Misguided Headline of the Week: Second Life Economy "Too Big to Fail?"

Miranda Marquit of the science and tech website PhysOrg asks us whether virtual world economies like Second Life are "too big to fail." Pixels and Policy wonders if the patchwork economy of Second Life might be too ethereal to expand.

Enthralled by Ms. Marquit's seeming comparison of Second Life to the major banks and lenders bailed out by the United States last year, we did a bit of investigative work on just how solid the economy of second life truly is.

Turns out the virtual grass isn't as green as imagined.

First Bank of Linden

Second Life feels like the United States in microcosm - banks mostly serve a decorative purpose on the landscape, while malls coat the hills and cash machines offer easy Linden Dollars for those willing to complete advertising surveys. The malls overflow while other sites sit empty.

It's generally agreed upon that Second Life brought in around $500 million last year, but $360 million of that was in the form of item purchases. While a $360 million payday isn't anything to sneeze at, most item purchases are one-time deals. Land sales, where fees accumulate monthly as long as the owner holds land, are a much safer source of income.

A rough estimate using the figures provided would put Second Life's land revenues somewhere in the $100 - 120 million range, and indeed land purchases have spiked almost 75% since early 2008 as players and developers snap up the ever-expanding virtual landscape. But despite being the largest virtual world economy, these figures don't amount to much when compared to other online games.

Tigers in the Virtual World

Though Second Life brings in half a billion dollars a year, the earning power of Linden Lab suffers two major problems:

1. The bulk of content purchases (and play hours) in Second Life are provided by the top-tier of players, while a growing percentage of "casual" Second Lifers purchase nothing at all.
   
2. The total population of Second Life is still small by market standards, with per-player expenses still averaging in the single digit to low double digit range.

Asian game companies, especially those now protected from foreign competition and investment by the Chinese government, are working on solving those problems.

With millions of users and a combined revenue of over $5 billion , Asian virtual worlds spread their risk of capital flight simply by having a larger base of potential consumers. Instead of the top 500 Second Life players spending and transferring the bulk of Second Life's currency, Asian games provide an active consumer base ten times the size. The likelihood of a few players causing a price shift declines.

Second Life has done something impressive by creating a market economy in the virtual world. It achieved even more by turning that market experiment into a financial success. But in the face of $5 billion behemoths, Second Life has much work to do in order to grow its consumer base and reduce the risk of flight from its in-game currency.

In short: fewer arms for back-patting, more arms for continued construction.

Comments

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virtual world economies like Second Life are "too big to fail."

That is COMPLETELY a false statement... (and i'll be commenting on their blog too in a moment.

Not only is the info and stats offbase on their article....

but lets take the Second Life economy for example: the SL economy is a Ponzi scheme (and I personally think Ponzi schemes have a bad light on em, because in my own opinion, some ponzi setups work, people just aren't willing to admit it.... for example tupperware parties, Avon sales, multi-level-marketing... all ponzis and pyramid schemes that work).

SL is a ponzi scheme that we all believe and trust. SL creates a fictional dollar which parallels to the real life currency. Linden Lab creates the fantasy that it is worth $260L to $1usd... and we all believe it. As long as we all keep believing it, the scheme continues to work.

The economy will collapse when a majority decide to stop trusting the value of the linden dollar. If everyone wanted to cash out their Linden Dollars at once, the economy would crash, the fictitious value would be exposed, and the bubble would burst.

PS: I'm not sure if you remember... a few years ago, the linden dollar value kept lessening and plummeting. So what did LL do, they hired one employee to present the fantasy that the Linden Dollar will now always equal $260L (approx) to $1usd.
and ever since then... that's how it's been. They don't care what the real economic value is. The point is LL wanted to present that their economy is fine, and that their Linden Dollar value will always remain stable... it doesn't matter if it's the truth or not... it just matters what the society believes. And that is the same in real life as well.