Commentary
Second Life Chugs Along
- by Erik Sass , Staff Writer @eriksass1, July 29, 2010
Second Life is a great case study in social media trends. First came the huge wave of hype in 2005-2006, when every marketer and his mother felt compelled to get into the pioneering virtual world created by Linden Labs, which was touted as the future of online virtual interaction. Then came the backlash, as self-identified "original" users bemoaned the influx of newbies and corporate brands, with some even engaging in acts of virtual terrorism. And then came the anticlimax: growth slowed dramatically, many newbies and marketers lost interest, and Second Life slipped from the headlines.
Last month it was back in the news, but for all the wrong reasons, when Linden laid off 30% of its workforce to consolidate operations in North America. This spurred speculation that the end of the (virtual) world was nigh, all firmly denied by the company's bosses, who said Second Life is doing just fine, thanks. And while it's hard to know what the future holds, Second Life does indeed appear to be surviving -- even thriving. In fact, this may be the most instructive part of the social media story arc, because (like the World of Warcraft) it's an example of an online social network reaching equilibrium, or "maturing."
Social media watchers tend to focus obsessively on the number of users, and there's no question that Second Life appears to have leveled off over the last year or so. From two million in 2005, the total number of members soared to 18 million this year, but only a small fraction of these are active users. Zooming in on active users, defined as those who log in several times a month to spend at least one hour on the site, the numbers increased from about 25,000 in 2005 to roughly 700,000 in 2009-2010. In 2010 there have been peaks and valleys (with the number of active users ranging from 680,000 in February to 820,000 in April) but that still puts it in the 700,000-750,000 range -- stable, maybe even growing a little bit.
Long story short: after five years it's clear that Second Life won't be competing with Facebook, which recently crossed the 500 million mark. But I would argue that the number of active users is only half the story. The other half of the story is what those users are doing, how much time they spend doing it, and let's not forget about money, money, money -- how much are they spending online, and how much is Linden making?
Second Life's relatively small user base logs an impressive number of hours on the site, and the total amount of time continues to increase. From 2008-2009 the number of active users increased 16% from 600,000 to 700,000, while the total number of hours logged increased 20% from 400 million to 480 million. In the second quarter of 2010 the total time spent increased 33% over the second quarter of 2009, to 126 million hours. Active users spend an average of 100 minutes on the site during each visit, and some of these people are crazy, with reports of hardcore users spending 12 hours a day or more in-world. According to the company, users create about 600 million words in text messages and other content every day.
Then there's the money: Sales of virtual goods continue to increase at a remarkable pace, making Second Life one of the largest markets for virtual goods next to Zynga games like Farmville and Mafia Wars. Total dollars spent on virtual goods in Second Life increased steadily from $30 million in 2005 to $344 million in 2008, then jumped again to $567 million in 2009, and so far they are up about 30% year-over-year in 2010, putting the site on course for over $700 million. Not all of this goes into Linden's pockets, of course: several analysts pegged Linden's 2009 revenues at $80 million-$100 million, based on user fees, subscriptions, and land sales. I don't know how much Linden spends on server costs for Second Life, so it's hard to know if they're turning a profit (maybe not, which would explain the layoffs).
But regardless of Linden's profitability, all this is important because it suggests that the Second Life user base, while relatively small, is committed and heavily engaged with the site. Turning from Second Life to the larger marketplace, I think this is an important fact for marketers to bear in mind as they deal with the continuing -- indeed, accelerating -- proliferation of social media. Because reach and scale aren't everything, especially online, where the audience is highly fragmented and likely to fragment further. In this arena a small, highly-engaged niche audience may be more valuable than a large, apparently indifferent one (Facebook, I'm looking in your direction).
Erik Sass is editor of Publishers Daily. You can reach Erik at eriksass@gmail.com.
As a long time Second Life player, my feeling is that the biggest threat to Linden Labs is Linden Labs. The company appears to be run more as a hobby than a business, with no strategic planning or long-term goals. Old problems continue to languish, while the "development" team cranks out new features that only work haphazardly to start, if they work at all. You really don't want to know how often they have rolled out new server software, only to have to revert it back to the prior version because the new one creates too many problems that should've been anticipated. It appears to be more like a "What do we want to work on now?" attitude, rather than a "What do we have to work on now?"
Second Life provides a brilliant platform for media and entertainment. One I am proud to be associated with as an award winning producer. This type of Social Media is real time and immersive within a 3D avatar based environment. And yes it is rich, and yes it is personal.
The ability to create entertainment content is huge, and I personally look forward to the next year as a watershed for this.
PS- Oprah Winfrey Network just picked up the movie screened at Sundance this year, "Life 2.0," a documentary about Second Life -
Can The Dating Casino be far behind?
It might be interesting if I could turn my Facebook profile into an avatar and then roam Second Life. How could the FB status updates, photo uploads and such manifest in a virtual 3D world? How about an invite among friends, some of whom we only keep in touch with via FB (high-school mates), to a virtual party? Or a virtual Family Reunion where we could all meet virtually and talk/chat in real-time?
I've tried to interest my students but they find SL too weird. I have to admit there's a certain strangeness to the place.
I personally like your comparison between Second Life and Facebook. :) I used to have more insightful essays in the past on m own blog, but since you focused on numbers, here goes just one example that gets so often missed: http://gwynethllewelyn.net/2009/05/21/second-life-4-of-world-wide-market-share-in-telephony-and-digital-content-economy/
Note that in 2009 there was more digital content sold in Second Life (in USD) than on Apple's immensely successful iTunes Shop... it's amazing that those numbers completely failed to be shown by the media. Only web-based advertising beat Second Life in terms of revenue (so Google is doing well :) ).
Another interesting number: profitability. Facebook, in 2009, even with 350 million users and heavy advertising, had a loss of 50 million USD. 2010 might be its first year of profitability. Linden Lab, by contrast, had a profit of 50 million USD with Second Life in 2009 — and has turned a profit for the past three years at least, long repaying by several times the initial funding that they required in 2002-3 to get the virtual world launched.
So I agree with your last paragraph. We have no idea, among the 350 million registered Facebook accounts, how many are active; many suggest that at least half log in every month. But they use Facebook far less than Second Life users — by an order of magnitude. They spend far less money. In fact, Facebook has to support a huge infrastructure of millions and millions just to remain afloat in terms of profitability. In Second Life, allegedly just around 100,000 users, who are content creators ("content" includes pretty much everything, including live music or just hosting discussion events... not only building and programming), are enough to provide a digital economy to turn those 800,000 active users into returning customers of digital content — an economy worth USD 0.6 bio. It's not peanuts. And as your graphs show, it's growing — not exponentially, but growing. Linden Lab, as a company, doesn't benefit directly from the sales of digital content, but indirectly: content is often available at virtual locations, and Linden Lab leases those for a monthly fee, and they also charge a commission on the money exchange between virtual "tokens" (Linden dollars) and real US dollars. While it's just a fraction of the overall digital content economy, it's more than enough to keep Linden Lab a profitable company with plenty of spare cash to invest, without requiring an IPO or another round of funding.
Contrast that to Facebook's business model. Ads are barely adequate to cover the running costs. On the other hand, slicing shares off and selling them due to the high speculation around Facebook has provided the company enough income to keep it going. One might wonder which of the two companies is more "virtual". Linden Lab encourages a huge economy of digital content, and gets indirect benefits from its growth. Facebook enjoys huge speculation, and next-to-zero revenues from its user base — but the speculation allows them to sell shares of the company for an increasing amount of money, valuating it more and more.
On which company would you put your money? :)
i'm curious about Gwyneth Llewelyn's sources for her comments about Linden Lab's profitability for the last three years. what is the source for this claim? SL's interim CEO (Philip Rosedale) made the pointed remark recently that SL is a privately owned company and does not release public financial statements. after massive layoffs there has been much speculation about the profitability of Linden Lab.
Hehe Wizard, fair enough! The quote for the profit comes mainly from two sources:
http://nwn.blogs.com/nwn/2008/05/how-much-is-lin.html
and my own calculations:
http://alphavilleherald.com/2007/08/linden-labs-met.html
At some point in time, it used to be a popular pastime to try to figure out how much Linden Lab really earned. :) You can just project the growth based on those numbers.
Also, make sure you read the comments on those articles. Most point out flaws in the argumentation and help to tweak the numbers. But the overall feeling is that Linden Lab is making round US$50 million profit every year, at least since 2007. Even though SL grows (in tier and some LindeX fees), LL as a company has also organically grown, and bought other companies, invested in office space, and so forth, so the overall profit might not grown at the same rate — even though the income certainly has.