The Future of Business in Second Life (an SL Bloggers Mix ‘N Match guest post)

by Joan Kremer on November 12, 2008 · 9 comments

in Adventures

Editor’s Note: This guest post by Gwyneth Llewelyn, rx and “a blogger, infection 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.

• • • • •

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!

Future of Business in SL

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

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{ 5 comments… read them below or add one }

1 Oscar Page (1 comments.) November 15, 2008 at 8:34 pm

Honestly, I can see some leaving and “megabrands” taking over somewhat, but not entirely. Some people create just to create; where their motivation is not money. They simply like to create and the lindens are nice, but not necessary. Yes, their hobby of creating content for virtual worlds may come at a higher cost now with the tanking currencies and stock markets, but that’s not going to completely stop them or anybody else from creating. And you know that somebody’s going to look at the “megabrand” items and spark the beginning of almost every entrepreneur’s journey where they say to themselves, “You know I can do that better than they are.” Some of the boutique designers are just going to have to hop off of that “I need my own island sim for my brand” mentality that struck with a vengeance. Trust me, I remember when my buddy’s island for his trees and landscaping business was in the furthest northwest corner of the main map. Now it’s slightly northeast of center and those are not mainland continents growing to the west.

Also, hopefully this will infuse the fashion world with lower introductory prices because, to be honest, some of them have gotten to be completely ridiculous. I have the money to pay for them, but there’s a point where quality doesn’t meet price.

2 Jordyn Carnell (1 comments.) November 17, 2008 at 1:06 am

I think Gwyneth Llewelyn caught the essence of RL economics and their impact on SL realities perfectly. Though SL isn’t impacted EXACTLY the same way RL is. (For example the major cost of production (time) is unaccounted for by many if not most of the businesses in SL. And changes in the Real Economy will definitely effect lots of people’s time allocation.) Other than that the market shifts predicted, and the opportunities afforded “branding umbrellas” seem perfectly reasonable.

Jordyn Carnells last blog post..Feelings.. Nothing more than feelings..

3 kanomi (1 comments.) November 19, 2008 at 4:03 am

You have a good analysis of the current bloodletting out there, and you make an interesting case for what can happen.

But you underestimate the challenges in-world, for-profit creators are currently facing. These factors conspire against price stability and the ability of anyone to make a profit:

* Old items never depreciate or fall apart, unlike IRL, dragging down demand for replacements gradually over time
* An ever-increasing number of available items compared to actual paying users push down price too
* Freebies of ever-increasing quality offer permanent alternatives to purchases
* Freebie aggregators whether in-world or on web sites like slexchange (or whatever their new name is) also drag down prices
* Creators who create for fun and nominal fees, not for profit, aren’t going anywhere even though times get tough
* Recessionary pressures in the macro-econonmy reduce the ability of the general userbase to spend money on SL:
http://www.massively.com/2008/11/18/second-life-land-loss-escalates/

I think that reflects more than the inept decisions around those low-rent quarter sims. I’ve already seen a lot of for-profit clubs being knocked out, which has nothing to do with land price freefall. It will hit for-profit content creators soon it it hasn’t already.

Against all of these overwhelming deflationary pressures, how can “super-brands” or alliances of creators compete to prop up prices and profits?

Oscar has it right: the most successful creators will probably be those who are not interested in making money, but simply put out quality prices at a reasonable price as they have always done.

SL is not classical economics by any means, and anyway I always thought content creators who do it for love and craft do a better job and create better products than a “brand alliance” or (even worse) some nasty real-life sweatshop brand ever could.

kanomis last blog post..The League of Virtual Vixens

4 Egor (1 comments.) February 18, 2009 at 10:55 am

Hi there I was browsing Internet searching for how much do hair extensions cost and your blog regarding ure of Business in Second Life (an SL Bloggers Mix ‘N Match guest post) | WRITERS IN THE (virtual) SKY came my way. Very interesting! You really do know your thing! I\’m gonna bookmark you and come back in a few to see your new posting! Looking forward to! Cheers!

5 John Tresh (1 comments.) January 9, 2010 at 9:25 pm

My son found it interesting how some of the effects of the economic downturn IRL affected the SL economy as he found fewer people were looking to buy things he was creating. It seemed every time I complained about my customers not buying he was saying the same LOL. I guess it helped to bridge the “generation gap” as we both had similar problems.
John Tresh´s last blog ..Wheat Beers My ComLuv Profile

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