Thursday, September 29, 2005

Economic Guesswork

With a system as early-stage and experimental as Second Life, I am not surprised at the various economic and social/community (they are intertwined) hiccups that are happening along the way. Linden Lab (LL) has an unusual, and fascinating, challenge of trying to manage consumer relations and a functioning economy at the same time.

This week GOM, the 3rd party currency exchange, announced that they were closing their doors. This was not surprising, but still saddening. I would have liked to see them innovate around LL’s new market system, but that is a selfish wish. With slim profits and little joy left (as apparent from their forum posts), it made sense for them to wrap this project up. Now we all await the release of LL’s own currency marketplace, and keep our fingers crossed that it will be well-designed, sturdy and secure.

Some have argued that the new market will cause the exchange rate to collapse by making it easier for the masses to sell Linden dollars. This assumes, however, that there are a lot of L$ sitting unused in people’s account balances. I think those who like to shop will continue to shop. My guess is that the people who have the ability to aggregate L$, and who are motivated to sell L$, are already doing so. Unfortunately, we do not have the data to draw effective conclusions.

While inflationary challenges remain, the tougher issues are on the demand side.
Linden Lab is solving a major barrier by making it much easier to buy currency. The other problems will be slower to fix. We need better “must-have” content that gets consumers excited, but this is dependent on LL’s ability to improve performance, stability and basic creative and collaborative tools over the next 6-18 months. Increased demand will also require a shift in market psychology, where SL consumers begin to accept a pay-as-you-go model for online entertainment rather than an all-you-can-eat bill paid monthly to a game company. If this latter is too slow in changing, then LL will have to rethink its current model.

I continue to have faith that we will get there, but I expect more bumps in our evolutionary road.
Economics requires a lot of guesswork, no matter how many numbers you throw at the problem, and LL needs to continually learn what tools do and do not work when it comes to promoting a healthy and stable virtual economy. There is one guarantee – the path will be an interesting one!

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