Sunday, March 12, 2006

How to "corner a market" in Second Life

Maybe you did not realize it yet, but the prices of a certain type of land in SL recently doubled! Fresh waterfront parcels that could be bought for a little more than 9L$ per sqm a week ago are now 15L$ per sqm and more. The most attractive parcels go for 19L$ per sqm or so. Yep, this all happened over the weekend, or better yet: in a single night.

"How can this be?", one might ask. Easy. A single land business group, bought up (nearly) all available waterfront land a week ago and reset the prices according to the new pricing. Waterfront parcels which for some reason were not grabbed up in this night were raised in price by their old owners - why should this land be cheaper than the rest of waterfront in SL, the owners thought. And the latest round of auctions for new land already reflected the new pricing, too. Sims with a long waterfront sold for more than 2,000 US$ - prices which have not been seen at the auctions since the Killing of the Telehubs.

Auction results from the night of Saturday, the 11th or March

This is interesting - even to those not in the land business and not interested in buying waterfront anytime soon - because it shows how easily some markets in the SL economy can manipulated; or "controlled" if we want to use a more neutral word.

The Rules of the Game
Actually, what happened is a very old scheme in business, which is called "cornering the market". It goes as follows:
  1. You identify a rare commodity; preferably one where the supply is limited and there are always times when demand outpaces supply.
  2. You secure possession of a large chunk of this commodity. A good idea is to try for at least a third of the world supply.
  3. You start selling the commodity at a significantly higher - or constantly rising - price.
  4. You wait patiently.

    What happens at this point is usually, that the other owners of said commodity realize the new profit potential and start raising their prices, too.

    Next, new speculators enter the market. They see the rising prices and want to take part in the bonanza. Demand for the commodity gets bigger and - simple rules of supply and demand - prices rise even higher.

  5. You sell your stockpiled inventory.
  6. You live happily ever after from the huge profit you made between the price in Step #1 and #5.
This is a strategy which has been tried and tested a lot in the First Life economy. The most famous case in the last years (at least to my memory) was practiced by the Hunt Brothers, Oil Billionaires, who in the early 1980s tried the scheme with silver. It was said that at one time they owned more than a third of the silver in the whole world.

Like in most of the cases before, the story ended slightly before step #6 with the bankruptcy of the Hunt brothers. This is not always the case. There were examples where at least some players in the game succeeded to make huge profits. As usually the timing is most important: when to liquidate.
Nelson Bunker Hunt

Is it really this simple to get stinking rich?
No, cornering the market in First Life most often needs either huge amounts of money or lots of criminal energy - or both. A famous quote of one of Nelson Bunker Hunt was "A Billion dollars isn't what it used to be". Even scarce resources are so abundant usually (and expensive) that we are talking about a starting capital of 100s of millions or some billions of US$. Depending on how you do it, it can be seen as illegal. So you not only have to accept the risk of going bankrupt but of ending in jail, too.

The SL Version
Contrary to the situation in First Life it is astonishingly easy to implement such a scheme in Second Life. First: while SL seems to be huge to us humble residents, our world - and its economy - actually is rather small. The land market probably is one of the biggest. But the whole land market wasn't the target of this move. Land is not really scarce in SL, and trying to corner the overall land market would require a lot more financial resources and risk before you got to a point where you could dictate prices.

The waterfront market is different. Only a small portion of the land coming online each month is waterfront - especially if you want mainland. Of course Linden Lab could bring more land online in the coming months. But they would have to change their policy for creating land completely to "produce" more waterfront. And as waterfront is the "dream land" for many residents, demand is always high.

So we have a situation where demand remains high but the total sub-market is relatively small. I did not have the time to actually survey the market, but making a rough estimate I would say that it did not cost more than a six or low five figure sum (in US$) to buy up all the waterfront - in addition to all the land the group already owns.

Will it work out?
Hard to say. As I mentioned, most of the time these schemes do not work in First Life economy. So why would someone try it again in Second Life?

Because there are some unique aspects that might make it work:
  1. The market is really small (in RL terms). So you don't need to gamble all of your money and still control well over 50% of the market. Such opportunities are rare in First Life.
  2. Customers who try to avoid the expensive mainland and move to rent on private sims fill the pockets of the main player in this game too. is already the biggest owner of private sim space in Second Life (a lot of waterfront here). The group already was the largest owner of "bulk sales" land, too - which accidentally features a lot of waterfront. Which leads to the last advantage:
  3. The group starting this move already owned more then 50% of the market in question before this newest game started.

A piece of land like this (8192 sqm) costs nearly 160,000 L$ now. Maybe we have to get used to it.

So, do we have to live with the new prices? Maybe. It mostly depends on what the Baby Barons will do. Many of them will consider this move advantageous for themselves (it is, short term) and "go with the flow". They can't undercut Anshe large scale (she would simply buy the land and mark it up). Undercutting these prices may be hard after all, because first you need to win the land at the auctions to resell it and prices at the auctions are determined by the expected valuation after the land is prepared. So you would have to buy high and sell low -- not a good idea.


Dear Readers, please don't get me wrong. Nothing that Anshe did (and where most competitors willingly followed in synch) is "illegal". There are no rules governing business in SL. Everything that is possible is legal. Everyone has the right to price their goods at whatever he or she thinks its worth, of course.

I don't think that it is a good sign for the maturity of the SL economy that such a strategy can be implemented so easily, though.

1 comment:

  1. I think it's important to note that Anshe's supply was running out before she jacked up the prices, and the Lindens also stopped the auctions for a week when they ran out of servers. I wish they had done this consciously as a policy to stop the land glut, but evidently they didn't. Anshe's behaviour is the natural oligarchic response to a socialist government. This isn't a free market, by any stretch, which actually isn't being allowed to come into being. The Lindens should stop the land glut so that more people can compete and diversify the land offerings, and many individuals can sell land for at least what they paid for it, and establish its true value. Otherwise, both Anshe and the Lindens are doomed to repeating this addictive cycle of the game of chicken, with the rest of us helplessly watching.