January 22, 2009

Linden Lab (Second Life) reforms its business model

Philip (Flickr picture of Chairman Philip Rosedale of Linden Lab by gisiger, Creative Commons License)

Linden Lab acquires Xstreet SL and Onrez, two Web-based marketplaces for virtual goods. Linden Lab is the company (based in San Francisco) behind the virtual world Second Life. The move is an interesting example of a changing business model in the fast moving virtual worlds industry. It is even more than that: it is an example of how open source and user generated content might lead to a viable business model. But first things first. Here is what Linden Lab announced:

Linden Lab is consolidating the two marketplaces on the Xstreet SL platform, offering one online shopping experience for customers and merchants. This will make it easier for Second Life Residents to find virtual goods to purchase and will provide merchants broader channels to sell their products.

The global market for virtual goods is estimated to be approximately USD $1.5 billion a year,* and Second Life plays a significant role in this market. In 2008, Residents of Second Life purchased and sold more than USD $360 million of virtual goods and services. Shopping for virtual goods has become one of the most compelling and popular aspects of the Second Life experience. The acquisition of these e-commerce sites will aid the continuing growth of the Second Life economy by making it even more convenient for buyers and sellers to transact virtual goods and services online.

Observers do fear that the acquisition could give too much power to Linden Lab in the creation and trade of content. What about adult products for instance, or what will be the consequences for in-world malls and for the Open Sim project? The residents of Second Life are very entrepreneurial, the whole content of the virtual world is produced by the users, who can trade the virtual objects and services and convert the virtual currency, the Linden dollar, into real US dollars.

The Open Sim project creates virtual worlds which are based on the core technology of Second Life but which are independent entities and competitors of Second Life.

It seems to me that this newest development in the business model of Linden Lab is rather logical. The company can be considered as primarily a hosting service, adding tools so people can create content on the hired server capacity (" virtual land"). As a business model, especially confronted with upcoming alternatives such as OpenSim, this is maybe not enough to ensure the long term viability of the company, which generates cash and seems to be profitable (the company is closely held).

Hence the necessity to offer services and content. This became pretty obvious to me after meeting Chairman Philip Rosedale in Amsterdam last year and after reading on Metanomics the interview Professor Robert Bloomberg had with him. As I wrote at the time on my personal blog MixedRealities:

The business model of Linden Lab now is that of a hosting company and there is also revenue from managing the virtual currency, the Linden dollar. In the connected virtual world there will be a desire to move virtual content around. Linden Lab could offer services like managing accounts, inventories, hosting and virtual currencies.

Even though it may make residents of Second Life nervous, I think it is a sound business decision to acquire both sites. It also is an audacious move. Linden Lab did not oppose the creation of OpenSim and the back-engineering of its technology. The vision of the company seems to be totally in favor of an interconnected system of virtual worlds, and Rosedale clearly thinks it is in that context that Linden Lab has the best opportunities to expand. 

Virtual worlds such as Second Life (an early champion of user generated content) need economies and a currency to flourish. It seems that Linden Lab will exploit this expertise in a much broader constellation of virtual worlds instead of staying just a hosting company. It is an example of how to use open source and user generated content and yet to become more profitable, an aspect of Linden Lab and Second Life which is rarely discussed in the non-specialized press.

Roland Legrand

Comments

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Hi,

A very smart and diplomatic answer. It’s really appreciable and generous.

Miller

Virtual Currency

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