While Google and small internet firms race ahead, Yahoo! seems to be standing still
“NOW let's just pause for a second.” It is the fourth pause for thought that Terry Semel, chairman and chief executive of Yahoo!, has requested in about ten minutes. He is trying to marshal various arguments to prove that his firm, the world's largest internet company by visitors to its website, has a coherent and winning strategy compared with Google, a phenomenally successful search engine. With only slightly bigger revenues, Google has three and a half times the market value of Yahoo!. Twice in three months Wall Street has dumped the shares of Yahoo! and widened the gap (see chart).
The first sell-off, in July, came after Mr Semel announced that Panama, an ambitious project to improve Yahoo!'s technology so that it can make more money on each of its users' searches, would be delayed until the end of this year. Yes, agrees Mr Semel, it was supposed to be released a quarter earlier, but this sort of market reaction was silly. Unlike Google, which has a habit of releasing sloppy brainstorms in test versions called “beta”, he says, Yahoo! wants to launch a fully functional product, and therefore had to be cautious—and since the financial benefits will come next year, why should the stockmarket get into such a tizzy?
The second sell-off happened last week, when Mr Semel warned investors at a conference hosted by Goldman Sachs that growth in online advertising was not quite what he had hoped. Quarterly earnings would be on the low side of his previous estimates. In particular, Mr Semel noted slower growth in demand from carmakers and banks—Yahoo!'s biggest customers—for graphical advertisements, the category in which it outsells all its rivals. “Let's pause for a second,” he says again. “We still expect to outgrow the segment in 2006. This is not about a tragedy or disaster; it's just pointing out something that we had seen.”
Part of the problem for Yahoo!, however, is that nobody else appears to be seeing a slowdown. This week the Interactive Advertising Bureau and PricewaterhouseCoopers, a consultancy, jointly released the latest industry numbers, which show that online advertising in America grew by 37% to $7.9 billion, a new record, in the first half of the year. Another firm that tracks online advertising, eMarketer, cut its forecasts, but that was in response to Mr Semel's statement. Jim Lanzone, the boss of Ask.com, the fourth-largest search engine after Google, Yahoo! and Microsoft's MSN, says that his firm is not seeing any similar easing of demand.
The deeper problem, says Henry Blodget, founder of Cherry Hill Research, a consultancy, is that Yahoo! is still suffering from a “colossal error” it made in the late 1990s. At that time, it already wanted to become a portal, or a gateway to content on the web, but thought that search would be at most a feature, not a business in its own right. This allowed Google to dominate the category. “By the time Yahoo! realised its mistake about three years ago it was too late,” says Mr Blodget. Google's share of search queries has been growing, and the enormous profits from this product allow Google to invest more than Yahoo! does.
Mr Semel counters that Google's gains in search have not come at the expense of Yahoo!, which has been a steady number two. MSN has been the primary loser. Panama will help. And there are differences between Yahoo! and Google which favour his company. For advertisers, the difference is supposed to be that Yahoo! is more of an all-round online media company, selling the full gamut of advertising, from pay-per-click text snippets on search pages to interactive banners, whereas Google sells almost exclusively pay-per-click advertisements. As such, Yahoo! benefits from its huge leads in web-mail and finance and general news, where Google is a tiny, niche competitor.
For consumers, the difference is supposed to be that Yahoo! is about human beings, whereas Google is about soulless machines and algorithms. So Yahoo! has bought several young firms such as Flickr, a photo-sharing site, and Del.icio.us, a bookmark-sharing site, which both allow users to “tag” the pictures and web pages they encounter, and pass them on to each other. There is Yahoo! Answers, where users can ask real questions and other users respond. Yahoo! started the service nine months ago, and it now has more than 50m users in 20 countries. Yahoo! has fared less well with its social-networking site, Yahoo! 360, and is now negotiating to buy Facebook, a networking site used by many American college students.
But none of these is a solid answer to Yahoo!'s woes. The “tagging” that Flickr and Del.icio.us offer is still far from the mainstream, and are mostly used by hard-core technology geeks. Yahoo! Answers is growing, but arguably full of rubbish. “What is the sexiest food?” is a typical recent question. Answers range from “bacon, mmmmm” to “a pickle” and “anything with a beautiful woman sitting across from it.”
And Yahoo!'s efforts to buy Facebook may illustrate the older firm's shortcomings as much as its market power. Yahoo! was originally interested in MySpace, the biggest social network, but lost it to News Corporation, a media conglomerate. It also wanted to buy AOL, a web portal owned by Time Warner, another media company, but Google swooped in. Yahoo! again lost to Google when the latter won a deal to supply the advertising on MySpace, and then to Microsoft when it struck a deal to deliver advertising on Facebook. Now Yahoo! looks rather desperate, and will have to pay an enormous price for Facebook, a fast-growing company which many big firms have considered buying.
“Days go by and deals go away,” says an outside adviser to Yahoo! who has sat in on executive meetings. The firm has a “relatively constipated process of reviewing anything,” he says. It is slow and cumbersome and “not an entrepreneurial culture” because Mr Semel is a “low-risk, non-confrontational guy”, says this adviser. He recalls a meeting at which an engineer asked: how long do we take from idea to execution? Several people scrawled on the whiteboard and agreed on an answer of eight months.
None of this means that Yahoo! is in dire trouble. If it turns out to be true that online advertising is growing more slowly as a whole, Google and all other internet firms will feel it sooner or later. Christopher Sherman, executive editor of SearchEngineWatch, an online newsletter, says he doesn't think that Yahoo! has lost its way. But “we're past the days of radical innovation where somebody is really going to blow past a competitor.” Yahoo! will have to content itself with a position as the internet's number two, at best.
9.29.2006
Living a Second Life
Living a Second Life
A Californian firm has built a virtual online world like no other. Its population is growing and its economy is thriving. Now politicians and advertisers are visiting
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. This is a “metaverse” (ie, metaphysical universe), a three-dimensional world whose users, or “residents”, can create and be anything they want. Mr Yellowlees created hallucinations. A resident might walk through a virtual hospital ward, and a picture on the wall would suddenly flash the word “shitface”. The floor might fall away, leaving the person to walk on stepping stones above the clouds. An in-world television set would change from showing an actual speech by Bob Hawke, Australia's former prime minister, into Mr Hawke shouting, “Go and kill yourself, you wretch!” A reflection in a mirror might have bleeding eyes and die.
When Mr Yellowlees invited, as part of a trial, Second Life's public into the ward, 73% of the visitors said afterwards that it “improved [their] understanding of schizophrenia.” Mr Yellowlees then went further. 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.
Second Life, as Mr Yellowlees illustrates, is not a game. Admittedly, some residents—there were 747,263 as of late September, and the number is growing by about 20% every month—are there just for fun. They fly over islands, meander through castles and gawk at dragons. But increasing numbers use Second Life for things that are quite serious. They form support groups for cancer survivors. They rehearse responses to earthquakes and terrorist attacks. They build Buddhist retreats and meditate.
Many use it as an enhanced communications medium. Mark Warner, a former governor of Virginia who is considered a possible Democratic candidate for president in 2008, recently became the first politician to give an interview in Second Life. His avatar (also named Mark Warner) flew into a virtual town hall and sat down with Hamlet Au, a full-time reporter in Second Life. “This is my first virtual appearance,” Mr Warner joked, “I'm feeling a little disembodied.” They then proceeded to discuss Iraq and other issues as they would in real life, with 62 other avatars attending (some of them levitating), until Mr Warner disappeared in a cloud of pixels.
By emphasising creativity and communication, Second Life is different from other synthetic online worlds. Most “massively multi-player online role-playing games”, or MMORPGs (pronounced “morpegs”), offer players pre-fabricated or themed fantasy worlds. The biggest by far is “World of Warcraft”, by Blizzard Entertainment, a firm in California, which has more than 7m subscribers. These worlds are the modern, interactive, equivalents of Nordic myths and Tolkien fantasies, says Edward Castronova, a professor at Indiana University and the author of “Synthetic Worlds: The Business and Culture of Online Games”. They allow players to escape into their imaginations, and to take part by, say, joining with others to slay a monster.
Making, not slaying
Second Life, by contrast, was designed from inception for a much deeper level of participation. “Since I was a kid, I was into using computers to simulate reality,” says Philip Rosedale, the founder of Linden Lab, the San Francisco firm that launched Second Life commercially three years ago. So he set out to construct something that would allow people to “extend reality” by building a virtual version of it, a “second life” not unlike that envisioned by Neal Stephenson in “Snow Crash”, a science-fiction novel published in 1992.
Unlike other virtual worlds, which may allow players to combine artefacts found within them, Second Life provides its residents with the equivalent of atoms—small elements of virtual matter called “primitives”—so that they can build things from scratch. Cory Ondrejka, Linden Lab's product-development boss, gives the example of a piano. Using atomistic construction, a resident of Second Life might build one out of primitives, with all the colours and textures that he would like. He might add sound to the primitives representing the keys, so the piano could actually be played in Second Life. “Of course, since these are primitives, the piano could also fly or follow the resident around like a pet,” says Mr Ondrejka.
Because everything about Second Life is intended to make it an engine of creativity, Linden Lab early on decided that residents should own the intellectual property inherent in their creations. Second Life now allows creators to determine whether the stuff they conceive may be copied, modified or transferred. Thanks to these property rights, residents actively trade their creations. Of about 10m objects created, about 230,000 are bought and sold every month in the in-world currency, Linden dollars, which is exchangeable for hard currency. Linden Lab estimates that the total value (in “real” dollars) this year will be about $60m. Second Life already has about 7,000 profitable “businesses”, where avatars supplement or make their living from their in-world creativity. The top ten in-world entrepreneurs are making average profits of just over $200,000 a year.
By emphasising creativity and communication, Second Life is different from other synthetic online worldsSecond Life's total devotion to what is fashionably called “user-generated content” now places it, unlike other MMORPGs, at the centre of a trend called Web 2.0. This term usually refers to free online services delivered through a web browser—for example, social networks in which users blog and share photos. Second Life is not delivered through a web browser but through its own software, which users need to install on their computers. In other respects, however, it is now often held up as the best example of Web 2.0. “It celebrates individuality,” says Jaron Lanier, who pioneered the concept of “virtual reality” in the 1980s and is now “science adviser” at Linden Lab. And it connects people, he says, because “the act of creation is the act of being social.”
The Web 2.0 crowd also extols Second Life for its highly original business model. Most Web 2.0 firms try to build audiences around user-generated content in order to sell advertising to them. This assumes the availability of unlimited advertising dollars, a notion that is increasingly ridiculed.
Linden Lab does not sell advertising; instead it is a virtual property company. It makes money when residents lease property—an island, say—by charging an average of $20 per virtual “acre” per month. Only about 25,000 residents, or about 3% or the population, lease property, but that already amounts to 53,800 acres, which, in real life, would be bigger than Boston. This works out to monthly revenues of $1m, not counting the commissions that it takes on currency exchanges between Linden dollars and hard cash. As a private company, Linden Lab does not disclose its exact revenues, although Mr Rosedale says the firm is “close to profitability”.
A common reaction to such numbers is astonishment that anybody should pay anything at all for something that exists only in a metaphysical sense. But “there's actually no economic puzzle in this; all kinds of things derive their economic value only from the realm of the virtual,” says Indiana University's Mr Castronova. The American dollar, for instance, is virtual (aside from the value of the paper used for the bills) in that it requires consumers to have faith in its worth. In the context of online games, virtual economies much bigger than Second Life's have existed for years. Many people in poor countries, called “gold farmers”, play games such as “World of Warcraft” professionally to score weapons, points or lives to sell to lazier players in rich countries. But Second Life is unique in that residents conceive what they sell. As such, says Mr Lanier, it is “probably the only example of a self-sustained economy” on the internet.
For all these reasons—its ability to change the real lives of its residents, its innovations in technology and in its business model—Second Life has become a darling of Silicon Valley. It promises to be “disruptive”, says Mitch Kapor, the inventor of the Lotus spreadsheet that played a big role in the personal-computer revolution of the 1980s and 1990s. He is now chairman of Linden Lab. To him, Second Life is comparable to both the PC and the internet itself, which started as something “quirky” for geeks, and then entered and transformed mainstream society. “Spending part of your day in a virtual world will become commonplace” and “profoundly normal,” says Mr Kapor. Ultimately, he thinks, Second Life will “displace both desktop computing” and other two-dimensional “user interfaces”. As “a hothouse of innovation and experiment,” he says, Second Life may even “accelerate the social evolution of humanity.”
Back to this reality
It is bold and early to make such predictions. After all, Second Life is still a relatively small virtual world—only about 9,000 residents are usually logged in at any one time, for example. About two-thirds create content from scratch, but mostly they customise things that they find or browse passively. And a lot of the wares on offer are banal. Whereas a few residents choose very innovative bodies for their avatars, most have shapes, male and female, that hew to the default templates and look, predictably, like cosmetically enhanced porn stars. Among the artefacts, there is some genuine art but quite a bit of junk.
Endless possibilities: Donna Meyer, a grandmother from New York, and her avatarIs Second Life a nirvana where unknown talent can prove its creative mettle and make it in the real world? “You can create your own island and people come to it,” said Bill Joy, a co-founder of Sun Microsystems and now a prominent venture capitalist. But “I don't see any correlation between that and what it's going to take to be a designer and have a skill set to succeed in the world.”
Mr Castronova also cautions against overestimating the depth and breadth of Second Life's economy. Yes, people do create clothes and games and spacecraft in Second Life and then sell them. But most of the big money comes from the virtual equivalent of land speculation, as people lease islands, erect pretty buildings and then rent them to others at a premium. Tongue in cheek, Mr Castronova compares Second Life's in-world boom to America's house-price bubble. In artistic terms, there is not always much difference between building an in-world house and designing a personal web page.
There are also stirrings of discontent among some of the “older” (if one can use that term in a three-year-old metaverse) and more purist residents of Second Life about what they see as a menacing trend toward commercialism. One avatar, for example, has created “MetaAdverse”, a network of advertising billboards inside Second Life to which property developers can feed images of their creations. More controversially, Second Life is also attracting the attention of corporations and advertisers from the real world hoping to attract the metaverse's residents. Publishers now organise book launches and readings in Second Life. The BBC has rented an island, where it holds music festivals and parties. Sun Microsystems is preparing to hold in-world press conferences, featuring avatars of its top executives. Wells Fargo, an American bank, has built a branded “Stagecoach” island, where avatars can pull Linden dollars out of a virtual cash machine and learn about personal finance. Starwood, a hotel and resort chain, is unveiling one of its new hotels in the virtual world.
Toyota is the first carmaker to enter Second Life. It has been giving away free virtual vehicles of its Scion brand and, in October, will start selling all three Scion models. The price will be modest, says Adrian Si, the marketing manager at Toyota behind the project. Toyota really hopes that an “aftermarket” develops as avatars customise their cars and sell them on, thus spreading the brand “virally”. Toyota will be able to observe how avatars use the cars and might, conceivably, even get ideas for engineering modifications in the real world, he says.
Those Scion cars have “great driving performance for in-world physics,” says Reuben Steiger, the boss of Millions of Us, a company he founded this year to bring companies like Toyota into Second Life for marketing and brand-building. “How it corners and makes sounds when it changes gears is great.” So Toyota, which is a client of his, along with Sun Microsystems and even Mr Warner, shows that Second Life is “perfect for creating experiences around a brand,” says Mr Steiger. “We don't think that conventional advertising will be very prevalent,” he says, because it would “be badly received culturally”. Advertising in Second Life is not about “trapping people” but about captivating and stimulating them. A good campaign in Second Life costs about $200,000 dollars, he reckons, of which only a tiny part is property leases and most goes to paying the talented designers to create great virtual stuff.
Virtual strip mall?
Inevitably, this sort of thing turns some residents off. Will Second Life, that realm of individualism and pure creativity and spontaneity, get plastered over by the same mega-brands and mass culture that have, arguably, made the physical world such a homogenous place? In real life, many avatars argue, big business tends to push out small artisans. If the same happens in Second Life, the metaverse will lose its raison d'être.
Mr Rosedale, Linden Lab's founder, empathises with the concern, but thinks it is misplaced. “That is a fear which comes from the real world that is not likely to be borne out in Second Life,” he says. His arguments are all economic. In the physical world land is scarce, so big brands can buy up much of it; in Second Life, Linden Lab simply allocates more computer-processing power and makes even more islands available. The world is infinitely expandable, in other words. If one patch did become homogenous and drab, avatars would simply fly off to the next.
Another economic difference, says Mr Rosedale, is the lack of economies of scale in Second Life. In real life, a shoemaker, say, can reduce the average cost of making a pair by producing huge amounts, and the average cost of marketing by buying advertising in bulk. In Second Life, however, scale means nothing. There is no manufacturing cost to minimise. Gimmicks, such as giving away free shoes, are useless because nobody actually needs shoes at all. Nike, say, has no inherent competitive advantage over a hobbyist who likes to design shoes (or feet, paws, wings or claws) for fun. Thus, says Mr Rosedale, whereas the physical world has relatively few things that are sold in huge numbers, Second Life has huge numbers of things that are sold in relatively small quantities. In the statistical jargon, Second Life's economy trades in “the long tail” of things.
This is why, for the time being, Mr Rosedale prefers to rule Second Life with Adam Smith's “invisible hand” only. To him that means treating every resident the same, whether it happens to be Toyota or “an 80-year-old woman from India.” Both will pay the same price for their acres; what they do with it is up to them. If it ever became necessary, he adds, Linden Lab could “become a regulator and break up monopolies”, but this does not seem likely to come about.
How, then, is one to make sense of Second Life? For those new to it, it appears to be too mind-boggling to have much relevance to real life. For those who spend time inside, however, Second Life ironically tends to resemble the real world even as its obvious differences become clear. Mr Kapor, Linden Lab's chairman, is the first to agree. “People bring all their karma” into the world, he says. Alongside benevolence, there is harassment. If Second Life were ever to become truly mainstream, there is no guarantee that residents would not pollute it with racism and hatred. Perhaps crime too: residents had to reset their passwords after a recent hacking attempt.
These things may be a criticism of human nature, but it cannot be blamed on Second Life. Henry Jenkins, a professor of media studies at the Massachusetts Institute of Technology, thinks that Second Life deserves credit as “a world of hypotheticals and thought experiments.” From new approaches to corporate branding to education, Second Life is a petri dish for innovations that may help people in real life. Already, therapists are using Second Life to help autistic children, because it is a safe environment to practice giving signals to others and interpreting the ones coming back. Other organisations are using Second Life for long-distance learning. Overall, says Jaron Lanier, the veteran of virtual-reality experiments, Second Life “unquestionably has the potential to improve life outside.”
A Californian firm has built a virtual online world like no other. Its population is growing and its economy is thriving. Now politicians and advertisers are visiting
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. This is a “metaverse” (ie, metaphysical universe), a three-dimensional world whose users, or “residents”, can create and be anything they want. Mr Yellowlees created hallucinations. A resident might walk through a virtual hospital ward, and a picture on the wall would suddenly flash the word “shitface”. The floor might fall away, leaving the person to walk on stepping stones above the clouds. An in-world television set would change from showing an actual speech by Bob Hawke, Australia's former prime minister, into Mr Hawke shouting, “Go and kill yourself, you wretch!” A reflection in a mirror might have bleeding eyes and die.
When Mr Yellowlees invited, as part of a trial, Second Life's public into the ward, 73% of the visitors said afterwards that it “improved [their] understanding of schizophrenia.” Mr Yellowlees then went further. 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.
Second Life, as Mr Yellowlees illustrates, is not a game. Admittedly, some residents—there were 747,263 as of late September, and the number is growing by about 20% every month—are there just for fun. They fly over islands, meander through castles and gawk at dragons. But increasing numbers use Second Life for things that are quite serious. They form support groups for cancer survivors. They rehearse responses to earthquakes and terrorist attacks. They build Buddhist retreats and meditate.
Many use it as an enhanced communications medium. Mark Warner, a former governor of Virginia who is considered a possible Democratic candidate for president in 2008, recently became the first politician to give an interview in Second Life. His avatar (also named Mark Warner) flew into a virtual town hall and sat down with Hamlet Au, a full-time reporter in Second Life. “This is my first virtual appearance,” Mr Warner joked, “I'm feeling a little disembodied.” They then proceeded to discuss Iraq and other issues as they would in real life, with 62 other avatars attending (some of them levitating), until Mr Warner disappeared in a cloud of pixels.
By emphasising creativity and communication, Second Life is different from other synthetic online worlds. Most “massively multi-player online role-playing games”, or MMORPGs (pronounced “morpegs”), offer players pre-fabricated or themed fantasy worlds. The biggest by far is “World of Warcraft”, by Blizzard Entertainment, a firm in California, which has more than 7m subscribers. These worlds are the modern, interactive, equivalents of Nordic myths and Tolkien fantasies, says Edward Castronova, a professor at Indiana University and the author of “Synthetic Worlds: The Business and Culture of Online Games”. They allow players to escape into their imaginations, and to take part by, say, joining with others to slay a monster.
Making, not slaying
Second Life, by contrast, was designed from inception for a much deeper level of participation. “Since I was a kid, I was into using computers to simulate reality,” says Philip Rosedale, the founder of Linden Lab, the San Francisco firm that launched Second Life commercially three years ago. So he set out to construct something that would allow people to “extend reality” by building a virtual version of it, a “second life” not unlike that envisioned by Neal Stephenson in “Snow Crash”, a science-fiction novel published in 1992.
Unlike other virtual worlds, which may allow players to combine artefacts found within them, Second Life provides its residents with the equivalent of atoms—small elements of virtual matter called “primitives”—so that they can build things from scratch. Cory Ondrejka, Linden Lab's product-development boss, gives the example of a piano. Using atomistic construction, a resident of Second Life might build one out of primitives, with all the colours and textures that he would like. He might add sound to the primitives representing the keys, so the piano could actually be played in Second Life. “Of course, since these are primitives, the piano could also fly or follow the resident around like a pet,” says Mr Ondrejka.
Because everything about Second Life is intended to make it an engine of creativity, Linden Lab early on decided that residents should own the intellectual property inherent in their creations. Second Life now allows creators to determine whether the stuff they conceive may be copied, modified or transferred. Thanks to these property rights, residents actively trade their creations. Of about 10m objects created, about 230,000 are bought and sold every month in the in-world currency, Linden dollars, which is exchangeable for hard currency. Linden Lab estimates that the total value (in “real” dollars) this year will be about $60m. Second Life already has about 7,000 profitable “businesses”, where avatars supplement or make their living from their in-world creativity. The top ten in-world entrepreneurs are making average profits of just over $200,000 a year.
By emphasising creativity and communication, Second Life is different from other synthetic online worldsSecond Life's total devotion to what is fashionably called “user-generated content” now places it, unlike other MMORPGs, at the centre of a trend called Web 2.0. This term usually refers to free online services delivered through a web browser—for example, social networks in which users blog and share photos. Second Life is not delivered through a web browser but through its own software, which users need to install on their computers. In other respects, however, it is now often held up as the best example of Web 2.0. “It celebrates individuality,” says Jaron Lanier, who pioneered the concept of “virtual reality” in the 1980s and is now “science adviser” at Linden Lab. And it connects people, he says, because “the act of creation is the act of being social.”
The Web 2.0 crowd also extols Second Life for its highly original business model. Most Web 2.0 firms try to build audiences around user-generated content in order to sell advertising to them. This assumes the availability of unlimited advertising dollars, a notion that is increasingly ridiculed.
Linden Lab does not sell advertising; instead it is a virtual property company. It makes money when residents lease property—an island, say—by charging an average of $20 per virtual “acre” per month. Only about 25,000 residents, or about 3% or the population, lease property, but that already amounts to 53,800 acres, which, in real life, would be bigger than Boston. This works out to monthly revenues of $1m, not counting the commissions that it takes on currency exchanges between Linden dollars and hard cash. As a private company, Linden Lab does not disclose its exact revenues, although Mr Rosedale says the firm is “close to profitability”.
A common reaction to such numbers is astonishment that anybody should pay anything at all for something that exists only in a metaphysical sense. But “there's actually no economic puzzle in this; all kinds of things derive their economic value only from the realm of the virtual,” says Indiana University's Mr Castronova. The American dollar, for instance, is virtual (aside from the value of the paper used for the bills) in that it requires consumers to have faith in its worth. In the context of online games, virtual economies much bigger than Second Life's have existed for years. Many people in poor countries, called “gold farmers”, play games such as “World of Warcraft” professionally to score weapons, points or lives to sell to lazier players in rich countries. But Second Life is unique in that residents conceive what they sell. As such, says Mr Lanier, it is “probably the only example of a self-sustained economy” on the internet.
For all these reasons—its ability to change the real lives of its residents, its innovations in technology and in its business model—Second Life has become a darling of Silicon Valley. It promises to be “disruptive”, says Mitch Kapor, the inventor of the Lotus spreadsheet that played a big role in the personal-computer revolution of the 1980s and 1990s. He is now chairman of Linden Lab. To him, Second Life is comparable to both the PC and the internet itself, which started as something “quirky” for geeks, and then entered and transformed mainstream society. “Spending part of your day in a virtual world will become commonplace” and “profoundly normal,” says Mr Kapor. Ultimately, he thinks, Second Life will “displace both desktop computing” and other two-dimensional “user interfaces”. As “a hothouse of innovation and experiment,” he says, Second Life may even “accelerate the social evolution of humanity.”
Back to this reality
It is bold and early to make such predictions. After all, Second Life is still a relatively small virtual world—only about 9,000 residents are usually logged in at any one time, for example. About two-thirds create content from scratch, but mostly they customise things that they find or browse passively. And a lot of the wares on offer are banal. Whereas a few residents choose very innovative bodies for their avatars, most have shapes, male and female, that hew to the default templates and look, predictably, like cosmetically enhanced porn stars. Among the artefacts, there is some genuine art but quite a bit of junk.
Endless possibilities: Donna Meyer, a grandmother from New York, and her avatarIs Second Life a nirvana where unknown talent can prove its creative mettle and make it in the real world? “You can create your own island and people come to it,” said Bill Joy, a co-founder of Sun Microsystems and now a prominent venture capitalist. But “I don't see any correlation between that and what it's going to take to be a designer and have a skill set to succeed in the world.”
Mr Castronova also cautions against overestimating the depth and breadth of Second Life's economy. Yes, people do create clothes and games and spacecraft in Second Life and then sell them. But most of the big money comes from the virtual equivalent of land speculation, as people lease islands, erect pretty buildings and then rent them to others at a premium. Tongue in cheek, Mr Castronova compares Second Life's in-world boom to America's house-price bubble. In artistic terms, there is not always much difference between building an in-world house and designing a personal web page.
There are also stirrings of discontent among some of the “older” (if one can use that term in a three-year-old metaverse) and more purist residents of Second Life about what they see as a menacing trend toward commercialism. One avatar, for example, has created “MetaAdverse”, a network of advertising billboards inside Second Life to which property developers can feed images of their creations. More controversially, Second Life is also attracting the attention of corporations and advertisers from the real world hoping to attract the metaverse's residents. Publishers now organise book launches and readings in Second Life. The BBC has rented an island, where it holds music festivals and parties. Sun Microsystems is preparing to hold in-world press conferences, featuring avatars of its top executives. Wells Fargo, an American bank, has built a branded “Stagecoach” island, where avatars can pull Linden dollars out of a virtual cash machine and learn about personal finance. Starwood, a hotel and resort chain, is unveiling one of its new hotels in the virtual world.
Toyota is the first carmaker to enter Second Life. It has been giving away free virtual vehicles of its Scion brand and, in October, will start selling all three Scion models. The price will be modest, says Adrian Si, the marketing manager at Toyota behind the project. Toyota really hopes that an “aftermarket” develops as avatars customise their cars and sell them on, thus spreading the brand “virally”. Toyota will be able to observe how avatars use the cars and might, conceivably, even get ideas for engineering modifications in the real world, he says.
Those Scion cars have “great driving performance for in-world physics,” says Reuben Steiger, the boss of Millions of Us, a company he founded this year to bring companies like Toyota into Second Life for marketing and brand-building. “How it corners and makes sounds when it changes gears is great.” So Toyota, which is a client of his, along with Sun Microsystems and even Mr Warner, shows that Second Life is “perfect for creating experiences around a brand,” says Mr Steiger. “We don't think that conventional advertising will be very prevalent,” he says, because it would “be badly received culturally”. Advertising in Second Life is not about “trapping people” but about captivating and stimulating them. A good campaign in Second Life costs about $200,000 dollars, he reckons, of which only a tiny part is property leases and most goes to paying the talented designers to create great virtual stuff.
Virtual strip mall?
Inevitably, this sort of thing turns some residents off. Will Second Life, that realm of individualism and pure creativity and spontaneity, get plastered over by the same mega-brands and mass culture that have, arguably, made the physical world such a homogenous place? In real life, many avatars argue, big business tends to push out small artisans. If the same happens in Second Life, the metaverse will lose its raison d'être.
Mr Rosedale, Linden Lab's founder, empathises with the concern, but thinks it is misplaced. “That is a fear which comes from the real world that is not likely to be borne out in Second Life,” he says. His arguments are all economic. In the physical world land is scarce, so big brands can buy up much of it; in Second Life, Linden Lab simply allocates more computer-processing power and makes even more islands available. The world is infinitely expandable, in other words. If one patch did become homogenous and drab, avatars would simply fly off to the next.
Another economic difference, says Mr Rosedale, is the lack of economies of scale in Second Life. In real life, a shoemaker, say, can reduce the average cost of making a pair by producing huge amounts, and the average cost of marketing by buying advertising in bulk. In Second Life, however, scale means nothing. There is no manufacturing cost to minimise. Gimmicks, such as giving away free shoes, are useless because nobody actually needs shoes at all. Nike, say, has no inherent competitive advantage over a hobbyist who likes to design shoes (or feet, paws, wings or claws) for fun. Thus, says Mr Rosedale, whereas the physical world has relatively few things that are sold in huge numbers, Second Life has huge numbers of things that are sold in relatively small quantities. In the statistical jargon, Second Life's economy trades in “the long tail” of things.
This is why, for the time being, Mr Rosedale prefers to rule Second Life with Adam Smith's “invisible hand” only. To him that means treating every resident the same, whether it happens to be Toyota or “an 80-year-old woman from India.” Both will pay the same price for their acres; what they do with it is up to them. If it ever became necessary, he adds, Linden Lab could “become a regulator and break up monopolies”, but this does not seem likely to come about.
How, then, is one to make sense of Second Life? For those new to it, it appears to be too mind-boggling to have much relevance to real life. For those who spend time inside, however, Second Life ironically tends to resemble the real world even as its obvious differences become clear. Mr Kapor, Linden Lab's chairman, is the first to agree. “People bring all their karma” into the world, he says. Alongside benevolence, there is harassment. If Second Life were ever to become truly mainstream, there is no guarantee that residents would not pollute it with racism and hatred. Perhaps crime too: residents had to reset their passwords after a recent hacking attempt.
These things may be a criticism of human nature, but it cannot be blamed on Second Life. Henry Jenkins, a professor of media studies at the Massachusetts Institute of Technology, thinks that Second Life deserves credit as “a world of hypotheticals and thought experiments.” From new approaches to corporate branding to education, Second Life is a petri dish for innovations that may help people in real life. Already, therapists are using Second Life to help autistic children, because it is a safe environment to practice giving signals to others and interpreting the ones coming back. Other organisations are using Second Life for long-distance learning. Overall, says Jaron Lanier, the veteran of virtual-reality experiments, Second Life “unquestionably has the potential to improve life outside.”
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