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Aviators, Moguls, Fashionistas and Barons: Economics and Ownership in Second Life


September 23, 2004 Article Start Page 1 of 2 Next
 

Second Life is a digital world that relies on a unique combination of grid computing and streaming technology [Rosedale03] to enable virtually all of its content to be created by its residents. To maximize the quality and quantity of user-created content, Second Life has embraced strong economic and legal connections to the real world. This approach is quite different than conventional massively multiplayer online games (MMOGs). Since Second Life launched in June of 2003, significant changes have been made to the business model and internal economic structure. These changes have shaped the many approaches residents have taken to creating content, building experiences and making real-world profits. This article will discuss the evolution of Second Life's business model and internal economy, its entrepreneurial activities, and the impact of those activities on Second Life's residents and community.


The option to create their own clothes is left to the user.

To the Beat of a Different Drummer

MMOGs generally follow similar paths regarding ties to the real world and business models. As spelled out in their End-User Licensing Agreements (EULA) and Terms of Service (ToS), most digital world operators own all of the content in their world, own any content generated by the player, and specifically deny residents the right to earn real-world incomes while using of the digital world. Sony [Koster2002] and Turbine [Castronova2004a] have followed through on their EULAs by banning the sale of digital items and currency on eBay. Most MMOGs are also subscription services, requiring ongoing monthly payments from all players in order to stay in the games.

Second Life takes a very different approach, recognizing residents' intellectual property rights to their creations, allowing them to generate real-world income [Linden03], and selling them as much digital real estate as they desire [Linden04]. As a user-created digital world, the ultimate success of Second Life is coupled to the innovation and creativity of its residents, not to ownership of their intellectual property. This is also a practical decision, as MMOGs establish economic links to the real world independent of the wishes of the developers or world operators. Land sales allow a more efficient and equitable allocation of resources and enable entrepreneurs to speculate in ways not previously available to them.

Heads in the Sand

MMOGs tend to be extremely time-intensive experiences, with players often spending 20 or more hours per week [Yee04] in world. Players with more money than time generate a demand for high-level characters, items and currency, while players with more time than money have an opportunity to supply all of these. Markets thus exist whether the EULA permits it or not. As Sony discovered, banning EverQuest sales on eBay simply moved the trade to other sites, such as PlayerAuctions and IGE. In fact, despite the nearly universal prohibition on legitimate digital item trading, the global market is conservatively estimated at $75 million [Castronova2004b] and experiencing very strong growth.

Game publishers continue to officially ignore the reality of item trading [Reynolds04], despite the untested, but intriguing, legal implications of failing to enforce their EULAs. Further muddying the water, some publishers have talked openly of monetizing digital item sales [Combs04], although it is interesting that the target is not subscription MMOGs but rather single and multiplayer games that have an online component.

Digital Property

The ownership of digital property is also an important question. Even leaving aside the debate about whether digital goods are property at all [Lastowka03], definitive answers do not exist about the enforceability of EULAs that retain ownership of everything created by players within MMOGs [Dibbell03a]. In fact, examination of hosting, colocation and bandwidth providers' EULAs show that it is simpler to allow customers to retain their intellectual property rights.

From an economic standpoint, property rights are critical to strong markets [Bernstein04], businesses [DeSoto00], and innovation [North94]. The already large digital item market would undergo dramatic growth if its participants were able to move out of the current gray and black markets. Additionally, strong and efficient markets also lead to rapid evolution of user-created content, as observed within Second Life.

Revolting Taxes

Second Life runs on an expanding grid of computers; however CPU, memory and bandwidth resources need to be limited and allocated to residents in a predictable and equitable manner. Initially, a complicated system of creation costs, taxes and stipends was chosen as the best method. Objects and land that a resident owned in world would generate a weekly tax burden. Residents would pay these taxes using Linden Dollars (L$, Second Life's internal currency) they had received from other users, by selling their creations, and from their stipend. Their stipend was a weekly payout that changed based on the resident's reputation. Residents paid a flat monthly subscription fee in US$.

This system had numerous problems. In order for taxes to effectively balance load, they had to be insanely high. As a result, very few residents were able to create on a large scale, and it was extremely difficult to create experiences or games within Second Life. Rich residents were able to generate severely non-uniform load on the system, magnifying the inequities between the wealthy and the poor. Resident frustration culminated in the "Second Life Tax Revolt" [Grimmelmann03], where residents picketed, held Boston tea parties, and set fire to numerous structures.

A New Model

Although some of the frustration could be linked to the general dislike of taxes, the revolt forced an examination of the deeper problems. Residents had learned that creating experiences on a large scale, such as creating a city rather than just a building, made Second Life much more compelling. Similar to conventional MMOGs [Yee03] where multiple accounts allow dedicated users to enrich their experience by spending more money, Second Life residents and entrepreneurs demanded a mechanism to create on a larger scale, even if it meant paying more.

The system of creation costs and taxes was removed, as was the monthly subscription fee. Instead, the amount of land a resident owned acted to limit the scale of creation. If a resident wanted to build more, they simply purchased more land. Since land was a scarce resource, it was auctioned off continuously. Thus, land ownership consists of an up-front cost, the auction price, and an ongoing cost in the form of a maintenance fee. Residents can own as much land as they need and can change how much the own each month. Those who want to create complete experiences even have the option of purchasing estates that aren't directly connected to the mainland and that have more advanced access controls than normal land. Despite some initial concern over the dramatic nature of the changes, virtual real estate has proven to be quite successful [MSNBC04].

Land values vary in Second Life because arbitrary teleportation is not allowed and some global rules vary from location to location [Ondrejka04]. "Telehubs" provide a public transportation system, so land closer to a telehub will experience higher traffic than a more distant local. Areas within Second Life are also divided into "Mature" and "Non-Mature", with appropriate changes in Community Standards, so depending upon desired use, different types of land may be more or less valuable. Finally, aesthetic issues clearly matter, as beachfront property in Second Life has consistently sold for more than inland plots.

The stipend still exists. By providing residents with a steady income, the velocity of money within the economy remains high and consumers have little incentive to hoard what they have. The stipend has a minimum amount keyed to being a member in good standing and is supplemented by daily dwell awards. Dwell awards are L$ payments to the residents whose land receives the most visitors during the previous day. L$ drains also exist, in the form of land that is auctioned for L$, upload fees for adding textures, audio, and animations into the world, and listing fees for the in-world find functionality.

Economic Strength

While inflation could be a concern in this economic model, Second Life's rapid and sustained growth in 2004 has actually resulted in a mild reduction in median and average balances. More importantly, unlike other MMOGs, the L$ has actually appreciated against the US$. Second Life's internal economy has also grown significantly since changing models, with monthly internal economic activity passing US$1 million at current L$ to US$ exchange rates. Transactional volume has undergone dramatic increases as well.

Digital Entrepreneurs

Second Life had the pieces in place to generate sustained economic growth at the start of 2004. Residents owned their creations, were free to profit off of their activities within the world, and could speculate and experiment with large creations simply by purchasing land. The opportunity to earn real-world profits was enabled when third party sites connected Second Life's L$ to US$.

Currency Trading

IGE and Gaming Open Market have both supported L$ trading since late-2003. Both have seen strong growth in sales volume, and currently trade well over US$100,000 worth of L$ between them per month. Second Life has not experienced the "mudflation" generally seen in other online games due to duplication bugs, shortcuts in the treadmill, and commodification. This stability has made the L$ a worthwhile investment and allowed in-world businesses to generate significant real-world wealth. In fact, going shopping with your friends has become a major activity within Second Life.

Trendsetting

Clothing and avatar stores were the first businesses within Second Life. Because the built-in avatar creation and customization tools are the first skills learned upon entering the world, virtually all residents learn that they are able to create clothing and avatars. Obviously, the quality and desirability of clothing will vary, but many residents attempt to inspire the next Second Life fashion craze. The transition to the new land model allowed speculators and entrepreneurs to build stores that supported large and varied displays, so designers with complementary skill sets began working together to improve the shopping experience. The ability to buy more land has allowed creators to explore franchising, multiple locations, advertising, and branding. Second Life's approach to intellectual property also means that budding fashionistas actually own their creations, whether in the digital or real worlds. One real world firm is even taking advantage of this to "cool hunt" within Second Life [STD04], exporting content from the digital to the real.

Clothing and accessories often act as a gateway to other retail opportunities. Storeowners can distinguish themselves from their competition by offering vehicles or weapons, or by selling clothing that matches other creations. Alternately, small outlets are often added to existing clubs and other popular location. Sellers quickly learn that the realities of a digital world, such as no marginal cost of reproduction and no need to keep inventory on hand, allow them to be flexible and experimental in their sales approaches.

Shoppers are able to choose stores based on text searches, the popularity of the store, and the recommendations of other residents. This results in a virtually infinite supply of new clothing ideas and options, sold in environments ranging from shopping malls to remote boutiques floating in the sky. For many of the storeowners, the shopping experience is as important as the actual clothing they sell, so meeting and greeting the clientele is a big part of their business.

All Dressed Up

Of course, once the perfect clothes and accessories have been purchased, seeing and being seen becomes the next important activity. Clubs and events are very popular in Second Life and make up another common business venture. As with stores, bigger is often better and many residents have chosen to make large land purchases in order to fully explore their visions.

Clubs, ranging from Wild West saloons to science fiction cantinas to clubs that would make Las Vegas blush, provide destinations and meeting grounds. Clubs consistently receive the most traffic within Second Life, and are often used to launch or sell other products. Clubs earn L$ for their owners and operators both through dwell awards and through goods and services sold within them. Clubs often act as locations for various events, although events also occur at private homes and public stages.

Resident-run events within Second Life are a common way to meet large numbers of other residents. They also can have economic motivations, as many give out prize money or are used to generate higher dwell awards. Events of all types exist. Costume parties, trivia contests, themed chat, open houses and game shows are quite common. Educational events, where residents teach new users about the best ways to accomplish various tasks within Second Life, are also extremely popular. Residents who entered Second Life without any formal programming training now teach hundreds of people how best to create airplanes, weapons, and other scripted objects.

Inventing the New

The ability to truly create within Second Life, and the rapid commoditization of content within MMOGs in general, provides a real opportunity to profit for those who come up with new ideas. The scripting language and creation tools can be used to provide features and behaviors not yet built into the system, to implement ideas better than everyone else, and to simply explore design space.


Avatars locked in a sword fight.

Second Life doesn't yet implement multiple avatar animations but several enterprising residents independently solved the problem [Au04c] by using the scripting language and user-created animations to allow avatars to hug each other. In each case, multiple groups of residents worked together and combined various skills and expertise. Their products have sold quite well and have served as the inspiration for the next round of animation scripts.

The popularity of shops, clubs, and events has also created a high demand for architects and those with a strong industrial design sense. While many residents can create a home or a store, fewer are able to design one that shows items well, allows avatars to move through it smoothly, and consumes minimal system resources so that more people can visit and enjoy it.

 

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