economy

When CSI's CEO Anthony Zuiker threw out a thousands Mars bars at the audience at the Virtual Worlds Fall 2007 convention in San Jose this week, he meant to symbolize the sweet mash-up of 50 years ago, when Milton Hershey and Frank Mars traded chocolate and cookies to make the century's winner with "pleasure you can't measure" as the old ad slogan said. But a lot of the candies fell on people's heads, prompting Zuiker to quip, "Do we have insurance?".

That's the question to ask, because the TV invasion into virtual worlds is a gamble for TV (not just a stress-test for VWs), one which appears to have been handled well by There.com with Virtual Laguna Beach, and which remains to be seen as a challenge to SL on October 24 for the first CSI: NY/SL airing. Yet the deeper question to ask is whether the TV invasion will destroy the very integrity of the virtual world that attracted TV in the first place. One workshop was even titled: "Virtual Worlds and Big Media: The Future or the Ruination of the Virtual Worlds Space." The discussion was largely framed around the brand-driven model for sustainable recurring revenue versus the purely socializing experience of Second Life and There. Inworlders are hoping that big media will stop trying to get their ad companies to drop discrete product logos or even discrete miniatures into the virtual streaming scene, and move to a more sophisticated model of sponsorship of community activity, like Philips Electronics was the sole sponsor of CBS' "60 Minutes" to make longer news segments and fewer ads, just as Toyota sponsored Scion city.

One TV producer very matter-of-factly told me that whether the CBS gambit on October 24 with CSI and Second Life succeeds big or fails small, the future of the population in VWS will have to be cross-over audiences for them to succeed, as their user audiences now simply are not big enough to sustain their cost. The people coming to search for clues will be the next wave of residents, not the oldbie craftsmen, the midbie inworld entrepreneurs, and the newbie clubsters and campers -- or for that matter, midbie big business and newbie corporate staff. They'll be TV-watchers or corporate networkers, who may or may not want to do these earlier activities, and may or may not contribute to the existing inworld economy as consumers or even producers.

I'm betting they won't, and that the inworld economy will take a severe hit. It is already being replaced by another model: the company town. In this model, a company like ESC or MOU brings in a big media client and creates not a world or an economy but an event or series of events. They hire a team of people, much like a Hollywood producer would hire a troupe of actors and stage-set designers. These hired hands get union salaries and they don't *need* to sell their designs or services to individual consumers anymore -- so their IP, rather than needing to be protected by themselves individually from a horde of consumers who will knock them off, will insteady be given to a company that will either simply buy it and protect it -- or not bother, because they *real* content is no longer contained in a box, a skin, a building but in *an event*. Companies and their creators can even afford to give away the dress of the murder victim that week, a coffee cup made with the same textures as something in the build, etc. because it simply won't matter -- advertisers will pay them, not consumers.

My thesis is born out by the DRM saga. This week's Economist explains, "Abandoning DRM might at least force record companies to develop new business models that focus not on the songs themselves, but on the activities that go with them, argues Mark Mulligan of Jupiter Research." The Economist notes that increasingly artists sign "360-degree contracts" including concert, merchandise and endorsement deals. I say: what better place to drop down a "360-degree contract" than in a 3-D virtual world?! Sell the event, the swag, the branding as a package of experience, and you no longer have to worry about Copybot.

So what happens to the thousands of craftspeople in Second Life and their Tupperware-like loyal customers? They will either get hired by big media companies and their metaversal development agencies -- as they already are -- or die. Perhaps a few sturdy boutique names will remain, possibly to dance the old native dances and wear the colourful constumes of the indigenous peoples for tourists...

It may be a long time before the dying dinosaurs of the big media companies understand what they have trampled, which is a burgeonining movement of independent intrepreneurs and serendipitous teams of creative people solving problems by making their own content, at levels ranging from amateur to professional. Eventually such entrepreneurs will prevail, however, in the long run in the Long Tail because ultimately, people don't want others telling their story for them; they want to tell it themselves.

This Monday the Metanomics series is pleased to present Dan Miller, Senior Economist at the Joint Economic Committee of the U.S. Congress. His latest study, Costs and Consequences of the Federal Estate Tax, investigates one of the more controversial debates in taxation today. He'll be talking about the legislative outlook on virtual worlds, from taxation to the Department of Homeland Security. Though Dan is speaking as an individual, not for or on behalf of Congress, it's nevertheless a significant milestone for the Metaverse, and the Metanomics series.

Around this time last year he indicated that many economists were struggling with issues of virtual taxation: “I found that talking about this issue with some of the other economists on the committee, they are not really familiar with what a virtual economy is. The idea of Second Life or World of Warcraft or some of these other synthetic universes, they have trouble wrapping their head around it. So there’s an educational hurdle to overcome here,” he said.

This didn't mean that taxes weren't going to come to virtual worlds. "Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," he told CNet last December. In August he met with Mindark, creators of Entropia Universe, in what by all accounts was a very productive meeting on the topics of tax evasion, money laundering, and terrorism.

As usual there are many ways for you to participate. Join us in Second Life on Monday at Metaversed Island, or watch the live feed on the web at SLCN.tv. You can also ask questions ahead of time at the Metanomics website.

The Ludwig von Mises Institute, an organization dedicated to the promotion of libertarian and liberal economic ideals, published an interesting essay about the economy of the virtual world of Second Life by Matthew Beller. In it they call for all economists to begin analysis of virtual worlds for what they are, rather than just regarding them as laboratories for research projects.

Of course, the Mises Institute does exist to promote a specific economic theory, and Beller presents it here:

As Ludwig von Mises and others have shown, one interventionist policy creates distortions that must be fixed by other interventionist policies, which lead to problems that require further intervention, and so on, until the state controls every aspect of the economy.

Unfortunately, despite Mr. Rosedale's free-market rhetoric, a look at Linden's actual practices reveals that it has already started down the path of intervening in the economy. One critical example of Linden's intervention is that it has granted itself the ability to manipulate the single-most important commodity in any economy: money.

In part the point here is that Linden dollar's value is entirely controlled by Linden Lab and does not reflect the actual amount of trade going on in the world. Things get a little more sinister from there, however. Second Life has been running a deficit which, according to Beller, may mean big trouble:

These deficits occur when the weekly L$ stipends Linden pays to premium residents exceed its revenues from land rentals and other administrative services it provides to residents. In order to fund the deficits, Linden creates new L$ and injects them into Second Life.
[...]
During the past year and a half, Linden created L$876 million through its deficits, which makes up over 33% of today's L$ supply.

The rest of the essay points out a number of instances where Linden Lab didn't bring in enough USD to cover the L$ that they produced. If that trend continues, we may hit a point where withdrawals through the Lindex exceed Linden Lab's cash reserves. The value of the L$ would have to fall, currency production would have to decline, and a major recession would be at hand. Beller's solution: "abolish restrictions on content, strengthen the ability of residents to enforce their property rights, and, most important, tie the L$ to a real-world commodity money backed by 100% reserves."

All of this is just one person's opinion, of course, and the practicality of some of these ideas is debatable. The point is that essays like this one are sure to spark more focused debate about virtual worlds among economists. The actual form that the debate takes remains to be seen, but there are so many different facets to economics that we can probably expect groups to form promoting specific ideals of all types. The idea of commodity-backed currencies, for instance, is one that has been adopted in several e-gold type services around the Internet and maintains a hardcore following. As Beller's essay climbs Digg's rankings, expect many more experts to join the fray.

It seems Linden, creaters of Second Life are struggling to keep up with the demand for land, but are taking steps to address the issue that's causing sharp increases in auction prices on new land:

January was another record month for Second Life in many ways. The size of the world, as measured by the virtual square kilometers of simulation, expanded 23% over December to 361 square kilometers. In fact, continued brisk sales have left us with roughly a two-week backlog for new Island order delivery. (Thanks to everyone for their patience on this.) The backlog has also affected our ability to expand the mainland sufficiently to meet. demand. As a result, the average price for mainland auctions is up higher than I think anyone would like to see it. Over the next several weeks, we hope to rectify both situations with a greater volume of server delivery from our supplier. With a recent release of more than 40 regions of mainland, the addition of a new mainland continent & and doubling of the daily release of new mainland regions I would hope that we will satisfy the seemingly insatiable demand and stabilize the mainland auction market to a more sustainable price.

The economy in general seems to be thriving, with user to use transactions up 37% on December, though actual sales of $L down.