Wages of Sim

Originally posted to SLSailing.com on December 2nd, 2008

Orca Flotta stated: I really don’t get it. …not too long ago we weer charging tiers fees of 2125 L/week for 1/4 OS sim. And we sold land like crazy. …Now after the upcoming increse in fees… the tier fee will be 2044 L/week. Big deal! …Can’t they see 2044 is still cheaper than the 2125 they had to pay only a few months ago???
Also I want to add that LL is recently busy with a major operation trying to make its network of servers more reliable, stable, and faster. …These activities are pricey, LL isn’t earning nearly as much money as many of you think they do. In fact they are borrwing money on a great scale … and of course the are trying to squeech out as much as possible from their customer base as possible.
In the end LL will again be at the top of their game, always one or two or more steps ahead of the many new contenders in the field of virtual worlds.
So the best advice I could give you now is a pretty lame one: SIT IT OUT! Or, if you think you must opt out of OS then be offensive: Upgrade to full sims instead of throwing in the towel completely.

I very much respect Orca’s opinion and we usually end up in agreement, but I disagree with Orca’s main points on this issue.

I can’t comment on the significance of her sim rental fees numbers, since each real estate development group works out an individual pricing strategy designed to recoup its costs and hopefully generate some profit. Selling a large volume of sim properties for a low price sounds good, but only if that price is realistic and covers all the costs.

At the same time, it’s undeniable that the 67% increase in Linden monthly tier and 50% increase in initial sim setup cost will negatively impact new sim purchases and small profit margins will require owners and developers to pass the increased charges on to renters and parcel owners. They will be forced to increase the weekly or monthly charges previously established by secondary real estate agreements, and many renters and buyers will protest or back out of their previously stable and mutually agreeable deals. When that happens, more likely than not the owners will need to add an additional surcharge to rental properties to cover the increased risk of the investment, given the loss of confidence in LL and the associated market instability. Of course this will cause further damage and escalate uncertainty even more. One might easily conclude that real estate sales will remain flat on the floor for the foreseeable future, and my real guess is the floor will collapse too. See Bitova Loon’s comment relevant to this point.

However, let me also state that my criticism of LL is not soley about the extra cost to landowners resulting from the astronomical hike in LL’s OS monthly tier.

I think the OS sim ‘problem‘ became a ‘crisis‘ because of LL management’s handling of the issue. LL appeared to inadequately plan the rollout for such a major policy change; prior to October 27 they failed to work with the user base to develop options that might mitigate the damage to the estates and projects involved. Following the October 27 announced policy change a predictable user uproar occurred, but once again LL showed apparent gross mismanagement of the deluge of user questions and concerns that were legitimately raised in response to the new policy. If there was any LL public relations effort to keep LL’s image and reputation with it’s users from driving straight off a cliff, I didn’t see it.

There are several web opinions that accuse LL of managerial ineptitude or mere ignorance over their handling of this issue, and twice this past week people savvy with the industry remarked that I was wasting my time hunting for a deeper, more complex explanation for LL’s actions. “Don’t attribute to conspiracy those actions that are readily explained by incompetence.”

Although I respect that advice, I don’t buy it in this case. It’s far too easy, and too frequently a tremendous mistake, to assume that decisions that contradict past policy and anger the user base are the result of mere mismanagement. I think it’s far more likely LL’s recent decisions reflect a significant correction in their business model and strategy. LL has a smart team; they didn’t fumble, they switched to a new playbook. That view makes more sense and is consistent with public statements, common business management strategy, and the recent sequence of events.

Most businesses go through at least three phases. There are probably a lot more phases, but remember it’s me explaining this and three is about the maximum I can handle at once. Phase One is the start-up phase. The company focuses on product awareness and user acceptance as well as brand identification. Phase One companies often need a relatively large staff and a considerable budget to establish public awareness and market position for the new product. In Phase One, the sales force focuses on building a broad and diverse user/customer base with knowledge and interest in the product. A company’s business plan will often anticipate a substantial loss during Phase One, since the startup expenses are large and little product is sold at full price. It’s common for a company to give away introductory free versions of a new product — which could be software, laundry detergent, broadband access, or bubblegum — during Phase One promotions.

At some point in the first couple years a company achieves Phase One goals; the company has name recognition and a diverse and growing user base. Thrilled by all the attention and support, many users develop niche applications using the company’s platform. The company encourages user-developed third-party products as a ‘win-win thing’ that benefits everyone.

At this point the company will often shift its business strategy to what I’ll call Phase Two. In my opinion, Phase Two is where LL is now sitting. Phase Two’s primary goal is to maximize profit from the sale of Phase One products and services. A Phase Two company will often strongly limit further R&D and focus on the core products. That eliminates costly staff and streamlines product identification and marketing; no more confusion over ‘upgrades.’ The company can cut back on its human sales staff and largely eliminate meaningful customer support as well, riding largely on Phase One success and core product focus.

Although Phase One cultivated an encouraged a broad-based and diverse user group, in Phase Two the standardized, “proven and market-accepted products” are more profitably re-targeted to corporations rather than individual users.

Mitch Kapor SL5B KeynoteMitch Kapor provided an interesting assessment of Second Life’s current position and future direction recently as part of his keynote address at SL5B. Although the terms he used to describe SL’s transitions were different, in large measure he was making the same point that I’m discussing here. He argued that the initial public phase of development for a new communication interface like SL involves a community that was primarily made up of “early adopters.” As I understood his point, this group largely consists of innovative and technically knowledgeable individuals that are willing to evaluate and adopt new tools they feel have significant promise.  The “early adopters” are the Phase One users/customers I discussed above.  They have a very important role in the company’s early stages, identifying new uses for the product, developing services and third-party applications based on the product, and helping the company evolve an interface that is easy to learn but also highly robust across a wide range of interests and user adaptations.

Kapor then described the next step.  Once a product like second life has been widely accepted by a broad user community of “early adopters” that have demonstrated the value of the product, helped develop new applications for it, and identified a variety of market segments where the it could be particularly useful, a transition occurs.  At that point the “pragmatists” are willing to step in to strongly ramp-up the market acceptance of the platform and strongly expand the user base.  Mitch Kapor SL5B keynoteKapor made it clear that his “pragmatists”  were corporate business users, although he preferred the more general term “pragmatists” since it defined their motivation; Kapor included large nonprofits as well business corporations in the pragmatist group. The switch from “early adopters” to “pragmatists” is analogous in broad strokes to my discussion of “Phase One” and “Phase Two” above.

It’s probably no surprise that Kapor emphasized SL was now right at the transition from his phase one early adopters to those phase two pragmatists. since he emphasized innovative uses of the platform, there was little discussion of the significance of this transition for LL’s  actual business strategy. However Kapor left little doubt that those essential, innovative early adopters were now pretty much benched for the rest of the game.  It was time to bring in the big players, it was time for LL to cater to the corporate business world. If Kapor was talking to a different audience he might have added “and it’s time to focus on profit so LL can pay off its investors.”

As I said, Kapor did not address LL’s strategy in this transition and next phase. For example, one big question is: How does the company maximize profits while it makes a strategic switch away from individual end users and towards corporate clients? Well, one possible tactic as part of a bigger strategy might be to strongly ramp up the cost of products and services to individual end-users, particularly those that encourage third-party entrepreneurs. Under Phase Two, LL might ramp up OS sim tier by 67% and actually maintain the income from private sims despite the loss of a significant segment of end users that don’t fit the Linden strategy.

LL’s decision to cancel past policies and agreements that gave price breaks to educational and nonprofit groups using OS sims seemed a particularly cold-blooded application of this strategy.
(Good grief Lindens, was that really necessary?)

I know, I know…
“It’s business, it’s not personal.”

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