to always get a bad wrap? by Ari Blackthorne
19. Life Lesson I learned through Second Life: Immersion Aversion by Rik Riel
20. Genderbender OMG by Torley Linden
21. Visions of SL in Five Years by ArminasX (the other co-organizer of the event)
22. How SL Has Helped of Hurt Your RL by Rik & Osiris Pfalz
23. Has SL helped me deal with RL issues by Crap Mariner
24. The Future of Business in Second Life by Gwyneth Llewelyn
25. Do’s and Don’ts of SL Avatar Fashion by Johan Yugen
26. The Best Moment of My Second Life by Dandellion Kimban
27. Drama and Neighbor Wars on the Mainland by Joan Kremer
28. 5 days away from SL and any SL related social media by Zoe Connolly
29. Keeping new male residents engaged in SL by Quaintly Tuqiri
30. Deep Psychological Impact of What I Wear by Mykyl Nordwind
31. Romance and Love in Second Life by Prad Prathivi
32. Top 10 Most Important Things for a Newbie to know in order to enjoy SL by Joonie Jatho
33. 10 Things I Hate About You by Nightflower Blossoming
34. Paying it forward by Brandy Rasmuson
35. Second Life® and it’s Role in the Discovery of Self by Kirasha Urqhart
36. The Economics of Freebies by Skinkie Winkler
37. Can SL and RL truly be seperate from each other? by Stuart Warf
38. Correlation between Drama in SL and A Very Small Number of Brain Cells by Tiyuk Quellmalz
39. Noobish SL experience through present by Ari Blackthorne
40. What Groups I Can’t Live Without and Why by Tymmerie Thorne
41. Fashion in Second Life: Can We Run Out of Ideas by Dusan Writer
42. The Immersiva of Bryn Oh by Botgirl
43. RL and SL: Separated at birth or art imitating life by Ariadne Korda
44. The evolution of SLex by Teagan Blackthorne
45. Sounds like Second Life® by Princess Ivory
46. Mixing RL and SL – The dynamics and pitfalls of living and playing in SL with your RL significant other by Cat Magellan
47. Non-profits in Second Life by Tiessa Montgolfier
48. Toilet inSL by Eliza Wrigglesworth
49. Extending your Virtual Life by Uccello Poultry
50. The History of Prim Hair by Luna Jubilee
51. Magazines that exist out of SL by Nadine Nozaki
52. Why fashionista drama is both a good thing and a bad thing by Ann O’toole
53. Real or Second Feelings by Shockwave Plasma