Second Life: Serious business

Fortunes are being made and squandered in a virtual world that has al the trapping – and traps – of the real world. Are there opportuniies for entrepreneurs in Second Life? And are there very real risks? By JACQUI WALKER.

By Jacqui Walker

Millions of real dollars are changing hands every week in Second Life. Entrepreneurs are moving into the virtual word, developing property and setting up businesses to make money in-world and out. Big companies have gone in to chase audiences for their ads and technology and entertainment companies are using it to explore the new technologies.

But the hype has created a wild west out there, and the big question is: How stable is this virtual economy? And who stands to lose if it goes bust?

Second Life is an economy that is growing faster than China or India, albeit from a smaller base. Two years ago it attracted 50 or 60 visitors at a time, now there are almost five million people with a Second Life persona – or avatar – and you will find about 20,000 to 30,000 people in Second Life at any moment.

About $US1.64 million changed hands in the virtual world yesterday. Its potential market is huge; anyone with a broadband connection is welcome.

So how does it work? Simply download the software, choose your name, and in a few clicks you can enter the virtual world that is generating so much excitement among gamers and technology entrepreneurs.

It is a 3D computer game without an object. Like real life, players define their own goals. Second Life allows them a new name, look and personality. They can go to concerts, walks, talk to their friends, dance in clubs, drive around and even have sex in a computer-generated world.

But what has caused the greatest excitement about Second Life is that in this virtual world, your avatar can make money. The creator of Second Life, Linden Lab – a San Francisco-based software company – took the world a step further than anyone else when it gave the players the right to own the property they create in Second Life.

And Linden Lab created a mechanism for players to trade their wealth (known as Linden dollars) into real world greenbacks. It is called the LindeX, and about 268 Linden dollars buys $US1. (Want a look? Visit the LindeX at www.secondlife.com.)

Right now, there is a property boom going on in Second Life, and it has encouraged a large number of speculators into the market. SmartCompany’s new Second Life blogger Wiz Nordberg, pictured above (real name: Gary Wisniewski) bought land in Second Life in November last year for 35,000 Lindens. Less than five months later he reckons he could get 140,000 Lindens for it. That would be a 400% return.

Wisniewski is not interested in selling his property, but he is doing a lot of business in Second Life. He, like many others, is using Second Life to network with powerful people in the entertainment, communications and technology world. He has run music events “in-world” promoting Australian artists and backed by Austrade, and done deals that have resulted in contracts for his real world ICT business (read Wiz’s blog for more).

In January, entrepreneur.com reported that virtual real estate developer Anshe Chung was the first person to make $US1 million in Second Life. The magazine also featured entrepreneur Peter Lokke who, with his business partner (whom he met in SL), creates online clothing. He’s about to quit his real job – as a supermarket manager – to be his avatar Crucial Armitage full-time – because he’s making more than enough to live on.

Countless similar stories abound – there is an Australian entrepreneur who invented a game for avatars to play in SL, called Tringo, that was so popular that Nintendo bought the rights to make a version of the game for video players and mobile phones in real life. Another young enterprising Australian was reported by ABC TV’s 4 Corners program as creating the “in-world” World Stock Exchange.

It’s not just enterprising individuals who are in Second Life. Big American and Australian companies are there, too. Cisco and Scion are setting up virtual areas for their products. Dell, Sun Microsystems and IBM all have headquarters (yes, it just looks like a computer-generated building). IBM employees attend conferences and forums in Second Life incognito. The CEO could be sitting next to a new graduate at the board table.

Toyota has a virtual city where you can test drive its cars. Coke has put on music concerts, and Gloria Estefan released her last single in Second Life. Technology entrepreneur Brendan McKeegan says Second Life provides a captive market for advertisers. “It’s an extension of product placement in games.”

Telstra’s BigPond is building an in-world facility for players to buy music and watch movies – with a bar serving Victoria Bitter, and the ABC has created an island. Reuters has set up a Second Life bureau – the bureau chief is an avatar – Adam Reuters. He covers everything that happens, including Linden currency movements.

But how stable is this virtual economy? Second Life property is not real dirt. It is binary code on Linden Lab’s servers. Associate professor and director of graduate studies in the Department of Telecommunications at Indiana University, Ted Castronova, is one of the first people to study the Second Life economy. He has pointed out that its value is not based on fundamentals. And unlike real-world money, Second Life’s Linden dollars are not supported by institutions and laws.

Second Life’s creator has made intellectual property and real property rights in Second Life, but there are no police, courts or government to enforce them. (Although, there are two private IP law firms in operation in-world to advise you.)

Gary Wisniewski says Linden Lab uses technology to enforce its rules – kicking out people not behaving. He has confidence in the company to do the right thing. “The greater risk is for Linden Lab,” he says. “They have a lot of invested in making it a stable economy.” On the other hand, he acknowledges the risks are greater than those in the real world. “We investors are quite aware that Linden Lab is a good acquisition target. All the investors know they are pinning a lot on this one company.”

Linden Lab is backed by Benchmark Capital and Amazon.com CEO Jeff Bezos. It raised $11 million in a second round of private fund raising a year ago.

There is also a risk that transactions in Second Life will soon attract United States taxes and the normal regulatory burden of the real world. Indiana University’s Castronova says this could spell the end of the current money-making spree because it could cripple the economy. And the fact remains, a crisis in confidence or a mass sell off of Linden dollars could be disastrous for investors in Second Life.

There have already been questions about the ability of players to realise their in-world wealth and some nervousness in the market. On March 19, Adam Reuters reported that Shaun Altman, a developer brought in through a merger to revive SL’s World Stock Exchange in February (after it had stopped trading due to software problems), is stepping down from his day-to-day role and selling nearly one-third of his stake in its parent company.

The reasons he gave to Second Life were: “I have to sell equity to mitigate risk. My position is huge, if your overall exposure in World Stock Exchange were 110 million Lindens [about $400,000] wouldn’t you take off a third of that, too?” His sell order was staggered between 5 Lindens and 9 Lindens to “offer a good price in exchange for the liquidity needed on an order of this size”. Altman has declined to disclose his real-world identity.

Second Life is experiencing the real-world equivalent of political strife as well. In early March the headquarters of the Second Life Liberation Army, (SLLA), a group that has launched a virtual bombing campaign to draw attention to its call for more in-world democracy, was attacked by vandals who planted swastika flags around the property.

This sort of misbehaviour has to raise questions for big companies about reputation risk in Second Life. It may seem relatively harmless, but it could be embarrassing. Last year vandals threw images of flying phalluses into a forum attended by Anshe Chung, forcing her to abandon the event.

Gary Wisniewski believes whether a Second Life crash would be a disaster depends on what you are doing in Second Life. “For some it’s a money game. But it also attracts people into fantasy, and technology people interested in the marketing and community potential.” For the latter he says the investment is more about education. “Any company specialising in multimedia technology and reliant on technology for getting out an entertainment message has to understand it. It’s significant.”

There is a good chance that if Second Life fell over, another virtual world, enabling 3D instantaneous communication between players, would rise up to take its place. There are already other technology companies with similar technology such as www.there.com and others are working on it: “Outback Online” is an attempt to create a peer-to-peer version of Second Life. But like YouTube, Second Life has got there first, and it may be enough to keep it there.

There is a lot of hype about how you can make money in Second Life. Much of it is encouraged by the creator of Second Life, Linden Lab itself. Its website includes a list of Second Life business ideas. These include: party and wedding planner; pet manufacturer, tattooist, automotive manufacturer, fashion designer, architect, XML coder, tour guide, publicist and real estate speculator.

But be warned. First, you’ll need a fast broadband connection to make Second Life work. Second, you just might get addicted. Wisniewski spends a few hours every night in Second Life for fun; when he’s got a deal happening, he can be in there 10 to 12 hours a day. And third, if it fails, you could lose your money – and waste your time.