Tuesday, March 07, 2006

The SL Economy in Review – 2006 February

February was a relatively uneventful month in SL, IMHO - at least, as far as those events touched the SL economy. There was a constant stream of updates (scheduled now every Wednesday) and no lack of drama at the forums. But, looking back to the past month I only can identify four major topics of relevance to the economy of SL as a whole:
  • SLs Growth is slowing down
  • The End of the "Land Bulksales Experiment"
  • Inflation or no Inflation
  • A Bold Move on the Waterfront Market

The Cold Facts - SLs Growth is Slowing Down
In the last month the official population of Second Life grew by 15% from 130,000 to more than 150,000. Sounds impressive at first. But only, if you don't take into account that the growth rate in the previous months was more like 20% per month or above.

The Number of residents online at 8pm every day

Even more dramatic is the slowdown for "inworld population" (the number of concurrent users online at a given time). This growth rate was down to 5% per month at the end of February (down from 15% - 20% in November, December and January).

I don't have any good suggestions for the cause of this slowdown. Maybe it is just seasonal. Maybe the outphasing of the Developers Incentive comes into effect (less camping chairs?). If this trend stabilizes it might be very important for anyone planning medium term projects inworld. The difference between a growth rate of 5% per month and 15% per month is one between a factor of 1.8 and one of 5.35 over the course of a year!

The average daily trading volume at the LindeX now grows by some 17% to 18% per month. This is down from growth rates of more then 20% in January. Daily trading volume hovers around 6 Million L$ these days (more than 21,000 US$) compared to 5 Million L$ per day in January. Peaks are at over 7 Million L$ at the weekends.

The decline of the exchange rate was temporarily stopped in February. 1 US$ bought you between 275 and 280 L$ during most of February. The new functionality for buying L$ integrated into the client lead to some increased demand and a rising exchange rate in mid February. At the end of the month it was nearly back to 280.

The End of the Land Bulk Sales Experiment
The (in)famous Land Bulk Sales Experiment from January (the sale of fully terraformable mainland sims to residents in huge blocks) was not continued in February. While Linden Lab has never said that this variant of the land auctions would be available forever (it was an "experiment"), it is hard to see this as a sign of success. Only three groups participated in the experiment. The larger block sizes were not contested at all. And the biggest chunk by far went to one bidder already dominating the land market in SL.

Maybe even more less satisfactory then the level of competitiveness were the results in the land produced. Although the new sims are connected to the main continent, most of them were terraformed in a relatively monotonous style optimizing for value (waterfront) and easy resell-ability. That is completely understandable from the buyers point of view. It would be naive to expect anything else. But still, it is hard to see connected continents on the mainland extended in this way; especially since there were very visible borders between the different land barons areas.

Consequently the new direction of LLs strategy for land creation by residents now seems to be focused even more on private sims - and large clusters of them like Anshe's Dreamland. Some of the new features for version 1.9 are clearly aimed in that direction.

Typical bulk sales land "optimized for sell-ability" (developed by CyberLand now sold by AnsheChung.com)

While it might be a bit early to already think about it, the biggest question that comes to mind with this development on the horizon seems to me: Will this further increase the fragmentation of the SL society and market place?

If it does, like Gwyneth Llewelyn fears, this might have interesting consequences for the retail business. In the past, shopping in SL shared some similarities with physical shopping in First Life. There was a chance to accidentally discover a shop while flying over land or strolling around. The implementation of direct teleporting already has led to a situation where residents can teleport directly to any shop they have "found", look around a little and then tp on to the next one. "Physical proximity", malls, shopping districts etc. are already less important than they were in previous versions. And you have to teleport a lot! The flagship stores of most successful designers are now on their own islands usually. This has some advantages - but "strolling around" is hardly possible anymore. And for the retailers this means that you have to get customers to your shop by using the classifieds or other means of marketing.

With residential areas moving to private sims more and more this (especially marketing) could get even more important in the future. And the available means to do marketing are woefully inadequate. On the other hand, local communities might develop which tend to frequent local stores and local sites for entertainment and socializing more intensely than those on other "continents".

Inflation or no Inflation?
While this is no measurement of inworld "value", the L$ lost more than 10% of its value in relationship to the US$ between November and January. There was some heated debate going on at the forums if this constitutes "inflation" or not (it does not) and what are the reasons for the ongoing devaluation. The latter is a question that is hard to decide. There might be many reasons, actually - like the recovering exchange rate after the addition of the new "Buy L$" functionality clearly shows.

But for all those who have to convert large amounts of L$ to US$ this devaluation is an incentive to raise prices. Luckily - for the consumers of SL - changing prices is a very time consuming job in SL. Any retailer who uses many vendors in many locations will be very reluctant to adapt prices regularly. It would take hours and hours to do so. Every time you bring out a new product you have to decide on its price, though. And for all those utilizing networked vendors price changes are easier at least (if not easy). And these kind of systems enjoy rapidly growing popularity in SL.

that's why it is hard for me to believe, that the devaluation of the L$ at the LindeX will NOT lead to inworld inflation after some delay time. And, while I lack the resources to do large scale market research in the retail market, I got the impression lately that goods like clothing, furniture, certain poseballs etc. did get a little more expensive on average. This is a very slow and gradual process of course, though, which is hard to measure objectively.

A Bold Move on the Waterfront Market?
There is no doubt about rising prices on the land market, though, or - to be more specific - in the market for the most desirable land in SL: waterfront.

Since last weekend (OK, I admit, this was already in March), waterfront property on the mainland costs at least 15L$ per sqm - up from 9L$ or 10 L$. Many properties now list for nearly 20L$ per sqm. Mind you: this are not some special parcels or some crazy owners setting up one or two parcels at ridiculous high prices. This is the new norm for waterfront!

The raise from 10L$ to 15L$ or more happened overnight on Thursday or Friday! It seems like Anshe or other officers from her group took a quick survey of the marked in that night, bought up all available parcels and set the new prices. The rest of the Land Barons quickly followed suit of course.

This relatively unspectacular piece of land (8192 sqm) now goes for 160,000 L$ (click on the picture and zoom in.)

After only a few days it is unclear how the market will react to this move. But if I look at the numbers and scenarios available I have to say that this strategy at least could be successful! I wonder what will happen if residents realize that this category of land has risen 50% in price - or in other cases nearly doubled. But it is a perfectly legal move of course, especially in SLs completely perfectly liberal economy.

It just goes to show how much power a single player can wield with very limited financial resources over a small economy like SLs. I guess it has relevance to more than just the land market in SL.

But, as this seems to be a textbook case of "cornering the market" I will follow up this monthly review with a little more detailed analysis in a separate post.


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