For eight months, the Second Life economy has been stagnant. After a series of failed initiatives, Linden Lab fired its CEO, closed its international offices and shed 30% of its staff. Needless to say, such a dramatic reduction in expenses is not unsound considering a lack of matching increases in revenues.
Since Linden Lab’s primary product is virtual land, one can measure the health of Linden Lab’s revenue stream by the amount of land in existence through time. Quantity of land can also be a surrogate for the health of the Second Life economy.
As with any product, there exists a Supply Curve (quantity supplied at a given price) and a Demand Curve (quantity demanded at a given price). In the case of virtual land, the point at which the Supply Curve meets the Demand Curve is the amount of land in service.
There are two types of land in Second Life: mainland and private estates. It is private estates that tell the story of the economy because 1) they are more expensive than mainland sims and 2) they cease to exist if abandoned by their owner. It costs an estate owner US$300 per month to keep a full-prim private estate ‘alive’. While an estate owner can sell his estate to another resident, the pool of estates requires a matching pool of people each willing to pay US$300 per month. If the pool of willing owners falls, the pool of estates falls accordingly.
Here is the data (unfortunately, less expensive Homestead estates are not distinguished from full-prim estates). What is clear, though, is a lack of growth in private estates since the beginning of March 2010. It is unknown whether people have been trading full-prim estates for Homesteads. If so, the stable quantity of private estates masks a declining revenue stream for Linden Lab. According to T Linden, “Regarding your question, we don’t see a lot of folks trading down to homesteads in our attrition numbers.” 2010q1 economic results 2010-04-28
It strikes me, therefore, that one of the main reasons why Second Life is not growing is the increasing relative cost of land tier. General hosting prices have more than halved in the past three years and, while Second Life is more than a simple hosting service, the cost/performance ratio of Second Life servers has certainly fallen. Meanwhile, other virtual worlds such as Blue Mars charge significantly less for virtual land. Opensim worlds, for all their faults, are essentially free. WordPress is free. Facebook is free. It’s not 2006 anymore. Moreover, there has not been a history of major improvements in Second Life over the past four years to justify maintaining high tier fees. In other words, tier fees are out of line with market conditions.
I therefore propose the following land tier fee schedule:
- Full Region: $200 per month (setup fee $1000)
- Homestead: $100 per month (setup fee $200)
- Openspace: $50 per month (setup fee $100)
- Mainland full sim: $100 ($50 each additional 1/2 sim)
- Mainland 1/2 sim: $75
- Mainland 1/4 sim: $50
- Mainland 8192m2: $30
- Mainland 4096m2: $20
- Mainland 2048m2: $15
- Mainland 1024m2: $10
- Mainland 512m2: $5
- Mainland 512 Premium bonus: free
I strongly believe the resulting long-term benefits of economic growth would more than offset the short-term decline in revenues. Second Life is expensive. Second Life is stagnant. It’s time to reduce prices to encourage greater participation.
See also: A History of Private Island Pricing
First Thoughts 
I generally agree with your suggestions, although I also think that the setup fee is way too high overall, compared to plain hosting or co-location — areas where there are no setup fees.
Why did LL have such high setup fees since the beginning of time? The explanation was simple: they needed to install a new server and the sim software in it, and this would take some time (up to week) — several hours in fact. I can estimate 4-5 hours as being normal to install from scratch a new server and test it — that would be something costing perhaps $300-500. The rest would be a margin for LL to deal with overhead expenses (e.g. technical support to deal with a bad installation, for instance).
But LL moved to a fully automated system (like all hosting companies!). This means that no labour costs are associated with the creation of a new sim. Granted, this automated system required a lot of development, and development costs also have to be paid, but I’m pretty sure that nowadays everything is pure profit for LL — and $1000 is really overwhelmingly high.
My own suggestion would be to reward long-term buyers: if someone commits for at least 6 months in advance, the setup fee would be forfeited. It would be more fair that way, and lower the entry cost for a new project that will remain in SL for a long time (like a new community, for example!).
The 30-33% price reduction you suggest is pretty reasonable I think. Some of the most expensive, high-end OpenSim grid operators don’t “host for free” at all, but give a similar discount to that — 30 to 50% over what LL charges. For some, it makes all the difference. Hosting your own sim using a cheap hosting provider may cost just US$50/month but you have to take maintenance costs into account, and those will be much higher than merely the hardware lease and the bandwidth costs. Even if you do it on your own, these are hours spent tweaking the servers instead of doing some work.
… and that should have been “less than what LL charges” and not “over” 🙂
Gwyneth,
I have thought about your comments on setup fees. Before Linden Lab canceled the transfer of grandfathered Islands (US$195 per month), grandfathered Islands traded at about US$1500. Currently, on the secondary market, Islands (US$295 per month) are trading at about US$500. If monthly tier fee were reduced to US$200, I estimate the market price of Islands would increase to about US$1000 – in line with the setup fee for a new Island.
Presuming the purchase price of an Island (new or used) is US$1000 and monthly tier fee is US$200, a prospective buyer gains a US$200 reduction in the first year of owning an Island. Existing Island owners gain a US$1200 annual reduction. Thus, new entrants are encouraged to buy and existing landowners are encouraged to hold.