SL Economy Misunderstood Again

A whitepaper is making the rounds claiming that the Second Life economy is a ponzi scheme. I wasn't sure whether to blog this at all; the SL economy is so obviously not a mere scheme that it's hardly worth opposing the notion. But what's interesting here is not that the SL economy is not as liquid as, say, the economy of the United States. It's that serious consultants such as Randolph Harrison would go into SL expecting the economy to be as liquid as that of the United States. What a silly expectation. Wonder where they got that idea?

Second Life has about 10,000 - 20,000 concurrent residents right now, explosive growth from the under-5,000 levels experienced much of last year.  Nonetheless, that's a small village. Imagine Mayberry, in isolation, with the occasional Don Knotts figure setting up a bank.  Ha: The consultants walk in and expect to find perfect price arbitrage. Ha Ha: When they exploit the arbitrage opportunities to winnings that exceed the local GDP, they expect to cash it all out. Fark: When the markets won't support that, they think they've discovered a con game.

It's not a con game. It's a village-sized market. In fact it's a tourist attraction-type village: the big numbers of the people you see are one-time visitors. Newcomers are arriving in droves. Land speculation is rampant. But it's not thick; it's tiny. Not a ponzi scheme: a little mini gold rush.

If there's a con in any gold rush situation, it's not in the local economy; it's not in the value of gold. Gold is real and valuable. The con comes in when people are told there's lots of gold when there isn't. I am not sure who is most responsible for the hype now surrounding Second Life. Nonetheless, the flood of articles and reports have not been very responsible in terms of putting SL's size in perspective. The fact is, a small thin economy can produce surprisingly large sales figures as the dollars whiz around from the dry cleaners to the auto body shop to the greasy spoon diner. If Mayberry posted its numbers, they'd also be in the hundreds of thousands of dollars per week. However, big economies are in the hundreds of trillions. Reporters don't have a feel for what those numbers should be; and apparently they got the impression that SL's economic numbers made it a candidate for the G-7.

I certainly have tried to put things right, telling every reporter  that whatever the economic stats seem to imply, the concurrent user numbers for SL are still small, dwarfed by two orders of magnitude by the fantasy games. I tell them that fantasy game economies are based on far more mundane and reliable production processes of enchanting, harvesting, and armor-crafting: good, solid crafting of useful items and services rather than wild speculation about future dwell. For this, I have suffered, criticized for not giving SL its due. But I was trying to help, actually. I don't think SL is going to enjoy the backlash that's now coming, led by Mr. Harrison's piece and Clay Shirky's. Hype is such a dangerous marketing tool. A two-edged blade with rebound.

All in all, it's disappointing. 2007 may become known as the virtual world crash. That was the year when all the serious people decided that everything they heard about virtual economies was crap, just because SL turned out to be more like Mayberry than Manhattan.

On the other hand, who cares. While the serious people decided it was all hype, the game masters continued to crank out virtual worlds and thereby sucked more and more real energy out of the mainstream economy. By 2012, macroeconomic effects became evident.

Whatever is said about SL, the portal to fantasy continues to widen, and that's what will determine the future of this space.


Comments on SL Economy Misunderstood Again:

Cael says:

I think that article merely makes clear what's obvious to almost everyone. SL is not a financial opportunity, no matter what Linden Labs or Ailin Graef may want you to believe.

That doesn't make it worthless. Many people apparently enjoy SL. Just not as many as they claim again, by orders of magnitude.

Really, most of the backlash problems with SL would just go away if only they'd turn off the hype. It's really annoying and it's almost all lies. If they didn't continually try to ZOMG!!11!-whitewash the major media, nobody would care enough to write backlash stories.

I think we just don't like being treated like suckers by somebody's PR agent.

Posted Jan 26, 2007 8:02:18 AM | link

Mike Sellers says:

Ted said, I am not sure who is most responsible for the hype now surrounding Second Life.

Well, let's see... Philip Rosedale is on the cover of the February issue of a little magazine called Inc. The title on the cover, in 2-inch type and right under Rosedale's smiling face, says, "The Coolest New Marketplace in the World." And, right there beside it is not just a quote, but the quote, quite literally the money quote from Linden Labs' CEO: "What you have in Second Life is real and it is yours. It doesn't belong to us. You can make money."

And then, even more ironically, the title of the article on the story inside the magazine is, "Only the Money is Real".

I don't think we have to look very far to find who is responsible for Second Life's remarkable PR and incredible hype. Second Life has captured the imagination of many people who might otherwise have never given virtual worlds a second thought. Unfortunately, Linden Lab execs have been publicly making dissembling comments like the one above for a long time (what you make is yours... unless we decide differently; you can make money... though more than 99% of people here don't; there are millions of residents... they're just never here; and thousands of you can watch the same event at the same time... so long as "thousands of you" actually means no more than a couple of dozen). Ponzi scheme or not (and I agree, that's an overstatement driven by the market's significant illiquidity), they've been beating this drum -- and are now in danger of being beaten with it.

All in all, it's disappointing. 2007 may become known as the virtual world crash. That was the year when all the serious people decided that everything they heard about virtual economies was crap, just because SL turned out to be more like Mayberry than Manhattan.

On the other hand, who cares.

Ted, you seem to think that fantasy and other non-SL worlds will somehow escape the "virtual world crash of 2007" you hypothesize. I'm not so sanguine. On one hand, it's terrific seeing someone like Rosedale on the cover of Inc., on CNN, etc.; it adds legitimacy and social currency to the entire MMOG/virtual world field. OTOH, when investors and others, including the press, find that they've been stung by SL's hype and (mistakenly) conclude that "everything they heard about virtual economies was crap" as you say, this is likely to backlash on us all: whether you're looking for a foundation grant, a university class to teach, a publisher deal, or investor capital, the last thing we need is another educational and financial winter like we had prior to WoW's success due to people mistakenly thinking that this "was all crap." I for one don't want to have to waste my time defending virtual worlds, trying to haul them back from pariah status as being nothing more than economic facades and social sideshows full of Gorean BDSM and furry sex.

If unbridled hype can make an economic Mayberry seem like Manhattan, think how it can distort the actual economic, community, and social impact of virtual worlds into complete undeserved irrelevance.

Posted Jan 26, 2007 8:34:32 AM | link

IAmEric says:

I think the economy has grown to be a little bigger than Mayberry by now. If you look at the exchange rates, you see frightening spikes. These are obviously the result of people trying to liquidate more than a few hundreds of dollars. However, notice that those spikes have disappeared in the last several months. I think there is increasing liquidity in the SL economy and it has already grown to at least the size of a small developed modern city and not merely a backroads town anymore.

I don't think SL or any other major virtual world will collapse in the next year and maybe never. SL is reaching that critical mass where it can survive beyond LL. LL is becoming less significant to the future of SL with every passing day. With the opening of the viewer, the process to independence is well under way. The opening of the server will ensure the continued existence of SL in some form even if LL disappears.

So, Professor Castronova, when are you going to release a thorough economic analysis of SL? I would do it myself if I didn't have a day job (which often is a day and night job) :)

Best regards,
Eric

Posted Jan 26, 2007 9:30:15 AM | link

Jerry Paffendorf says:

Ted > All in all, it's disappointing. 2007 may become known as the virtual world crash. That was the year when all the serious people decided that everything they heard about virtual economies was crap...

Virtual world crash. All the serious people. The Second Life Horde Is Evil!

Seriously, it's weird to hear you guys talk like this. There's so much going on in this space, as Eric points out SL is evolving, and, god, if anything 2007 will be the year virtual worlds start to take off in wider and wider circles, not crash. There seriously isn't too much to crash yet, there's money coming in, there are new efforts coming up that haven't hit the light of day yet, and a whole lot of open sky ahead. You really don't feel that? Keep the faith, Ted. When you start to look down you lose the best part of yourself.

"2007 may become known as the virtual world crash."

That's another great line to print out and pin up next to my desk. Keep 'em coming!

Posted Jan 26, 2007 10:27:19 AM | link

Cael says:

Jerry Paffendorf wrote:

> The internet is a whole new business model! Invest in our dot.com!

Or the wide-eyed equivalent thereof.

Posted Jan 26, 2007 10:30:22 AM | link

Jerry Paffendorf says:

Cael > Or the wide-eyed equivalent thereof.

LOL. Well, color me young and Tech Crunchy but we haven't seen anything yet.

Invest in Zombo. The value proposition is immense.

Posted Jan 26, 2007 10:46:55 AM | link

Hiro Pendragon says:

Hey Ted, remember although Mayberry seems small, SL was only a strip mall in Mayberry a year ago. :)

Posted Jan 26, 2007 10:51:10 AM | link

mmowtf says:

I so wish Ed would stop ripping me off.

http://www.mmowtf.com/mmowtf/2007/01/castonova_steal.html

Posted Jan 26, 2007 11:05:42 AM | link

Mark Herpel says:

Great discussion, what I find funny is that SL is a virtual clone of the real world. Small economies work exactly the same way, some people capitalize while others have fun or loss a bit. It is no ponzi, the way it works is exactly how a free market system works.

The lack of liquidity on a sale or exchange of L$'s to fiat should eventually disappear with more agents, just like in the real world.
Mark
http://www.digitalmoneyworld.com

Posted Jan 26, 2007 11:20:04 AM | link

Thomas Malaby says:

@mmowtf:

That's a serious charge, but unsurprisingly it makes no sense. My reply is a comment on your blog here.

Posted Jan 26, 2007 11:57:16 AM | link

Kathy says:

There's so much wrong with that article, it's hard to know where to start. It was so silly, it's tempting to think it was planted by LL to discredit critics. There's so many things wrong with the hype about SL that it's hard to believe one could throw a dart and not hit something more meaningful than this.

As an aside, I thought the author's obliviousness to any form of economic value to an economy other than the ability to game the economy as a currency trader said more about the financial services industry in the real world than it did about Second Life.

The reality remains. SL is a game. It's a game you can make money at IF you understand it and play it as a game. And that game's owner is playing a dangerous game with the press, attracting attention to a company who's main markets, fetishistic pornography and gambling, are ones that thrive best when attention is diverted.

Posted Jan 26, 2007 12:45:24 PM | link

Daniel Stengel says:

There is a lot of press coverage on SL also here in Germany (with Ted being quoted in many articles). I think within the next 12 months, the gold rush may abate, but a more serious (and sober) understanding of vw worlds will kick in. Currently, the press is fascinated by ridiculous vw sex clubs and casinos, missing the point that one day we may not use the conventional browser to skip through the online offers of our favourite rl clothing store, but with a char with the rl body measures. Of course, the store is located near other stores we prefer, like a 3D presentation of search results.

In this sense, and that's the connection to the main topic, I assume that within short we will come to the conclusion that it would be wrong to discuss a virtual economy as an economy, but rather as a distribution tool. I wouldn't compare Second Life to Mayberry as an economy entity, but rather compare the inherent information infrastructure.

Daniel

Posted Jan 26, 2007 12:51:04 PM | link

Jeff Freeman says:

Seems more like a prison economy to me.

Posted Jan 26, 2007 2:38:10 PM | link

randolfe_ says:

I am sorry that you find my analysis hardly worth mention, and so easily dismissed.

I have a simple question: Do you really believe your "Mayberry" analogy? I bit later I'll enumerate the flaws in comparing Second Life to a developing country economy, let alone "Mayberry".

I studied under Stiglitz, Schramm (who set up some developing countries' central banks and currency systems) and Beim. I seem to recall the word "sovereignty" being a fundamental prerequisite.

To what sovereignty does Second Life and/or Linden Research fall subject? It's own?

True there is a lack of liquidity. I notice that no one addresses the issue that Linden Research advertises the ability to create such liquidity (to the tune of $1.2m real dollars per month, I might add). So the problem is liquidity, which we don't really want, but we want to pretend is there.

When they start printing M$ in MayBerry, let me know so I can go break the MayBerry Central Bank's peg to the dollar.

Posted Jan 26, 2007 3:11:30 PM | link

Matt Mihaly says:

Mike Sellers wrote:

Ted, you seem to think that fantasy and other non-SL worlds will somehow escape the "virtual world crash of 2007" you hypothesize. I'm not so sanguine. On one hand, it's terrific seeing someone like Rosedale on the cover of Inc., on CNN, etc.; it adds legitimacy and social currency to the entire MMOG/virtual world field. OTOH, when investors and others, including the press, find that they've been stung by SL's hype and (mistakenly) conclude that "everything they heard about virtual economies was crap" as you say, this is likely to backlash on us all: whether you're looking for a foundation grant, a university class to teach, a publisher deal, or investor capital, the last thing we need is another educational and financial winter like we had prior to WoW's success due to people mistakenly thinking that this "was all crap."

I agree with most of your post Mike, but I think there's one thing you're missing out on. It's not about foundation grants, university classes, and so on. It's about the players.

The players are there, and as long as the players are there, money will be chasing those players. Sure, Second Life is stupidly overblown and sure, it's clearly a result of a conscious decision to mislead the public by Linden Labs, but there's no changing the fact that there ARE virtual worlds out there that actually do have millions of players and which do not have to hype themselves to be quite impressive. And hey, they're actually profitable.

I'm not telling you anything you don't know, but I think there's a tendency among all of us Terranova types (whether academics or developers or otherwise interested parties) to get overly caught up in the importance of hype surrounding Linden Labs (I know I have.) Yes, it's incredibly annoying to watch them so blatantly misrepresent their product to the media, but the players aren't fooled.

You can fool the media insofar as they're apparently happy to publish without even minimal fact-checking, but the players are a lot harder to fool because they will judge the experience on its own merits.

And they have judged. They've judged, en masse, that worlds like WoW and Runescape are where they'd like to be, for now at least. As long as WoW, Runescape, Habbo, Lineage 2, etc continue to maintain and attract millions of players, I wouldn't worry about the money drying up too much regardless of what happens to SL in the long run. They may be a major world in the eyes of the media, but they're a second-tier player in reality (which is a couple tiers higher than my company, lest anyone think I'm slamming on them for being second tier), and while an eventual success by Second Life could help us all, their failure wouldn't have much impact, I suspect.

Or perhaps I'm just being naive in maintaining faith that investment money isn't completely and irrationally herd-like.
--matt


Posted Jan 26, 2007 3:43:57 PM | link

bobby says:

I welcome the crash.

Let the posers, speculators,and academics move on to the next big thing.

Things we so much better before....

Posted Jan 26, 2007 5:47:29 PM | link

Hamlet Au says:

> Second Life has about 10,000 - 20,000 concurrent
> residents right now

Actually, Ted, that's *so* last month ago-- peak concurrency is now 27,000.

Posted Jan 26, 2007 5:58:03 PM | link

Vili Lehdonvirta says:

The hype is not quite over though: Sweden to set up embassy in Second Life

Posted Jan 26, 2007 6:00:13 PM | link

Andy Havens says:

Here's the thing... I have played golf. Twice. And I have bowled. Probably about two dozen times in my life. If you ask me, "Have you golfed? Have you bowled?" I would have to answer, "Yes." Am I a golfer? No. Am I a bowler? No.

I was unaware that something that exhibited real-word economic elements had to be a discreet, complete economy unto itself in order for it to be, well... "an economy." Maybe it does. I'm not an economist. If that's the case, I guess a place where I can't buy cheeseburgers will never be "an economy," because, by-god, I don't care what else "an economy" is or does, if I can't transfer my funds into some medium of exchange whereby a cheeseburger in my pie-hole is the final result... screw you, it ain't an economy.

SL is a game/VW for the love of Mike. Of course it isn't and will never be a "complete" economy. You can't eat a cheeseburger there. Or retire there. It's not real, children. It will, at best, be, maybe, someday, a "virtual economy." Because it is a virtual world. Whether it's a virtual third world, virtual Mayberry, virtual Manhattan or virtual Cincinnati is dickering over size.

There are real world economies where you can't do things that you can do in the US economy, because the banking systems and stock trading systems aren't set up for them. There are real world markets that are so far behind ours in terms of things like arbitrage and money markets and financial vehicles that it might as well be 1930. Well... does that mean they're not real? That they're not "economic?"

No. They're just different. SL's "economy" isn't the same as that of the US. Or Ecuador. Or a prison. It isn't a fully-fledged economy in which I can trade ANYTHING real (cheeseburger...mmmmm) for anything real (actual sex).

I love that Ed talks about fantasy MMO economies in terms of, "far more mundane and reliable production processes of enchanting, harvesting, and armor-crafting: good, solid crafting of useful items and services rather than wild speculation about future dwell." These are fictional economic quantities, eh? The writers of the fantasy fiction say, "This piercing sword of +6 is worth twice what this smacking object of +3 is, because it does twice as much damage." It is invented value, wholly created by the publishers of the system. The value is in no way linked to anything other than the fiction, and is entirely related to in-game pursuits.

In SL... value is determined by the market. Which is much closer to RL. If i want to buy some cool prim hair, I get to look at 37 varieties and determine which looks best on my avie and compare prices, which have been set by other users: NOT by the publishers. That's real economics, not game economics, and that's what I hear when I read that SL "has an economy." Not that it's the same as the real world economy, but that it has features in common with it.

Unless you count RMT, WoW only plays at economy. SL actually has some economy. Not as much as RL, but some.

Posted Jan 26, 2007 6:16:14 PM | link

Matt Mihaly says:

Andy Havens wrote:

Unless you count RMT, WoW only plays at economy. SL actually has some economy. Not as much as RL, but some.

So, unless you count the real economy in WoW, it doesn't have one? That doesn't make much sense, does it? The RMT market in WoW likely dwarfs the size of Second Life's market. If we're talking about the developer's intentions, that's one thing, but if we're talking about whether it has an economy or not, the developer's intentions don't really matter. What is, is.

--matt

Posted Jan 26, 2007 6:35:35 PM | link

mythicalblog>>Terra Nova Corrects Error in Second Life Report says:

[..Edward Castronova noticed that this report about Second Life contained an error, and has posted corrections to the second drawer from the bottom, on the left-hand side, of the desk in his 4th-floor study of Edward Castronova’s Furry Fun Palace, also Terra Nova...]

Posted Jan 26, 2007 6:41:56 PM | link

randolfe_ says:

There are real world economies where you can't do things that you can do in the US economy, because the banking systems and stock trading systems aren't set up for them. There are real world markets that are so far behind ours in terms of things like arbitrage and money markets and financial vehicles that it might as well be 1930. Well... does that mean they're not real? That they're not "economic?"

But alas! Second Life isn't in Uganda or inter-war Germany, or pre Depression US. It is in the US, and subject to existing US financial and legal systems. I know that's not a progressive or particularly popular view. It wasn't in the world of online gambling a mere year ago when 2 guys from the UK were pitching an idea to us, either.

And, the promoters of Second Life promote it as -- read this carefully -- a modern, sophisticated, open, economy fully of opportunities. They set up multiple levels of trader, merchant, enterprise currency-participation statuses, with a top bracket of $1.2M USD value limit.

No where, once, in the Economist, Financial Times, BusinessWeek, or Lindens' own materials do I see an invitation to "come help build the foundations of an emerging economy". But then, that won't get IBM, Sun and Sweden to jump on board, most likely.

And by the way, the value of things in WoW, EQ, etc. are also set by the market. Markets exist everywhere, whether they are sanctioned or not. The difference is Blizzard isn't offering million dollar capacity trading accounts to RMT farmers and passing it off as a real, dynamic economy.

Posted Jan 26, 2007 6:47:15 PM | link

IAmEric says:

Hi Randolf,

I can appreciate your qualifications of having studied under real economists, but perhaps you might consider that you could be wrong? I could lay out my credentials too if it would help. There should be no doubt that the people here are qualified to speak on the topic at hand.

Having said that, I think your analysis is incomplete and wrong on many levels. What is the definition of a Ponzi scheme? Here is a candidate from Wikipedia:

"A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business."

In what ways does SL satisfy that definition? There may be Ponzi schemes within SL, but that doesn't make SL itself a Ponzi scheme. So there. That is the first criticism, which will provide a theme. Semantics. If you had said "pyramid scheme", which you do mention in the article, you'd be closer to the point you're trying to make. The lack of precision in your choice of terminology calls the research into question right away. Aside from that, even the question of whether SL is a pyramid scheme is quite debatable.

Earlier I noted that the spikes in exchange rates have disappeared over the last several months as you would expect as the liquidity increases with more participants in the "economy". You even provide the exhibit yourself. What do you think would happen if you and your hedge fund buddy tried to repeat your experiment today? I suspect it would be much more difficult to force a spike in the exchange rate. This is quantifiable so I would be glad to be proved wrong on this point.

You also said,

"SecondLife isn’t even a simple virtual economy, with legitimate buying and selling, and opportunity for those who would compete."

If that is so, then how can you explain people quitting their dayjobs and making a living in SL? Even if it is a modest living, people are doing it today. SL is a small but legitimate virtual economy and for you to not recognize that in the presence of such documented facts is a bit baffling. Since the semantics in your arguments have been rather weak, here is another candidate definition for virtual economy from wikipedia:

"A virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually in the context of an Internet game."

If you agree with this definition, then you would have to agree that SL is a virtual economy. If you do not agree, then would you mind offering a better definition?

You said,

"I seem to recall the word "sovereignty" being a fundamental prerequisite."

Maybe for a sovereign nation, but what about Mayberry? Mayberry has an economy and is not sovereign.

Ack! I could easily sink another hour at least dissecting your article pointing out the flaws, but I unfortunately don't have the time. I'll just part by noting once more how completely unscientific your research into SL has been.

Eric

Posted Jan 26, 2007 7:45:44 PM | link

Alvis Brigis says:

Jesus Christ, Muhammed, Brahman, Vishnu, Thor, Gaia & Spaghetti Monster,

I beg of Y'all, please help your people to understand that Second Life is not just a game, that it is a new technology, that Multiverse and Google's developing Earth-a-verse are new technologies in the same vein, that these are budding little economies, that SL is a new more open phase space that allows more possibility multiplication aka EVOLUTION than MMOGs, that if people do consider SL a game then they must also consider life a game, that it is natural for many people to react negatively as powerful new technologies begin to diffuse, that many folks with serious investments in the MMORPG space need to better evaluate their neuro-economic inertia and related cognitive dissonace related to SL, that SL seems overhyped to those who can only imagine and hope for it's linear diffusion or demise, that SL is not overhyped (in a general sense, yes in a reported users sense) considering what it will evolve into, that SL is ONLY JUST BEGINNING TO FORM, that SL will experience ongoing explosive development and value increase as the concurrency rate jumps astronomically and NETWORK EFFECTS kick in and it goes OPEN SOURCE -- MULTIPLICATION -- MULTIPLICATION -- MULTIPLICATION, that the Virtual Worlds crash of 2007 will never happen (definitely a backlash though), that the polarized reactions to SL are indicative of something NEW diffusing -- not the same old thang with crappier graphics and a few novel bells and whistles, that people need to swallow an objectivity chill pill and look at SL in an evolutionary context.

Is that too much to ask for?

:)

Of course, the reactions are inevitable, as is my annoyed reaction to those reactions, and the annoyed reactions to my annoyance.

Posted Jan 26, 2007 8:09:50 PM | link

Prokofy Neva says:

>I don't think SL is going to enjoy the backlash that's now coming, led by Mr. Harrison's piece and Clay Shirky's. Hype is such a dangerous marketing tool. A two-edged blade with rebound.

Oh, stop fretting and fussing, Aunt Bea.

Posted Jan 26, 2007 8:27:08 PM | link

Prokofy Neva says:

Well, I hate to cite him, but you know, Stalin had a good formula for designating autonomy to the Soviet republics and even being willing to concede sovereignty. These involved:

o border with a foreign country
o compactness of the people, i.e. a homogenous people who spoke the same language and had a common culture
o able to secure their borders

there were a couple more, I think it was national industry and banking.

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Posted Jan 26, 2007 8:48:03 PM | link

randolfe_ says:

If that is so, then how can you explain people quitting their dayjobs and making a living in SL?

I'm sorry if that sounds like a ponzi pitch. People on my blog are claiming they work but a few hours weekly and earn many thousands USD per week, yet somehow are experiencing 50% growth.

Wow! If that is real, there will be 1bn users by the end of the year and the Fed will need to reconsider how they measure the money supply.

I've stated my economic arguments over and over, but apparently the inconvenient parts are generally ignored.

How about a practical argument, which tends to really rub the people on this forum wrong: if my analyses are so clearly and laughably flawed, then why all the fretting? Now I'm hearing about leading an industry wide crash?

Pardon my incredulity. Even the economy of Mayberry (which will learn about the importance of sovereignty very promptly were they to begin printing and circulating their own currency) is resilient enough to withstand some pointed questions and researched criticisms.

This is all part of the process too, even if you're right an Second Life *is* an emerging economy. Emerging economies get tested, hard, in some very unpleasant ways. Or, they don't tend to last all that long.

Posted Jan 26, 2007 9:31:51 PM | link

blaze@blaze.com says:

oh come on guys, why argue. Clearly Terra Nova and Edward, etc know way more than the CEO of IBM, one of the longest standing and largest tech multinationals.

Pah.

Posted Jan 26, 2007 10:23:12 PM | link

blaze@blaze.com says:

I just can't understand why it is that Terra Nova has such a hard on for SecondLife. It's ... surreal.

Well, maybe Cory alienated you folks or something. Oh, who knows.. But seriously, isn't this all getting a little silly?

Aren't you folks grown men? Don't you see this is an unhealthy obsession you've all got going?

Posted Jan 26, 2007 10:26:52 PM | link

magicback (Frank) says:

SL and other economic ecologies work only if there are people willing to support it. It's a trust, civilization, and citizenship issue.

Moreover, touts are touts and promoters are promoters. Some may be annoyed by the attention they get, but I at least pass they by along the street without notice.

The hype machine may be on, the backlash may be in progress, but smart people in smart companies are moving in to SL like it's Antarctica. I see much parallels to Antarctica:

1. Native land is mostly barren and undeveloped
2. People staking claims and declaring ownership
3. People have to import goods and serices
4. People maintaining their cliams at a lost
5. Intrinic advantage to trade among each other for goods and services to collectively reduce operating costs (economies of scales, sepecializiations, and other elements of developing economies)

I also see parallels to mall development:
1. The mall developer need anchor tenants to bring in the crowd
2. The mall developer earn their keeps by the smaller tenants that put up shop next to the anchor tenants
3. The mall developer, the anchor tenant, and the smaller tenants all need cusomers to come in and spend
4. Have a plaza or lobby area to hold special events to attract attention and crowds

The able Linden business development dept. is not out to sell the small guys the vision and future of SL, they are out to get the anchor tenants. They are touting SL like Antartica and anchor tenants are moving in the same way.

Nothing wrong with this. It's business as usual.

Frank

Posted Jan 26, 2007 10:56:22 PM | link

magicback (Frank) says:

Also, note that in terms of attacting customers....Theme parks, like WoW, and Mall parks, like SL, tend to converge over time into something like Las Vegas, or in this case Macau 2.0.

Maybe Multiverse will be the mashup of WoW and SL.

Frank

Posted Jan 26, 2007 11:05:29 PM | link

IAmEric says:

Hi Randolf,

Thanks for the level-headed response to my criticism. I may have been a little harsh, but I like your response (a lot). So maybe we can all learn something through this exchange. I can see where you're coming from if the people on your blog are making ludicrous claims like that. I'd like to think I'm open-minded enough to see merit to both sides of the argument. If I am too optimistic and you are too pessimistic, maybe the truth lies somewhere in between.

No reasonable person would claim that SL is a booming economy, but I think it is also unreasonable to claim that it doesn't even constitute an economy. Professor Castronova struck a good balance I think, except for, as I said in my first response, I think the economy is already bigger than a virtual Mayberry.

Do you find it interesting that the exchange rate has not spiked in the last several months? With so much media attention, do you think people haven't attempted to withdraw more than a few hundreds of dollars from the economy? I think your arguments might have held up better several months ago when I assume you performed these financial experiments, but I not so sure they would hold up now. I could be wrong.

Several months ago the concurrency rates were likely 5,000-10,000. Of those, probably only a handful were interested in exchanging currency. Ask the hedge fund guys about something called "algorithmic trading" (it doesn't mean what one might think at first sight). Even in the real financial markets, you cannot simply liquidate large positions. Large is relative to the economy. At the time you performed your experiment, "large" probably meant a few hundreds of dollars. I suspect, although could be wrong, that "large" is significantly larger now. Perhaps in the thousands of dollars. Even with liquidity capped at a few hundreds of dollars, if you are clever about the way you did it, you could probably still withdraw significantly large amounts from the economy without too much of a drag on the rates.

I think SL is interesting because it is debatably the first relatively good functioning virtual economy that is supporting full time (+) employment, the attention of big corporate sponsors, not to mention celebrities and politicians. Understanding that good ideas are not necessarily determined through democracy, it is probably worth keeping in mind that some very intelligent and thoughtful people are taking SL seriously. Sure, it is possible that the critics are much smarter than champions, but to outright dismiss the possibility that this is real seems premature.

I'm not sure if it will be SL, Areae, There, or something we haven't yet heard of that tips the scales, but it is clear to me that the virtual world we've been expecting is now upon this gamer generation.

Best regards,
Eric

Posted Jan 27, 2007 12:04:13 AM | link

Stan Trevena says:

I just came from a presentation at our local junior college. The ages in attendance ranged from middle school to college. The presenter of the evening was Bruce Damer, author of the book "Avatars!" He had an emergency today, so we ended up bringing him in over video conference for the event. For an hour and a half he talked on the history of Virtual Worlds, and we ended with a demonstration of an education project I am working on in Teen SL. There were close to 200 people there at the lecture. Many of those in the audience were high school students who were there on a Friday night (do you remember your Friday nights in High School?). After the presentation on the SL Teen grid project, we had many students come up and ask how they could get involved. If you are curious, information on this project can be found on our blog at http://pacificrimx.wordpress.com

So I ask you this. What other educational topics and/or projects would bring teenagers out to a local junior college on Friday night? Maybe this 2007 crash that everyone is predicting is the falling out of the media hyped aspects of SL that have been perpetuated by many in all forms of media; the SL millionaires, sex trades, and real estate tycoons. That bubble might be popping, but there's another one growing in the education world.

A quarter of the population of the United States attends school. That's roughly 75 million students. The early explorers (we are not even in the early adoption phase yet) are just discovering SL as a platform for education. If even a fraction of these start using SL as a platform, there will soon be a boom. With the SL client now in open source, and the server to follow by year's end, I think many are missing the true potential for SL to establish itself as a strong virtual world platform for education. The project I am working on now will bring close to 200 new "travelers" to the Teen Grid. Notice that I am not using the term "resident". As more virtual worlds are established, avatars will travel between "bubble" universes in the metaverse. With the SL platform, these "bubbles" will be private or corporate grids in the not too distant future.

Yes, the reported business opportunites of SL are over hyped. Yes, there seems to be plenty of blame to go around. And yes, Linden Lab has not helped with the vague overblown numbers used on the login screen quantifying "residents". But the real story is that Second Life may have more than a few lives left that have not even manifested yet. Everything evolves, why would a virtual world like SL be static?

Right now everyone's jumping on the "Doubter's Club" bandwagon with respect to Linden Lab and Second Life. Call it the Shirky effect, a bursting bubble, or the coming backlash of 2007. While everyone's jockeying for position on the virtual soapbox, something wonderful is taking place on the far side of the bubble. Students are hungry for something that engages them, and ignites their imaginations. From what I've seen, SL is the odds on favorite for crossing over into this educational realm. 2007 will be the year education goes virtual. The students of today have grown up with a controller in one had, and a keyboard in the other. I think they're more prepared than any to dominate the emerging metaverse.

Posted Jan 27, 2007 4:15:46 AM | link

Cael says:

> So I ask you this. What other educational topics and/or projects would bring teenagers out to a local junior college on Friday night?

Anything involving an equal amount of porn.

Posted Jan 27, 2007 6:11:15 AM | link

Richard Bartle says:

Imagine going to a new casino in which the casino owner gives you some chips with which to gamble. You play a few games of roulette, strike it lucky, and end up with many more chips than you had to begin with. You want to cash in your winnings.

However, the casino owner doesn't buy chips, they only sell chips. If you want to convert your chips into cash, you have to find someone else in the casino who wants more chips. Then, they'll buy your chips from you.

OK, so there are plenty of people in the casino who enjoy gambling and who will buy chips from you. New gamblers are arriving all the time, not all as lucky as you, and they're happy to buy chips from you.

What happens, though, when people don't want your chips? Maybe they have enough of their own, or lots of other people have also won and want to sell their chips? Or perhaps there aren't so many new gamblers coming into the casino, so there isn't the demand. What happens to your vast wealth of chips then? What happens when other people realise that their chip holdings are falling in value, and try to cash those in while they still can, too?

There are an awful lot of Linden Dollars in Second Life. They can't all be converted back to US Dollars at a rate of L$266/US$1 (which is what the rate was when I checked just now).

Richard

Posted Jan 27, 2007 7:32:22 AM | link

Andy Havens says:

@Matt: (chuckling) Right. Unless I count reality, reality doesn't count. Good point. What I was trying to make clear, was that if people obeyed the EULA/TOS, there would be no economy in WoW that wasn't game-y. It's *supposed* to be Monopoly money in there, eh? People ascribe real world value to all kinds of situations that aren't explicitly "economies," but that doesn't make them a place where you are supposed to set up businesses. If my kid beats up other kids in the playground and takes their lunch money... is that a job? It has some of the aspects of "job," but we wouldn't call the playground an "economy" even though monetary exchange has taken place. It's extra-curricular, if you will allow that phrase. I feel the same can be said of all real money trades related to WoW, Everquest, etc. They aren't based on the designed function of the space. None of the "units" of the game "know" what "a US dollar" is. The only money that is supposed to go into WoW is $15/month from the player to Blizzard. No money is supposed to come out, except to Blizzard's owners. If you look on anybody else's bank sheets, planning schedules, etc., economic activity related to WoW is, essentially, against the stated wishes of Blizzard. Some would say against the law; some would say Blizzard encourages it. I don't know. But trading $US for gold is not inside the magic circle.

Conversely, SL was explicitly designed to host real-world economic trades. The only way someone would be surprised by a person offering products/services for money is through ignorance. It's in the rules. I get to prim, craft, code, texture, hook, sing, dance, chat, DJ, and (if the market will bear) spin on the beach for a unit of exchange that is explicitly convertable -- through the publisher -- for a real world currency. No going around the system... no eBay... no grey-hat.

So, sure. There is economy *around* WoW. But there is economy *inside* SL. I ain't saying one is better or worse, but there is a huge difference.

@Randolfe: Just so we're clear, I agree with some of your points. Like the fact that SL is inside the US and will, at some point, come up against some pointy truths r.e. gambling and (less likely) porn. When the US shut down some online gambling houses earlier this year, that industry took a huge hit. I'm not sure what portion of SL revenue comes through gambling. They may have to do some serious re-jigging of their bookkeeping or such. Or stop allowing gambling. I don't know enough about online gambling to know.

What I don't agree with is your characterizations of pyramid and ponzi. Just like Clay took one decent point -- the "Residents' number is bad" -- and overblew his point as badly as he was accusing the press of overblowing their points, you're taking some good observations about SL's economic issues and interweaving them with hyperbole. Less than helpful.

For example, you seem to be making the point that you want SL to be a unique, stand-alone (I think the word at one point was "sovereign") economy... and then when I compared it to such, you say that it exists within the US economy, so it can't ever be such. That would have been a very different (and, I think, helpful) angle to take in your original article. Not "SL isn't an economy," but, "SL exists within the US economy, and therefore should/must behave like a _____________." I don't know what. I'm not an economist. Bank? Casino? Chuck E. Cheese? If it can't be an economy because it's inside the US, why did you and your investment team go in there expecting it to behave as such?

As to the ability for the "market" to assign value within WoW... you're just wrong. And I don't say that very often in this space, really. Linden can control the $US-to-$LD ratio to some degree. They can shut the whole mutha down, certainly. They can do many things that have more power than users, of course. They own the whole space, eh? But, within the bounds of not doing "meta" stuff, buyers set value.

What happened to the "value" of old Level 60 items as soon as "Burning Crusade" stuff hit the bricks recently? Blizzard, as part of their business plan, in order to ramp up the one explicit metric in their economy -- $15/month/sub -- released a major expansion pack. I'm pretty sure that the RMT value of various rare items didn't figure very highly in their VP of Finance's spreadsheet.

I've got a buddy who's a relatively casual Level 60 player. He thinks it's hysterical. He's been hanging on to his character, not playing much, waiting for TBC to come out, not chasing the iterations of new gear that have been trickling in, kinda staying at the edge of his guild. In about 15 hours of playing Burning Crusade, he's got items that now outclass his high-play/RMT buddies' crap that had taken them months to accumulate.

Which was, I think, the business case behind TBC; to get casual players back into the game to play more, or to re-up.

I will repeat: there is one unit of explicit, real-word economic value in WoW: $15/month/sub. If you are hanging your hat on anything else, OK. There is mad money to be made in RMT, I'm sure. And order-o-mag more than in SL right now, yep. But if Blizzard can make more money for its folks by wiping out RMT, they will. SL's economic model, on the other hand, *relies* on players doing well, in aggregate, with a rule-set that says, "Among other things, you can make money."

@Richard: Same thing holds true for banks in the US since we went off the gold standard. And you can trade your $LD back to Linden for $US; you don't have to trade it to "other players." Not sure where that came from.

- - - - -

As a marketing consultant in the non-gaming world, I really, really don't recommend that anyone currently put all (or many) of their investment eggs in the SL basket. It's not a platform that currently supports many ways to make a full income. There are a very few people doing well at what is, currently, a hobby space. As advertising is part of what I advise on, I would also not recommend that a client spend a significant portion of their budget on SL assets, as the number of unique users you'd get in front of your product is currently quite low compared to other media. That being said, if you've got enough dough for a MLM campaign, a few hundred or thousand a month to spare, and an intern with nothing to do... knock yourself out. You could get a huge return on your investment from a PR standpoint and have some fun.

What I find continually surprising is that in spaces related to gaming/VWs, social and communicative media, there is this tendency to go all wonky when it comes to discussing SL.

We expect the MSM to get it wrong, eh? They've been getting gaming wrong since they reported that D&D was really about Satanic cults and baby sacrifice. Remember what computers looked like in movies in the 80's? Geez, people... yeah, it would be nice if the Old Grey Mare "got it" about SL, but we at TN are still arguing this shite.

If it's the size of Mayberry, and only some tiny percentage of people are even really taking more than $10/month out of it... good Lord, people... it can't be the financial antichrist. Are there a couple people in the game who are, probably, upset that they've spent a bunch of time and aren't making the money they thought they could? Sure. Are there a couple who got that idea from the glowing press accounts? Yes. But let's compare that to the people who are flocking to Red Roof Inn this weekend to learn about buying houses with no-money-down.

Look at Second Life's website. There is very little there about "build a business here." It's mentioned, yes. But mostly it's about the content, the players, the social aspect, the features.

The reason IBM and American Outfitter and Suzanne Vega and Cory Doctorow are interested in SL isn't because it's going to affect their bottom line at the moment... it's because it's *interesting.* For some people, that's more important than money.

Who's getting paid to write this blog? Anyone? I ain't getting paid to comment. I do it because it's interesting to me. For some people, the money makes it more interesting.

Wow. That was a long comment. Maybe I should get paid...

Posted Jan 27, 2007 9:12:09 AM | link

IAmEric says:

Hi Richard,

You could be describing some future SL scenario, or equally the Asian currency crisis of 1998 :)

The point being that there are risks in any (emerging) market/economy including virtual ones. Most people are well aware of the risks, but some can't resist the promise of reward.

Eric

Posted Jan 27, 2007 10:19:41 AM | link

IAmEric says:

Hi Stan,

That was an awesome post :)

I completely agree with you. The potential for education represents the most fascinating thing about SL in my opinion. The gamer generation grew up associating themselves with little pixelated images on the computer screen, e.g. "You killed me!" or "That hurt!". How many haven't made statements like that? Associating pixels on a screen with your "self" provides a sense of presence that non-gamers (e.g. my wife!) will probably find hard to understand. Get two avatars together in a virtual classroom, one in New York, the other in New Zealand, and that sense of presence puts them in the same vicinity. For all purposes, they may as well be really standing next to each other.

That sense of associating your "self" with an avatar provides all kinds of entrepreneurial opportunities as we've seen, but will have an even more profound impact on education.

Fun stuff!

Eric

Posted Jan 27, 2007 10:31:05 AM | link

randolfe_ says:

Andy,

I probably shouldn't engage in this given it's hardly worth opposing the notion, but in the spirit of this thread's host author, here goes anyway...

As to the ability for the "market" to assign value within WoW... you're just wrong. And I don't say that very often in this space, really.

Perhaps you should say that a bit less, then. Econ 101, Market: Collection of willing buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. ... further, the price may be ascribed to anything mutually recognized as bearing value.

What happened to the "value" of old Level 60 items as soon as "Burning Crusade" stuff hit the bricks recently?

Thank you for demonstrating my point. Level 60 items are clearly a scarce resource to which willing buyers assign economic utility. Further, demand shifts affect the price of those items. Sounds pretty microeconomic to me.

Your counter to Richard's point, which was a very sapient one: Same thing holds true for banks in the US since we went off the gold standard. And you can trade your $LD back to Linden for $US; you don't have to trade it to "other players." Not sure where that came from.

I'll leave the macro economics 101 lesson to someone else. A retreat to the "everything is fiat, in the end" philosophical argument is evading the hypothetical analysis, as put forth. Anyways, the USD was a particularly bad choice to attack given it is convertible and enjoys reserve status.

Posted Jan 27, 2007 1:20:56 PM | link

Michael Chui says:

Completely irrelevant to the conversation, but I figured those reading this would find this comment interesting:

"VIPs jumping onto the SL bandwaggon seems more of an act to garner recognition in the eyes of the in-crowd by joining the latest online hype."

I got it from a comment in Nick Carr's blog. First one. (Can't link to comments directly.)

Posted Jan 27, 2007 1:28:44 PM | link

randolfe_ says:

Eric

Thanks for your similarly well reasoned response. I'm not a professional trader myself, but as I understand it what you are describing is very similar to the strategy employed, minus the automatic electronic entry point stuff.

I receive the point well, from you and others, that 6 months is a long time delay, and current liquidity may well have produced different results. The caveat to that statement, however, is the fact that LindeX is largely a non-starter for any serious trading strategy due to the fact LL themselves sell L$ on this exchange, and effectively control the rates, spreads, and if they choose, volume capacity. Many responses to my analysis puzzled as to why my clients would have tested the private exchanges, when they have inferior liquidity. Therein lies the reason. As recently as late December a Google search will reveal the tribulations of frustrated "LindeX L$ Currency Traders" at being continually undercut by LL as the company skillfully liquidated somewhere between $740K~$1,000K USD worth of L$. At least these traders -- and they may not represent the population of successful traders -- experienced the same type of illusionary liquidity which drove my guys away from LindeX even when the numbers were much smaller. And "skillfully" when applied to LL's trading strategy is relative to the fact that they enjoy significant transactional and informational advantages over the rest of the market.

As to qualitative and potential value of future uses of the Second Life virtual world, I really can't comment with any knowledge or authority. I can see the logic in these arguments, and the utility of using the platform for things such as education or business communication. These points aren't much more than wishful speculation until Second Life's promoters, both official and participant, determine to quit pushing the platform as a "get rich easy/quick/fast" world. Sadly, these phenomena feed upon themselves, and once the first wave of "I quit my job and now earn thousands per week" hits, the endgame is largely already determined.

Maybe Second Life will turn out to be a bubble, and not a ponzi. Bubbles are also pyramids; not all pyramids are illegal or prohibited. What makes the current reality of this virtual reality appear very ponzi or HYIP like is the way in which LL promotes, facilitates, and profits directly from the system itself.

Posted Jan 27, 2007 2:07:20 PM | link

IAmEric says:

Hi Randolf,

I'm not sure how much you WANT to know about SL, but since you bothered to write an article that seems to have gotten some attention, I assume that you are not opposed to learning more. You've made some pretty strong accusation against LL. I've been following events in and around SL since August and I suspect you that you are making assumptions based on what you read from second-hand sources. Have you spoken with Rosedale or any other person associated with LL? You might be surprised to find that they are not the lunatic marketers you are making them out to be. Although some of the executives of LL know less about SL than the average "resident" and may make inaccurate statements, that is probably to be expected and is true of a lot of companies.

If you are interested in learning more about SL, I would highly recommend the "Through the Looking Glass" series from The Infinite Mind. You can find it here:

http://www.lcmedia.com/secondlife/

Even that is a bit dated by now, but it demonstrates that the kinds of things I'm talking about are not some futuristic dream sequence, but are things going on today in SL. No one can say anything with authority about the future of SL, but there is a lot more you can say about the present that I think you may have missed.

At the pace at which things are changing in SL, six months is an eternity. I suggest taking a fresh look. I am probably a decent source of knowledge, so if you would like to know anything about the current state of affairs in SL, I'd be glad to pass on whatever I know.

Best regards,
Eric

Posted Jan 27, 2007 4:30:51 PM | link

Jerry Paffendorf says:

Since a video is worth a ninjillion words, here are a few I was compelled to surf around to while noodling about the post and comments:

*Here's Linden Lab investor Mitch Kapor virtually interviewed in Second Life by Reuters at the World Economic Forum in Davos. He talks about hype, the SL roadmap, economy, and governance, among other things.

*Here are the old State of Play timecapsule videos from 2003, including an interview between Ted and Philip Rosedale that I think clears up any notions of Philip being a hypey dummy. He and Cory are on point three/four years ago and have been saying pretty much the same thing since then.

*And just to hark back to humble origins, why not take a moment to enjoy Linden World 2001. "You mean people are supposed to fill this stupid place with stuff???" "Yup."

Posted Jan 27, 2007 5:12:20 PM | link

Andy Havens says:

@Randolfe: If we want to consider Blizzard as "part of the market," then, sure. I'm wrong. They provide all kinds of various items in WoW and the rest of the market -- players all -- set the value. If you want to make the comparison to a real-world economy and say that Blizzard is the government and the players are buyers/sellers in a virtual economy that is overseen by a government that does things like fix the prime rate... well... OK. I'm back to disagreeing with you, and here's why.

In WoW, the value of almost all items boils down to how much damage they can do or prevent. Now, there are hundreds -- if not thousands -- of minor variations on that theme, regarding race, class, specific quests, types of damage, etc. But it's generally still a question of item utility. Yes, some folks will prefer items that look a certain way, and certain items have achieved some flair due to other reasons... but almost overwhelmingly, it's based on what smiteth mine enemy harder, and protecteth mine ass better.

All of which are fictional concerns, written and created by the publishers and their team. Which I love. Because it's a game. And that's what games are about; 4th wall, magic circle, RP and all that. But it also means that the publishers have 100% control over the creation of value. They can flood the market not just with *money* but with *value.* That's a very important difference. Because money isn't value, it's a placeholder. Right? Isn't that an economic truth somewhere in Econ 101? Or do we have to go back to stuff like, "Love of money is the root of all evil," or something...

If everywhere I turned in WoW there was a way to get infinite gold... or if there was a Sword of Infinite Smiting and a Garb if Infinite Protection, the game would be, essentially, over. Because I could kill everything (all NPCs) on site, and not be killed by anything. The fictional value, as presented by the publishers, would be flooded away, as they would have produced infinite inflation.

You could not do that in SL, not matter how hard you tried. Why? Because, just like in a real economy, there are values that aren't placeholders provided by the owners/publishers. The government in RL can't say, "One loaf of bread will now feed a family of four for two weeks instead of one day." In WoW, they can. In SL, the Lindens can't say, "Dancing is now twice as much fun as it was yesterday," or "You can learn to prim twice as fast," or "VR conferencing makes sense today, whereas yesterday it didn't," or "You can get your rocks off in cyberchat in 5 minutes instead of 15 minutes, if that's you thing" [Note: if it's not your thing, please move your hand].

The economy (notwithstanding RMT) in WoW is *fictional* and is driven by the fiction. I'm not saying it isn't real, for the love of mike. Fiction is real; look at how many people have all the characters in Star Wars memorized. Hell, my 7-year-old knows more about Salacious Crumb than he does about Abe Lincoln. But fiction can be changed by the writers and editors and publishers. Whereas economies (even small or weird ones) can't.

I'm not saying better/worse. I'm saying different. And I'm saying that WoW's in-game economy -- which is tied to its fiction -- is entirely driven by the publishers. Ridden by its players, sure. They're in there, and as much as someone says, "A sword +12 is worth 5 gold and that's worth $US 5.00," that's fine. But the value of what "+5" means is entirely set by the fiction and its writers. Not the market, the platform.

In SL, the values of "pretty," "svelte," "fun," "musical," "artsy," "educational," "viable," and all other kinds of adjectives are driven not by Linden, but by the market. Linden can't make a pair of 6" goth pumps "+12" anything in SL that it ain't to the folks who think, "Wow... that's so +12."

Posted Jan 27, 2007 6:32:49 PM | link

Prokofy Neva says:

There are an awful lot of Linden Dollars in Second Life. They can't all be converted back to US Dollars at a rate of L$266/US$1 (which is what the rate was when I checked just now).

Richard, try to look further into this. If Supply Linden didn't sell *one million US RL dollars* in purely printed money last month, if there were a need for Lindens and the price went up, people would be willing to sell them. Don't forget the GOM used to give a rate of $4.25/1000, not $3.70/1000 as we have now around the 266 or so mark.

Posted Jan 27, 2007 8:04:38 PM | link

Prokofy Neva says:

While you can make money in SL, it's a very stratified society, that rewards primarily the top land barons and most compelling content-creators, and that's not making for a fair and just society. Imagine a world with only Southhampton and Gucci bags, a thin layer of middle class under these very wealthy, and everybody else sitting on the sidewalk with their hands out, or in the sex trade.

I think it's useful that Randolfe has brought a cold eye to the SL hype and useful correctives, even though I disagree with his assessment. It's not a pyramid scheme. It's real.

I do think that when everyone talks about IBM, Sears, Nissan etc. they have to keep in mind that these big companies do not make money in SL. They only get exposure of their brand; they SPEND money, they don't make it. They don't really go for micropayments; the micropayments they might get from selling little cars are probably not even covering tier. The people who work for them building out the sims are the ones making a killing, not them.

Posted Jan 27, 2007 8:09:43 PM | link

Stan Trevena says:

Who's the Ponzi here?

I just forced myself to read the extremely long and whiny article Randolf Harrison posted over on Capitalisim 2.0. He details his research into RMT buinsess opportunities, and how SL stood out as a Ponzi or Pyramid scheme. I'm not going to write some detailed item by item response to this post, but instead will make a few observations based on my dealings with LL, and my actual real life interactions and visits to the LL offices.

I've been to the Linden Lab offices several times now, I've met a handful of people from LL, and have communicated with many others with the project I am working on. Not a single statement in the past, or in my current project dealings, indicated or implied that one could get rich quick in SL. EVERYONE that I've met at LL is EXTREMELY committed to the concept and idea of SL as a vehicle of expression, and one of creativity and imagination. Things that I've seen that they are working on are definitely NOT in-game business related, or intended to facilite getting rich quick. EVERY SINGLE LL EMPLOYEE that I've met and interacted with are fully committed to the vision of the platform, and of the growing international community, not getting rich quick in-world.

I took a group of students to LL over the holidays and they spent a good hour with Eric Call learning about how to make Machinima in SL (he created the Silver Bells and Golden Spurs video). We met people who were fairly new to LL that had come from other "gaming" companies that were very committed to the direction of LL in facilitating international projects and communication. Research projects of some of the staff are focused on subjects that are much more academic and sociological than financial. I've experienced NOTHING personally that would give me any indication that LL was fueling a Ponzi scheme, quite the opposite.

Now if you turn the spotlight around to the media, and blogs like Capitalism 2.0, that is basically all you hear from these people. It's the classic get rich quick schemes moved into the virtual worlds.

Real-Money Trading, by it's very nature, is opportunistic and seeks to force profit from a virtual environment. What makes for a better cover article on a publication, the educational or artistic pursuits of creative people using SL as a platform for expression and learning, or virtual hookers and real estate tycoons getting rich in these brave new lands? I keep hearing that it's LL pushing the idea that SL is a place to get rich quick. I think it is quite the opposite, I think it's these people seeking yet another place to play the arbitrage of a fledgling or non-existant economy that are now throwing stones because they can't run their schemes to get themselves and their "clients" rich quick.

Randolph clearly states that he was acting as a venture consultant for some entrepreneurs and investors trying to develop a fairly ambitious “real-money-trading” (RMT) business idea. Isn't that a long winded way of saying it's a "get rich quick" scheme?? Does the fact that they were likely going to play the arbitrage of the Lindex exchange somehow set them apart, or raise their intellectial capital, above the Chinese gold farming houses that so many people curse in all of the MMO's?

The majority of those I've met running small shops or businesses in SL are doing so as a hobby, not to make a living. Almost all are artistic and creative people who are thrilled that someone is willing to pay them for their creations. Randolph takes a shot at these people stating that "SecondLife is a giant magnet for the desperate, uninformed, easily victimized." He likens the mentality of those running these small businesses to those who can't afford to play the lottery, but continue to cash in their food stamps to buy another stack of tickets. It's clear that Randolph needs to get out into the countryside of SL, and stop tossing dollars in the stip clubs of the red light districts while interviewing the escort entrepreneurs.

The bubble I want to see popped is the one driving all of these articles that seem to have started at the end of last year with Clay Shirkey's analysis of the resident numbers. There's a group of people who really want to see LL fail, they have become obsessed with "bringing down" LL and the SL platform. Valleywag put it very plainly, LL was getting too much positive press in the MSM and it was high time for a "take down".

Look in the mirror guys. It's the people out trying to "get rich quick" that perpetuate the myths of "getting rich quick". Like the late night real estate investment tycoons that no longer make their millions buying and selling real estate, but instead make their's selling audio programs and books instructing others in how to "get rich quick", often leading their customers to instead "go bankrupt quick". Most all of the RMT's are trying to leverage profit out of MMO GAMES. I remember these guys, they were the same ones who horded the foil Pokemon cards waiting for the price of the Charizard card to hit $200 so they could dump their supply on the secondary market.

Posted Jan 27, 2007 9:24:06 PM | link

randolfe_ says:

It's the people out trying to "get rich quick" that perpetuate the myths of "getting rich quick". Like the late night real estate investment tycoons that no longer make their millions buying and selling real estate, but instead make their's selling audio programs and books instructing others in how to "get rich quick", often leading their customers to instead "go bankrupt quick".

Oh the irony. Second Lifers assaulting my blog telling me how they're "earning thousands per week working from home, for only a couple hours of work; and growing at a rate of 50% per [insert random unit of time here]!". Venture capitalists and hedge funds following SEC regulations, not the least of which is the Qualified Purchaser rule (Section 2(a)(51)(A) of the Investment Company Act of 1940). Which rules do investors in Second Life ventures abide by again?

And which hedge funds were buying Pokemon cards? Really, I'd like to know. That would make for interesting blogging.

(And you didn't read my blog, or you'd have known that I am among the more vocal authors on the internet who've been railing *against* the real estate bubble and real estate flippers/scams/investment schemes for some years now.)

Posted Jan 28, 2007 12:06:14 AM | link

Richard Bartle says:

Andy Havens>Same thing holds true for banks in the US since we went off the gold standard.

Well, up to a point.

In SL, you can sell your L$ so long as someone wants to buy them. In RL, you can sell your US$ so long as someone wants to buy them. Selling US$ is the same as buying something with them ("I'll sell you $50, which you can pay for in groceries"). Selling L$ is also the same as buying something with them, only the way that the L$ is set up you can only buy things in SL or (via the LindEx) US$.

In RL, some things you have to buy because you die if you don't get them. In SL, the only reasons to buy things are to enhance your SL experience or to use the L$ to buy US$ from people who want to sell US$ for L$. The only reason these people would do that is because they wanted to enhance their SL experience.

So while people in SL have things they want to buy, and while they don't want to cash out, SL's economy will thrive. But if they don't want to buy as much, or many of them want to cash out, it hits the buffers.

In the casino analogy, this means that while there are people who want to gamble, then you can sell chips for dollars. However, if the demand for dollars is greater than the demand for chips (say, because more people want to give up gambling than are entering the casino), then the price of a chip plummets.

In RL, you can't opt out of the economy, because if you do you starve to death; in SL, you can opt out whenever you like.

Richard

Posted Jan 28, 2007 7:25:05 AM | link

Andy Havens says:

@Richard: I get you, and agree. The economic not-quite-fiction of $LD is there to enable microtransactions which wouldn't be feasible with $US money. Every time I use a service like PayPal at a site like Etsy, even to sell a $3 friendship bracelet, it involves RL costs that are inappropriate to a VW. So a micro-currency is necessary for reasons of friction. It also helps that it is internal to the world, so that those who really do wish to play it as a game -- never converting "chips to dollars" -- can do so without having to worry about issues like taxes, banks, etc. If I want to play at SL rather than work -- as do the overwhelming majority of people, I can do so without having to file any onerous paperwork, or even worry about keeping a receipt.

As Stan points out very nicely, and as I have said a number of times, the *function* of SL isn't to make money for its users. The economy is one of it's *features.* Which is why, when stretched to extremes, you get issues that are, well... extreme. Yes, if everyone tried to pull their money out of SL at one time, it would crash. Yes, if you try to arbitrage the game as if it were a robust, RL economy with multiple banks, commodities, etc., it won't work. Yes, if you go into it expecting to make a full-time living or sell your warez in the same way as on a web site, no soap, polar bear.

Same as the whole dating on MMOs thing. The *function* of online games isn't to facilitate mature, reasonable relationships. Can it happen? Sure. It has, therefore it can. But nobody designed WoW as a dating service, so when it does happen, there are bound to be issues. This isn't the middle of the bell curve, but the weird end.

Is it OK for Linden to talk about the economy of SL, the ownership of IP, transactions, etc. as features? Sure. They are. But, again as Stan points out, the overwhelming *function* of SL, in the press and the Linden's conversation, is that it is a place for users to create stuff. One of the attractors of that is the possible economic value; for people who like the idea of owning some portion of their stuff. It's not the other way around. Personally, I think that's the right way to go. Build a platform that's intended to foster creativity, and work ownership/business in as a part of it. Rather than saying, "Hmmm... let's figure out a way for people to make money, and then graft creative tools onto it."

I advise, from a biz/marketing standpoint, as I've said before, caution. Consider SL as "one small place among many" to do... whatever it is you want to do. I think what a few people like Anshe are doing is great... but it would scare the boojum out of me to have my future entirely tied to another company's bottom-line like that.

Then again, happens all the time in real life. A friend of mine managed a small book store in a mall that was doing real well until the two anchor stores decided to pull out. No fault of his. Nothing of his doing. All of a sudden, the "mall tokens" went away, and the owner of the book store closed up shop. Eggs, basket... Virtual eggs, virtual basket. If any business comes with a guarantee, I haven't seen it.

Posted Jan 28, 2007 10:20:33 AM | link

Thomas Malaby says:

Well said, Andy.

@ randolfe: If the impulse is to argue that Second Life isn't an economy because it lacks certain institutional controls, it's an untenable position, since we know that economies emerge regardless of whether those controls are in place. You don't need "sovereignty" to have an economy, in a strict sense. Do I think that Second Life and others like it need regulation to avoid the worst of unregulated markets? Yes, as I wrote about here. Does that mean that, lacking such controls, Second Life is a scheme or scam? Of course not.

Posted Jan 28, 2007 11:19:50 AM | link

Stan Trevena says:

@Randolfe: Do I really need to fill in the blank in the closing Pokemon statement to indicate that it was intended to close my entry with some humor? I guess I could of said:

"I remember these guys, they were the same ones who horded the foil Pokemon cards <* insert 'in junior high school' *> waiting for the price of the Charizard card to hit $200 so they could dump their supply on the secondary market.

And you are correct, I did not read your ENTIRE blog, I have not interest in reading your blog. But when you put out accusations in public forums accusing Second Life of being a Ponzi scheme, or some sort of pyramid scheme that suckers people like single moms, to steal away their money while hooking to support their small online businesses, you had to expect some comments that did not jump on this runaway "Doubter's Club" bandwagon.

Investors, entrepreneurs, and other industrious people looking to exploit new markets have often poisoned, and then discarded ventures that were never inteneded to be a platform for generating wealth.

The examples are many, and some quite elementary. When my kids were younger and actually "played" with hot wheels, they were often crowded out of the local Target by collectors who were laying in wait when new boxes were stocked to the shelves. And yes, they have a few Charizard cards to this day that are in protective sleeves because a market grew out of collecting and selling Pokemon cards and placed an artificial value of $200 on that rare card that they never played with in a game because they saw at the local store how it was coveted and valued by other "non-players".

I have a Business degree, so I don't need lectures in supply and demand, and all the other analysis that follows. It's sad when a little metal car intended for kids to play with, little cardboard playing cards, or virtual worlds become the focus of those seeking profit. The object of obsession is at first coveted, then exploited and eventually cursed. You have clearly arrived at the cursing stage with Linden Labs. And as is completely predictable, as past experience shows all too often, you are now blaming the creators for your problems with not achieving your false expectations of profit.

I close with another Pokemon analogy, since it seems to have caught your attention. People always accused Wizards of the Coast of creating the markets by producing the foil cards, they marked the cards with rariety codes, and ......... wait for it ......... they controlled the production and could flood the market at will with rare Pokemon cards to ruin the investments of the collectors.

Risk is risk, you can find it anywhere. If you are not content to invest in traditional markets and financial vehicles, YOU (and any investors who choose to follow you) will solely be assuming the risk that comes with the platform you are trying to exploit. It's silly to blame anyone else.

Posted Jan 28, 2007 2:02:48 PM | link

Jeff Freeman says:

Personally, I think the more interesting story is how SL's growth turned into a media feedback loop.

Posted Jan 28, 2007 2:16:52 PM | link

randolfe_ says:

Investors, entrepreneurs, and other industrious people looking to exploit new markets have often poisoned, and then discarded ventures that were never inteneded [sic] to be a platform for generating wealth.

Poisoned? Intended? Ok, well, the first 3 items to scroll by on the news ticker as presented by Linden, on the official Second Life web site:

Second Life: It's not a game Fortune's David Kirkpatrick reports on why IBM's Sam Palmisano and other tech leaders think Second Life could be a gold mine.

I got my job through Second Life Looking for work?

Starting a Second Life Business Find out what entrepreneurial opportunities the virtual world of Second Life has to offer.

Seems to me that someone intends this platform to generate wealth. Perhaps you just don't want it to generate wealth for those you don't like...you know, the ones who tend to poison things.

Yea, "Gold Mine", no wealth motive there.

Posted Jan 28, 2007 8:36:32 PM | link

Stan Trevena says:

@Randolfe:

From the Reuters story on IBM's push into SL: http://tinyurl.com/2rftta

"IBM is ramping up its push into virtual worlds with an investment of roughly US$10 million over the next year, including an expanded presence within Second Life and the development of its own 3D intranet."

Last time I checked, Intranets were for "internal" use by a company. IBM is a global company with offices world wide. One of the projects IBM did was to network retired employees with current IBMers in virtual space. I think we can agree that is information transfer, and not wealth transfer.

"Big Blue has already established the biggest Second Life presence of any Fortune 500 company. It is also looking to build a 3D intranet where its clients will be able to discuss sensitive business information."

Again, I've not stumbled on any IBM AS/400 or midrange computing shops in SL. They sold off the ThinkPad business, so no "assemble your own" computer shops like Dell. And I think the Dell island is much more informational than sales based. It's all about brand awareness on that island. If they can sprinkle the landscape with virtual Dell desktops and laptops, even more advertising and brand awareness. What could they be up to in SL?

"The company is already holding meetings and conducting development inside virtual worlds with about 20 major clients, including telecommunications and aerospace firms, a petroleum company that wants to use virtual worlds for training"

Hmmmm, no shops there either. Looks like more virtual presence and information sharing.

“IBM’s ultimate aim is for inter-world integration, instead of separate islands of virtual worlds, where you cannot cross over from one to the other in a consistent way.”

None of this looks like jewelry stores or virtual shops. Looks like IBM might want to get a foothold in the future market of linking different virtual worlds and allowing people to move their avatars between them. That would mirror the eCommerce role they played back in the 90's with the Internet (which was at about the same stage as SL is now).

From the CNN article last week "Second Life, It's not a Game" : http://tinyurl.com/2ln6vt

"But what's beginning to catch the attention of IBM and other huge corporations is something potentially far more profound than a new online pastime. It's the ability to use Second Life as a platform for a whole new Net - this one in 3-D and even more social than the original - with huge opportunities to sell products and services."

Bingo, we have sales. The big boys see the potential in the Second Life platform for selling products and services. The key word here being "potential". Yes, there are many hobbiests running small businesses in SL, and even a few larger ones (but are they really selling products or raising awareness of their products?). Would you buy shoes in a virtual world?

"In the case of IBM, it's not just a matter of touting the wonders of Second Life; it's really using it - both as a business opportunity and as an internal tool. Ian Hughes, one of the company's "metaverse evangelists" - an actual title - says Second Life stimulates collaboration among a dispersed workforce. ("Metaverse," a word coined by Neal Stephenson in his 1992 novel, Snow Crash, is gaining currency as the generic name for virtual worlds.)"

Collaboration among a dispersed workforce. Hmmmmm, still no money makets, online investment strategies, or expansive megastores. Just virtual spaces for getting people to work together.

"Says venture capitalist Jed Smith, an early investor who sits on Linden's board: "We decided then to be a platform and not a game." Not incidentally, that meant Linden - unlike the purveyors of popular online games such as World of Warcraft - wouldn't have to spend any money creating its content."

Another mention of Second Life as a "platform". Yes, it's being touted as being "not a game", as you quote in your last post, and the word gold-mine is also used. But that goldmine might just be in getting knowledge shared between employees and their customers, and not rolling over dollar signs on the virtual cash register.

"And Linden changed its business model. It began generating revenues primarily from the sale of virtual land. So far Linden has sold 3,500 private islands, each equivalent to 16 acres in the real world."

I purchased three islands for use with my educational project. Linden Labs gives a nice discout to educational institutions that want to own land in SL. I paid $995 for each island (the cost of the server), and $150/month to maintain it. That's not a bad deal at all, and I am sure they are not getting rich off those fees. The "platform" of Second Life is suited nicely for any activity where virtual presence, communication and collaboration is necessary. Thus the focus by Linden Lab on educational institutions looking to set up shop in SL.

"One of the biggest landowners is IBM, which rules over 24 islands."

I've not seen any supermalls in SL run by IBM. These islands are most likely being used as virtual campuses. Information sharing and product awareness and education for their clients. There's also a trend developing for virtual tradeshows.

"In December, Linden Lab estimated that 17,000 residents had positive cash flow in Linden dollars, with about 450 generating monthly income in excess of $1,000 (that's U.S.)."

I don't think anyone's quiting their day job to pursue those kinds of incomes. It would be a nice little cash flow to support a hobby, but not to make a living.

And towards the end of the article there is a very telling statement:

"That could lead to what Rosedale thinks will be Linden's greatest long-term opportunity: running some of the lucrative services necessary to keep all these linked virtual worlds functioning smoothly. "We can recreate Google's business in this environment," Rosedale says, not to mention Network Solutions' web-address registration business and Paypal's online-payments system."

We've come full circle again to what IBM did in the early 90's with eCommerce. Linden's biggest long term profit will come from setting the standards for the coming Metaverse, and being the glue that ties it all together. There's no gurarantee that they will be able to hold their current lead in virtual world platforms into the future. But they do have quite a head start on everyone else, and some pretty big names are falling in line hedging their bets on this future. Nowhere in the "not a game" CNN story do they go into any kind of detail or evangelism about the Lindex.

You might need to redefine your definition of "Gold Mine". The group of entrepreneurs and investors that hired you as a consultant for their RMT concept obviously thought SL was a place to turn a quick profit. "Gold Mine" does not necessarily imply instant payoff. "Gold Mine" can relate to the wealth of information transferred internally in IBM, and externally to their customers. "Gold Mine" clearly relates to Linden Lab if they are able to set (and hold) the standards for virtual worlds in the Metaverse. "Gold Mine" most certainly can apply to any company that helps to facilitate the linking or transfer of avatars, objects and currency between virtual worlds. And "Gold Mine" could also mean the opening up of new avenues for getting students together from across town or across the world to collaborate on educational projects.

We disagree about what exactly Linden Lab created with Second Life, and what the future holds. It's obvious we will not agree on this. I don't hate you, I just strongly disagree with your position on SL being a "Ponzi" scheme. And that's why the Internet is such a wonderful place, people can disagree and the world will not come to an end.



Posted Jan 28, 2007 10:07:24 PM | link

randolfe_ says:

Stan

I appreciate your interpretation. I guess my point is that you are not representative of the real-dollar growth that is powering the SL presently. Very few will read past the "Gold Mine" and "Quit your Job" headlines to gain a better understanding of the complexities driving the virtual world's structure, society, and even marketplace. The same as few who ran around flipping houses, driving the asset bubble in house prices, took the time to understand the intricacies of housing economics. I similarly characterized FRE, the NAR and large lenders as engaging in ponzi pyramid like exploitation.

The problem is, when the music stops most everyone trapped inside any bubble inevitably feels like they've been taken by a ponzi scam.

But, we probably do agree on much more than we disagree vis-a-vis the promise and potential of virtual technologies and internet communications. My primary disagreement with you, others I've heard from through this, and our thread's host is that virtual worlds must by and large play by already established, developed, and tested rules and regulations, or they will inevitably go the way of bubbles, pyramids and disappointments. A private company printing their own money and at least passively allowing opportunist hype to stand is not the proper platform for the internet's next revolution. I've been around since the Internet 1.0beta, and what is happening here is not smelling of coming revolution. At least, not to me. There were plenty of pre-mosaic false starts too, and plenty of disappointed people.

Posted Jan 28, 2007 11:29:52 PM | link

Stan Trevena says:

Randolfe: Yup, ditto here. Been around a long time, since v1.0 of most everything from the first "personal" computers on up (actually, I've beta tested almost all of the MMO's since EQ). My first experience with "online" was in the early days of Compuserv and The Source (now that really dates me).

My statements on the Metaverse and virtual worlds are always made from a platform independent viewpoint. I am a huge proponent of the idea of a Metaverse as the next evolutionary step of the Internet. I have no idea if Linden Lab will be successful, or if they will be able to hold onto their lead. That's the problem in these markets, someone is always gunning for you if you are out in front of the pack. Personally, I think that the wild success of World of Warcraft has amped up the search for the next WOW, and might also be a reason some inflate the numbers and feed the hype.

Yes, LL can "print money" and pull land out of thin air (which also has real value in the open market). But isn't that the same with any company that controls a commodity or system? I think this will be one of the biggest challenges if a Metaverse is to emerge from these early attempts at virtual worlds with viable economies. As soon as there are two competing systems, an intermediate organization is going to have to emerge to be the broker between universes if anything even resembling Web 3.0 is to emerge. That player has not emerged yet (although from statements and media it would appear that IBM is positioning themselves to take on that role), and neither has a competing virtual world platform (Metaverse is in open beta).

I believe that when this third party emerges to broker transactions between universes, you will see your rules and regulations emerge as well. That will also be the invitation for governments to step in and start taxing these transactions. We're still in the Wild West stage with these virtual worlds. There's no doubt that a sheriff will one day ride into town to lay down the law. Until then, things are going to be a little loose, and anyone looking to make a profit will be assuming a large amount of risk.

For people like me who are exploring the educational possibilities of this space, it's a wonderful time. Education has been waiting for something like this for a long time. The steep price of admission keeps falling, and the technical knowledge required to pull together a fairly large and complex project has lessened as well. Regular old educators with absolutely no programming skills can use a platform like SL to bring life to their projects. And I've seen first hand how these platforms pull students in, so to me this is very exciting. Education needs a shot in the arm to recapture the attention and interest of this generation, and these virtual worlds might just be the ticket.

Posted Jan 29, 2007 12:54:57 AM | link

Endie says:

There are a few very vocal people here who clearly didn't understand Randolfe's analysis, and who don't really mind because they're so committed to the SL dream. As with Prokofy's open resentment of the "developers" - those of us with coding knowledge he doesn't have and perhaps understandably feels disinclined to spend years acquiring - these people clearly resent an expert using even limited terms of art to criticise their fantasy life.

That's understandable: if someone came in and gave an economic analysis of my fantasy life ("Endie, you make assumptions about the liquidity of the depraved-twins market that is unsupported by the available evidence") I, too, might get defensive.

There is a problem with economics: because it describes something which almost all of us indulge in every day - economic activity - we all feel that we understand it and can pontificate in multi-page posts. To be brutally frank, we don't just spend the five years to get to post-grad standard smoking and discussing TV shows.

While I feel that the term "Ponzi scheme" was perhaps a little too loaded, there is certainly a degree to which the Linden economy depends heavily on a vast newbie hose, both of end-users and PR-seeking companies. Judging from the frankly desperate, shameless nature of the Linden PR machine's pronouncements, that seems to have occurred to them in framing their business plan, also.

The Linden economy should tend towards perfect competition (and that's a technical term, so don't bother spouting about it if you haven't at least consulted wikipedia first!): in a virtual, electronic environment, after all, information about recent trades and both sell- and buy-orders is already in analyzable form to which all participants should have equal access (Randolfe has described how this is not the case). Arbitrage opportunities in the 4-figure percentage range should be closed-out in seconds. And radical price differences between small and large trades point to the other side of the same coin.

I don't know if there is a working futures market for the Linden. Can anyone point me at it? If there is, then I would expect a truly immense risk premium on even short-dated prices.

I could go on and on, but Randolfe has done better, already, and I suspect I have done enough already to attract the ire of the SL fans.

Posted Jan 29, 2007 10:50:19 AM | link

Thomas Malaby says:

But he hasn't done better, Endie.

The list of those with an axe to grind either way about Second Life seems to get longer every day, and this blog seems to attract them in droves (which is a good thing, I guess -- better here than in two camps, each with mutually exclusive audiences, continually confirming their own expectations).

But both over-drawn criticisms and under-reflective support for SL get in the way of understanding it for what it is (becoming). There are all kinds of very solid, social science reasons why Randolfe calling it a Ponzi scheme is unwarranted. Similarly, the hype (some of it from Linden) of "limitless possibility" should be rightly targeted as not reflecting the reality of inequality (of information, etc) that Second Life (like all economies) demonstrates. Let's reward neither poorly-conceived criticism nor blind support.

Posted Jan 29, 2007 12:58:46 PM | link

RedWolf says:

Sweden buys into the SL scheme.

Posted Jan 29, 2007 1:31:02 PM | link

Edward Castronova says:

Thanks, Thomas. This thread needed those comments.

It seems hard for the world to to keep SL in perspective. Perhaps that's because its future challenges us in much the same way that fantasy games do, but, unlike games, it can't be labeled as 'game' and thereafter ignored.

Posted Jan 29, 2007 3:29:10 PM | link

randolfe_ says:

With all due respect, Mr. Castronova, an economics professor should know better. Dismissing analysis which disagrees with yours as hardly worth opposing, even though apparently many within the SL hierarchy found merit in the criticisms? I can discount cash flows even in little old Mayberry. Why not virtual Mayberry? Until such time as you offer a theory positing a new system of financial valuation formulae for properly determining financial value in the context of a virtual world, we're stuck relying on our own tiny little nonprogressive minds and mechanisms. I don't know about you, but my virtual future doesn't include privately funded, unaudited companies printing currency, fixing exchange rates, and passively picking winners and losers. My future metaverse does support faster markets, more efficient allocation of capital, and more perfect competition. What theoretical framework compels me to believe the opposite should be expected or is even desired?

It does seem hard for you to see this stage as itself evolutionary. It's not the great crash of 2007; not unless this emperor's clothes failed to rez. Maybe it's just time for Linden to quit nation building and do what it's best at. But then, there'd be a whole different lot of winners and losers, in a freer, fairer market, probably not all that unlike exists already; and no one wants that.

Posted Jan 29, 2007 3:55:23 PM | link

Alvis Brigis says:

Thomas Malaby: The list of those with an axe to grind either way about Second Life seems to get longer every day, and this blog seems to attract them in droves (which is a good thing, I guess -- better here than in two camps, each with mutually exclusive audiences, continually confirming their own expectations).

Jeff Freeman: Personally, I think the more interesting story is how SL's growth turned into a media feedback loop.

Both are excellent points and reflect the community desire to continually advance the quantification of what SL actually is and bring to light the overarching themes running through this excellent comment thread. There are many really, really solid points being argued here: the necessity of microcurrency in VWs, the difficulty of establishing a new microcurrency, the evolutionary power of SL, the possible growing role of LDs in a US$ based economy, possible regulation of the SL market on the horizon, the real reasons that big companies are investing in SL (tech based, not for short term income), the Google Metaverse rumors, the reasons that people get involved in SL (to make cash vs. to innovate in a new social phase space), the hype / anti-hype, etc.

Reducing it, 4 SL discussion themes I've picked up on here at TN and around the blogosphere include: 1) SL is a rudimentary yet functioning microcurrency market (in the early stages of evolution, possibly heading toward some big bumps in the road), 2) the user generated content that has built a dynamic world bottom-up, 3) the new social communication and coordiantion possibilities enabled by SL, 4) the fact that for one reason or another a great deal of people are very interested in SL.

Each theme generally has a a bunch of people at the poles, and a few people in the middle (as seen in this thread): 1) the micromarket is awesome and allows creativity to flourish vs. the LD is an irresponsible implementation and will bring about the demise of SL, 2) SL is a new technology vs. SL is a prettied up and over-hyped pig, just another MMOG, 3) corporations can use SL for a variety of comm efficiencies / development vs. SL is useless, the lag sucks, it's annoying to use, there are much better games out there, 4) people are interested in SL because it heralds a new era of comm, possibly a new dot-com type of phase, Web 3.0 vs. it's much ado about nothing and I can't f'ing stand it.

As Thomas Malaby insinuates, this is a good thing, despite the emotional / intellectual polarization. And I too would love for the community to continue to push forward the quantification and bring more of the most important points to the surface. In particular, I'd love to see more synthesis of the comment threads themselves, because these are really helping me to find my SL blind spots. More simplification of the polar viewpoints. This evolving discussion is very interesting in and of itself and should be tracked methodically.

TNers, please keep up the good work and continue to put this stuff into the proper broad perspective! This has been my favorite back-and-forth thread in a long time. Very valuable.

Posted Jan 29, 2007 4:00:16 PM | link

Thomas Malaby says:

Thanks, Ted -- I agree that the polarization is remarkable. It's no accident that one of my book chapters will be on the "game" trope and Second Life. I hope you don't mind if I keep chiming in.

randolfe_ wrote:

my virtual future doesn't include privately funded, unaudited companies printing currency, fixing exchange rates, and passively picking winners and losers.

Your reasoning is muddled, randolfe_, because (as some have pointed out in other ways above) you haven't sorted out the prescriptive from the descriptive in your claims. Sure, you may not *want* an unregulated (or perhaps under-regulated) economy, because it has all sorts of demonstrably bad effects, but that doesn't mean that there *isn't* an economy in places where we find insufficient regulation. And it also doesn't follow that just because that inequity is demonstrably happening, that it is a "scheme" or otherwise thoroughly corrupt.

Posted Jan 29, 2007 5:07:57 PM | link

magicback (Frank) says:

As always, the truth is somewhere in the middle.

In regards to LD, and its role, I think that while it was useful as a fiat currency in the early days, it may be time to change the structure.

In the early days it was a good way to control the economy and extract revenues, but if the aim is to be a platform then the platform should adopt/leverage a stronger monetary system. Why have a weaker intermediatary currency? So LL can have greater control over the flow?

In the arena of international business, investors don't like controls and uncertainty. The recent imposition of monetary controls in Thailand shook the investment community. The imposition of capital controls in Malaysia made that country less attractive.

Nevertheless, the interest in China is red hot regardless of their controls. And the interest there is similar to the interest in SL. People (both tourists and investors) and their money will flow to both greenfields of opportunities.

The recent Fortune article on SL is a milestone in this direction.

That article started with the CEO of IBM using SL to showcase IBM's vision and initiatives to 2,000 people in Beijing and 5,000 more on the web. Now, just think about the "addressable market" for companies using SL as an extension of their big annual powwows?

Posted Jan 29, 2007 8:31:30 PM | link

Alvis Brigis says:

@ Frank: Indeed, the demand for microcurrency pegged more directly to a stable currency inexorably increases over time, in SL and in general. Currency / transaction cost-size needs to compress in order to increase fulidity and better quantify everything. The LD just may well push this compression to a tipping point, forcing the system to react.

Judging by all of the currency talk, LL will need to address this sooner than later and my guess is that they will shift away from the LD sometime in 2007. This prompts some obvious questions:

1. What will LL use to replace or beef up the LD? Will this prompt a merger / partnership with a financial company / exchange?

2. Will Google and Microsoft establish microcurrencies? If so, how micro will they go, how soon and in what manner will their currency link to real dollars?

3. Will certain governments be incentivized to allow tax-free micro-currency transactions? Say, the Chinese or some very small country? This might be a (temporary?) necessity in social / market evolution as it would certainly favor innovation -- keeping in mind, of course, that innovation is disruptive, disruptive, disruptive.


Posted Jan 29, 2007 11:13:47 PM | link

Luis Villa says:

Will ... Microsoft establish microcurrencies?
You mean, like Microsoft Points?

Posted Jan 30, 2007 11:23:02 AM | link

randolfe_ says:

Thomas,

My reasoning only appears "muddled" because my prescriptive claims and objective, quantifiable remedies have been selectively ignored. It seems quite clear to me at this point that SL Believers and virtual world thinkers are not interested in quantifying notional financial or economic values; something even the tiniest of emerging countries, smallest of villages, or most abandoned amusement park attractions are expected to produce.

And it also doesn't follow that just because that inequity is demonstrably happening, that it is a "scheme" or otherwise thoroughly corrupt

I never said "just because of inequity", therefore a corrupt scheme. I demonstrated the process by which notional financial values are broadcast, difficult to transfer, illiquid, and heavily skewed in favor of the organizers of the system, and the first wave of entrants.

Regardless, I have offered an objective exercise which would remedy important parts of this issue regarding establishing objective notional financial value of a typical Second Life venture. Perhaps Mr. Castronova and yourself believe that a bit too prescriptive (at least too much so to permit trackbacks). When is it time to stop the arm waving and put some real numbers to a virtual economy roughly the size of a tiny country GDP?

I suspect the response will just be to dismiss and ignore me until I move on to other, more lucrative distractions. Unfortunately, if there is anything real to the realization of otherwise very innovative and exciting ideas offered forth by Castronova, another overeducated, bleeding edge financial capitalist who happens to appreciate MMOGs and VWs will surely follow close behind. There are what, at least 15 companies in the Valley working on virtual micropayment/microtransaction networks at the moment, probably at least 6 of which involve some sub-component of the Second Life experiment, not to mention the big guys who are destined to try to enforce their own proprietary regimes. Shielding Second Life from cold criticism will probably lead to it ending up an interesting niche irrelevancy. Just my decidedly non-academic, descriptively flawed, easily semantically dismissed opinion.

Posted Jan 30, 2007 7:19:57 PM | link

magicback (Frank) says:

@Alvis:

The likely scenario is a partnership with (1) a credit card issuer or payment processor looking to stake a presence. The second likely scenario is to create or partner with a proprietary system like paypal, Alipay (China), or the other innovative microtransaction companies randolfe_ speaks of. The process of establishing the first entrant and defacto standard is probably going to be slower than faster.

I don't think Google is going to establish another currency, but it does sound like a Microsoft play :)

And if you get the government involved, they will be looking to extract tax revenues. The current key reason for creating and keeping an in-world currency is to forestall a tax event (which the current consensus is upon exit)

Now as for the claim of being a pyramid-like scheme, SL is just another example of an autonomous developer (real land or virtual land) that provides a great structure and incentives for first movers. Governments that established economic zones would provide similar structures like export credits, foreign exchange conversion credits, tax credits, preferred zoning, etc.

And like the case with any other developmental/economic zones, other cities and even other countries are quick to develop their own zones too. Google, Microsoft, IBM, and other major players are doing R&D on 3D internet GUI as it could be the next kill app business tool for remote collaborations. The vision is that tele-presence and tele-conferencing is old and virtual-presence and virtual-conferencing will be new and better.

While randolfe_ advocates a quicker move towards a playing field, reality indicates that it will be slower than faster in coming.

Frank

Posted Jan 30, 2007 8:42:12 PM | link

Thomas Malaby says:

randolfe_ wrote:

my prescriptive claims and objective, quantifiable remedies have been selectively ignored

I'm not ignoring your prescriptive claims. Or, perhaps I am, but the point is I'm not criticizing that part of what you're saying. And I'm not dismissing your broader (descriptive) claim -- that Second Life is a "Ponzi scheme". I am merely trying to sort out the second (which I disagree with, for the reasons stated above) from the first. Your prescriptive recommendations for how to fix Second Life's economy may be the bee's knees, and I wish them well. But that's not interesting to me (although I'm sure it is to others here). My problem is with the conflation of that set of prescriptive recommendations ("Here's how to improve SL's economy"), with a descriptive claim ("SL is not an economy") that doesn't hold water.

Posted Jan 31, 2007 12:19:55 AM | link

randolfe_ says:

Thomas,

Those are fair criticisms. It has been quite some time since I've had need to prepare argumentation worthy of rigorous academic analysis and critique. Much of my reality is rooted in condensed, practical argumentation supported by empirical justification and descriptive logical extrapolation, and a bit of informed guesswork. It is the latter that forces the melding of prescriptive and descriptive.

In retrospect, my analysis would have carried more weight were I able to prepare and argue it more akin to a HBS case. At least then the methodology would have been clearly separate from the qualitative conclusions.

But I take your point that my insistence that Second Life does not represent an "economy" is also semantic and irrelevant to the informed debate. It would be useful to distance ourself from all such analogies whether be they country GDP comparisons, Stiglitz-hated-IMF development regimes, Easterly poverty traps, or fictional small towns, in my opinion. If for no other reason than because, philosophically, all modern economies based upon an assumption of perpetual growth (even if in the form of technology/productivity ala Solow) represent pyramid structures. And whether governments overseeing economies are guilty of operating ponzi schemes themselves is henceforth a question that then transcends my ability to add meaningfully to the debate.

Posted Jan 31, 2007 1:50:09 PM | link

Thomas Malaby says:

@randolfe_: I very much appreciate your gracious and thoughtful reply.

I look forward to continuing to sort out what SL (and places like it) are all about; for that, we'll need both their harshest critics and their most ardent admirers.

Posted Jan 31, 2007 2:48:41 PM | link

Thomas Malaby says:

Erk. Parentheses above should have been deleted. Internet hiccup FTL.

Posted Jan 31, 2007 2:50:02 PM | link

lewy says:

Technically I don't know if SL is as much a Ponzi scheme so much as some kind of high yield scam, (assuming there's any difference). The point of a high yield scam is to make it prohibitively difficult or expensive for investors to realize their gains. Thus it looks like you're making a ton of money, up until the point that you actually try to cash out. I read the article in question on Slashdot a while back and from what I remember that was precisely what happened to the author--he amassed a sizable number of Lindens, tried to exchange them for dollars, and that's when the fun started.

So far as earning a living wage in SL goes it's certainly possible if you happen to live in China.

Posted Feb 1, 2007 3:24:30 AM | link

Ace Albion says:

I'm the named owner (ok leaseholder/whatever. It's not like anyone except one person in the *real* United Kingdom is actually a landowner) of an island sim in SL- not sole owner, it's shared with some friends.

I gathered the cost of most of the island in world, in L$ from them. I converted $1000US worth of L$ to USD in my SL account to cover most of the cost at a rate very close to the "best". It all cleared within an hour, and there was no impact on the currency that anyone noticed I'm sure. It would be no problem to do that even every week and pull it out of SL via paypal. Living wage in China, indeed.

As long as there are people visiting SL to spend money, some of us will be making money down the line. Just like seaside B&B owners, or beach side souvenir sellers, 2p a go arcades, or ice-cream vendors. Until package holidays to Spain destroy our local seaside market and we all go bust.

It's only a scam if everyone expects more than some fun time from their investment. Most people in SL don't. They throw $15us a month into it instead of WoW with the same expectation on financial return.

Why is this so hard to see?

Posted Feb 1, 2007 5:43:07 AM | link

Endie says:

Ace Albion said:

"I'm the named owner (ok leaseholder/whatever. It's not like anyone except one person in the *real* United Kingdom is actually a landowner)"

You didn't mean the UK, oh perfidious Albion. You meant England. The last vestige of feudal tenure was removed in 2004 here, in a process that begun 30 years before.

Endie
Scotland

Posted Feb 1, 2007 10:08:46 AM | link

Endie says:

Oh, and US$1000 (which you will not be able to extract every week in a market of limited liquidity without beginning to alter the rate: that's increased demand and marginal pricing for you) is ionly $52k pa, which you might consider good money, but with the dollar currently trading at parity with the potato only comes to about 26,000 pounds. Not a lot at all, especially when you factor in the extraordinarily high risk premium involved both in individual transactions and in the environment.

If, however, you reckon you can steadily make 1000 dollars for a little over an hour's work every week, then I invite you to do so, and then blog about the results. You should also add a section on why you think everyone isn't exploting this remarkable market innefficiency.

Posted Feb 1, 2007 10:15:49 AM | link

Aaron Delwiche says:

It's important to note that many people who make money in Second Life are paid in US dollars. Talented builders, designers and scripters command wages that match (or exceed) what they would earn in other creative agencies.

Posted Feb 1, 2007 10:29:59 AM | link

randolfe_ says:

Aaron,

Those settling payment in USD or any other hard currency are outside of the virtual economy, which at best represents an economic bubble at the moment. Breaking my own no-more-analogies rule, it's similar to web designers charging 50-pound-bag-of-dogfood.dot.com $75/hour for their skills versus 75 $1-strike valued at $2 per options/hour. The former is transferable and unaffected by the actions of dot.com, the second is not (using late 1990s rules).

Posted Feb 1, 2007 8:52:25 PM | link

Andy Havens says:

@Endie: Read Ace's comment again, please. He didn't say he made US$1,000 profit in a wekk from 1 hour's work. He said it wasn't a problem to convert the $LD he'd collected into dollars. The process of marketing to and gathering the decision of a group of buyers could take much longer. That plus he also had to pay for the island himself originally. So that $US1,000 is actually his gross, not his net.

@randolfe_: I'm not aware that anyone was ever claiming that stock options were, in and of themselves, "an economy." They were units-of-value that didn't always translate into spendable specie; having had a crap-load that were worth an insane amount of money before they vested, but then died underwater, I understand that perfectly. Better than perfectly -- I understand it viscerally and angrily.

But just because the $LD has some things in common with stock options -- you can't live off them without transferring them (eventually, and, maybe... not at all) into a more "fundamental" currency, doesn't mean that the "Second Life Economy" is as bad (or as good) in the same ways as options. It has one thing in common.

It has that in common with the US dollar, too, as I pointed out, in certain circumstances, and on a large-enough (or small enough; desert island) stage, or when you want to buy/sell certain things in certain places at certain times.

Are real world economies always going to have a leg-up on virtual world economies? I assume so... but only because the former houses the latter. At one time, however, real estate was the single most valuable thing in all the world. The idea that ownership of an idea or brand could matter more than ownership of land would have gotten you laughed out of your castle.

So while the economy-y-ness of SL may be less economy-y than what happens in the US or China or North Korea... it is simply different, eh? You can't do the same things. I agree with that 100%.

But just because I can't eat music doesn't make me want to stop dancing.

Posted Feb 1, 2007 9:09:54 PM | link

Aaron Delwiche says:

Randolfe,

Of course these transactions are taking place outside of SL's virtual economy. Nevertheless, these developers are still making substantial amounts of money for their services.

When you look at the recent tidal wave of stories surrounding Second Life, most of the press has to do with large-scale branding builds, educational applications, and training initiatives. These projects are typically built out by virtual world development agencies according to the traditional model for web development services.

Browse the portfolios of virtual world development agencies such as Metaversatility, Electric Sheep, Aimee Weber, Millions of Us, and Rivers Run Red. The people who build out these projects are paid in US dollars rather than in Linden Dollars.

Doesn't this strengthen the hand of those who suggest that Second Life (and other social virtual worlds) have immense economic promise?

This, in my view, is one of the biggest differences between social virtual worlds like Second Life and game worlds like WoW and Vanguard. The social virtual worlds have economies that intersect with the real world, and their user-creation tools enable all sorts of enormous projects that are funded largely with external currency. The game worlds like WoW and Vanguard simply aren't capable of supporting this type of economic activity.

It's interesting that traditional business and advertising agencies seem more capable of grasping the real-world potential of these social virtual worlds than those who are still stuck in the gold-farming mentality fostered by the game worlds.

Aaron

Posted Feb 1, 2007 10:25:10 PM | link

randolfe_ says:

Aaron & Andy,

I appreciate the spirited and civilized debate. As much as I would love to continue on, I think I've approached the limits of hospitality as a guest her at TN. I very much thank Mr. Castronova for opening this thread. I'll continue to engage in detailed debate on my own blog, but I'll not clog up the broader discussion here anymore. Thanks for everyone's input.

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Aaron Delwiche says:

Randolfe,

Just visited Terra Nova after a busy week at school, and was sad to see that you felt unwelcome in this conversation. Discussion and controversy is one of the things that makes Terra Nova such a pleasure to read. As long as one is respectful of others, it's difficult to wear out one's hospitality on these pages. I hope you'll consider returning, as you make many important points.

Aaron

Posted Feb 10, 2007 9:37:02 AM | link

randolfe_ says:

Aaron,

Thanks for the kind words. My backing off this subject is not directly related to any of the discussion here on TN or in this thread specifically. Even spirited disagreement at TN is usually very courteous.

Rather, I've grimly discovered there exists a frightening fringe who are cult-like SLers or otherwise have some fanatical interest in SL -- and they are not prone to receiving criticism. Given the contents of their messages I'd have to say that analogies to a wholesome virtual village are tragically ironic.

I have written quite a bit about the real-estate bubble both local to the Bay Area and nationally, for over two years now. Doing so earned me a tremendous amount of unflattering criticism along with a good share of name calling and insults. I even got ambushed on a radio interview which turned out to be a realtor-sympathetic setup. And many of these folks have real fortunes and real livelihoods at stake, and rightly see me as someone attempting to prick the balloon that's earning them hundreds of thousands in house-flipping profits.

But in just the short couple of weeks after writing my SL article I learned the difference between cynical self-interest and pure fanaticism. I mean, I called the entire NAR a de facto criminal cartel yet received nothing really intimidating; just a little bit of ad hominem. Question the right of computer SimMayberry to mint their own coin and engage in questionable seigniorage...no that apparently brings out the whackos.

Posted Feb 10, 2007 4:37:03 PM | link