Business in Virtual Worlds, Deep Thoughts, Second Life, Virtual World Platforms

In-World Business Models and Second Life

second life business model hierarchy

The departure of Rezzable had me re-thinking what it takes to build a business in Second Life, or maybe it was more the comments on my post, most of which seemed to express one of two thoughts: “yeah, it was never clear what Rezzable was trying to do” or “the whole thing’s a pyramid scheme anyways and Linden Lab is on top.”

Now, I’ve long held a few beliefs about this, things I can’t seem to shake, and one of those beliefs, I suppose, is along the pyramid scheme lines, but it’s not because Linden Lab is a giant Amway distributor or something, but rather because they set up a world in which there are no sinks other than attrition - virtual goods don’t die, they don’t wear out, and they don’t combine with other virtual goods to become potions or armor sets or whatever. In Second Life, virtual goods live forever, or at least at the bottom of your inventory, which for me anyways is a sink of a whole different nature.

So my first belief is that the virtual goods economy, if under-pinned by a static technology or user base, is unsustainable. The question therefore becomes whether the technology will remain static or the user base will grow. Either way, it’s a “semi pyramid scheme” only so long as Linden Lab doesn’t take action on either: they either need to continue to improve the technology, or increase the user base, and preferably, obviously, both.

See, there’s a challenge in virtual goods: in a game, you intentionally create wear and tear. Your armor wears out. You need to combine herbs to make a potion which you then consume. This demand, supply and removal cycle creates an economy of goods. But in Second Life, the economy of goods doesn’t have scarcity. Scarcity was instead built into the concept of land and the prim limits within that land. I can own a million couches, but if I don’t own a million sims on which to rez them, they sit silently in my inventory never to be seen again. And, realizing that, I’m not so likely to buy too many couches.

This is also, to my mind, why the fashion and skin business is so successful - because you aren’t limited to land, all you need to do is scrounge a few Lindens together and you can look like a model, there’s no prim limit on your attachments (other than the bouncer at some event who complains about your ARC).

Now, scarcity of land, where there’s a natural restriction on how many prims can be rezzed in the world based on how many people want to shell out the real world dollars to own some virtual real estate places a cap of sorts on how large the demand curve for virtual goods can be. You only need a few couches, or one house, although sure, you swap it out now and then, move from a beach house to a castle or whatever.

And scarcity of land, and LOCATION of land, used to be the counter force to the cap on demand. Because if you SUPPLIED virtual goods, the best way to fulfill the not-limitless demand was, well, location, location, location.

This started to change when out-of-world commerce kicked in, and has become institutionalized with the purchase of XStreetSL by Linden Lab. Sure, it’s still location - you can get a better location through better keywords, and certainly through advertising, but regardless, this decouples the counter pressure of land ownership for the suppliers of goods from those who demand them.

This reshuffling of what land means, with virtual goods being institutionalized Web-side, doesn’t kill the market for malls (people love to shop in world, and I think they’ll always love to do that), but it does change the pressure points in the land market which leads to its uses by things other than living and selling stuff.

It puts, instead, increased pressure on the use of land for the actualization of experiences, which leads, perhaps, to the zoning of those experiences.

The Hierarchy of Needs
I remember reading about the idea of Maslow’s Hierarchy of needs in Hamlet’s book, which he initially posted on his blog. And intriguingly, this idea got picked up again by ArminasX.

ArminasX has it something like this:

Now, I have my own issues with Maslow’s Hierarchy, but I thought there was something interesting in exploring this because of my belief that the in-world business models must, by the very nature of the virtual economy, evolve to ever higher forms of engagement to be successful.

I’ll call this the “Hierarchy of Business Models” maybe, and it looks something like this:

second life business model hierarchy

At the base are virtual goods and land. The stuff that gets you going when you first arrive in SL, or, really, in SL at the beginning (or at least at the point that they embedded IP and commerce and land).

Above that are the systems that support either making stuff, or distributing it. Those are the tools for building and then the systems for managing it - inventory systems, texture managers, in-world vendors, and rental box systems.

Belonging is marked by environments and performance. You build a castle, and then you build the village around the castle. Or, you build a night club, a performance space or a theatre.

At the next level is branding. The ability to package up all the stuff below and create a brand around it that brings value to all the rest of it.

And then I put cross-platform integration, which shouldn’t be confused with interoperability. By that I mean the ability to carry a brand into other channels, or to bring brands and experiences from other channels into Second Life.

The Limitations and Enablers
Now, as I said above, the success of Second Life, or at least the idea of business IN Second Life (you can always kill the economy entirely, I suppose, and just sell Nebraska or sims to schools or whatever, so I’ll limit this to the idea that the in-world economy and land market is meant to stay) is that it relies on two things: an increase in users, or changes to the technology, and preferably both.

And I’d propose that these are, and will be, highly influenced by enabling and constraining factors (click for larger image):

Second Life business model factors

Now, I’ve left unstated the constraining and enabling factors related to the very two things I think are most important: new users, and technology. Frankly, the list of factors for either one of these would be as long as this already lengthy post.

So what’s interesting about this, I suppose, is that it’s NOT static. Changes to the restraining and enabling factors can influence existing businesses and open up new opportunities.

You change policy, and the pyramid shifts - the virtual goods section becomes smaller, maybe, and the ‘tools’ business more prominent. Or you add mesh import, or clothing layers maybe, and the base of the pyramid goes through upheaval.

What’s safest, generally, is to be closer to the top of the pyramid…or to build businesses that include those layers.

One final thought, I suppose - which is that as you move from virtual goods into higher levels of conceptualization, the real winner seems to me, in-world at least, to be the one who creates a pyramid scheme of your own - helping others to realize their own visions for their in-world businesses through the services that support the people providing services.

And in my next post on this subject, I’ll cover this biggest gray market of all - the business that doesn’t even really happen IN world, where virtual worlds are extensions of existing business models rather than born of prims and land and a lot of dreams of climbing to the top of the heap.


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