Real Estate Crashes In Second Life, Too: Linden Lab's Bailout Plan

Eric Krangel | October 28, 2008 10:00 AM
Linden Lab's new-ish CEO Mark Kingdon has been fond of telling reporters "there's no credit crunch in Second Life." We'll see about that. Last night Linden announced it was jacking the prices on its "Openspaces" virtual land by two-thirds, from $75 to $125 a month (that's American dollars, not fantasy game-currency).

Linden Lab has an easy-to-understand business model. The company creates and sells "virtual land," which is essentially dedicated CPU time with which Second Life avatars can build space stations, elven villages, whatever. (Think 3D webhosting.) Linden collects a monthly fee on the land it sells, which is the company's revenue. Unlike many other Web 2.0 companies, Linden's fortunes aren't dependent on selling advertising and the company isn't at the mercy of declining ad rates.

But that doesn't mean Linden is doing well. The base of paying customers is declining, prices in the avatar-to-avatar aftermarket for land have bottomed out, and the company has been unable to introduce new land into Second Life for months amidst the glut. And if Linden isn't introducing new land, it isn't growing its bottom line. So the company came up with a new way to make money -- charging its existing customers more.

In the short term, this was probably a smart move by Linden. The company introduced "Openspaces" months ago as budget option with reduced performance, thinking most of its customers would still prefer the more robust experience of being on Second Life's mainland. Many more users went for the cheap low-performance virtual land than expected, so much so the company can't even sell its more expensive product anymore. (That would be the credit crunch. Or the end of a fad.) Second Life's avatars are already screaming and howling over the price spike, but even if a few customers are lost, the company will most likely score a net positive.

That being said, there's only so much blood that can be squeezed from a stone. For Linden Lab to survive, it can't keep raising usage fees, and it can't try to con business users into teleconferencing in Second Life when the product is so poorly suited to enterprise use. In the end, Linden needs to pull off an image overhaul and make Second Life once again a hip place to be, with a growing population and a steady influx of new land-owners (read: paying customers). If Linden can do that, it prospers. If it can't, it's doomed.