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Is Land Sinking? Linden Lab Holds An Unusual Sale

korman-avril
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Last Friday, Linden Lab announced a most unusual event - a weekend land sale during which the setup fees for private regions would be waived. As someone in business within SL I am aware that drastic sales of this nature are usually the result of only two things- a need for immediate, short term cash, or panic. Sometimes both, as when the need for immediate short term cash for a particular purpose causes panic. But before I get ahead of myself, let's break all the pieces down and analyze them.

The Time Before: How We Got Here

Understand that as much as I bang on about virtual commerce, that is not the primary way Linden Lab makes money from Second Life. The primary way has always been through the sale of virtual land. To those not involved in virtual worlds, this might cause a bit of a head tilt. The thought of making money through an oxymoron such as "virtual land" seems ridiculous. But they have, and in the hundreds of millions of dollars. Everything you see in a virtual world exists on virtual land, and that land, whether purchased or rented goes at a RL price. In the case of Second Life there are two kinds of land- mainland and estate land, each with their own pros and cons.

Mainland is less expensive to own than estate land. At a full region, it costs $195USD to own. You can see the mainland rates in their entirety here. If you own mainland, it doesn't necessarily have to be contiguous. You can own a few parcels here, and a few there, all of them adding up to a region's worth or more. You can then, if you like, use them yourself or rent them out to other people, setting yourself up in business in that fashion. However, mainland ownership does not give you full control over those regions. Because mainland itself is a very large, generally contiguous land mass, there needs to be a certain amount of continuity, as a lot of it is designated for public use via roads, rails and waterways. So you, as an owner, have a limited set of controls over what happens on it. For everything else, you have to go to Linden Lab as the ultimate landlord of mainland property. It's the tradeoff for it being less expensive- you have fewer tools at your command, and you have to deal with the Lab for things like sim resets and other meta issues (for which you may or may not get anything resembling a timely response). The Lab is not always the best landlord (and by that you may decide that's a wonderful understatement). But some people really like the communal chaos of mainland- it can be, in its own bizarre way, a bit like an ongoing piece of performance art, as Swiss style chalets wind up with giant neon rotating signs as next door neighbors. You never know what you will run into next. However, for folks who don't find that particular brand of chaos amusing, there's estate land.

Estate land, also known as a private region, costs more than mainland, and to actually own it directly from the Lab, you have to either buy it from them directly with a $1000USD setup fee, or buy it second hand, which waives the setup fee, but costs in terms of a fee to the previous owner, another $150 to move the region to wherever you want it moved, and another $150 to rename it to whatever you want that's not already in use. The monthly cost for a full private region is $295USD. For the extra 100 dollars over the same size land on mainland, estate land owners get full control over their regions, and do not need to involve the Lab for things like restarting and debugging their sims. There are a handful of people who own large numbers of estate regions and are in business renting them to other people at a profit. This, in fact is how the first SL Millionaire (that's millionaire in RL money) Anshe Chung made her money. Virtual land is not only big business, it's HUGE business. You can see both mainland and estate land in this photo. Which is which is easy to spot. Estate regions in a checkerboard pattern are often owned by the same person- they're in that array to maximize waterfront property, which tends to rent or sell at a higher rate than spots which are landlocked.

The Secoond Life Grid

But in the past several years, as the economy has gone more and more sour, the monthly price of virtual land in Second Life has not dropped. What's more, what you get for that price has not increased. It has remained stock still, even as the cost of the technology to provide it has dropped rapidly. Aside from people noticing that small problem, current economic conditions alone, both in RL and SL, have caused many people to abandon their virtual land. So much so that, long before this past weekend, there was a huge glut of unused land already extant. Many private regions are only partially being used, but where you really see the rate of land abandonment is on the mainland- because it's neatly color coded. Have a look. The areas with price tags are currently available (this is all that would fit on my monitor- if I move the land view the percentage of results is consistent).

The Secoond Life Grid for Sale

The Present: Last Week's Land Sale

The glut of land is not solely caused by RL economic conditions alone. Part of it has to do with the active push Linden Lab has made towards their ownSecond Life Marketplace, a frequent topic of this very column. Because the Lab makes a small commission on each item sold on Marketplace, they have been pushing it very hard over the past year as a convenient alternative to inworld shopping (on which they make no direct cut). However, this has a rather nasty side effect- the more people who shop on marketplace and not inworld, the less reason a merchant has to maintain the cost of an inworld store. At a certain point, it simply becomes more cost effective to go "Marketplace only" and not bother with an inworld location at all. Even though the Lab makes a small cut on each sale, it still costs significantly less to do this than to maintain inworld locations. As such, more and more merchants have chosen to go this route with the upshot being that they are using less and less land- which again, is the primary source of Linden Lab's income.

Now, one might think that would free up the land previously used for stores to being used for other cool projects. But other than residential land, that's just not what happens. Because there is no active subsidy for artistic or other socially related ventures (not money making) in Second Life, these kinds of things often simply become unsustainable, as donations alone will not make up the cost of tier (land fees) to the Lab. Again, as I mentioned previously, even though the cost of providing the land has gone way down, the fees and what you get for them have remained stock still. So there is no incentive toward these types of projects unless one is very, very dedicated. In truth, it was/is the merchant community who propped up the rest of it- but the push towards marketplace has decimated that business model, generally speaking.

What the Lab did last week was waive the $1000 USD setup fee for a private region as an incentive toward folks buying new land. They were trying to cash in on the subset of folks who *would* buy a private region, but the initial bar of setup fees was too great. When one buys a private region secondhand, it often is being sold very close to the tier date- so you wind up with paying roughly the same anyway, though the first month is then absorbed by the cost. This is a lot to swallow at once, and is often an effective barrier against private region ownership.

However, waiving this $1000 USD fee does more than simply encourage more land purchase in a short span of time. It shows everyone that the fee is really basically bogus anyway- which is something quite a number of people had already figured out. With the sheer volume of abandoned/unused land, the Lab is sitting with servers that are not being fully used. There really is no "setup fee" to be had. All they have to do is fire up a sim on a server they have already running. Basically, that $1000USD fee is almost entirely pure profit.

It also causes what I will refer to as a "sale culture". People will simply hold off buying a region in the future unless it goes on sale once again. This particular phenomenon has occurred infinitely within Second Life with any business that is known for having sales. People will only shop when they know there's a sale of some kind happening. As a short term cash boost, it works. But it comes at a long term cost, measured in the Pavlovian response it engenders.

It also affects the land barons already in business. These people are a significant part of the SL economy. This sale throws more land into an already glutted market, dropping its value and causing even more regions to be dropped or sold off at bargain basement rates.

The total statistical results of the sale can be found here, as compiled by Tyche Shepherd, as she does weekly to determine the ups and downs of the land market in Second Life. In total, it shows a net gain of 508 new regions since Friday to the Monday following the sale. But in reading further, you see that some larger estate owners wound up dropping some of their land as the land glut simply became unsustainable. Also, any homestead or openspace regions bought during the sale were bought by previously existing landowners, as you cannot buy a homestead or openspace region unless you already own a full one.

The Future: More Trouble Ahead?

Though the sale is now over(at least this one, anyway), the consequences of it are far reaching. There are two primary issues which concern me. One, is why the Lab did this at all, particularly while doing nothing about the already existing glut of land? Huge portions of mainland are already abandoned. Though some folks will never be the mainland type (I lived on mainland for a year and then never went back- I count myself among them) - mainland is a huge source of income, paid directly to the Lab. The fact that so much of it is abandoned is problematic, particularly as there is no way to consolidate it without causing significant problems.

Again, this type of sale raises short term cash, but generally has a long term cost. So either there's a large project that needed a cash boost to get rolling (possible), the Lab went into a panic over land revenue (also possible), or the Lab really doesn't see how this may very well come back to bite them in the ass later (sadly, perhaps the most possible of all).

The last thing I mentioned is perhaps the most likely outcome. I say this, because of something I said way at the beginning- that the ongoing cost of owning a private region still has not changed, nor has what you get for your $295USD monthly fee. Though that 1k barrier to ownership is surely a nice chunk of change, the real cost isn't that- it's that ongoing monthly tier fee of $295USD, particularly when you cannot make the region self sustaining. Because of this, I fully expect to see a significant chunk of the regions sold in the sale to wind up going right back to nothing within six months.

The Overall Issue

The big problems here that exist will not be solved by a short term land sale. In fact, they may only have exacerbated the problem. The model for how the Lab earns their income has been damaged in many ways- but primarily by the Lab themselves, as the costs of regions have remained stable, even as the cost of the technology to provide them has dropped, all during an ever more miserable economic climate. The sale may have also damaged the businesses of some of the SL land barons, who provide the backbone of the economy (with merchants coming in right after them.) Pulling the rug out from under them in an already glutted market may have unforeseen negative consequences.

My concern is that those spanking new land owners will soon learn that it's not the setup fee that's really the drain- that it's the ongoing cost of monthly tier, and find themselves scrambling to try to cover it at a time when merchants are being ever encouraged through economic reality to go marketplace only. The ripples of this sale will be going on for quite some time. I'd say roughly six months to see how things shake out. I wish I could say that I think that overall this will have been a positive gain- but to be honest, I think that it may be a gigantic overall disaster.


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