Philip Linden meets Kintoki, a “leather-clad and buxom” fox in late 2007 and waits for the Space Shuttle to launch at the International Spaceflight Museum in Second Life. It’s nearing midnight on December 31st, 2007, and by the account, Philip is still at the office while lesser Lindens have headed off for a night of real life.

Baby MBAs will be reliving that moment for years to come in a case study published by the Harvard Business School that sheds light on the conditions leading to a consideration of “radical initiatives” by Linden Lab:

- Should the server code be released under an open source license?
- How could this be done in a way that would prevent digital assets from being stolen by unscrupulous avatars?
- Should property owners provide their own hardware while the Lab exits the equipment and hosting business?
- How would all of this affect revenue from land use fees?
- Could the Lab reduce fees for property owners that supplied their own servers without undermining its business model?

At the same time, the company’s commitment to the idea of virtual world interoperability was still a priority yet posed risks to the company:

- What business model would allow the Lab to profit from an open architecture that reduced or eliminated users’ switching costs?
- Would an influx of visitors from other virtual worlds, say Sony’s “Home”, erode the Second Life community?

Harvard case studies are descriptive rather than prescriptive. They outline a business scenario and provide the facts, context and factors that could drive decisions, and then leaves it to the reader (or teams of MBA students chunking through a case a night or whatever they do) to figure out the best solution.

The Harvard case study is a fascinating read. For $7 it gives a snapshot in time, but it’s about as concise and perceptive a description as I’ve yet read of the challenges that Linden Lab faced as a business with the leveling off of growth following the heady days of 2006-07 (kudos to them for getting the terminology correct, and for capitalizing Residents):

“Growth had strained Linden Lab’s software, and Residents suffered frequent crashes. Likewise, software ease-of-use was a serious problem. New users found tools that controlled movement, communication and content creation to be very complex. Finally, like most other large, open, online communities, Second Life had trouble with antisocial behavior and fraud. All these factors posed barriers to mass-market adoption and contributed to high churn. About 90% of new users abandoned their Second Life avatars after only a brief trial.”

Following a brief overview of MMOs, the case study highlights why Second Life is different:

- A world not a game: “Second Life was not a game; it lacked a story line with well-defined goals. Instead, Second Life was a world entirely created by its Residents.”
- Intellectual property rights held by the users
- A business model based on “land use” with subscriptions entirely optional
- Client-server architecture allowing users to interact with each other (as compared to “sharded” worlds)

The case study highlights the early days of Second Life’s creation, quoting Mitch Kapor (he of the moving pieces) and how they overcame waves of skepticism:

“With something radically new and disruptive, you always see a struggle between faith and skepticism. The earlier it is, the greater the struggle…Today’s skepticism about Second Life is that it’s not for regular people. “I’d never use this.” That reminds me of other things I’ve heard people say. In 1995, I was showing people Amazon.com, and they would say “I’ll never put credit card information on the Internet.” Well, we got over that.”

But the case study shines when it describes the forces that come to a head in late 2007/early 2008, and in some ways the exhibits and appendices are worth the price of admission, neatly summarizing statistics available elsewhere, but forming a nice snapshot of the in-world economy, growth statistics, and corporate involvement.

And priceless is the description of the Linden Lab business model, especially because the authors don’t break out into gales of laughter when they describe the Tao of Linden:

“At Linden Lab, employees were expected to choose their own projects; they never got direct orders from a supervisor…’Sometimes you will fail, and in those cases it is very important to fail fast and fail publicly - that is how we learn and iterate…

JIRA contributed to a culture of transparency at Linden Lab, as did a system called “As & Os” (Accomplishments and Objectives) which required every Linden Lab employee to send a weekly email to every other employee, detailing progress over the prior week against previously stated objectives as well as tasks for the coming week.”

(Aside: OK, and let’s say each person replies to 2 of those emails you get from your fellow staffers, and just assume you reply all, isn’t that something like 1000 emails in your in box on Friday afternoons? It’s no wonder you can never get Concierge support on those days).

But the case focuses mostly on the question of how to open up Second Life without over-turning its business model entirely, or at least retaining one at all. Philip pictured SL as a service company:

“The Web provides a template: it’s open, but companies like Google, Verisign and PayPal earn huge profits by providing services like search, domain registration, security certificates, and payments.”

The case ends with the following question:

“Rosedale had described Linden Lab’s role in fulfilling its new mission as akin to that of a public utility providing dependable electric power or telephone dial-tone service. But what did the transition from laboratory to utility mean for the company’s culture and its distinctive management practices? Would current employees continue to find their work challenging and rewarding? Were new employees with different skills and attitudes needed? As a utility, did it make sense to continue to allow the Lindens to choose their own projects?”

Back at the offices of the Lab on that lonely New Year’s Eve, Rosedale said” “I guess the idea of the Lindens trying to build a stable public utility must seem funny. We look more like a group that would build a really compelling dance club!”

It’s unclear to me whether he actually said that, or whether Harvard was taking creative license, but it echoes Philip’s remarks on Second Life’s 5th birthday when he waxed nostalgic of the club he built in those initial months of Second Life. At his side for the 5th anniversary of Second Life stood M, (who was just learning to push the buttons on the Love Machine) while Mitch Kapor waited in the wings to end the frontier mentality and get the grid ready for the grown ups.

The case study is currently listed as being “under revision”. It’s silent on whether Harvard MBA students are required to wear a special tag when wandering around the Grid looking for statistics.