The Fate of Second Life

Will Second Life still be here next year? In five years? To answer this question, let's first take a look at Linden Labs financial situation.

It's important to realize that revenue is not profit. Many people see that Second Life is generating millions of dollars a month, and then don't understand why LL doesn't upgrade their network infrastructure and servers to be able to support the growing population. The fact is that LL doesn't have millions of dollars to spend, because the cost of maintaining the grid at its current state is extremely high. An article published in the Second Life Herald this summer looked at the sources of income for LL and their costs, and found two important facts. First, that while LL is making a profit, it is a very small one; and second, that about 1/3 of their revenue comes from selling servers (private islands), and this doesn't include the monthly fees of those private islands, but just the setup fees. This means that unless LL significantly changes either their sources of revenue or their costs, Second Life is only profitable as long as it continues to grow at its current rate. This is basically what caused the dot-com bubble and burst. Internet companies assumed that the growth of the internet seen in the mid-late '90s would continue at that rate indefinitely. There are only so many people in the world, so obviously the growth is going to have to slow down at some point. For the dot-com companies, this happened around 2000. When will it happen for Second Life?

It was around the time I started SL that so many companies began experimenting with marketing in Second Life. If Second Life became an effective marketing tool, LL might be able to get support from companies to boost their profits. LL announced in their blog today the launch of a website focused on assisting companies and other organizations in creating a presence in Second Life. However, I began to see articles popping up a few weeks ago (I get email from Google whenever news stories with the term "Second Life" appear) reporting that many companies are now abandoning their Second Life projects. I think at this point it's too early to tell if and how companies will use Second Life.

There is an article I read earlier this summer I found intersting. Unfortunately, I haven't been able to find it again. The author speculated that LL might not care about Second Life continuing for years to come. Why? He saw the trend of LL releasing new features one after the other while the quality of the grid degraded, and recognized a strategy that has been used by companies before. The idea is basically that a company spends all their money creating features (which they patent) and don't care about the actual product failing. Other companies will create their own versions of the product, and now the original company will be able to collect royalties on their patents. So in the case of Second Life, it might fail but if anyone else creates a virtual world with, for example, integrated voice chat, LL will collect royalties. The caveat to this theory is that LL doesn't appear to be patenting like crazy. I personally don't think this is what's going on, but you never know.

From what I've seen, it doesn't look good for Linden Labs, but I don't think this means the end of Second Life. Even if Linden Labs loses all its money, declares bankruptcy, and the grid is shut down, there is still the open source viewer and OpenSim. People will start creating their own grids using OpenSim. It's even likely that the employees of Linden Labs would start contributing to the open source projects (I can only assume they are as obsessed with playing SL as all the normal residents are). But these new grids won't all be linked together in a monolithic "main grid" like the current SL. Instead, there will be numerous grids for different purposes: A C:SI grid, a Gorean grid, an underwater basket weaving grid, etc. I think this is a good thing. Smaller grids are cheaper and easier to maintain. Also, because both the client and server are open source, each grid can have specialized viewers and server code for whatever service they are providing. In fact, I think that once the OpenSim project becomes more mature, what I've just described will happen regardless of whether the main grid goes down or not. I think that people will want to specialize the software to fit their needs, as has happened with almost every open source project out there.

But it's expensive to buy server machines and rent enough bandwidth to maintain your own grid. It seems like these new grids would have to charge lots of money to stay running. If you look at Second Life now, though, there are tons of private sims that people have provided free of charge, and those sims are pretty expensive.

Still there are some other problems that will have to be addressed. For example, what happens to our accounts? Will we have separate accounts for each grid we want to log on to? Perhaps someone will maintain an account server that the grids can talk to, so that we can maintain one account across all the grids. What will happen with money? Will we revert back to a pure barter system (I'll give you this exploding egg for that dancing cow)?

Regardless of these problems, I think the future of Second Life is bright, even if LL goes out of business.