Competition from Above?

I wanted to touch on a slightly controversial topic this morning, and discuss the prospect of Linden Lab competing with resident-built products and services. Those familiar with the Second Life economic scene know that the recent announcement of Linden Lab’s currency exchange system (now released), and the subsequent closing of Gaming Open Market, created quite a stir. The question du jour: “is LL my next competitor?”

Linden Lab’s slogan “your world, your imagination” obviously only goes so far, but this should not be an upsetting surprise for anyone. They have granted residents intellectual property rights and provided a hazy promise that they will not compete with in-world content, but they have not explicitly defined the boundaries of what they will and will not compete with. This latter point is hardly surprising. As a technology company, LL has the right to innovate and extend/improve their functionality as they see fit. A smart company would never needlessly limit development options, and Philip will probably avoid setting boundaries unless: 1. he feels significant customer pressure, or 2. he feels the uncertainty is constraining growth.

Personally, I prefer competitive risk to technological stagnation. For example, I would rather see a more advanced avatar mesh – and have to redo all of my clothes – than feel like SL is permanently stuck in 2002. Second Life is in its technological and functional infancy, and its progress and growth benefits us all. Every Linden Lab change will negatively affect someone, somewhere, even if this is entirely due to unintended consequences. If LL handcuffs their development effort to protect the status quo, SL will either die on the vine or be overtaken by competition.

This type of partner/compete conflict is common in business, and is defined by the balance of power between the various parties. Microsoft is a classic example of a company who aggressively partners and competes at the same time (controversial example, I know, but let’s put aside their anti-trust violations for a moment). Every startup who buys Microsoft’s programming tools and databases knows that there is a risk that Microsoft might end up being a competitor. Every startup who tries to improve Microsoft’s technical limitations with an add-on product knows that their original business might evaporate with the next Microsoft product release. The smart, agile ones stay alive by staying ahead of Microsoft’s technology, diversifying, or competing through a superior sales and marketing program. Why do people continue to create businesses in and around Microsoft technologies? Easy answer – the opportunity balances out the risk.

Within the Microsoft ecosystem, there are obvious lessons for both LL and Second Life residents. For LL, an important one is the dampening effect that excessive competitive risk has on complementary innovation. For example, few businesses will attempt add-ons and improvements to Microsoft Office or Internet Explorer because the risk is too high. If competitive risk is too high, then SL’s improvement will only be as fast as Linden Lab’s development team. Since LL’s very business model is an acknowledgement that they cannot do everything themselves, I would bet that Philip knows that he has to chart a compromise path through these waters. Second Life is NOT yet an open source project, and no one should be confused on that issue. It is in Philip’s interest to continue to communicate with SL creators on this issue, not only to build developer confidence, but also to spread a realistic understanding of the dynamics at work here.

A smart SL entrepreneur weighs the market opportunity and the competitive risk (including Linden Lab in that picture) for any business idea. A smart entrepreneur is also aware that market windows open and close for many reasons. New functionality or a policy change by LL could very well be one of the reasons your market window closes. There is no status quo, and there should be no entitlements. (Side note: if you happen to be one of the many people who simply make things for fun, rather than trying to create a virtual business, then there really shouldn’t be any controversy here for you anyway.)

So if competition with LL in certain areas is inevitable, what are those areas? Here are a few of my guesses, and let me be clear that I have no inside information -- this is purely my own conjecture.

Vulnerable Areas:

• Extensions of system functionality: LL provides basic functionality for communication, transportation, prim editing, scripting, etc. The products and services that improve on the base functionality or create workarounds for current limitations (for example, movie players in pre-quicktime days, security/privacy products, ROAM, Cadoe’s free ShapeMaker, and various information-network systems) are highly vulnerable to functionality changes/improvements.

• Advertising tools: I pulled this one out of “extensions” because it is more complex. I can see LL eventually adding functionality to make in-world advertising more efficient, including enabling an advertiser to pay a resident for showing an ad on his/her land (I would still categorize this as “enhancing the tools”). If LL also decided to sell the advertisements themselves, then would they be infringing on the “your content” promise?

• Services which bring SL to the Internet (Web-based storefronts, photo sites, blogging networks, landmark sharing tools, etc): these are not “in-world” content and so do not fall under any sort of protective promise.

Less Vulnerable Areas:

• In-world content: avatars, animations/gestures, buildings, clothing, particle settings, textures, vehicles, weapons, etc. While buildings and textures do face some competition in the form of new Library releases (for example, when the Atoll territories were released the huts and textures were made public), this competitive threat is really minor.
• Content services: custom services for the above categories
• Entertainment services: clubs, activities, games, and other social events

This issue is going to evolve as Second Life evolves. I hope that Linden Lab tries to over-communicate on this topic, because too much uncertainty can stifle innovation. At the end of the day, both sides of this equation are dependent on each other.

(P.S. only blog members can post comments, so if you have a comment you would like me to consider sharing on this blog, please send me a forum private message or an inworld IM/notecard.)