Business in Virtual Worlds, Education in Virtual Worlds, Second Life

Decoding Linden Lab and the Oracle of Virtuality

Philip Rosedale returned as CEO of Linden Lab and all I could remember was this running tally I used to keep at the side of the blog: the number of days since Philip had last blogged.

With the debacle of Viewer 2.0, Mark Kingdon had capped two years of transformative change with a flare-out (or was it a fizzle out?) but you had to admire that he had set out some clear goals and had ruthlessly pursued them. He had brought in the adults, set strategies and goals, and had a vision for improving the first hour, snazzing up the platform, and creating the infrastructure for a ‘social media-ish’ virtual world.

While we were left with broken search, a Marketplace that doesn’t quite function, a Viewer that new users didn’t mind but old users hated, a sexy looking new Web site, Avatars United, and an Enterprise product that wasn’t given the time or resources to gather steam – at least it always felt like there was a methodology, a plan.

With Philip back at the helm, he begged for patience at first, and then revealed his own version of a strategy: fast, easy and fun; a more focused open source development project (Snowstorm); and….well, and then silence (other than a post about third-party viewers).

Sure, we have mesh imports and display names. But both projects were well underway before Philip returned, with the former announced well over a year ago by Tom Hale, and the latter tested in focus groups and NDA marketing focus groups in the spring.

Now, it’s not that Philip didn’t set out a strategy. He highlighted two main efforts: fixing the Viewer, and the system by which it is developed; and improving the Marketplace. But his big call to action was fast, easy and fun and his theory was that if you can do that, and do it as a sort of Grid-wide thing, the sub-markets and communities would follow:

As a final note, I would note that we are not planning to change Second Life to exclude any categories of users. Our restructuring messaging around ‘consumers’ and ‘web’ versions of Second Life seemed to mistakenly suggest to some that we plan to more narrowly focus the experience on a specific demographic or use model. We aren’t. We are reducing efforts across the board that in our opinion are being done in the wrong order, but those resources will re-focus on creating a single effective system that is better for all categories of user. We believe we first need to improve and complete the core experiences that drive Second Life, before we dive into how to customize it for different markets.

Strategy Obscura
So, back in the day my running tally of days since Philip last blogged was a sort of proxy call for better communication of strategy.

We’d hear general sort of pronouncements and then we’d go months without hearing from senior management (and Philip himself) and we’d end up trying to decode more granular changes to see if we could figure out the strategy behind them.

Hindsight is everything, I suppose, but these days I can’t help thinking that I made a mistake: it wasn’t that the strategy was obscured, it’s that there wasn’t one, there was just a sort of draft set of principles, vaguely worded, and the folks working at the Lab had as much trouble as I did making sense of it all.

I can’t help wondering – if you’re on the Snowstorm team, do you have anything more to go on than fast, easy, fun? I mean, maybe that’s the entirety of the strategy and you have to decode it yourself.

But yesterday’s announcement that the Lab was raising prices on education and non-profits has kicked in a sort of reflex instinct: maybe there is a strategy, and I’m simply too mortal to get it.

I have no idea why I’m doing this to myself again. I went through this for, hmmm, a few years I guess and it turned out that there wasn’t any sort of secret answer, there wasn’t much more than the Love Machine, and Mark Kingdon was brought in to answer the same question I had pounded my own head over: where are you trying to go, and how are you going to get there?

So maybe I’m feeling nostalgic. Maybe the Lab is charting a specific course and just can’t tell us about it.

The Way Ahead
So with all that in mind, knowing that this is a fool’s errand and that when sacrifice chickens (or pigs) at the Oracle of Linden Lab you’re more likely to get vague, cryptic and spluttering replies, I’ll take a crack at it anyway.

I mean, maybe there is a strategy, after all, and our view of the world is just too narrow to see it.

Money Well Spent
On yesterday’s Metanomics, we closed the show with a quick discussion of the Lab’s move, and Robert made the point that it’s possible that the decision was calculated based on known data and that it could be related to profitability.

If this is the case, it’s possible that the Lab has factored in the size of the education and non-profit markets, has taken a survey, has assessed the attrition through some sort of mathematical model based on customer insight and come away with a conclusion: a price increase will see some attrition, but the losses will be mitigated by the gain in revenue.

With 800 education institutions in Second Life, and countless non-profits, let’s just take a guess and say that there are, hmmm, 500 islands say which will be affected by the price increase. That’s roughly $75,000 in revenue each month. You would need to lose less than half of your customers to be making more money at the end of this.

Do the math:

- If you lose 25% of your customer base, you still come out ahead $37,500 per month (based on there being 500 sims, if there are more, it’s more, if less, it’s still a profit)
- That equals $450,000 in new revenue per year, even though you’ve lost 25% of your customer base. Even if you think you’ll eventually lose 50% of your customers, you’ve still netted out a big chunk of change

So the logic might be really simple: “What could we do with roughly $500k in new revenue. Even if we assume that we can hang on to 75% of our customers in the first half of 2011, that’s still $250k – and we can lose another 25% of them before year end and still come out even. What can we do with all that cash?”

The benefit, to the Lab, isn’t just the gained revenue, it’s that the revenue gained can be spent on something else – and theoretically, the something else includes increasing the number of users, the number of islands being rented, or the amount of revenue to be gained.

The problem, of course, is that the math is one thing, but the calculation of goodwill is another. And there’s an implicit gamble: that the loss of goodwill will have a neutral effect. For myself, the loss of goodwill is, decidedly, NOT neutral but then I’m not Linden Lab.

New Product Offering
The Lab has a history of making announcements, waiting for the fallout, and then announcing something new with a post that begins: “We’ve heard your feedback and we’re pleased to announce….”

I’ve often wondered whether this is a refined form of back-peddling or is something more devious. But whatever.

In the more devious scenario, the pricing announcement is actually prep work for a new product launch of some kind. Lord only knows what it might be, but my guess is, based on previous hints from Terrence, is that it would have something to do with a geographic archipelago.

Following panic about a price increase, the Lab would announce something along these lines:

“We’ve listened and we’re pleased to announce that we’ll be forming an education and non-profit section of the Grid. A continent for schools and a continent for non-profits. These continents will enjoy reduced tier. If you’re interested in relocating, let us know.”

But why would the Lab do that? And my theory has to do with something else, namely….

Second Life Will No Longer Be One World
In this theory, the Lab is trying to force march institutions to aggregate with each other by using price increases as a way to shake up attention and bring ‘sectors’ together geographically. The price increase is followed by a retraction, but the retraction includes the caveat that institutions need to “physically” come together.

Geographic contiguity, however, wouldn’t be done because the idea of being able to roam through an education archipelago makes geographic sense, but because the Lab’s longer term plan is to spin off Second Life into separate products. Separate Grids, interconnected via identity systems, inventory, Marketplaces and currency….but stand-alone Grids.

In this long-term play, the Lab will end up with a series of “mini-Grids” and would start to spin out the management of those mini-Grids to stand-alone companies or third-parties.

Linden Lab will become a services company providing software development, identity systems, currency, etc. but will leave the management of communities to stand-alone companies and organizations.

The Non-Profit Commons would manage the community of Non-Profits. The Teen Grid would be managed by the teen educators or ISTE or whoever. The military islands would be managed by a third-party military contractor, etc.

Linden Lab as a services company, Second Life (the consumer world) as a stand-alone company, and the specific segments of users managing their own little mini Grids through whatever third parties step in to take that on.

Open Source the Servers
All of which would lead to the “big play”.

Here’s the scenario:

- Bring the education sims together and then split those sims off into their own archipelagos, with the long-term goal of spinning off the management those archipelagos to third-parties as well. Same for non-profits, etc.
- Spin Second Life off from Linden Lab. The “public Grid” would be a stand-alone company making money solely from tier and would be responsible for community management.
- Linden Lab would be a private company making money off of the software services (commerce, Markeplaces, identity, etc) it provides, the servers it rents to individual communities, but would NOT manage those communities itself.
- Finally, a new entity would be formed: the Linden Lab Foundation, which would take on the task of maintaining the Viewer and the server code development under a new open source arrangement modeled on Mozilla.

News Before the Storm
Of course, the above is early morning speculation. And there’s another side of the coin.

Often, bad news precedes big news: layoffs are made before Philip returns. The new management wants a clean slate so they aren’t saddled with having to handle the negative stuff, they can always blame it on the guy who came before.

Or maybe there is no strategy. Maybe it’s just, well, a decision, and they make it, and they see what happens and move on. And as always, of all the things that it could be, perhaps that’s the scariest speculation of all.


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