Goodbye SL General Discussion Forum

It is with some sadness that I retreat from the Second Life General Discussion Forum. Unfortunately, because of Linden Lab’s secretive and erratic moderation process and its seeming indifference to AR griefing, the forum has become too unstable for general use.

Many regular participants have noticed a significant degradation of the service over the past month. It is unclear whether it results from a single active griefer or the concentrated efforts of a clique. Nor is it known whether Linden Lab has adopted a new policy of aggressive moderation or assumed a more passive, automated role that resulted in an escalation of griefing. Linden Lab is silent on the issue.

It does seem, though, that Abuse Reports are the root cause of the problem. Several cheerful, on-topic threads have been removed. Many forum contributors speak of innocuous posts vanishing in the night. My own experience confirms both situations. I am currently unable to read more than half a dozen recent threads, none of which were controversial, all of which were interesting. It is difficult to imagine Linden Lab proactively removing them based on their content. It is more likely that they suffered at the hands of AR griefers who were able to trigger an automated removal function.

If this is indeed the case, the griefers have won a clear victory. Longtime contributors have left the forum. Many have moved to SL Universe, which is now the de facto community center for Second Life residents. Some, like myself, have begun to set up their own blogs. Others have withdrawn from fora/blogs completely and returned inworld. In all cases, Linden Lab has lost the trust and confidence of yet another constituency of Second Life, not to mention the loss of their knowledge and experience to Linden Lab and the SL community in general.

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Posted in Strategy and Policy | 2 Comments

A Strategic Assessment of Second Life – Part 2

What is Second Life? Why was it created? On the eve of its seventh birthday, what is the condition of Second Life? What is its future?

First, one must say a few things about Linden Lab. Linden Research Inc. is a private limited company with its headquarters in San Francisco, California. Linden Research Inc. is not a public limited company. Its shares are privately owned; they are not traded on a public stock exchange. Because Linden Research Inc. is a private limited company, it does not have to report (Form 10-K) to the SEC. Nor is it subject to the Sarbanes-Oxley Act. In general, a private limited company is much less regulated than a public limited company. It is subject to fewer laws than a public limited company.

Why is this information relevant? Two reasons. First, because it needs to be understood that not all companies are subject to the same laws. Not only are there different laws affecting public and private companies, but there are different state, national and international laws. Thus, Linden Research is subject to a different set of laws than a small company incorporated in Delaware whose products are sold only in the United States and a multinational corporation based in Singapore whose products are sold around the world. There is also a difference in applicable law based on the types of goods and services a company produces. Pharmaceutical companies are subject to different laws than automobile companies or film studios. So, while Linden Research Inc. is subject to ‘the law’, one must ask, which laws within which jurisdictions under what circumstances? Second, it needs to be remembered that Second Life was not set up by UNESCO to be a global virtual world with universal access under the auspices of the UNHRC. Nor is Linden Research Inc. a legally registered charity.

Linden Lab pressroom 2002-02-11

Bloomberg-Businessweek research

So, what is Second Life? What combined package of characteristics define Second Life uniquely? What, in total, does Second Life have which exists nowhere else? Why is Second Life special?

Second Life is a self-projecting metaphorical interface with a user-generated economy based on a sophisticated private property rights structure.

By ‘self-projecting’, I mean the following. In RL, we all seek to project certain symbols to other people by the clothes we wear or the car we drive or our house or furniture etc. Yet there are many characteristics we are born with that cannot be easily changed, if at all: physical appearance, race, sex, family history, etc. Nor in RL can we easily mask our education, employment, family relationships, health etc. Needless to say, almost all of our RL characteristics vanish when we create an avatar. As avatars, everything about us must be chosen, self-selected (including whether to be default avatars or not). In this way, we become 100% self-projecting.

By ‘metaphorical’, I mean the following. Log on to Second Life then stand up and look at the back of your computer screen. You will see some plastic panels and wires. Everything you see in Second Life, therefore, is a symbol that represents something in RL or in the mind of a content creator (or even sometimes solely in the mind of the perceiver). Second Life is a world of symbols, a world of metaphors. The blouse you buy for your avatar is not a real blouse (you can’t pluck it out of your screen and wear it to a RL cocktail party). Real blouses are bought in RL stores and have to be washed to remove RL sweat. Virtual blouses are only symbols; they are a metaphor of RL blouses.

By ‘interface’, I mean a real-time transactional environment, a place where avatars meet each other, project symbols to each other, communicate and transact with each other.

By ‘user-generated economy’, I mean an economy in which the price mechanism is employed to allocate goods and services between producers and consumers.

By ‘sophisticated’, I mean subtle and complex. Land and objects can be owned by one person, many people or groups. Land can be divided into parcels to be sold, leased, rented and sublet. The group structure for a big mall is quite complicated. Objects can be composed of sub-objects, each with different permissions.

By ‘private property rights structure’, I mean that land and objects can be owned by an individual and traded between individuals. A ‘common property rights structure’ is one in which a central authority owns land and objects on behalf of a community.

When I say ‘land and objects’, I mean metaphorical land and objects. The multi-million dollar SL economy is one in which symbols are created, bought and sold. In this way, the SL economy is similar to the art market or the fashion and luxury goods industries. There is nothing to eat in Second Life.

A Virtual Country Separate from RL or an IT Platform within RL?

Facebook is an IT platform within RL. Facebook is a nexus of RL personal information – a centralized location for email, photos, conversation, contact lists, etc. The biggest problem with Facebook (and other such RL social networks) is privacy and personal safety.

A primary characteristic of Second Life, on the other hand, is privacy and personal safety. Second Life provides not only the opportunity to distance oneself from RL, but it enables people to escape from the unchangeable physical constraints we are born with in RL and most of the political and social constraints we are surrounded by in RL.

  • physical appearance and/or physical disabilities
  • race / ethnicity
  • sex / gender / marital status
  • class (dress codes, social clubs, spoken accent)
  • geography / nationality
  • level of formal education
  • legal and financial circumstances
  • professional qualifications and associations

Our RL resumes put us into boxes that restrict our personal and professional growth. In Second Life, it does not matter if you graduated from high school or went to Harvard; it doesn’t matter if you belong to the American Institute of Architects or have connections in LVMH. Don’t have five years’ experience in fashion design? No problem. Got kids and want to work from home? No problem. Overweight? Skin problem? In a wheelchair? No problem. Living in the Ukraine? Can’t travel? No problem. The only things that matter in Second Life are your talents, skills, ambitions and enthusiasm. Anyone can be a designer or programmer or entrepreneur – no questions asked. Facebook and Linkedin are great for getting ahead in RL, but Second Life offers the unique opportunity to bypass RL entirely – to create a new, ‘second’, life independent of the first.

A New Economy

As mentioned earlier, Second Life is unique in that it has a user-generated economy. That economy is possible because of a private property rights structure that enables economic agents to own their creations and trade with others. It is because of this virtual economy that people can bypass the RL economy in search of opportunities. Many people joined Second Life in 2006 and 2007 specifically for that reason.

A New Society

As a new, ‘virtual country’, Second Life attracted many ‘immigrants’ from a wide range of RL countries. Why? Because Second Life offered an opportunity for people to escape from the social and political constraints of their RL countries, cultures and societies. The guiding philosophy of Second Life was individual freedom and responsibility. Second Life was pluralistic. There were too many people from different countries and cultures for Linden Lab to impose blanket moral and behavioral standards over the whole grid.

“[W]e cannot play the role of arbitrating personal grievances or defining behavioral standards. This is particularly important as Linden Lab becomes more international. We don’t want to force a California-centric set of rules on the virtual world.”Linden Lab, December 2006

A New Method of Personal Growth

“Peter Yellowlees, a professor of psychiatry at the University of California, Davis, has been teaching about schizophrenia for 20 years, but says that he was never really able to explain to his students just how their patients suffer. So he went online, downloaded some free software and entered Second Life… For about $300 a month, he leases an island in Second Life, where he has built a clinic that looks exactly like the real one in Sacramento where many of his students practise. He gives his students “avatars”, or online personas, so they can attend his lectures inside Second Life and then experience hallucinations. “It’s so powerful that some get quite upset,” says Mr Yellowlees.” – Living a Second Life, The Economist, 28 September 2006

Residents who have been in Second Life for a year or more have witnessed a personal progression – within themselves and among their friends – from initial drama and/or sexual gluttony to calm maturity as RL frustration is sated by SL roleplay. It is nothing less than a social revolution with far-ranging consequences for mental health. I wonder how many RL rapes have been prevented because fantasies were unleashed in SL rather than RL. How much RL domestic violence has been reduced by membership in SL society? How many marriages have been saved instead of ruined by virtual rather than real mistresses?

Second Life represents a unique opportunity for many people to revisit childhood memories, to overcome teenage frustrations and live fantasies that were either blocked or suppressed growing up in RL. In my opinion, Second Life is one of the best forms of therapy and self-help available anywhere in the world.

To quote Zoe Llewelyn, “I myself, am a child abuse survivor as I have mentioned here before. Though Zoe is short compared to the 8 foot amazons running about SL, she is not a child avatar…but I do have a child avie alt. Like many grown adults who choose to play a child avie at times, SL allowed me to try to experience an innocent, carefree renewal of a childhood that for me was very violent and horrific at times. playing my child alt was liberating, safe, comfortable and very therapeutic. It allowed me to create a new childhood for myself that replaced the one I never had.”

What Went Wrong 2007-2010?

In 2006, Second Life was a pluralistic, international, ‘New World’ ‘virtual country’ with its own user-generated economy. It was separate from RL – independent – a parallel universe of privacy and opportunity. Linden Research Inc. was subject to various RL legal regimes, but Second Life itself was a new legal entity, arms length, protected by RL resident account information and its own legal vagueness as a virtual world.

I believe Linden Lab made one crucial mistake that changed the direction of Second Life: anonymous accounts. To quote from an article I wrote in 2008:

“The establishment of anonymous accounts in June 2006 opened the doors to underage players. This resulted in international legal scrutiny, increased exposure to legal liability and damaging media coverage. Linden Lab responded by intruding into residents’ sexual relationships and expelling two consenting adults for underage roleplay – even though no underage players were involved. Refusal to close the anonymous accounts and dogged insistence on an ineffective and unsound ID-based age verification system cost Linden Lab considerable political capital with no benefit.”

Then came the policy reversal on gambling, the policy reversal on VAT, the ban on banks and the policy reversal on social behavior leading to Zindra. In none of these cases did Linden Lab quote definitive legal arguments. To this day, the relationship between Second Life and RL legal regimes remains vague. With respect to VAT, that too was a policy decision: to sacrifice long-run revenue for short-term cost savings. None of these decisions were imposed upon Linden Lab from outside; all were formulated internally.

COGS in the Vat Machine

Linden Lab gambling policy

Linden Lab banking policy

Linden Lab sexual policy

The future of second life mainland 2008-08-06

What am I saying? I am saying that from 2007-2010, Linden Lab sought to reduce the freedoms and risks associated with a pluralistic, international, ‘New World’ ‘virtual country’ in order to make Second Life more “predictable” and thereby more appealing to RL organizations and the mass market. I believe this was a strategic error that undermined Second Life’s core strengths and made it less predictable, resulting in a loss of confidence in the inworld economy and generating a battle between residents to determine how best to ‘reform’ Second Life to match their own RL ideologies. The founding principles of “Your World, Your Imagination” and caveat emptor in an adult virtual world were replaced by a new principle of inworld loco parentis in an increasingly infantilized sandbox.

There were other problems resulting from the push to RL. SL Enterprise was a spork, useful for neither fish nor fowl. It could not compete with specialized secure corporate multimedia networks nor could it provide the density and depth of a virtual economy. The new viewer too was a spork, designed in secret for the mass market, but serving neither the mass market nor the existing userbase. Moreover, it was unnecessary considering there were several excellent third-party viewers available based on LL’s own open source policy. I have no doubt that most of the money saved on VAT went down the sinkholes of SL Enterprise and Viewer 2. Avatar United is cute, but what good is it? A virtual Facebook? What’s the point when SL is the ultimate virtual world in the first place?

Rediscovering the Roots of Success

Mark Kingdon has resigned as CEO. Linden Lab is laying off 30% of its workforce. Philip is back in charge. I therefore implore Linden Lab at this critical time to think carefully about why Second Life was created and why it was initially successful. I believe the attempt to blend SL with RL has failed on all fronts, commercially, economically, politically and socially. I believe there remains a window of opportunity to correct the mistakes of the past three years and build on SL’s core strengths. Above all, I ask Linden Lab to think five years ahead of the curve rather than five years behind it – to prepare for an esthetics economy in which metaphor, like the giant stone currency of Yap, has enormous monetary value. On the eve of its seventh birthday, I believe Second Life has a second chance.

Posted in Strategy and Policy | 5 Comments

A Strategic Assessment of Second Life – Part 1

I first heard about Second Life in an article in The Economist back in October 2006. I had flirted with Project Entropia about a year earlier, but I could not figure out how to get out of the airport welcome area. I struggled for several days, wandering around various empty aircraft until I finally gave up. Why Project Entropia? Because I was fascinated by the new Esthetics Economy that is being developed in games. Game Theory, Experimental Economics, realtime models of social and economic interactions, whole economies based on art and metaphor. Project Entropia was a disappointment and then, suddenly, there was Second Life.

I was impressed from the first moment I saw the LL website. I registered straight away, gave my credit card details and went Premium. I downloaded the software and, bang, I was inworld – in Ahern. I stumbled around for about an hour, offering friendship to almost anyone who wasn’t screaming obscenities then flew north, leaving the kids behind. (I did not know that in June, Linden Lab had opened the doors to kids via anonymous accounts.)

As I flew over the land, I was amazed at the world I had entered. Below me stretched miles and miles of changing scenery, extraordinary buildings and objects of every kind. It was like flying over India or Cairo or the jungles of a Tolkienesque South America.

Slowly, I began to meet people. Most were kind, polite and helpful. I was hungry for knowledge, hungry for the freedoms and choices available in the new world. I learned how to dress, to walk, to amend my shape. I shopped for hair and eyes and jewelry and, with each passing day, I became more human, more real, more integrated into the world.

How can I sum up those first few months? Hardship, yes, for I also met some very unpleasant people. Joy, yes, the wonder and magic of creativity and kindness. Delight, amazement – and responsibility. Responsibility because there were no rules, no police, no parents, no priests, no lawyers, no politicians. Responsibility to make decisions – to calculate risks – to live in a world of nasty people as well as generous people. Responsibility to be an adult – alert, intelligent, flexible and tolerant. What a marvelous world!

I met a former real estate dealer who taught me the ropes. I brought in thousands of dollars and began paying hundreds of dollars in tier. Second Life was expensive, but I had faith in Linden Lab. Here was a company that understood the creative entrepreneur! Finally, there was a world for people like me – and I bought into that world, heart, mind and checkbook.

Then, in the spring of 2007, things began to change. New rules, new restrictions, new sanctions, new controls. Risk was to be stripped away, to be replaced by a “more predictable” user experience.

Many people think this is a good thing. In the fora, I see a constant stream of reformers, each wanting to remove yet more risk and individual responsibility. Some want full-blown Disneyfication – to create a vanilla playground of perfect safety and security in which no one is offended by anything. Others want to eliminate ‘inequality’ – to hammer every nail flat into the board. These voices, each with their own pet complaint, verge on a howling mob, drowning out the wonder of Second Life like vuvuzela horns at the World Cup.

Second Life is not cool anymore. The creative types are leaving – and taking their quirky, idiosyncratic, unorthodox, iconoclastic characteristics with them. “Wonderful,” you say. “Good riddance to all those freaks and weirdos! Now Second Life can become a nice safe place to raise our kids.” Yup, no more gambling,  no more banks, no more naked people on the mainland (lock ’em up in Zindra), no more bad words in search. Soon SL will be a clean, tidy, uniform, safe, secure…boring, dull, banal, mediocre wasteland.

The vanilla playground is not working. Entrepreneurs are no longer willing to invest long-term capital and labor in an increasingly unpredictable environment with lower potential returns. They are moving on to other projects – and taking their money with them. They are going to where there is risk and uncertainty, to where there is messiness and opportunity, to where they can live on their wits as adults, to where their energies and talents are rewarded, to where they are not branded as freaks and weirdos by the good and proper citizenry of a sanitized society.

Posted in Strategy and Policy

The Way It Should Have Been

Request for opinions concerning zoning and sexual content in Second Life

Dear residents,

Conceived in a moment of passion, born healthy and vibrant, Second Life has gone from playpen to sandbox to schoolyard so quickly that we at Linden Lab gaze tearfully at the pencil lines that mark its growth. As Second Life approaches maturity, therefore, we feel the time has come to sit down with you and have a chat about the birds and the bees. In brief, we would like to know if it might be possible to improve the user experience regarding zoning and/or sexuality.

First, let me state clearly that Linden Lab is not seeking to impose social restrictions of any kind on the community. We recognize the unique value of the freedoms enjoyed in a virtual world – indeed, it was this insight that made us a successful company – so we won’t be killing the golden goose for the sake of a hot dinner. Instead, we wonder if there might be changes that would improve the experience for some without diminishing the experience of others. To use a fancy economics term, we seek a ‘Pareto Improvement’ to the social environment such that some people win, but no one loses.

For example, the mainland was originally created with PG and Mature sims side by side. Over the years, this has led to an increase in abuse reports as residents with different lifestyles clash at the sim borders. Recently, we have sought to be more consistent when zoning new land – Nautilus, for example, is entirely Mature – but perhaps some of you could provide a clever solution to the problem of older land.

Another question that has vexed the policy folks at the Lab is ‘sexuality’ within Second Life. As might be expected, there are an increasing number of residents and organizations who would prefer the removal of sexually explicit content. While we recognize that Second Life is an adult environment by definition, we wonder if the growth of Second Life is being hampered by a public misperception of Second Life as ‘pornographic’. Of course, anyone who has spent time inworld knows this is false, but we live in a media age in which branding is important. Perhaps you can help us.

A third question, related to the other two, concerns our own legal protection regarding minors. We believe that children should not be allowed on the main grid – this is why we created the teen grid – and we have wrestled with various methods of preventing children from gaining access. None is foolproof, but it is important for us to be able to enter a courtroom and defend ourselves against accusations of negligence. Therefore, we seek your opinions on what might constitute a set of legally defensible as well as practical methods of restricting the main grid to adults.

Before proceeding to formulate policy, we wish to ask you three specific questions:

1. Is there a better way to zone the mainland? <link>
2. Is there a better way to rate/flag search? <link>
3. Is there a better way of keeping minors off the main grid? <link>

We know this is political dynamite (and believe me, after pressing the submit button, I’m going out for a cigarette), but we think it is important now to solicit opinions from residents before attempting further discussions in-house. Remember that we are seeking a win-win solution. Perhaps that means doing nothing at all. We need your input.

In asking you in advance, we acknowledge that the collective intelligence of the community vastly exceeds our own. You, our customers, are perhaps the brightest minds to be brought together since the Philadelphia Convention of 1787. The insights from only one percent of 60,000 online residents represent the brainpower of 600 professional consultants. Imagine what McKinsey would charge us for that!

I look forward to seeing you in the forums,

Regards,

Blue

Before anyone foolishly quotes the above, I wrote it – not Blue Linden. I did so to provide an example of how Linden Lab is squandering the intelligence, dedication and goodwill of its residents. The forum would be 50% shorter and 100% more productive if the company had the wisdom to treat its residents as an intellectual goldmine rather than a herd of cattle. Forgive my sharpness, but no business succeeds without consulting the customer before a major change in business practices. No army conquers with low morale. I am not promoting democracy here. I am simply asking for Henry V instead of Hamlet.

Publication history:

http://forums-archive.secondlife.com/352/11/314444/7.html

Posted in Strategy and Policy

Sanity, Not Sanitation

[W]e cannot play the role of arbitrating personal grievances or defining behavioral standards. This is particularly important as Linden Lab becomes more international. We don’t want to force a California-centric set of rules on the virtual world. – Linden Lab, December 2006

Linden Lab seems to have got its knickers in a twist regarding sexuality in Second Life. While seeking to improve the ‘user experience’ by segregating residents based on their sexual preferences, LL’s proposed policy changes have instead opened Pandora’s Box. The blogs and forums groan under the weight of hair-splitting detail concerning the best method of classifying sexuality within Second Life, but Linden Lab asked the wrong question.

Background

The establishment of anonymous accounts in June 2006 opened the doors to underage players. This resulted in international legal scrutiny, increased exposure to legal liability and damaging media coverage. Linden Lab responded by intruding into residents’ sexual relationships and expelling two consenting adults for underage roleplay – even though no underage players were involved. Refusal to close the anonymous accounts and dogged insistence on an ineffective and unsound ID-based age verification system cost Linden Lab considerable political capital with no benefit.

Many of us who came into SL in 2006 (and brought money with us) were horrified by the policy changes of 2007. The deal was that LL would provide a basic property rights structure and act solely as a referee in property disputes. We sighed with relief when LL reassured us that they had no intention of applying overarching codes of morality on the community. I also vividly recall LL announcing that we there would be no change in gambling policy. Then came 2007 and bitter disappointment. All the reassurances given only weeks before were abandoned as Linden Lab slammed the gearshift into reverse. For thousands of people, the trust and faith they had in Linden Lab was badly damaged.

During 2008, the company’s reputation slowly began to recover. Yes, the Openspace pricing model was flawed and, yes, there was a second round of mainland supply problems, but at least LL were not bungling policy anymore. The micro-parcel issue was resolved within reason. LL seemed to be developing the ability to handle complex issues…then bang! We are back to square one with a crude policy on social behavior.

The Right Question

The right question, then, is a) how best to prevent underage players from mingling with adults and b) how best to zone the mainland in a tolerant and efficient manner? Needless to say, eliminating anonymous accounts solves the first part of the problem. Instead of creating a complicated system of filters to prevent kids accessing adult content, keep them out of SL altogether.

As for the second part, when constructing the mainland, Linden Lab established a patchwork of Mature and PG sims such that a loud BDSM club can open next to a quiet, residential home. The introduction of a third sim type, ‘Adult’, though badly named (all SL is adult by definition) – let us call it ‘Xtreme’ instead – makes sense. Constructing an ‘Xtreme’ continent and allowing residents to migrate there – at their own choosing, at their own pace – also makes sense. It may take a year or two, but I believe most ‘Xtreme’ players will prefer to be free of the moral harassment they receive from PG residents.

The New Problem

As has been known since the dawn of time – articulated again recently by the US Supreme Court – one man’s obscenity is another man’s beauty. To attempt to codify the wide range of human social norms into a regulatory system is counterproductive. At best, it will generate high monitoring and enforcement costs; at worst, it will lead to confusion and conflict within the SL community.

Context and Perspective

1. Second Life is VIRTUAL, VOLUNTARY and ADULT

Seeking to apply RL standards to a virtual world is silly. There is no safer place on Earth than the privacy of your RL home. It is voluntary in that one must sign up for an account and it is adult in that everyone in SL is an adult (or should be). That means one has passed through puberty, has learned to relate to people and become responsible for one’s decisions – including the decision to be in a virtual world with other adults. As an adult, one recognizes and accepts that people have different styles and tastes and that rudeness or harassment should not be confused with sexuality.

2. Creativity needs VARIETY, COMPLEXITY and SYNERGY

Second Life is unique in catering to a broad, international population of adults. Because of its richness and diversity, SL attracts a wide range of entrepreneurs who provide a wide range of services to a wide range of residents. The organic nature of this mix is itself creative. The functionality of a BDSM collar may benefit another entrepreneur making improvements to a PG hugger; Gorean silks may generate new ideas in traditional fashion design; techniques learned to make vampire animations are transferable to dance animations. As for ‘deviant’ behavior, Penicillin was the result of dirty dishes. Post-It notes were a mistake. Lord Byron was a scoundrel. Virginia Woolf was a manic-depressive. Alan Turing was a homosexual. History is littered with the corpses of the brilliant heretics.

The founders of Second Life understood this. They recognized the organic nature of the IT industry and that ‘creative destruction’ had to be embraced rather than shunned. They were amazed by the fall of IBM and inspired by the Burning Man festival in the desert of Nevada. They built Second Life – against all the odds – and it was hugely successful. Sadly, in 2007, the regulators, lawyers and bureaucrats arrived. All this organic stuff had to go, they said. The time had come to strip away risk and uncertainty, to seek the lowest common denominator and penetrate the mass market. I summarized the spirit of this new direction in my profile: “In the name of safety and security and to protect residents from themselves, all activities requiring intelligence and maturity will be banned.”

3. Don’t micromanage the rainforest

Getting rid of snakes may seem like a good idea, but they play a vital role in the natural ecology/economy. Without the snakes, there are too many rodents. Importing hawks to solve the rodent problem disrupts other birds, causing a new problem. Soon, like a vast cascade of dominoes, the whole ecosystem goes out of balance. Hiring 1000 managers and forming new committees to provide more control only makes things worse. In an ever-descending spiral, the managers scramble to repair the ever-increasing damage until the rainforest is finally paved in concrete. Problem solved.

Conclusion

While my criticisms may seem harsh, I feel it imperative to warn Linden Lab of the long-term consequences of ‘cleaning up’ Second Life. Yes, improvements can be made in the property rights structure to give residents greater privacy and control – I am very much in favor of this – but Linden Lab does not seem to realize that the lowest common denominator is poison for any creative enterprise.

I implore Linden Lab to note the howls of protest against this new [Adult Content] policy drowning out those voices raised surreptitiously beforehand in its favor. Please reflect on the nature of the world you have created – that became a wonder before you began meddling with it. Please remember that Second Life is virtual, voluntary and adult and understand that Disneyfication will buy you at best a temporary advantage before the whole edifice slides gently into banality.

Publication history:

SL Newspaper, 25 March 2009

http://forums-archive.secondlife.com/352/11/314444/4.html

Posted in Strategy and Policy

COGS in the VAT Machine

On 27 September 2007, European landowners got a rude surprise: their tier fees had increased overnight by 15-25%.

Questions about VAT 2007-09-29

VAT is a sales tax levied by the European Union on goods and services passing through the value chain to the final consumer. Linden Lab chose to absorb this cost for a period of time then changed their policy without warning. The result was devastating – and it remains a serious problem.

[W]e have been asked quite a bit why we haven’t charged VAT before now. The simple answer is that Linden Lab was able to absorb the cost of VAT on behalf of its EU customers. Our business in Europe has quadrupled each year since 2004 and already it has more than quadrupled in 2007 through September. As a result, we can no longer afford to absorb these costs for European Residents.

VAT are you talking about 2007-10-5

Yet I draw the opposite conclusion: that because of its enormous success in the European market, Linden Lab can easily absorb VAT – and do so without detriment to non-EU residents.

COGS (Cost of Goods Sold) is a cost that varies with sales. The simplest way to think of it is the cost of hiring more salesmen or designers when your business grows. Alternatively, think of the cost of electricity for a restaurant. The more customers you have, the more food you cook, the higher your electricity bill. Needless to say, it would be foolish to turn away customers to save on electricity. You need to measure costs against revenues.

Gross Margin = Gross Revenue – COGS

By absorbing VAT, Linden Lab would face an increase in COGS. In other words, it would cost Linden Lab US$52 ($347-$295) more per month to sell a full region to a Brit instead of an American, which means gross revenue of US$243 instead of US$295 per month. Since it would still be profitable for Linden Lab to sell a full region at US$243 per month (and there would also be US$825 in revenue from the $1000 setup fee), the company is wrong to say it cannot afford such a sale.

Worse, passing VAT on to European entrepreneurs reduces Gross Revenue because:

  • existing European entrepreneurs withdraw their financial and human capital
  • potential European entrepreneurs are discouraged from investing
  • reduction of European participation undermines the Network Effect (a term used by economists to describe increasing marginal returns)

In other words, passing VAT onto European residents is not free. While absorbing VAT reduces Gross Margin (profit), passing it on reduces Gross Revenue (sales). I maintain that absorbing VAT is the lesser cost – especially in the long term. I believe that Linden Lab is turning away customers to save on electricity.

There is more to it than money. The once-harmonious relationship between Americans and Europeans has come under increasing stress because of discriminatory pricing. The issue ran like an open sore for months as European entrepreneurs bled out of the game – never to return because of the recent rise of the dollar against European currencies. If SL is to be an American game, no problem, but unless LL reverses its policy of discriminatory pricing, it’s nonsense to pretend Second Life will become a ‘global village’ in the face of massive regional disincentives. A restaurant that turns away customers to save electricity is bad enough, but one that does so by setting higher menu prices for foreigners is unlikely to remain convivial.

Publication history:

SL Newspaper, 24 August 2008

Posted in Strategy and Policy | 1 Comment

A Difficult Year for Second Life

2007 was a difficult year for Second Life. 2008 is not looking much better.

The establishment of anonymous accounts in June 2006 opened the doors to underage players. This resulted in international legal scrutiny, increased exposure to legal liability and damaging media coverage. Linden Lab responded by intruding into residents’ sexual relationships and expelling two consenting adults for underage roleplay – even though no underage players were involved.

Refusal to close the anonymous accounts and dogged insistence on an ineffective and unsound ID-based age verification system cost Linden Lab considerable political capital with no benefit. ID-based age verification is no better at screening underage players than credit-card verification, nor is it more ‘fair’. It rarely works for residents outside their home jurisdictions and, in many countries, it may not even be legal.

While anonymous accounts may have launched Second Life’s dramatic growth phase (October 2006 to June 2007), failure to formulate a land management strategy resulted in a speculative bubble as Linden Lab first starved and then flooded the mainland market. Islands ceased to be an attractive alternative when LL raised tier charges from $195 to $295 early in the cycle. Worst affected were the very residents who comprised the growth phase. The unexpected policy reversal on gambling in July further undermined Linden Lab’s credibility. Growth stopped. Premium accounts and total hours remained flat throughout the second half of 2007.

The overnight imposition of VAT (15-25% sales tax) on European residents (40% of SL’s population) in September not only trashed European landowners, but it caused considerable friction between European and North American residents as Linden Lab, a supposedly global company, began charging based on regional factor prices. It also led to the crazy situation whereby European landowners (some owning dozens of islands) who shifted their tier to North American business partners lost access to Live Chat support.

Longstanding problems of asset management, grid instability and poor customer service have undermined residents’ confidence in Second Life’s entire technological and managerial infrastructure. While organic development was the correct approach to building Second Life, expectations of success amplified perceptions of failure. The year ended with the resignation of CTO Cory Ondrejka due to “irreconcilable differences” with CEO Philip Rosedale.

Just days into 2008, without consultation or discrimination, Linden Lab banned all banks, regardless of their history, reputation, structure or business practices. In a matter of minutes, SL’s evolving financial system was demolished as sound and responsible banks closed their doors in the ensuing panic. More residents lost money because of LL’s clumsy intervention than from all bank frauds combined. Good businesses were crippled and good people hurt – not so much by scammers as by Linden Lab itself!

So, what went wrong?

Philip Rosedale and the Board of Directors are highly skilled engineers with little or no knowledge of economics, economic history, strategic planning or customer relations. As Second Life grows from a technological startup to a mature business, they are out of their depth. They are making serious mistakes. They are destroying the wealth and confidence of the entrepreneurial class who risked enormous time and money to build Second Life in the first place. More importantly, they have lost sight of their original vision.

Second Life was about user-generated content, remember? It was about “your world, your imagination”. That was the business plan and founding principle: to create a world that was VIRTUAL, VOLUNTARY and ADULT – framed by the philosophy of individual liberty and responsibility. Second Life was not intended to be a pale imitation of real life. It was not meant to be a playground for Republicans and Democrats to ‘govern’. It was not about majority rule through public opinion. Yet this is what has leaked into Second Life since 2007, drip, drip, drip. The sad irony is that now, out of ignorance and a naive desire to ‘do good’, Linden Lab is poisoning the very world they created and seek to protect.

How do we fix it?

Linden Lab is a private company, so they can do with Second Life what they wish. We ‘residents’ have the choice of being here or not. At the moment, there is no viable alternative to SL as a comprehensive virtual world. Therefore, Linden Lab still has time to prevent Second Life from becoming the ‘Lotus 123’ or ‘WordPerfect’ of the virtual universe.

1) Regain integrity of the system. Announce the closure of all anonymous accounts on 1 March 2008. ‘Anonymous’ accounts may now be described as accounts without payment information on file or have not been age verified through the ID scheme. Keep the ID scheme during the transition process, but consider phasing it out by the end of the year and returning to credit card verification.

2) Stabilize the financial system. Lift the ban on banks. Present the following message on the login screen: “Rate of return (interest or profit) on any investment is proportional to the amount invested, the length of time invested and the risk of nonpayment.” Give residents information, not regulation, and the system will evolve in a healthy and productive way. Reputable businesses providing good customer service will always prevail against fly-by-night operations.

3) Reassert the founding principles of individual liberty and individual responsibility. Resist the temptation to sanitize Second Life. The road to hell is paved with good intentions; the desire to protect residents from themselves will only lead to a downward spiral of regulations to offset the harmful effects of other regulations. Also, Second Life is not real life. It is not a nation-state. Second Life is virtual, voluntary and adult. We are here by choice precisely to escape the restrictions of real life – and there is no Berlin Wall to prevent us from leaving. As for those who want SL to become more like Disneyland, well, Disneyland already exists. We don’t need another one.

Publication history:

SL Newspaper, 23 January 2008

The Alphaville Herald, 23 February 2008

Posted in Strategy and Policy