The continuing decline in the number of private regions in Second Life, as documented by Tyche Shepherd, is giving rise to no small amount of concern, some of which is taking the form of calls for Linden Lab to reduce tier.

Certainly, Tyche’s figures – a loss of 1138 regions in the first 22 weeks of 2012  – are sobering; but is cutting tier really the solution at this point in time? Is it actually possible? If not, what are the alternative?

On the surface, reducing tier might seem to be a logical option. We’re all aware that tier in SL is high – but just how practical would it be for Linden Lab to lower it? If truth be told, the answer is actually, “Not very” – and for a number of reasons which may not be entirely palatable to some, but which are nevertheless unavoidable. First and foremost is the fact that, like it or not, tier accounts for 80% of Linden Lab’s revenue, so any reduction is going to hit them very hard – and will do so for some time to come.

As it stands, the current decline in private sims amounts to around an average monthly drop in tier revenue of 0.8% per month to date through 2012 – a figure which includes the fact that tier revenue did in fact increase in March by some 1.1%. While this may sound a lot, the fact remains that overall, it is a gradual downward swing. A cut in tier is not; it is an immediate and lasting loss of revenue. Drop tier by 20% and that’s 20% of your revenue gone in a blink – and with absolutely no guarantee you can compensate for it.

Of course, it will be argued that any drop in tier will lead to an uptake in land sales which will compensate for the initial loss. However, the reality is that this is very far from guaranteed. Just because tier is lowered does not automatically equate to a sudden growth in land sales. Let’s face it, private estates are already struggling to fill their available land (and the fact that they are is also likely to be a factor fuelling the number of regions being returned to Linden Lab) – so why would they rush out to obtain even more sims on the strength of a tier reduction when the population currently isn’t there to warrant them doing so?

The one possible exception to this might be with Homestead sims. These might well enjoy an initial boom period as people opt to take advantage of the lower tier and migrate to them. However, this would be somewhat tempered by an increase in the number of surplus full regions being returned to LL that would also result from such a migration. Thus, while land may appear to grow as a result of the increased number of Homesteads, any corresponding growth in revenue for LL is liable to be much smaller, and unlikely to compensate for the tier cut itself.

The same goes for commercial enterprises: any cut in tier is an immediate increase in revenue for them – but it doesn’t mean they will rush out and set up even more stores across the grid. Why should they when the teleport can instantly bring people to their existing store? Additional stores don’t automatically translate into increased revenue – but they do incur increased costs, thus undercutting and gain made through a tier reduction. And while some might opt to take the plunge and expand – or even open new product lines in new stores – it is unlikely, overall, that a tier reduction is unlikely to bring about the renaissance of the mall in SL, for example, much less a quantifiable boost to the economy as a whole.

The cold hard truth is that however much a reduction in tier might individually benefit those of us who hold land within SL, it’s actually not going to do that much to stimulate the economy – and it will stand to benefit Linden Lab even less.

Nor is being “radical” the answer. While it is true that the one way of stimulating growth in SL is to grow the user base through increased user retention, etc., this has to be tempered with the fact that the infrastructure itself can only support so much. So while Second Life does need more users and a sustainable upswing in user retention, calls for LL to try to pull-in “millions” of users are misguided and will remain so until such time as the platform can handle large volumes of avatars in close proximity to one another on an ongoing basis. Bold and radical are only useful if they are actions taken with clear intent and realizable goals.

Which is not to say something shouldn’t be done to safeguard the future. The question is what that something should be.

And it is a question Linden Research has already taken steps to address – although not in the way many have guessed. Because the answer isn’t in the company trying to reduce tier – not yet, at least – or in doing anything else with Second Life itself. Rather, they are seeking to address it through their drive to diversify.

As has been reported far and wide across SL and other blogs, Linden Research is in the process of developing a portfolio of non-SL products, at least one of which, called Dio, is nearing readiness for closed beta testing. These products that are important for two key reasons:

• They will open up new revenue streams to the company, thus reducing the strain on SL as the company’s single source of revenue, potentially allowing the company to be far more flexible in how it handles the platform fiscally;
• They make Linden Research a far more attractive proposition for investors.

Of course, it will take time for the revenue streams from the new non-SL products to mature. But as it stands, Linden Research perhaps has that time at their disposal, despite the current sim losses. In March, during a discussion on her blog, Tateru Nino estimated that the break point for LL in terms of private regions losses would be around 6,000 fewer sims than were on the grid at that time. Assuming the rate of decline in regions continues at its present rate, then LL will reach that break point about 24-30 month from now – which is potentially more than enough time for the revenues from these new products to make their presence felt.

Not that the company actually needs to wait that long. As mentioned above, the new products have the potential to benefit the company more immediately through inward investment through them. This is unlikely something that has been lost on either the management team or the board, especially given the mounting interest in, and speculation around, a new era of narrative games.

This may be of scant comfort to those of us feeling the pinch in Second Life right now – but the fact is that when it comes to tier and LL’s revenue, there is no easy answer, and any solution that is offered up is unlikely yield the anticipated benefits. Nor can the SL revenue model be easily or radically shifted. As such, the move to diversify into new product lines is perhaps the one means by which Linden Research can remodel its revenue streams without harming itself, and bring about the means by which it can take a more flexible approach to the management and operation of Second Life. If this is the case, then the company has perhaps shown itself to be far shrewder than people are prepared to credit.

Don’t much care for the prognosis? Would you like a second opinion? Would you like to read more on the subject of tier economics in SL? Well, I invite you to have a read of Tateru’s Nino’s thoughts on the matter..