An Unreal Financial Crisis

If you heard the president last night, you know -- or at least you've been told -- that the U.S. economy is on the verge of collapse unless we authorize a massive bailout.

Read and received, Mr. President. But what do we do about Linden Lab? The privately held maker of the virtual world Second Life is watching its virtual economy wobble as ours teeters. Notable statistics:

  1. The average spent per square meter to acquire virtual land in Second Life has declined from 1.9809 in August to 1.8378 month-to-date in September. (As expressed in the virtual Linden Dollar, Second Life's virtual currency.)
  2. User-to-user transactions fell year-over-year in both the first and second quarters of 2008.
  3. The average exchange rate for the Linden dollar fell from 267.4 in July to 266.8 in August. Not exactly the sort of freefall we've witnessed with the U.S. dollar, but not great, either.

And in an art-imitates-life moment, Linden in January banned virtual banks from operating in Second Life because of risks to its economy. The irony? Real-world banks -- fine institutions such as, say, Wachovia (NYSE: WB  ) and Washington Mutual (NYSE: WM  ) -- were made exempt from the rule. Quoting a statement from the company made at the time:

Usually, we don't step in the middle of Resident-to-Resident conduct -- letting Residents decide how to act, live, or play in Second Life. But these 'banks' have brought unique and substantial risks to Second Life, and we feel it's our duty to step in. Offering unsustainably high interest rates, they are in most cases doomed to collapse -- leaving upset 'depositors' with nothing to show for their investments.

Is Hank Paulson stealing from Second Life? Is Linden Lab founder and chairman Philip Rosedale ghostwriting for Ben Bernanke? Unbelievable.

Fortunately, not all the news is bad. Linden is still seeing outrageous usage growth. Subscribers spent 48% more hours in Second Life in August than they had the year prior.

Corporate usage is also up. Toyota (NYSE: TM  ) gets prospects to try its Scion using Second Life. Thomson Reuters (NYSE: TRI  ) has established a Second Life bureau to cover news from the virtual world. And Starwood Hotels (NYSE: HOT  ) has tested designs of its new Aloft brand in Second Life.

And yet none of this prevented a virtual banking crisis. Will Linden be due for a bailout if it gets worse?

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Fool contributor Tim Beyers owned shares of IBM at the time of publication. He also hunts for the best of tech as a contributor to Motley Fool Rule Breakers. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Thomson Reuters is an Inside Value pick. The Motley Fool's disclosure policy is expecting a bailout for the virtual deposits it had in a failed Second Life bank.

Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On September 26, 2008, at 5:06 AM, RightasrainR wrote:

    the dollar moves way more than the linden...which is surprising stable (but if you look at the buy/sell spread you can see that it is huge and loaded with fees).

    SL economy, resident to resident, so transactions not involving Linden Lab is comprised of 3 major pieces: porno, land rental and merchandise.

    Porno (although I gotta say I don't have direct insight into this!) seems to be growing a little and still er..cranking the lindens. Land rental could collapse big time and is already showing major signs of stress.

    Linden is still benefiting from land sales--growing islands by more than 20% of the total land mass in the last 3 months. They are in effect squeezing the inworld land owners out of business.

    Merchandise where we have a lot of experience and data at Rezzable, is flat to slight increase--although the cost of production for items is growing rapidly as people demand more complex stuff or lower unit price points.

    What does it all mean for LL? They need to get more new people inworld--their registrations conversions are very low and core group of users is flat growth with signs of hard core user decline. If they kill the land rental market they will need to keep selling sims to corporates and universities, non-profits to keep the platform profitable.

    some related blog stuff from our site here:

    Anecdotally, we hear that LL is tracking at 100m annualized revenues with about 30% margin. So net net--economy is strong for Linden Labs but weak unless you into selling porno!

  • Report this Comment On September 28, 2008, at 8:34 PM, ArminasX wrote:

    It is indeed interesting to observe the SL economy, especially in times of Real Life trouble. One important thing to remember, however, is that SL's population is only perhaps 40% US-based. Most of the users are from other countries (like me) and have less direct exposure to US-based banking fiascos. Nevertheless, myself and other virtual entrepreneurs have observed issues lately in SL's economy, and I posted my thoughts here:

  • Report this Comment On September 30, 2008, at 9:03 AM, SLUser wrote:

    RightasRain, I keep seeing links to your blog all over the internet quite amazing for Rezzables Limited a company based in the United Kingdom to be so publically negative on the platform (in that post) they utilise.

    Regardless, brands are starting to return to looking at more viral compaigns in Second Life and even if developers such as Rezzables Limited are generally negative on their platforms of choice we are seeing growth throughout the commercial sector that will by end of Q4 strengthen the residential *joe bloggs player* sector.

    While yes there does need to be more new people inworld, the REG-API phase 2 development is near complete and will encourage additional portals into Second Life from third party sites.

    The economy in world has stablized, with positive balances being seen by pro - creators. Sales are generally slow in August each year but the trend over 2008 has been an increase in sale revenue by individual creators by 24%. This was collated with inworld survey and vendor data.

    Costs for land have come down (Bubble, it was overpriced, now it's more reasonable) leading to increased ownership by the regular user.

    Although Rezzables have likened the user of Second Life who wants to own their "land" to having a website luckily most do not follow their viewpoint.

    Overall, the RL economy is not allowing the consumer to afford a holiday/car/that luxury item. They are instead turning to purchase of virtual goods to obtain more "in-reach" entertainment. Therefore I would argue, the RL economy going down the pan is actually going to strength the SL one.

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