Second Life

M&A inside Second Life

By | Second Life, Virtual Worlds | 5 Comments

Linden Labs, the company behind Second Life yesterday announced the acquisition of two inworld businesses – reported here in the LA Times.

These businesses broker the sales of virtual goods – kind of like Amazon market place, but restricted to virtual goods for use inside Second Life.  It seems Linden has a strategy to become a sprawling corporation, as used to be the fashion for real world companies in the 1960s.  For a long time they have made money by selling land and letting everyone else innovate around that.  Now they want to grow revenues and profits by controlling more of the commerce themselves.

One of the products you can buy from these companies is an Obama avatar:

To my mind this makes sense in a short term view, but is likely to stifle innovation over the longer term.  Kind of like if Twitter acquired one of the leading Twitter clients.

Moreover Linden Labs strategy up to now has endorsed this point of view.

So I wonder if this move signals a recognition by them that the economy inside Second Life is not going to be so huge that they can afford to cede large areas of it to other companies and still have enough left for themselves.

That said the economy inside Second Life is still growing well, although not staggeringly fast.  Goods traded (equivalent to GDP) in Q4 2008 totalled $101m, up 54% on the year ago period.

From supply chain management to the future of web hubs

By | Amazon, Google, Innovation, Second Life, Web2.0 | 2 Comments

I bought a new video camera on Amazon this weekend, and I also bought an extra battery and a couple of SD cards.  So far so normal.  The amazing thing to me is that I ended up buying each of these three items from different suppliers on Amazon’s market place, and the last of the three arrived today, four days after the order was placed.  One came from the UK and two from Germany.  The postage was inexpensive.

That is an amazing piece of supply chain management, and if one company had tried to do it my guess is they would have screwed something up.

This is testimony to Amazon’s incredible transformation into an infrastructure business and also the power of the web.

John Batelle has a number of definitions of web2.0.  The one I like the most is:

companies that let other companies build their businesses

This is what Amazon are doing in spades now.  Third party suppliers open an Amazon Market Place account and their products become available to all Amazon’s traffic through the same search box that you use to buy books directly from Amazon.   When you buy something through the market place Amazon takes a commission and makes a 100% margin.  Amazon also gets to benefit from the innovation and creativity of their market place suppliers in product choice, presentation and pricing.

The website experience could have been a little slicker, but that is splitting hairs really.  Plus I didn’t find another website where I could buy all the items I wanted.

But the really incredible thing is the way Amazon have combined their brand/traffic with a piece of technology infrastructure to become the glue that holds a vibrant ecosystem of suppliers and customers together.  To borrow a thought from Umair this is increasingly how successful companies will operate.  Facebook and their apps are like this, and Myspace with their widgets, Google with search and adwords is similar, even Salesforce with their app-exchange is on the same model.  And I almost forgot ebay.

These examples show just how much value is created by these fluid hubs where people come together and are matched with each other and products they want.  The scale and fluidity these sites have is only possible because of the internet.  Excitingly as we see more scale and fluidity (more people on the web and more creative ways to match and bring people together) I believe the things that seem incredible today will begin to seem trivial.  Think about Second Life, for example.

Musings on the future for virtual worlds

By | 3D, Business models, Second Life, Social networks, Virtual Worlds | 5 Comments

There are two big takeaways for me from the Virtual Worlds Forum conference I have been attending for the last couple of days.

The first is a firming up of a conclusion that I have been coming too for a while – there is huge opportunity at the nexus of virtual worlds, games (probably casual) and social networks.

Habbo Hotel is a good example of this, as are new companies that are here at the conference MoshiMonsters from Mind Candy and Moipal.

Games, social nets and virtual worlds are coming together and that is creating opportunities for new companies that are radically different from their forbears that have focused in one of the three areas. I think the best will be easy to learn, work well with short session times be social, and have an interesting and continually developing content story. The revenue model will be about subscriptions and/or virtual goods and/or advertising.

Which brings me to my second point – there is already huge opportunity (by which I mean dollar opportunity) for brand advertising in virtual worlds.
Until now I had seen the empty brand sponsored spaces in Second Life and the comparatively small numbers of active users and concluded that the brand budgets coming into the world are experimental, and were not at the point where they would really start to scale.

Not so.

The combination of deep engagement and response rates as high as 30% are getting brands to the point where they are parting with budgets they would normally reserve for campaigns with high headline impressions numbers. The key to this is the quality of the campaigns which contribute significant new content to the worlds. Habbo Hotel in particular is blazing a trail here.

Emotional contagion in social networks

By | Consumer Internet, Facebook, Second Life, Social networks, Virtual Worlds | 2 Comments

In the 1960s William Condon extensively researched the non-verbal interaction which surrounds speech. Beyond the obvious body language of looking into people’s eyes and hand movements it turns out there is a world of tiny interactions that happen at incredibly high speed. He wrote:

Your body’s locked precisely with your speech. You can’t break out of this no matter what you do. Your eyes even blink in synchrony with your speech.” Movements appear to begin, change, or end on the same film frame that a new vowel or consonant begins – within about four-hundreths of a second in the new sound. “The synchrony of the listener with the speaker is just as good as my own synchrony with myself.” An auditory-motor reflex in the central nervous system might allow, even force, a listener’s movements to synchronize with a speaker’s voice far faster than any conscious reaction time. “We’re almost in auditory touch. When I speak to you, my thoughts are translated into muscle movements an and then into airways that hit your ear, and your eardrum starts to oscillate in absolute synchrony with my voice. In essence there’s no vacuum between us – it takes only a few milliseconds for a sound to register in the brain stem, 14 milliseconds for it to reach the left hemisphere.

This goes a long way to explaining the power of face to face meetings compared with phone calls and online interaction. I found my way to it through Gladwell’s Tipping Point.
It also highlights the importance of building conduits for expressing and sharing emotions into social networks.

For those that can be bothered to get over the hump of learning to use it properly SL does this really well – and the power of the emotions that people feel through their avatars is pretty well documented now – remember the avatars rioting over copybot? This is possible because there is a large range of tools available for people to signal emotions to one another in Second Life – including expressions (XYZ smiles, or blushes, or shrugs etc. etc.), the way someone dresses, the use of IM rather instead of public speech, giving of gifts, dancing, all the way to user programmed interactions.

Facebook also does this well, albeit at a much lower level of intensity suitable for a less immersive social experience. The tools there include pokes, writing on walls, status updates, private messages and virtual gifts. Thanks to JP for this insight.

In a related point, World of Warcraft is powerful because of the emotions evoked when teams pull together to do missions. It is incredible hearing people talk about the way they go about this, and how exciting it is. The exhilaration of a team victory is familiar to most of us and the widespread use of Skype for real time chat as teams undertake missions is important for getting the emotions across.
Regular readers of this blog know of my enthusiasm for virtual worlds and social media. What is dawning on me is the importance of thinking explicitly about the emotional aspects of any given service. In particular what the emotions will be and how they will be communicated.

This point is clearly not relevant for all internet services (e.g. delicious) but there are elements of it in most of the successful ones. It is particularly true in any 3D/virtual worlds play – where the whole point of being 3D is that it makes the experience imersive and more conducive to the transfer of emotions.

Facebook sucking in apps from the rest of the web

By | Facebook, MySpace, Second Life, Social networks | 8 Comments

It is getting fashionable to take a dig at Facebook these days.  It seems the company is nearing the peak of it’s hype curve and will shortly move into the phase when the popular opinion becomes that the company won’t be that successful after all.  Second Life is firmly in that phase at the moment.

This chart from ModernLifeRubbish captures this thought graphically.

I would look at things slightly differently to this.

Facebook is still pretty new and people are just getting used to how to use it.  This is particularly true here in Europe.  The whole Facebook apps thing is perhaps the best example of what I’m talking about here.  Four or five months ago when they were new we all installed and played around with all sorts of crappy apps for the novelty value.  We also invited all our friends to do the same.  This initial flurry of activity was kind of interesting but much of it had little real value and people have been left feeling that they are suffering from application spam.

Now that the novelty has worn off and we are getting to grips with what we actually want to use Facebook apps for things are changing.  Firstly, most people I know are already ignoring most of the application invitations they receive, and secondly they are starting to be careful about not spamming their friends with application invites they might not welcome.  This is a natural progression from initial interest to looking for real value.  It happened before with viral emails – to start with we thought they were hilarious and sent them to all our friends, but now we are a bit bored with them and only forward on the ones that are really funny.

By this analogy the question with Facebook apps the question is whether there are any really useful ones, i.e. equivalents to the really funny virals that we still send on to our friends.  If there are then people will use them and tell their friends about them.

For me the answer to this question is an emphatic ‘yes’.  There are now two Facebook apps I use that have stolen me as a customer from other sites.  I use Blogfriends in place of Netvibes most of the time and this weekend I started using Visual Bookshelf in place of LibraryThing.  (If you are into this question check out this comparison of LibraryThing and Visual Bookshelf.)

We won’t know for some months whether Facebook will go on to greater heights or whether it will hit a plateau and then decline, as per the chart above.  My feeling is that people will come through this period with patterns of usage that get real value out of Facebook, and that the company will go on to get stronger.  The value derived will be different for different people – I like the status updates and the two apps I mention, my dad is using it to share and tag family photos, other people use groups, and so on, but there is real utility there.  The social graph is very powerful.

It was observing my own behaviour and how the power of the social graph sucked two apps that I use from off the web and onto the Facebook platform that really convinced me of this point.

Google rumoured to be building a virtual world

By | Second Life, Virtual Worlds | 10 Comments

Techcrunch yesterday reported rumours that Google is building a Second Life competitor.

I have a couple of observations/thoughts about that :

  1. Is it me or are virtual worlds suddenly more fashionable than toga parties in freshers week? To my knowledge just about all the major tech companies have a play in this area now – and for many (Sony, Microsoft, and now Google) the play is to build their own world. Also I am seeing lots of virtual world business plans and am talking at two conferences on the subject before the end of the year.
  2. Distinct strategies seem to be emerging, or at least being talked about with a clarity I haven’t seen before. They include virtual world for kids (Club Penguin, Habbo), virtual world come game (World of Warcraft, Eve Online etc.), virtual world as anything you want it to be (Second Life), virtual world as social network extension (which is where Google seems to be heading) and virtual world with a content angle, which is a mix of the last two or three categories (Doppelganger, Playdo).

All of which leaves me increasingly excited about this segment. As I’ve said before I think Second Life will come through the current bout of negative sentiment and we will see some big businesses built in this space.

Zwinky, IAC’s virtual world starting to be successful

By | Second Life, Virtual Worlds | 6 Comments

From Techcrunch:

IAC’s Zwinky has been carefully growing their pre-teen social networking service. It started out as an online avatar creation tool. They later created a virtual world where those avatars could socialize. Usage of the service has been growing, under heavy advertising, as well. They currently have over 9.5 million registered users with 4.6 million active users per month that spend an average of 64 minutes a day in their virtual world, Zwinktopia.

Zwinky is now expanding the service to their users pocketbooks, or rather those of their parents. The site is now letting users purchase batches of “Zbucks”, their virtual curency, instead of having to earn them. They join a growing group of other tween sites with paid virtual economies as well (Club Penguin, Habbo Hotel, Gaia). Users can purchase them using PayPal or credit card at a rate of about $10 for 2,000 Zbucks. With the Zbucks, users will be able to purchase their own avatar accessories or furnish their virtual rooms in Zwinktopia. Zwinky is not only making money from the Zbucks, but also through sponsorships and sales made through the virtual goods.

So far users have spent over 500 million free “Zbucks” on the site since launch. There’s no telling how strong the uptake of the new paid currency will be, but other services have shown a clear market for virtual goods. The passion around World of Warcraft drove a black market for virtual gold. SecondLife has also driven a paid virtual economy. While virtual goods seem hokey for outsiders, startups that create a meaningful environment find their customers willing to pay to save time earning currency or get at exclusive items.

This is an interesting development for a number of reasons:

  • This is the first time I have seen a corporate successfully launch a cool web service.  Kudos to IAC for getting it right where so many others have struggled – but it also shows that what was an art is becoming a science.  There are enough successes out there now that the lessons can be learned and copied by great executives who don’t necessarily need a great gut feel for the market they are going after.
  • It will be instructive to watch how the launch of a paid for currency goes.  That said by my maths 500m Zbucks at $10 for 2,000 Zbucks is equivalent to $2.5m in real money so they have some way to go before they will get a meaningful revenue contribution from this new feature.
  • There are enough virtual worlds out there that it is starting to emerge as a distinct category.

Second Life being used for recruitment

By | Second Life, Virtual Worlds | 10 Comments

I wrote back in July that Second Life is riding the Gartner hype curve, and is now rapidly coming off it’s first peak and down into the trough of disillusionment. This article from Nicola Mattina adds a bit to that idea, explaining how the corporations that went into Second Life got it wrong, and were always likely to end up disappointed.

That doesn’t mean the game is over though. Far from it. Companies need to learn how best to use this new medium – just as it was (and still is) with the web. When companies start to find those uses the cycle will enter it’s final phase and the hype will start to increase again.
From this perspective I was interested to see that companies look like they might start to get value out of Second Life in their recruitment processes – and not just by the mere fact of getting kudos for having a presence.

From Australian jobs site SearchCIO:

Last week, recruiters from four major companies — Accenture, EMC, GE Money and U.S. Cellular — and job seekers looking to land positions at those companies are engaging in real-life interviews online. This virtual job fair, the second one hosted by recruitment advertising agency TMP Worldwide Advertising & Communications, is being held on “TMP Island,” the company’s space within the popular Second Life virtual world.

Note that they are conducting interviews in world. If they are efficacious then that is far more efficient than getting face to face – for the first interview anyway. I can easily imagine that for candidates and companies alike a virtual interview is a great way to quickly weed out those situations where everyone knows in the first ten minutes that there isn’t a match.

The stats are pretty good as well:

The recruiter does the screening and schedules the half-hour interview. At May’s event, there were 872 registered job seekers, 750 requested interviews; 209 were granted interviews.

“We know for a fact that at least three hires came directly from this event,” Vong said. [Vong is a TMP executive.]

It is early days though:

Microsoft recruiting manager Warren Ashton, who attended TMP’s first virtual job fair in May, said Second Life shows promise as a recruitment venue but admits it’s too early to declare success. Still, Microsoft did make at least one hire from the May event and, according to Ashton, the company will probably do more virtual job fair events.

“It was a really good experience. The candidates that we talked to were of good quality.”

I like the pragmatism in this quote. Microsoft are trying something out to see if it works. That is a far cry from a lot of early corporate activity in Second Life where all anyone seemed to want to do was have a presence and shout about it – which tells me we are on the way to finding some useful applications for Second Life and virtual worlds in general.

This is a link to TMPs virtual job fair site. Note the prominent sponsorship from the companies listed above.

Big money in virtual worlds

By | Second Life, Virtual Worlds | 6 Comments

Club Penguin

Club Penguin – cuddly 3D virtual playground for 6 to 14 year olds has just been bought by Disney for $350m plus a further $350m earn out.

According to Techcrunch the company is flying with expected revenues of $65m this year and profits of $35m.  Awesome margins.

Club Penguin apparently gives a substantial portion of its profits to charity – a factor that was a stumbling block for some acquirers and explains why the profit multiple (10x including earnout) isn’t that exciting.  There was a lot of interest in this asset – including from the likes of AOL and Sony.

I think there will be many others after this.  I’m hearing Second Life will do revenues around the $100m mark this year, and Habbo did €51m last year – putting them in the same ball park as Club Penguin from a valuation perspective.
To my mind all of this activity is very much phase one for virtual worlds.  None of the most successful worlds are mainstream in the big markets of US and Europe, so that is all to play for.  And after that there is the 3D internet story which is an order of magnitude bigger.  More of that another time.

SecondLife is riding the hype curve

By | Second Life, Virtual Worlds | 4 Comments

LindenLabs have done a great job of building a buzz round SecondLife that has made it seem bigger than it really is and the whole SL hype machine has also had a huge boost from the interest that traditional media has taken in the worlds favourite virtual world. These two things have combined in a positive feedback loop which has taken the hype to higher and higher levels.

The most real result (geddit??) has been big corporations rushing to build presences in SecondLife – this has had the dual benefit of generating lots of offline column inches and keeping their brands on the leading edge.

The problem with all this has been that the hype got way ahead of the real activity, and when that happens disappointment usually follows.

We saw the first signs of that earlier this year when people started analysing SL’s usage stats and showing that active users were only a small fraction of the headline Total Residents figure (now standing at 8.3m) and hence SL was overhyped. My thoughts on this subject from January are here.
Now the disillusion has reached a new high – at least if this article from the LA Times is to be believed (thanks to Sam at Blognation for the link).

the sites of many of the companies remaining in Second Life are empty. During a recent in-world visit, Best Buy Co.’s Geek Squad Island was devoid of visitors and the virtual staff that was supposed to be online.

The schedule of events on Sun Microsystems Inc.’s site was blank, and the green landscape of Dell Island was deserted. Signs posted on the window of the empty American Apparel store said it had closed up shop.

If you read the article you will see that many of these companies are starting to leave SL.

This doesn’t surprise me. Dell et al didn’t go into SL because people wanted to visit them there, they went in for the first world brand benefits. Further, if there are many more articles like this one maintaining a presence in SL will start to be seen as a PR stunt – which will hurt brands rather than help them. Hence the start of the exodus.
But this isn’t all bad news. In fact it is part of the natural evolution of any new technology/market.

I’ve seen this Gartner hype cycle applied to just about every market I’ve been involved with, and now it is happening to SL.
Gartner hype curve

The good news about this, of course, is that coming off the “peak of inflated expectations” forces people to focus on doing things of real value. To my mind that is when we will really start to see the benefits that virtual worlds can bring.

None of which is to say that SL will be the eventual winner in virtual worlds – although they occupy the lead slot at the moment. In order to stay out in front Linden will need to find a way to rebuild the momentum. Some of the stats later in the LA Times article make grim reading on this front:

Between May and June, the population of active avatars declined 2.5%, and the volume of U.S. money exchanged within the world fell from a high of $7.3 million in March to $6.8 million in June.

I hope that this is just a blip.