Monday, April 03, 2006

The SL Economy in Review – 2006 March

First it looked like March would be a relatively boring month for the SL economy, but the last two weeks made up completely for the uneventful first ones. The L$ fell to nearly 300L$/USD, Anshe proposed a new currency, got her account suspended... Let me just say: it is still thrilling to watch Second Lifes economy developing, never a dull month! Here is the complete list of events I would like to cover this time:
  • Version 1.9 out and (relatively) stable
  • Philip Linden: "Inflation is good for you!"
  • News from the waterfront (market)
  • Anshe's "threat" for a New Currency, the A$
  • Anshe Chung suspended?
But first, the boring numbers:

The Cold Facts - SLs growth gaining speed - The L$ going down
Second Life is still growing, of course. This is nothing exceptionally new. It is interesting, though, that - after a lackluster February - the growth rates are recovering again. The number of residents grew from 150,000 to 170,000. This means a monthly growth of some 14%; which is not much, compared to the rates in January and December, but the absolute user count is just one indicator. Even more interesting is the number of concurrent residents present in SL at the same time. This indicator for the true level of "activity" inside SL nearly stagnated in February and now has picked up momentum again. These days you can often see 6,000 or more residents in SL at the same time. The growth rate for this indicator - which I like to understand as "true growth" - is now back at more than 10%.

Not as pleasant as these numbers are the developments at the LindeX. During the month of March the exchange rate of the L$ against the USD went from 280 to 300 (and back to 295); higher numbers meaning lower values in this case. Most of this 10% loss happened over a 10 day period - a rather steep fall. But more on that below.

Version 1.9 is out and stable
On the 15th of March the new Version 1.9 was released. It brought a plethora of new functionalities for owners of privates estates (as well as new functions for camera control through scripting, some performance increases, another new version of rippled water ...). Most interesting to me are the new functionalities for private "islands", or "estates" which is the official name. Owners of these can now delegate a lot of the typical management tasks associated with a private sim to some other resident: allowing and banning users, setting terraforming and other limits, sun position, terrain textures etc. etc. In the past only the owner, the account ordering and paying for the sim, could do this. This was OK when most owners of private estates only had one or two sims. It obviously became a serious problem with the larger private continents.

Owners of private estates can better employ support personnel now - and they can apply some functions to all of their sims in one step. Banning of griefers is the most cited example. Anshe or one of her employees can now ban someone and exclude this someone from all of her more than 120 sims in just one step.

Additionally owners of private estates can upload so called RAW files now without Linden intervention, which allows very fast terraforming of large regions. It is also possible to download the current RAW file of a sim - and restore the terrain later. This together makes it very easy now to experiment with terraforming.

In a separate but related development Linden Lab opened the new Land Store. Residents can now order their private sims at a simple online shop, pay for them and have them delivered without much interaction with human support personnel. The signal sent into the community is clear: Linden Lab is gearing up its production lines for fast and efficient delivery of many private sims.

It is still too early to judge how the new functionalities will effect the land business - especially the rental market - but I am sure there will be an effect and we will see some interesting new price models and increased activity in this market.

Philip Linden: "Inflation is good for you!"
Last week Philip Linden was making one of his rare posts at the forums again. This time it was an answer to a question about the often mentioned "target rate" of 250 L$/USD. Philip described that this is all a great misunderstanding and that Linden Lab never pursued such a target rate. He considers the current developments with the exchange rate as nothing to worry about much - but admitted that in the medium to long term the money influx to Second Life would need to be reduced.

Philip defended the current policy of not intervening in the market vehemently, though. It is obviously the current attitude at Linden Lab that the flow of new money into the economy is in-synch with the current growth of the SL society. I am not sure of this personally. I don't have the data to disprove this assumption, but it is hard to believe, that the constant decline of the L$ is founded in purely psychological problems and not in a fundamental imbalance between supply and demand.

What worried me most with Philip's reply was his open invitation to convert L$ devaluation at the LindeX to inworld inflation:

Originally Posted by Philip Linden
The absolute rate (250:1, or 275:1, or 300:1, etc) isn't really that important, because if it changes slowly, folks can just reprice goods and services as desired to match their prices to a desired 'real-world' value.
If residents would do this, we really would see runaway inflation (20% in 6 month, 10% in the last 40 days). I find this a very interesting suggestion to be brought forward by the head of a (virtual) country.

News from the waterfront (market)
It is still unclear to me if Anshe's attempt to corner the market for waterfront land in SL is successful or not. (More on that topic here.) Prices for waterfront land are still extremely high - but falling. Some parcels can now be had for around 12 - 13 L$ per sqm. This is still a lot but please take into account that the lowest prices immediately after Anshe's move were around 15L$ per sqm (and up) for fresh waterfront! This land is moving very slowly, though. Most of the larger parcels which are for sale are simple sitting there for a month and more now. This is no problem for Anshe, who bought this land at price levels that will allow her a profit even it she has to hold the land for 6 months or more.

The little land barons which bought waterfront sims at the auctions after the price raise can't be that patient, though. They paid much higher prices for the land. Looking at the prices fetched at the auctions I estimate that they must sell after two or max. three month or tier costs will cause a loss for them. This will be interesting to watch.

At the other side of the land market, prices are falling! Plain flat, green, mature land now can be bought for 5.5 L$ per sqm or less! At auction prices of 1,000 USD to 1,100 USD for one of these sims it is nearly impossible to make a profit here.

On the other hand: good times for land buyers. Especially when you take into account the lower price of the L$ (when buying them at the LindeX), it's been a long, long time (if ever) since you could buy fresh, flat, mature land cheaper than this.

These developments are interesting not only to those involved in the land business, though. The land market influences the SL economy in many ways. Anshe and the little land barons are the biggest sellers on the LindeX for example. Anshe alone has to convert more than a million L$ to USD nearly every day. This "pressure to sell" might well be one the most important reasons for the decline of the L$. Selling L$ is no voluntary decision for those involved in the land business: a land baron has to sell L$ at a high rate to finance the acquisition of fresh sims at the auctions. This is not malice or ruthlessness like some commentators on the forums judged it. It is simply the way this kind of business works: Linden Lab only sells you whole sims for USD, your customers only pay you in L$; so you have to convert on a regular basis.

Interesting enough, it are the land barons which suffer most from the decline of the L$. If you win a sim at the auctions, cut it into parcels, calculate the prices so that you make a 10% profit ... and then the L$ drops 10% in value ... a nice deal might become a bad one in a matter of weeks. So it is not a huge surprise if the biggest land baron of the all thinks about a more stable currency.

Anshe's "threat" of a New Currency, the A$
On Thursday, 30th of March Anshe proposed a new currency for Second Life, the Anshe Dollar, or A$ for short. This would be a currency created by the Chinese company Anshechung Studios Ltd. and would be backed by "Silver Euros" according to her announcement. The idea is to have a web platform like the LindeX where you buy and sell the new currency and some scripts with which you can integrate them into inworld transactions with vendors and RentOMats.

Many commentators on the forums - even her competitors - welcomed the idea with open arms. I bet it were mostly those, who are suffering from the decline of the L$, too. Any idea that promises a stable currency must seem like a revelation to this target group. And the offer was cleverly phrased: "Silver Euros" suggests a kind of inherent stability which no modern currency (none of which is backed by precious metals anymore) can offer; at least on the emotional level.

Little sidenote: as a citizen of Germany, where the EUR is official currency for a few years now, I know of no "Silver Euro" besides some collectors coins. And actually it does not matter much in these times if a currency is backed by precious metals (prices of which fluctuate wildly sometimes).

More important is the long term stability, the policies and the oversight for the institution issuing a currency. And while Anshechung Studios Ltd. admittedly is probably the biggest RL institution behind any inworld group, this company is a far cry from any RL banking institution. And to look at this relatively small company as offering more stability than the (financially) much larger Linden Lab seems more than wishful thinking of those suffering from the decline of the L$ to me.

Given the inherent instability and sometimes insecurity of some of the LSL functionalities which would have to be used to integrate the A$ as a currency for inworld transactions into vendors and RentOMats, I would not like to trust such a system with large payments personally. Second Life has many bugs but the internal payment functions for L$ have never been buggy and never have been cracked so far - not for lack of trying, I am sure.

The legal side might become interesting, too. Creating a "currency" (with "real value" behind it) is nothing most governments in the world would allow their citizens to do. Even if it would be named not a "currency", the A$ might be seen as a security. Issuing a security is strongly regulated in most jurisdictions of the world. I doubt if Anshe and Guni would like the level of government control that comes with that.

But who knows what Anshe's true goals with this suggestion were. Maybe it was just an attempt to put some pressure on the Lindens "to do something" about the L$. Maybe it is a first step for a kind of Dreamland Currency.

On the other hand a success of this proposal would strengthen Anshechung Studios Ltd. significantly. The monthly influx of fresh L$ into the SL economy has reached a volume of about 200,000 USD. If Anshe could capture just 10% of this volume this would mean she would have to put "Silver Euros" worth 20,000 USD into some vault every month. Admitted, this is no money, she and Guni would be allowed to "use" (there would have to be some trusted institution to make sure they would not do this ...) But after half a year they would have a nice cushion of 100,000 USD or more in the vault which would make their company a much more credible debtor with a bank or any partner in a financial transaction; which would surely be a nice side effect for this business.

The side effects for SL might not be so nice: transferring a significant part of the SL economy (and the whole land business constitutes a fairly big chunk of this economy) away from the L$ into a new A$-based economy would make the L$ weaker and probably even more volatile. I seriously doubt if a segmentation of the SL economy with two - and maybe more ??? - currencies this would be in the best interest of most other participants in this economy and Linden Lab itself.

Anshe Chung suspended from SL
Some residents assumed that this might be the reason for the suspension of the "Anshe Chung" account which she announced on the 31st of March on the forums - which lead to an ugly debate nearly instantly. Could this really be a kind if Linden Lab revenge?

I seriously doubt that. "Billing problems" leading to the temporary suspension of an account are not uncommon in SL (I got such a warning myself last autumn). To use this as a kind of muscle play would be very unprofessional from Linden Lab and really not "the style" of this company's dealings from my experience. And it is hard for any customer to get customer service from Linden Lab outside business hours on the US west coast.

On the other hand: Guni assured me personally that instead of the usual 7 day "probation period" that any resident gets after a billing attempt fails, "Anshe Chung" only got less than 48 hours warning before the account was suspended.

What this event shows, in any case, is how volatile business relationships between Linden Lab and its resident partners in SL can be. I can't help but doubt that the current way of doing business with the larger "companies" in SL can stay like it is. I am sure that there will be RL agreements between RL companies (one side being Linden Lab) this year. Just the TOS alone is a very weak foundation for doing business with SL. It puts you as the "resident" in a rather unfavorable position. Such a position might be considered OK as long as you are doing some freelance work in SL but I would consider it downright irresponsible to base a real company with real employees on such a relationship with nearly all of the power just on one side (Linden Labs).

This does not mean that I mistrust Linden Lab. It is just very risky to base a relationship which means life or death to your company on trust alone.

p.s.: Please forgive me for writing this much about Anshe, dear readers. This does not mean that I am a "fan" of Second Lifes most prominent business girl - you have to acknowledge her business skills and entrepreneurial spirit, though. It is simply impossible to analyze the SL economy without mentioning her a lot.

(as the comment functionality had to be disabled, I add some comments of readers which I have received via email/IM):

Elde Epony writes:
I can't speak to other countries; but in the US (with some minor
restrictions) it's quite legal to do so. Google on "community
currency" for more information.

Prokofy Neva writes:
Pham, once again, your otherwise good economic analysis is marred by your socialist ideology and memes -- there's not going to be any "run-away" inflation if people like me start raising prices -- which we're doing! -- because most people DO NOT esp content creators -- and even I or other agents are limited by the $50 and $500 stipend demarcation for what the average person is willing to spend on an average thing -- until that ends, prices are capped too to match that.

What's most hilarious though is your stomping on Anshe over her currency, and silence about the Lindens *doing the exact same thing* with releasing THEIR currency. Gosh, what a double standard!!!!!

The Anshe is a game currency, like the Linden is a game currency, your hatred of Americans/Capitalism/Immigrants, whatever, hard to say, all or some of the above is blinding you to this -- if Lindens or WoW can make a game currency, so can Anshe.

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