SecondLife: Revolutionary Virtual Market or Ponzi Scheme?

[Comments reopened.  Deutsche Bemerkungen begrüßt.]

Follow up article on the Linden dollar is here.

In 2005 I began working as a venture consultant for some entrepreneurs and investors trying to develop a fairly ambitious “real-money-trading” (RMT) business idea. My work resulted in my collection of a large amount of RMT market data for most of the popular massively multiplayer games and virtual worlds. Although the new venture was never pursued due to my analysis of the true RMT market, one game caught our particular interest: SecondLife, operated by Linden Research Inc. (privately held, San Francisco CA).

Unlike the makers of nearly all other online games, the operators of SecondLife not only allow and encourage the exchange of game currency for real money, but they actually facilitate it. As early as 2005 I began noticing a rumbling in interest-focused blogs about the exploding market that was SecondLife. Touted as a pioneering future Metaverse on the industry’s most informed blog, TerraNova, an array of journalists, academics, and company executives have claimed that SecondLife boasts an economy complete with in-game banks, multiple currency exchanges, a floating currency exchange rate, and a burgeoning in-game commerce and business base.

The Virtual Economy

Although many people were introduced to the idea that commerce and trade within virtual reality worlds could represent real world money profits by BusinessWeek’s cover story on infamous SecondLife resident and self described “Land Baroness”, Anshe Chung, industry followers had long realized the potential of RMT. Shanda Entertainment (SNDA), operator of the most popular and successful games in Asia, for example, had committed to a strategy of harvesting RMT profits long before Linden Research set up shop. Nonetheless, financial publications such as The Economist and The Financial Times began catching on, running articles about RMT – often citing SecondLife as the phenomenon’s leading model. One Financial Times article, referencing a university professor who makes his career by studying “virtual economies”, suggested the size of the total RMT market was $1bn USD in 2005, and would grow to over $7bn USD by 2009.

And SecondLife was at the forefront of where money was being made. Or, so one would rationally conclude from the buzz. When BenchMark Capital backs a company like Linden Research, it’s safe to assume otherwise smart investors are expecting huge potential market payoffs.

The idea of SecondLife’s economy is simple. It’s just like a real world economy, except it takes place entirely within the company operated game servers. Customers from around the world connect with a sort of super-browser, which renders complex graphics, video, stereo music and other useful utilities not unlike a web browser. But the difference is that SecondLife is a virtual world. More like a Hollywood representation of the web than today’s mundane reality. Customers take on avatars which represent their presence in the virtual world. 

As these avatars interact, commerce is conducted. One starts SecondLife with some fairly mundane clothing, for example. Upon entered the world, a new customer is immediately assaulted with a variety of clothes, jewelry, shoes, hair styles; and that’s only the tip of the iceberg. But nothing is free, not even in virtual reality. New customers are allocated a few “Lindens” or L$ (SLL being the standard trade abbreviation). Most new customers quickly blow through these starter L$ as they dress up their avatars. 

New L$ are distributed to customers as they pump real money into the virtual world. Nearly all customers utilize the game’s built-in “buy money” feature, which allows them to charge their credit card or PayPal account “micropayments”. Micropayments are a popular, proven business model first established in the mobile-phone market. All SecondLife does is extend this concept to a virtual reality game world. 

Multiply all these micropayments among Linden’s claim of millions of customers, tens of thousands of which are online at any given time, and SecondLife supposedly represents a very real economy generating hundreds of thousands of real dollars of commerce, daily.  Linden self reports an astonishing L$314,101,463 were earned in December 2006. That’s $1,163,338 USD of value by Linden’s average “exchange rate” of SLL/USD. But more about exchange rates later.

What are People Buying?

Reading BusinessWeek, or studying Linden’s or various other SecondLife blogs, it appears that the largest business of SecondLife is land speculation. Anshe’s claim to have earned over $1m USD from SecondLife is primarily related to her virtual land brokering business.

Another important source of SecondLife commerce is people “playing dress up” with their avatars. Buying clothes, earrings, new faces, or other more private body parts represents a great deal of the readily visible commerce outside of virtual real estate brokers.

Of course, anyone lingering in the world of SecondLife for more than a passing glance quickly discovers the real engine to the SecondLife economy: sex and gambling. A healthy share of micropayments are pumped into the system as customers engage in pulling the virtual slot lever or patronize one of the myriad virtual sex workers. 

But it’s Still an Economy, Right?

As opportunists and capitalists, we’re not particularly bothered by indications that SecondLife generates most of its economic “wealth” through a rampant virtual real estate bubble which makes San Francisco, Marina District condo look like a bargain. Nor are we particularly bothered that the virtual playground provides a safe harbor for what is effectively the phone-sex industry reinvented. And internet gambling, despite the US Federal Government’s recent protestations to the contrary, is inevitable. So why not profit off of it? And how better, than in a utopian Ayn Rand open market capitalistic metaverse?

Of course, it’s not all that simple. And what’s true of the real world turns out to be true of the virtual world: if it sounds too good to be true… 

The Test

In order to participate in a legitimate economy, there are a few basic prerequisites. SecondLife has the appearance of a virtual “securities and exchange commission”, virtual banks, virtual currency exchanges, and even virtual venture capitalists and REITS.

In July of 2006 we took a look at two in-game banks which allowed SecondLife residents to deposit their L$, and earn interest on the balance. These are private banks, run by other players, not by the game company itself. I discovered that the interest rates being paid by these banks, when calculate by interest-rate-parity against the USD, were mispriced allowing for a whopping 2,786.32% return arbitrage opportunity. Over some months we sunk the better part of $10,000 USD into SecondLife, borrowing from banks, lending to banks, and entering into various types of virtual financial arrangements with virtual businesses.

The first problem we encountered was one of counterparty risk. Put simply, you can seldom trust those with whom you’re doing business in SecondLife. Even supposedly well established, well regarded business citizens are prone to defaulting on any obligations which prove inconvenient. Whole banks will disappear over night, along with your L$ balance. Private businesses will simply refuse to make good on financial contracts. And individuals, pretty much all of whose real world identities are carefully guarded anonymous secrets, sometimes even will openly default, without recourse.

Justifications for default and non performance are usually wrapped in pseudo-libertarian internet political rants, or SecondLife political hyperbole. The simple fact is, if you arbitrage a bank for over 2,000% return because they don’t understand financial engineering, don’t expect to be able to collect come payment time.

But, that doesn’t mean it’s impossible to make L$. In fact, we were able to make quite a few L$ in a very short period of time, despite disingenuous counterparties.

Enter the second problem, the L$ exchange markets are effectively rigged. At any given time over the past year or so, the SLL/USD exchange rate has hovered between about 250 and 300. That is, for every L$300 you earned, you could expect to get $1 USD. Now recall, there are supposedly hundreds of thousands of real dollars being spent daily; over L$250,000,000. Between Linden's official exchange market and the private exchanges, all appearances suggest a large volume of L$ daily exchange trade.

The catch is, however, these headline rates only apply to small amounts. For small time buyers and sellers of L$ -- be they virtual Johns paying up for sexy avatar escorts, or small time digital jewelry makers cashing out a couple hundred real dollars – this works well. Most of these people will use Linden’s official LindeX exchange, anyway. LindeX is actually not a virtual currency exchange market so much as it is an open auction, anyway. This means LindeX is not particularly useful for big trades.

The private exchanges, however, are owned by the businesses which sit at the top of the SecondLife economic pyramid. The “Virtual Land Baroness” owns the largest such exchange. So it is not surprising that our attempts to trade our L$ for $ USD were met with confiscatory market reflectivity. Or, put simply, every time we attempted to transact more than a couple hundred dollars, the SLL/USD rate would spike to levels approaching or even greater than 500. Example: mid July 2006 SLL/USD was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade L$650,000 resulted in settlement bids of 350-450. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.

The Ponzi Scheme Epiphany

As we scratched our heads trying to figure out if there weren’t a more clever way of disguising our trades, or perhaps creating our own in-game banks and exchanges in order to arbitrage the other direction, it suddenly dawned upon me.

This game was just a pyramid scheme.

SecondLife is not a dramatic taste of our future, in which markets are virtual, currency is free from government control, taxes are non-existent, and normal people can become real millionaires simply by clicking their mouse a few times.

SecondLife isn’t even a simple virtual economy, with legitimate buying and selling, and opportunity for those who would compete.

No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate SecondLife customers who just like to go there to get their kicks, spend a couple dollars, and be on their way.

But, the buzz isn’t that Joe Sixpack can sit at his computer and gamble a little before bed with a smashingly attractive avatar. The buzz is that Anshe and others are making real millions. And a short visit to the world of SecondLife will reveal the frighteningly large portion of residents who “know someone who makes his or her living” doing something in SecondLife. Just the other night I had an interesting conversation with someone claiming to be a single mom of three, who spends her days turning virtual tricks and arranging for E-Bay payments through SecondLife L$. She didn’t seem to have any idea why her mysterious benefactor would pay her a commission to simply arrange PayPal transfers. More cynically intelligent readers will immediately recognize these transactions for what they are.

Again, the fact that tax evasion, organized crime and money laundering exist in the virtual world doesn’t distress me all that much; these things exist in the real world, and have for a pretty long time. The distressing part is what this single mom said later; the same thing one will hear over and over from SecondLife residents: she was just doing the cybersex and E-Bay stuff to fund her virtual jewelry store. She was a jewelry designer, and had already opened a little shop in a virtual mall. And, to her amazement, she’d already made over L$50,000 after only a month (about $185 USD). I didn’t bother to point out that she hadn’t counted her expenses for renting her virtual shop or accounted for taxes, let alone the fact that she was earning less than 1/100^th of what she could get just flipping burgers in the real world. [This statement was an error.  I should have said "let alone the fact that she was earning much less than she could get..."]

SadLife

And that’s the story of SecondLife. Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.

Even some corporations have dedicated marketing budgets to creating a presence in SecondLife. While few will shed a tear for the frivolousness of these companies’ spending, such adds a false legitimacy to SecondLife. Interestingly, no legitimate, real world corporation has earned net profit from SecondLife activities.

That’s because there are but a very tiny handful that profit off of the SecondLife economy. A handful of casino owners, large scale virtual land flippers, and brothel owners are responsible for nearly all of the real money extracted from the game. And they continue to attract new recruits to the bottom of the pyramid.

After all, Anshe Chung herself started out as a virtual whore, so you too can become a SecondLife millionaire, right? [I apologize to Anshe for what was a very poorly considered statement.  I deeply regret any ill will it has caused.  Please consider it retracted.  I also thank Prokofy for enlightening me to some of the bitter realities experienced by those on top of Second Life's economic order.]

---

Read the ValleyWag version of this article.

---

Retractions and Corrections:

Acknowledging an error in my original article: A “burger flipper” does not earn 100 times more than a Second Life income earner, at least not as I intended express. I double dipped on my analogy and merely meant to demonstrate that a “burger flipper” earns significantly more than a similarly skilled Second Life income earner.

When I typed “market reflectivity” I meant to type “market reflexivity”. I am sorry for any problems this caused in those seeking definitions.

Comments

[SVG]

It’s about time someone exposes SL for the “pyramid scam” it is. But it’s more than just that. SL has a dark underbelly that is disturbing to understand, let alone enter.

My time in the SL universe allowed me a glimpse into the world that would never be allowed in RL (Real Life). After speaking with women (and men) who act as “escorts” (a nice way to call a prostitute), I realized that SL is nothing more than a mafia run world. Masters and Mistresses of sex clubs not only employee and pay workers to have cyber sex with patrons, but they force them into sexual servitude. The workers are forced to have cyber sex with anyone their employers say, including the employers themselves. When one rejects, they simply remove the “problem worker” in order to keep the rest in-line.

Full-time employment within SL is hard to come by. Workers are willing to do anything necessary to get what full-time employment they can so they can cash out below minimum wage. These people are delusional in thinking its better than a real job because they are on a computer game and feel that it is not real work. Some workers enjoy the work and feel they are getting paid for pure enjoyment. Unfortunately others feel forced to do so because of necessity (they begin to rely on the income).

Sooner or later the U.S. Congress will start looking in to the darker side of SL. The flood gate that will open will rip it apart. SL believes they are the web 3.0, a virtual realty web. This might be true. But if it is, someone else will profit off it and fine-tune it to be more acceptable by the masses. SL will become another Napster. It was the first one in, and in being so, will be the first one ripped apart by the government which will be more than happy to win more votes by getting rid of such an internet hazard.

If you don’t believe me, I welcome you to search for specific cultures and groups within SL. They have areas dedicated to rape fantasies, torture, and beyond. They run casino’s that pay no tax, and banks that report to no one. It can’t continue forever. Right now they are enjoying the fact no one is paying attention. Once a major news network looks deeper in to the underside of SL and reports it on their evening news, the damn will break and a flood of lawsuits will follow. But that’s the good scenario. A bad scenario will involve a child under 18 that gets involved in the underside.

Mark my words, SL will either not exist in a year or two, or it will be merely a shell of its former glory.

[Michael Teplitsky]

Although I do believe that people on the bottom of the pyramid have only themselves to blame, it is good to finally see a sober look at this so called "phenomenon".

Thank you.

[Michael Teplitsky]

By the way I completely disagree with the previous poster (SVG). Since SL is a game it can't be said that anyone is forcing anyone into anything. Nobody can be "forced into sexual servitude" because there is no sex involved. What is involved is a glorified chat room with a visual interface. Anyone who feels uncomfortable can disconnect at any time and suffer absolutely no repercussions.

On the other hand those who don’t realize that the amount of money they make in SL is significantly less that what they could make in real life are victims of their own ignorance. Consider this a tax on people who are bad at math.

As far as coming to depend on SL income, we all depend on our income one way or another. If the income is inadequate we look for another place to work for. Nobody is forcing those people to stay in SL. They do it of their own free will. It is their fault alone.

[Doug]

This is all exacerbated by the constant inflow of money (Linden $), which will serve to spur inflation.

There is a similar (but different) phenomenon in World of Warcraft. Although artifacts can be bought and sold outside of WoW for real $ (which hedges some of the liquidity risk), new monsters and treasures (which is the WoW currency) are constantly created, creating an inflationary environment.

Since WoW and Second Life are growing much faster than the U.S. money supply, most treasure/SLL will soon be worthless. An economist did an a more complete analysis of the WoW economy and came to similar conclusions (sorry I don't remember the link).

[_ezaK]

Very good and interesting article. You've made the headlines (slashdot)! I had started playing SL yesterday, to see what it was all about, and I believe I will stop today... I would never have put any real money in the thing anyway.

[Swiss]

The really sadening part is that SL is THE great thing at the World Economic Forum meeting in Davos.

They even have SL presence, avatars, workshops etc.

[Michael Teplitsky]

Doug, World of Warcraft is very different from Second Life. In WoW there is no implication that one could make real money or profit off the game. Those who trade in gold and items (for real money) do so illegally and are routinely banned from the game by Blizzard (the company that operates WoW). In an essence the game is merely about the fun of killing monsters, doing quests and discovering the lore, not about accumulating real wealth.

Since there is no official gold to USD conversion in WoW, and no real ties between the virtual and a real economy, I think that there can be no valid comparison between WoW and SL.

On the topic of government meddling I firmly believe that no government has any business telling people how to play their games. Nobody should have to pay real taxes when they buy a new pair of shoes in the game. The next step would be taxing the paper and pen role-players for the treasure they discover and further down the road taxing people’s dreams.

[Ecocandle Riel]

Mr. Harrison,
In your piece you describe the troubles you had with converting 650,000 L into US dollars. I have traded on the exchange, though admittedly not in that quantity, but I was curious if you sold at "market" or you placed "Sell" orders at a specific price. I have had good luck with placing a "Sell" order at (as an example) 269 Lindens. Often there is 8 - 10 Million lindens waiting to be sold at that price, and sometimes it takes several days for the order to fill. If, however, I had placed my sell order at the market, I would expect to get a much less favorable price.

You also mention the woman who is building a jewelery busines, and making less than she could at a burger joint. This is the case with many business owners to be sure, but there are many, especially in the clothing business that started out making very little and have substantial incomes after becoming established. An example that comes to mind is of one of the top fashion designers in SL. In April of 2006, I read how she was making (annualized) 15 - 20K USD. This was better than her RL job. In August, at the convention, I learned the same person, working the same 50+ hours a week, designing clothing in Photoshop, was now earning 40 - 50K USD. The increase in quantity of residents had increased her sales, even though she didn't change the time she spent on the work. This same person, 5 weeks ago was now making $3000 USD per week. This is not the only example. Another, much smaller designer I know, was earning $36,000 (annualized) 5 weeks ago. Last week he was earning $47,000 USD (Annualized). A 3rd friend who sold her first outfit 8 weeks ago, is up to 10K per year. It takes a long while to build a following, but it can be done. I do not know if your jewelery friend can hope to see similar sales, as jewelery doesn't do as well as clothing, but she can expect to have her business grow, and likely to the point that it is better than flipping burgers.

I myself have just started Riel Life Productions, a company devoted to helping RL companies establish a presence in SL. I have just landed my first major contract, and I am paying 7 people in excess of $25 USD per hour to complete the build. This is perhaps a better example of the opportunities for content creators of all types. People who can build and do photoshop textures, and have experience in SL command $15 - 30 USD per hour from any of the major production companies (The Electric Sheep, River Runs Red, Aimee Weber, and Millions of Us). Machinima creators are earning $30 -50 USD per hour doing corporate machinima videos in SL. Top quality scripters are getting $35 USD per hour. This is where the opportunity will lie for many people who discover SL.

I think the points you make are valid, based upon your experiences in SL. I only make my points, as I have had a completely different experience in SL, and will be making my living through this new medium.

In closing, I will offer one argument on your side. One can find little pyramids laying around SL. If you click on them, you are given the opportunity to join a pyramid scheme. They aren't shy about it. I have not tried them, but you might find it interesting in your continued research.

Thanks,

Ecocandle Riel
CEO Riel Life Productions

p.s. Go Bucks!

[mteather]

Very interesting, but I'm not sure I agree with the pyramid comparison. Convincing people to work for as little compensation as possible to produce products and services that make the owners much more money is not a pyramid scheme, it is the basic concept of business: buy low, sell high.

Perhaps I'm missing something, but the pyramid schemes I remember had no resulting product or service. At least in Second Life there are products and services that consumers value enough to pay for. The fact that the products and services are virtual doesn't make any difference. As long as there is supply and demand there is an economy.

The concept of money and exchange rates doesn't concern me either, because as soon as we left the gold standard our money has become a concept subject to supply and demand. When you attempt to change a large amount of money, of course it will impact the exchange rate (in a very small economy). This happens in any econonmy.

[randolfe_]

Thanks everyone for the comments. Responding to some of the criticisms from slashdot and ValleyWag:

* There's no pyramid scheme, just a simple lack of liquidity.

It is very true there is a basic lack of liquidity, this is not particularly difficult to figure out. The problem is that liquidity constraints don’t evenly apply to market participants. If you have lots of L$ to sell, and you run the exchange, then you can get a preferential exchange rate.

This does not constitute a “free floating exchange rate”, as is touted. Even if you factor in Linden Research’s “currency manipulation” (the rates are effectively pegged for small volume trades), the fact still remains that getting real money out of the game is a privilege reserved for those at the top.

* It’s not a pyramid scheme, it’s a “developing economy”.

SecondLife fails many attributes prescribed by Beim & Calomiris (Emerging Financial Markets (c)2001), which would render such a comparison valid. Financial intermediation, role of government, legal foundations, information and control issues… But we keep reading over and over from academics and journalists about “The Second Life Economy”. In reality, there are so many fundamental prerequisites necessary to claim any type of economy before reaching the “Inflation and Currency Stability” phase, that all I can do is refer to a text book.

* Real companies _are_ making money in SecondLife.

All the examples of this I read on Slashdot referred to real-world businesses, charging real-money for services rendered in the virtual world. These surely exist, and are probably even profitable (although that enters into deeper questions about sustainability of future cash flows, etc.).

But this is more akin to a web design shop doing early Napster’s web pages. Sell the picks and shovels if you can; I’m all for it. Just be sure to only accept payments in real money.

* You aren’t a real Capitalist/Libertarian/Free-Marketer.

Nothing in my article was meant to be overtly political. My beliefs are very strictly capitalistic. But, I am also weary of pseudo-libertarians and free-market-fundamentalists. A free market capitalism requires, at the very core, freedom from coercion and a system of financial intermediation. A free market is not the same thing as an anarchy.

* You don’t understand what a pyramid scheme is, and it’s not Second Life because of …

A couple of comments on Slashdot more eloquently captured my reasoning:
here
and here

[randolfe_]

Response to 3pointD, “SL Economy Not Quite Examined By Critic” (trackback, above).

I appreciate what I read to be a very fair and insightful criticism of my article. We agree on what you point out as my primary issues.

A couple of distinctions, however:

“Large currency moves in real-world economies that can’t handle them often result in the same thing.”

This is patently untrue. The international FOREX market is by far the most liquid market in the world. We’re not talking about Soros like moves on the L$ market here, but relatively meager (as a portion of total apparent daily liquidity) trades.

“an economy like the United States’s, which is grounded by what’s known as a reserve currency, i.e., a currency that’s so widely held that it’s largely insulated against shocks and sudden exchange rate movements like those Harrison describes.”

The link you provided yourself to Wiki regarding “reserve currency” shows the fallacy of your contention. Reserve currency status is entirely irrelevant to this discussion. When I see L$ competing against USD and EUR for petro-trade on the oil bourses, then we can have this discussion.

What I am disappointed by is not that currency exchange rates can fluctuate, but that they do so asymmetrically and without financial intermediation. These aren’t so much currency exchange rates as they are timeshare-buyout rates. The only people who can sell their shares for any real profit (as measured by opportunity costs) are the first ones in.

I call that an unsustainable system in which value is internally trapped and not readily transferable. I’m no expert on legalities, but the practical definition for such systems is a pyramid scheme.

[randolfe_]

Ecocandle,

Thanks for sharing your experiences, and congratulations on Riel Life Productions.

I'm quite sure there are any number of enterprising entrepreneurs making real money selling services inside of games. And, insofar as you settle payment in convertible, real currencies, I see no particular additional risks.

My only unsolicited advice is to diversify your sources of income as quickly as possible. Given you succeed in creating a presence for your clients in SecondLife, perhaps you can also provide consulting for them in other media like blogs, etc. Being dependent upon a singular source for your cash flow is hazardous, and will almost always lead to a short run for your company.

And if you can get paid in $, but pay your workers in L$, then you’re the real winner. Just be sure to 1099 them anyway for the USD equivalent, so you don’t get stuck with a nasty 940/1 letter from the IRS.

(there’s always next year for our ‘bucks)

[randolfe_]

Valleywag plays the fool - gulled by dodgy analysis in own haste

[I have allowed my original comment-rebuttal to stand in its original form, unedited, despite the fact that "Tateru Nino" has continued to modify his/her original report over time. I certainly hope this type of revisionism is not indicative of Second Life's ethics.]

Thanks to Tateru Nino for a nice demonstration of good, old fashioned, ad hominem attacks. I’ve never been called dodgy, an odd adjective to ascribe to someone who’s freely non-anonymous (which cannot be said of my critic, by the way). Tateru might try rereading things over again without getting so exercised, and realize a pretty big oversight (s)he’s made.

Nonetheless, here’s my response:

1. Our trades were not simplistic, all-or-nothing, or naive. No single trade represented anywhere close to even 1% of the total “currency in motion” (although I’m not exactly sure what that means, to be honest).

2. Numerous accounts in various financial rags referred to virtual-millionaires going back as far as late 2005. I believe Gaming Open Market moved more than that in L$ alone, and they’ve been gone for quite some time now. My sponsor in these trades read about burgeoning SecondLife millionaires in the Spring of 2006.

3. I have continued to follow SecondLife’s “economy” as a function of other work I’m doing, which includes over a dozen other games and their virtual currencies as well. I chose the data from roughly 6 months prior because it is the most recent example of a pure SecondLife scenario. Other cross-game transactions are not as interesting in the context of my original criticisms. In fact, SecondLife is one of the most-liquid of the RMT platforms in existence.

4. Yes, I’ve “logged into Second Life”. I was even a DJ (darkwave industrial music is my specialty) for some months. I used SAM, in case you need verification that I actually experienced even that. I also ran a short-lived SecondLife investment fund called SLiquid Markets myself. Admittedly, others helped with much of the specific trading I referred to in my article.

5. I even immersed myself in LSL for a couple of weeks – I also have a talent for such things, as one might know reading my “anonymous” blog – and found it pretty cool, albeit frustratingly non object-oriented.

6. I assure you I am not easily confused by matters economic or financial. I could explain to “Tateru” the intricacies of supply and demand in a currency exchange market, and why his/her conceptions are naive, but I think I’ll save my economics lessons for things more tangibly important like the San Francisco Real Estate Bubble. (The real real eastate bubble, not the virtual one.)

7. I never intended to state that companies can’t make profit in SecondLife; only that they can’t do so purely within a SecondLife economy. Read my above comments to others. It’s like this, lots of companies made good profits selling stuff to dot-coms during the 90s bubble. Those that took stock-options as payments – akin to a virtual currency – suffered total net losses, and most are gone today. Those which settled payments in real money did fine. But they weren’t beholden to anyone else for the transferability of their profits, as are any persons or ventures receiving L$ as payments.

8. No one paid me to write anything.

9. In fact, this is not the primary focus of my work, and has caused me a bit more distraction than I had expected.

10. If you offer me a dunce’s cap I’ll wear it with pride, but only in game.

[longtime SLer]

This whole article is nothing but a pile of schlock designed to self-aggrandize and pretend its author knows what he's really talking about.

He commits multiple gross errors... from assuming a burger flipper earns $222,000 US per year, to utterly failing to justify any accustions. SL is a ponzi scheme? really? whats a ponzi scheme? how does SL fit in any way the definition you (failed to) provide? Sorry bub, slamming a house wife does not exactly back up your words there.

the 'dismissal' of lindex and talk about trading with anshe as some kind of 'valid' metric is patently ridiculous as well. You could have at that time pushed L$650k on lindex easily without a major market swing. Heck, anshe at the time was dumping 3 mil twice weekly on the lindex and it only slowly devalued it.

You provide some 'straw man' targets for basically patently false or simply unresearched accusations, shoot them down, and call the 'argument' sound. Thats not actually the way it works... I won't argue that a tremendous amount of L$ in game is cycled for the personal gain of a few, and that any random person joining tomorrow is going to face an uphill battle in order to legitimately 'make it' in sl, financially.

Your 'core idea' is valid, but more or less your entire argument is poorly researched, based on crass assumptions, invalid data, mathematical mistakes, and straw man arguments that prove little. Its a shame because honestly we really could use some compelling real dialog about the SL economy and its prospects. Just don't look for it here.

[randolfe_]

longtime,

That you're not familiar with some basic terms and concepts does not discredit my account.

Perhaps I should remove the "Anshe" references. I'm coming to believe she's a cult of personality. Reminds me of how some people got all worked up whenever anyone dared to question the technical competency of Marc Andreessen -- most of which proved deserved with time.

By the way, you are aware that Anshe effectively owns a large L$ exchange, right?

And I'd like to see how your claims that she was "dumping 3 mil twice weekly" reconcile with Tateru Nino who insists that there was no one of such wealth during that time.

Maybe it's my lack of math skills that keeps me from figuring that anomaly out.

[Taliesan]

Just want to congratulate you on one of the few sober pieces I've ever seen written on this issue.

[randolfe_]

Responding to a couple of emails:

No. I do not work for, nor have I been paid by Linden Research (or anyone else for that matter) for this article.

To me, things marketing related are largely confined to Dilbertesque visions of togas and champaign.

[mohan]

I trade FX Futures on Globex and found this article via Google Reader. Two things struck me in particular.

Your clients seeking profit opportunities in RPG's exhibited some really prescient insight in looking beyond actual markets. The opportunities for real arbitrage may have so dried up that this is what it has come to. And if in fact, they were successful, it would be an entirely different story, with potentially billions being poured into these idealized transaction spaces.

But, alas, the second point is that interest rate parity calculation you mentioned with a 2000% return. Let me get this straight, you are basically describing an uncovered forward exchange, borrowing USD (at 4% + fees), exchanging it for SLL, depositing it in a virtual bank and converting it back at an amount larger that the initial loan settlement. I doubt I've ever seen more than a single digit return on an investment of this type. This would have tipped me off immediately that something is too good to be true, and even now I can't get my head around it. Even accounting for a relatively volatile exchange rate, what sort of interest rates were the virtual banks offering to make this possible???

[Ricardo B]

Dear Randolfe,
I don't think calling SL a pyramid scheme is very apropriate, since a "pyramid scheme" is a very specific kind of investment fraud (and often distinguished from Ponzi schemes) and it's practical definition usually includes that no product or service is being delivered.
In SL, a service is being delivered for the USD that go in to the system: gameplay.
As people play more, they bring more USD into the game.
So, the game can survive as long as enough people are willing to spend money.

On the other hand, if people are seeing the money they put in not as an expense but as an investment, in hope they'll one day get more money out of the game than they put in, then they have a problem since most of them will never be able to do so.
BTW, that ability isn't related to how long they've joined the system but to how skillfull they are at convincing others to buy virtual goods/services from them. Or maybe how much real money they're willing to invest in order to become currency exchangers.
So, here's another reason not to call it a pyramid scheme.

That said, the moment you can take money out of it, SL it's no longer a simpler service you're purchasing and it's closer to a finantial institution.
However, unlike real world finantial institutions, it works without any of the regulations that have been put in place throughout the years to protect the clients of real world finatial institutions.

And indeed, one's ability to convert virtual wealth to real money may not be what one expects.
Maybe some regulation is in order here.

[Baba]

You're right. Trading on Anshe's exchange is not a good idea.

Why not try a larger market with a bit more liquidity?

The LindeX which is directly accessible to the thousands of users online through the client to make impulsive market orders and on the Second Life website. It sees quite a bit of action and is less likely to swing on volumes as low as L$650,000.

[Andy Havens]

Ricardo B. made the points, pretty much, that I was going to. Thanks, Ricardo.

Ponzi and Pyramid Schemes are, indeed, very specific types of fraud. The fact that you can play SL without paying any money, and, indeed, take money out of the system without paying any money disqualifies it as a Ponzi scheme, which is a type of investment fraud. A Pyramid Scheme relies on recruitment for success. Unless we are using these terms metaphorically, neither apply to Second Life.

If you want to say that SL is over-hyped, go ahead. If you want to say that the press has given many players unrealistic ideas about the ability to bring wealth out of the game, OK. But the terms used, as such, aren't reasonable in this case.

You seem to be complaining that the economy of SL isn't real, because it's not self-contained. Because when you get paid in $LD it ain't really worth anything. Well, no offense, but... it's virtual. All wealth not real is virtual, and by "real" in this sense, I mean stuff I can eat, drive, wear, kick, etc. All money -- even when it was gold -- is a virtual currency. If we're stuck on a deserted island and I have 10,000 MREs and you have $2 billion in gold bullion... whose wealth is virtual now, baby?

It's not surprising that a few people "at the top" are making more money in SL. Ain't that the way it works in RL? What percentage of people in RL own the top 50% of the wealth? A whole lot less than half, eh?

Is it a *weird* economy? Hell, yes. I'm not saying it's anything I'd invest heavily in. If my kid wanted to set up shop doing biznezz in the virtual frontier, you best believe I'd have him cashing out into $US pretty often.

Then again, I bet if we tracked it over the past year, we'd find that then Linden has been more stable than some other, more worldly currencies, eh?

Weird, yes. Virtual, yes. Scheme? Fraud? Un-real? Not so much.

[randolfe_]

mohan,

The particular bank in question was paying an EAR of 2,786.32%. Most banks were paying between 36%-150%. I'm not sure what today's prevailing rates are.

The trade theoretically works because the SLL is effectively pegged to the USD around the 300 range.

In reality, factoring in the reflective volatility of the exchanges, this particular trade returned 3.88% in a LindeX/Ginko arb, and 0.08% SLExchange/Ginko, pretax for 30 day deposits.

The calculated returns (275 SLL/USD) were 793.17% and 780.05%, respectively, with rf=3.40%.

We weren't totally naive, and thought this was too good to be true. But the hedge fund guys wanted to test it out anyway, hoping to shake out some more reasonable arbs. They did go on to try some much more complicated trades which involved making and taking loans, and transacting through intermediaries on multiple exchanges.

Hedge funds may get a lot of bad press, but one thing these guys aren't is timid when it comes to turning over every rock in their search for extreme alpha.

[randolfe_]

Andy,

Certainly the SLL is more "stable" than many real-world currencies. Although, I could take contention that those currencies are non-convertible and therefore much less comparable as an analogy. The basket of convertible currencies are far less volatile (as measured by sigma).

Perhaps "ponzi" and "pyramid" are not perfect, but the "Second Life Economy" as an opportunity strongly resembles a "High Yield Investment Program". And HYIPs are often compared to pyramid schemes.

Keep in mind, the stability you refer to in the SLL/USD is illusionary, and only applies to immaterial micro transactions and to the "oligarchs", as you seem to be casting those at the top.

That's all fine, except that the press (today's FT US ed., supplemental section for example) insists upon telling us that SL has a *real* economy with *real* market opportunities.

Insofar as that attracts new entrants with investment intentions, it is a HYIP, at the minimum.

I'm not sure where the fiat currency arguments apply. The SLL has yet to evolve as any type of fiat except within the walls of its host. And, as of yet, I don't see Linden Research conducting open market committee operations to support a convertible SLL exchange. Although, I wouldn't put it past the BoC to buy Lindens in their search for USD diversification.

[Paul]

The article, while well written, misses a few things. No one is "forced" into prostitution, for example; and how could they be when physical force cannot be applied, and the viel of anonymity cannot be lifted (without consent).

The idea of sex slaves, for example, seems very bothersome. But after time in that environment, a friend (who was such) filled me in: she roleplayed this, and enjoyed the fantasy of it. Far from coercive, it is consensual. Now I don't go for such things, but I will say that government and people like this blogger have no business deciding what people should and should not do provided no one is harmed and no laws are broken -- and this is clearly the case with Second Life.

As for investment, I might agree -- Anshe Chung inspired 100's of wannabes, all who buy and sell land from each other at a furious rate, forcing the price of virtual land beyond the reach of the average user. This bubble will burst, and hundreds will lose thousands (most telling is that Anshe Chung herself has stopped buying or selling "mainland" land).

But I run a store in Second Life. I make about $600 U.S. per month. I have no trouble withdrawing the money. I did not spend an inordinate amount of time either (my estimate is that if I match the actual time spent building to the lifetime sales of an object, I make $50 US per hour). Of course I am highly skilled and the virtual economy favors goods over services (no cost of goods, no stocking fees, everything automatic -- while services are offered on a payment per hour of time).

I also think the nature and direction of Second Life is not planned by Linden Labs, meaning there is no attempt at deceipt or fraud in terms of the transactional environment. I do think their stats are misreported -- they have 2 million avatars, which does not mean 2 million users. They show transactions of $200K U.S. daily, but these are avatar transactions. In my successful business I send my alt (alternative avatar) my daily profits so I don't accidently give it away or buy something expensive. So even though I'm transacting to myself, Linden Labs will report it as movement in the economy.

In the end Caveat Emptor applies. Those flipping land do so out of greed, and do so without being convinced or goaded to do so. When they lose their shirts, they will have none to blame but themselves. For some, it may prove a valuable lesson for the real world.

It is the wild west, and you do have to be an idiot to stick any substantial money into a virtual bank in Second Life, but it does not meet the criteria of a Ponzi scheme nor does Linden Labs promote or engage in deceptive promises.

And you can't toss out experiences like mine: honest products (software) with a "PG" environment just because you have those interested in sexual encounters (been to myspace recently) or users trying to defraud other users.

Maybe, in some ways, the education someone receives in losing L$400 will save them from losing U.S.$400 in the real world.

[Chip Midnight]

Paul's comments were right on target. SL is not an investment opportunity where you can do nothing but put money in and pull profit out.

SL is a marketplace for virtual goods where people turn real world skills (art, animation, programming, event planning, etc) into real world profit. Most don't do it because they earn enough to consider it a viable real world income. They do it because it's a fun hobby that can pay for itself and maybe earn a little extra. Your comparison to flipping burgers would only apply if people would flip burgers as a hobby even if they weren't being paid. In other words, it's a straw man and a stupid comparison.

I'm a freelance artist who started designing goods in Second Life four years ago, before it was possible to extract real money, simply because it was enjoyable. Many of the people who are at the top of your imagined ponzi scheme are like me and do what they do in SL because they enjoy it. They weren't looking to make themselves rich. Profits came in time through earned reputation and quality of goods and services. Greed was never a part of it.

The big downside to the amount of attention SL is generating these days is that it attracts people who seem to have no interest in anything except easy profit without any actual skills to offer. Those who think they can simply buy profits as if SL were a stock exchange are going to be disappointed. Franky, they deserve what they get.

Perhaps if you'd entered Second Life because you found it entertaining to explore its culture and the work of its thousands of talented artisans instead of as a result of reading about Anshe Chung which sent you running for some imagined profit spewing feeding trough, you'd have enjoyed yourself, and maybe spared us all this uninformed, misguided, and useless diatribe.

If you're looking for an investment, go find one somewhere else. If you're looking for creativity, social interaction, and self-expression, with the possibility that it may become a self-funding hobby, and if you have something worth contributing, you'd find a richly rewarding experience.

[randolfe_]

My restrained response to some anonymous avatar-reporter calling him/herself "Tateru Nino", has been called "snippy" and dismissed by the Second Life faithful faster than Shiller is dismissed by a "millionaires club no money down real estate flipper". This despite the fact he/she apparently either didn't read or understand my original article. He/she didn't even realize that I was the author, and accused *me* of being anonymous.

I just thought I'd share the quality of comment taken as rallying cry by the true believers in the Second Life Metaverse. Keep in mind, this is from "Second Life Insider", which purportedly carries some credibility.

I'd have to agree; it wasn't nice at all. Just more ranting, why do we feed the troll.

Summing up his rant:
vertual currancy can be used for money laundering, but so can any monitary transaction.

small trade = laundering money

there are more small trades, then large trades. ( Just like more people buy fast food per day then people buy cars per day. )

flooding the market with money changes the price of money.

sl is a scam, because people buy goods and services, witch cause the people who make the goods or supply the services to gain profit.

there are more pore avatars then they're Rich avatars (no unexpected)

if you give a complete stranger your money; with no way for them to be held accountable, and no way to track them down, then they probable will run off with your money. (and this is a surprise how?)

Serves oriented industries, on average, make less in sl then they do in real life.

He site ash chun, but he doesn't try to invest into the rental markets, witch is how ash makes her money. If I had invested with him, I'd be asking for my money back, because what he chose to do with the money was groce incompetence.

[randolfe_]

Paul, Chip,

I have no contention with anything you say, but for the fact that Linden Research welcomes, encourages and fosters the commercial and financial aspects of Second Life. I've now read so many rebuttals today insisting I compare Second Life to an emerging country economy. Well, you cannot have your cake and eat it too. Financial institutions and markets are part of any economy, or it's not an economy at all but something else.

All I've done is suggest what that something else might be. Perhaps I'm wrong, and it's a big chat channel for artists, though I doubt that would have made front pages of BusinessWeek, Financial Times, etc.

Chip, you particularly apparently believe that financial professionals have no skills to offer, add no value, and "get what they deserve". So be it. Then why not take up that cause with the apparent push to legitimize the commercial/economic/financial aspects of Second Life? Or did you think that only artists and storytellers would get to make all the money?

(By the way, the L$ exchange markets can *never* be liquid unless there are enough of those very speculators who you think add no value. That's how things like liquid markets work.)

[Chip Midnight]

By"SL faithful" I'm guessing you mean "people who understand SL better than I do" - a descriptor for which most SL participants would seem to qualify. SL is an international community, by the way, and it's quite likely that English isn't Tateru's native language. Spelling errors aside, the comments are well deserved and show more knowledge of how the SL economy actually works than your blog post. Tateru is right. Anshe makes her money by renting land and providing services to her tenants.

Sinking $10,000 usd into a virtual bank run by anonymous people without any guarantees is a monumentally stupid thing to do. That anyone purporting to be an economist would do something so obviously ill-advised with their money is amusing, and it doesn't say much for your qualification. It says a lot about your greed. But hey, if you're still looking for a way to get rich quick without offering any actual skills, goods, or services, I have a bridge you might be interested in buying.

[randolfe_]

Chip,

I don't know where you get the idea anyone "sunk $10,000" into a virtual bank. I assure you the trades were far more complex, involving many actors. I'm not a trader, but the traders who helped set these up are very good at what they do.

If you cannot see the many inaccuracies with that poster's "counter arguments", then debating with you is a lost cause. For example, where did I ever assert that "small trades = money laundering"?

But again I posit the question to you: why not take up your issues with Linden Research and those who insist upon positioning Second Life as a valid economy and marketplace?

(Those errors aren't indicative of a foreign language speaker anyway. I read dozens of documents daily from foreign English speakers in my line of work, and this strikes me as simple poor-native English writing. I suspect you already know as much, though.)

[Chip Midnight]

SL most definitely is a valid economy and marketplace. You just have to have something worth selling. Money by itself isn't it. Those who are profiting in Second Life are those who are converting their real world skills into things that other people find entertaining. I personally cash out an average of 1-2,000 usd a month as a result of converting real world art skills into SL products. The only people who seem to think that SL doesn't have a viable economy are those trying to make money by simply investing money which by any rational yardstick is a bit of a fool's errand in SL. As noted earlier, Anshe Chung makes the bulk of her profits providing a service, not speculating in real estate.

As for the money laundering issue, I don't blame Tateru for bringing it up. What does it have to do with SL since money can be laundered anywhere financial transactions take place? It seems to be inserted in your article as nothing more than a red herring, no more worth mentioning than your swipe at Anshe in your last sentence.

What makes SL tick is real world talent applied to SL's creative tools, not speculative investing by people looking to make a quick buck. Your only mention of that, which is by far the most important aspect of SL's economy, was to compare it to flipping burgers, which is a bad analogy for reasons I pointed out in my first comment.

As someone who's been involved in SL since its inception, and who now makes a sizable portion of my real world income from it, the biggest impression your article gave me was that you completely miss the point of SL, and that you were only interested in it as a way to get easy money.
It isn't Linden Lab that's given the impression that SL is a goldmine to the general public. It's the press, and bloggers like you who aren't interested in the culture and creativity. As soon as people hear that someone made a million bucks they come running with their wallets out looking to score. The idea of selling virtual goods for real world profit is beyond most people's ability to comprehend because they don't understand that what's being sold isn't virtual. It's entertainment created by real world skill by thousands of artists, programmers, and entrepreneurs who provide services. A bunch of greedy opportunists selling land back and forth to each other isn't going to do it. Sure, one of them might get rich but it'll be at the expense of all the others. I can't explain why people like yourself paint SL as a virtual stock exchange instead of what it actually is... a marketplace for creativity. Those that bring it to the table are the people who might find SL profitable, not speculative investors and "get rich quick" dreamers.

[Tom jones]

I'm asking myself why I lose my time in reading this article, since his author admits "I’m no expert on legalitie" while trying to answer to the critics.

Why, why I lose my time doing this?

[frans]

A virtual closed economy doesnt create money. So anyone making profit means that amoutn of money is taken away, from depositing people.
So if someone takes 1000 dollar out of the game which he didnt deposit (see it as profit) that 1000 dollar is considered loss too other gamers.

The exchange rate adds to that, making it impossible for all too profit.
Sicne the rate isnt fixed it can also get hyperinflated, so u wake up on day to find linden dollars worhtless and the gate closed.

when u look at other games: try project entropia
thats a game ownded by mindark compagny, they provide fixed 1 on 1 exchange rate, in and out through creditcard, paypall,
so 100 dollar in is 1000 ingame "dollars"

1000 ingame "dollars" is 100 dollars rl when back,
except for the creditcard transaction fee

total in game volume 300 million real dollars,

i play both , and second life is loosign big time,
last motnh we seen Anshe move too entropia game with second life money

[Ricardo B]

It just hit me: SL is indeed like a small country economy. One with tiny liquidity and financial anarchy due to lack of regulations. The kind of economy where, in real world, people avoid keeping their money in.
Except it's not provided by a sovereign country but by an US company.

[Baba]

Awesome! Are we in a blog war? ;0 If I go post something mean about you on my blog you can counter my argument with some hardly more intelligent comments.

The blogosphere will light up as we clash wits in comment forms from TechCrunch to Scoble.

Oh PLEASE! It will be such fun! Imagine the blogebrity!

[Ordinal Malaprop]

I rather agree with Chip here. You appear to have come to SL with a view of it being an "RMT game" of some sort, World Of Tradecraft, perhaps one where one can dress up and play industrial music at the same time, but basically there for players to make money, where only "Joe Sixpack" cares about anything except making "real millions". You attempt to make real millions or at least a stab in that direction by speculation, borrowing, lending etc, find that you can't and that it's not really very good for that at all, are annoyed that you read all of these articles about Anshe Chung (how could you have possibly known the mainstream press might misrepresent things?) and conclude that there's no real economy apart from pyramid-making and the whole thing must be a con. The End, apart from Valleywag picking it up and sticking it in their "omg SL sux" section.

Your perception of what makes an "economy" appears to concentrate on non-productive activities. If in your money-making activities you were performing a service or making virtual goods or somesuch, do tell, but I was not able to find anything related. Thus you are able to say with confidence "Second Life is a Ponzi scheme" because that's the only part of it that you see. That is the impression that I got, anyway.

While it seems appropriate for the author of a blog called "Capitalism 2.0" to engage in such activities in SL - that is clearly the game you like to play - I would at least have thought that you might have appreciated that they are incredibly minor ones to the majority of residents who like to meet, dance, dress up, have cybersex, play Russian Roulette, build houses, argue with each other, pretend to be eaten, watch movies, shoot people, make dresses in Photoshop, listen to music, and myriad other activities, new ones of which I hear about every day. They effectively give cash to each other and to Linden Lab for services via an eccentric micropayment system; some people end up with more money than others. I see nothing pyramidal about that.

[randolfe_]

I have no arguments with the escapist, experimental, and entertainment utility provided by Second Life. Neither do I question the sincerity of many creative, imaginative often idealistic players immersed therein.

The point is, however, that this "game" is being widely broadcast through intensely capitalistic financial media as an "emerging economy"; a "virtual global marketplace with its own internal financial system".

And the producers of this game are not shy about fanning the flames of such attention. I just read yesterday a very serious economics professor actually suggesting that Second Life should be measured in terms of GDP.

Perhaps if you guys don't wish Second Life to become "World of Tradecraft", you should work to counter the direction in which the games promoters are pushing it.

I have to say, though, I somehow doubt that those who make Second Life possible in the first place -- that would be venture capitalists (in particular Benchmark, the funders of E-Bay, WebVan, etc.) -- are certainly not interested in fueling a giant social sandbox with their precious capital. They are interested *only* in creating return for their limited partners. Apparently pushing Second Life as CommerceWeb2.0 fits that strategy.

But, don't bemoan the entrance of financial capitalists into your magic circle if you're simultaneously going to defend it as a legitimate virtual economy. You can't have it both ways.

[Anya Daligdig]

You commented (under Ponzi Scheme Epiphany): "I didn’t bother to point out that she [single mother of 3]hadn’t counted her expenses for renting her virtual shop or accounted for taxes, let alone the fact that she was earning less than 1/100th of what she could get just flipping burgers in the real world."

A more accurate compairson of earnings rates would have included the cost of childcare deducted from her hourly rate at that fast food job. SL jobs are, after all, home-based, which is a big consideration to single parents.

[randolfe_]

Chip,

Clearly you and I have very different opinions about what makes markets and economies go round. I could point to all kinds of theoretical this, empirical that, or practical the other. But I respect your opinions, even while I fundamentally disagree with them.

Had Second Life been presented as the type of world you describe, it would have barely caught my eye, and certainly would have never even registered on hedge-fund types' radar. I mentioned from the outset that I came across this whilst working on RMT venture strategy. What propelled Second Life into everyone's cross-hairs was the intense self-promotion of it as a virtual marketplace with a freely convertible currency.

That got a lot of people's attention. Many of which you clearly could live without.

I guarantee you -- especially if I am so wrong about the legitimacy of the Second Life economy as many insist -- my clients will *not* be the last or the biggest professional speculators you'll see pierce the Second Life magic circle.

Where there's real money, inefficient markets, unsophisticated market makers, and at least some liquidity, soon there will be arbitrageurs, speculators and investors.

And you should be thankful for that. After all, Second Life wouldn't even exist if not for "speculative investors"...you know, the people who's money actually paid for all those cool grid servers, 3d tools and semi-object-oriented scripting languages.

[randolfe_]

A more accurate compairson of earnings rates would have included the cost of childcare deducted from her hourly rate at that fast food job. SL jobs are, after all, home-based, which is a big consideration to single parents.

This is an opportunity cost fallacy. Childcare costs will be slightly less than or roughly equal to operational costs of running a SL business. Many, maybe most SL "businesses" either don't know they have to or simply don't care to pay myriad taxes and remittances required under US and state laws.

So called "self employment tax" (as a sole proprietor you are responsible for both employee and employer portions of medicare and social security effectively doubling your payroll taxes) alone will go a long way towards plugging the gap.

[Ordinal Malaprop]

I can certainly tell you that many SL residents have been fighting this avenue of promotion for years now. I tend to think personally that it provides some useful publicity, but it gives entirely the wrong impression of SL to many, as your piece demonstrates.

I'm not sure quite what your point is when you mention the VC behind LL - it's hardly as if Mitch Kapor is punting L$ on Ginko, is it? They aren't going to care whether people can come in and play speculator; their financial interests are in SL itself giving them a return on their investment. The economy within SL may be interesting to them but they don't plan to participate in it. They've not "entered my magic circle" (ahem) in that way at all; they are not your compatriots here.

[Ordinal Malaprop]

Childcare costs will be slightly less than or roughly equal to operational costs of running a SL business.

*raises an eyebrow* Really? I'd be interested in hearing how you came to that conclusion.

[randolfe_]

I'm not sure quite what your point is when you mention the VC behind LL

Do you think their board seats sit there quietly and allow LL and SL customer player to determine the strategy and positioning of their product's value proposition?

I think you feign naivety. I'd expect a bit more of Benchmark. Maybe eBoys was a work of fiction and VCs I've worked with are atypical, but in my world VCs are so far up the arse of product marketing and PR decisions that seldom does a press release escape without their notice and at least tacit approval.

[Eric Rice]

Good grief. Talk about sensationalism.

A very simple creative services, digital goods, and hosting economy has been turned into this comical Greenspan-ish tit-for-tat.

People can and are monetizing RL interests and the social engagement that exists there.

If you want to pay me to create a JPEG in Photoshop of me punching you in the face, I'll take your money. Also, if you want to pay me to actually punch you in the face, I'll gladly do that too. Well, unless you (being the everymedia) want to pass judgement on on the value of the economic exchange.

There's a deeper lesson within SL, and that's the value of social media. The press will write what they think, and LL takes a hands-off approach, so what's left is the world of user-generated content in a social space. And money changes hands.

But, headlines drive things, right?

/smirk

[Booperkit]

"...to her amazement, she’d already made over L$50,000 after only a month (about $185 USD). I didn’t bother to point out that she hadn’t counted her expenses for renting her virtual shop or accounted for taxes, let alone the fact that she was earning less than 1/100th of what she could get just flipping burgers in the real world."

...you get £18,500 a month flipping burgers? where? please where?

...and yes I think a single mother of 3 is probably happier sitting at her computer with her kids than flipping burgers and paying for kids in daycare, petrol/transport and getting treated like crap...

[Anya Daligdig]

I wrote: A more accurate comparison of earnings rates would have included the cost of childcare deducted from her hourly rate at that fast food job.

You responded: This is an opportunity cost fallacy. Childcare costs will be slightly less than or roughly equal to operational costs of running a SL business...
*********
I beg your pardon? Please go back and reread my post. I didn't state that she could equal or surpass her burger job earnings by the income from her jewelry business in SL; I merely pointed out that because she has 3 children, who will need childcare if she works outside the home, the simple comparison of net income to net income was not a true picture of the gap between the two work opportunities.

[randolfe_]

...you get £18,500 a month flipping burgers? where? please where?

Huh? All I said was $185USD from one month's sales.

Does the additive property of equality apply to math in Second Life?

Hey, if people want to make whatever life choices for whatever reasons, more power to them. Her motivation was clearly not intense concern for parental participation, but climbing the virtual millionaire ladder. "My friend makes over $100K per week and just hired 2 employees!" to paraphrase her.

Sound just like what San Francisco Bay real estate flippers were proclaiming a year ago. We're experience over 100% increase in mortgage payment delinquencies now. These types of phenomena are not without consequence.

[Chip Midnight]

Ordinal has it right in regards to your comments about Benchmark and the VC behind SL. They aren't speculating in SL's economy. They're investing in a real company with a tangible product that's rapidly becoming "the next big thing." From their standpoint I imagine they're quite pleased with the foresight of their investment. To compare that to activities in SL's internal economy is just silly.

I don't think I'm the one being naive here. You seem to have some strange conception that everything the media prints must have somehow come from the lips of someone at Linden Lab or their financial backers. That too is silly. The media hypes what they find most sensationalistic, and that happens to be the fact that real people are making real money selling virtual products.

Traditional media is not the land of careful research. It's more like "hey our competitors are writing about 'the next big thing(tm)' so we'd better jump on it too." Then they may spend a couple of hours exploring SL, meet a dozen people out of the 25,000 online, and form their impressions accordingly. If they stumble into an adult area then SL is a den of iniquity! If they heard about Anshe and don't make a fortune in their scant explorations then SL is a Ponzi scheme! Mostly they just borrow from what everyone else has already written on the subject.

I've been interviewed a half dozen times by the media about my SL business, and every time it was obvious that the writer's thesis was already formed. They were just looking to flesh it out with some quotes. There have been some good articles written about Second Life but they are few and far between.

You're right that we have a very different philosophical outlook. I consider what you tried to do in Second Life to be little more than leeching - trying to skim profit without providing anything of value. When SL resident businesses start issuing stock or looking for VC it will be a different story, but then you'd be providing a service by investing rather than simply trying to fish ducks out of a pond with a net.

Finally, as for taxes, I happen to be an S corp. I have been for the past ten years as a professional freelance artist. You better believe I write off my expenses and claim my profits. I both sell products and do contract work for other in-world businesses who certainly intend to file 1099's on their contractors.

My participation in a virtual world neither automatically makes me naive or an idealist. It makes me someone who can recognize a viable marketplace for my skills.

[randolfe_]

Chip

I commend you on being a solid role model for running a responsible corporation. If you are mentoring others similarly, then you do yourself and your community a service.

I shed no tears for the mainstream media. I'm myself in no way connected with any media; I just write about stuff that interests me on my blog.

I must admit, though, I still find it very curious that any criticisms I read, and now myself receive, questioning Second Life meet with intense, often fanatical response. It's been my experience that usually masks weakness.

I never expected nor intended any of this attention, and I certainly won't seek to repeat it. This is mostly a distraction from my normal daily course. And, while I find it intensely educational -- I have learned about many positive aspects of Second Life which I wasn't previously aware of, even as an casual "resident" for over 2 years -- I'm destined to head off my way and you yours. I doubt you'll ever cross paths with me again, and you'll forget my name quite quickly.

[Anya Daligdig]

Randolfe quotes Booperkit: "...you get £18,500 a month flipping burgers? where? please where?"

Randolfe responde: "Huh? All I said was $185USD from one month's sales."
********
Umm, you actually said a little more: "...let alone the fact that she was earning less than 1/100th of what she could get just flipping burgers in the real world."

$185/month x 100 = $18,500, no? Booberkit was generous in converting this sum into British pounds, as today's exchange rate is 0.50616 British Pound to 1.0 US Dollar,equalling ~£36,550.

OAN, I found your blog on this issue quite interesting. You've started me thinking about some of the larger issues involved in SL.

[randolfe_]

anya

I stand corrected; my reference to 1/100 of burger flipping was inaccurate. I doubled up on my analogy, causing my statement to be false.

I don't change my original articles except for spelling errors as a policy. Instead I will let this comment stand as a retraction.

I find the fact that so many bloggers (including some of my critics from previous comments) simply change their blog statements instead of acknowledging errors or answering critics a bit discrediting.