Apologies to those who may have received notification of an early version of this post being published at the weekend. Slight error on my part hitting the wrong button when trying to clear-up some old drafts.
Tier has long been an issue within Second Life, one which has been exacerbated over the last 24 months by the ongoing decline in private region numbers, which form the greater proportion of LL’s revenue. The decline has been tracked across the weeks and months by Tyche Shepherd via her invaluable Grid Surveys. In 2012 alone, the grid has suffered a loss of around 12% in private regions. Such is the concern over tier that it gets raised following articles which may not be related to the subject – such as LL moving to promote SL through Amazon.
This decline has been subject to many calls for the Lab to reduce tier, with some recently advocating it should be cut by one-third. However, as both I and Tateru Nino attempted to explain in June 2012, while cutting tier may appear the obvious thing to do, it may not actually be the easiest or most comfortable thing for the Lab to do.
Crunching Some Numbers – the Lab’s Perspective
While I have covered some of this ground before, I thought it interesting to look at some numbers purely from the Lab’s perspective, using Tyche’s Grid Survey and survey summaries as reference.
- As of December 31st, 2011, monthly private region revenue for LL was approximately $5,006,000, with a margin of error of +/-$60,000
- As of December 31st 2012, monthly private region revenue for LL was approximately $4,244,000 per month, with a margin of error of +/- $53,000
- While acknowledging we have yet to see Tyche’s 2012 end-of-year survey, that amounts to a drop of $762,000 through the year, or an average of $63,500 per month
If there is no reduction in tier, it is probable that the current decline in private region revenue will continue at or near the 2012 monthly average of $63,500. However, were the Lab to cut tier by one-third, they immediately slash monthly private region revenue by $1,400,520. That’s equivalent to 4,747 full private regions vanishing from the grid – 1.6 times more that the total number of private regions (full, Homestead and OpenSpace) lost in 2012.
Even allowing for the tier cut stimulating the demand from new land (and there are problems with that, as discussed later in this article), and assuming set-up fees remain unchanged, it means the Lab would need to see the equivalent of 1,337 full private regions added to the grid in the first month following the cut just to match the revenue loss suffered had they not cut tier (i.e. the difference between $1,400,520 and $63,500).
Obviously, in subsequent months following the tier cut the total number of new regions needed to offset revenue losses does drop as tier for those added cuts in. But it still means that the rate of demand needs to remain in the high hundreds (i.e. an equivalent of over 500 full regions a month) for around 4-5 months. Even were this to happen, it would still take at least 7-8 months for LL’s revenue to recover to pre-cut levels.
Thus, from the Lab’s point of view, such a substantial cut in tier represents a huge risk. Would it in fact generate the necessary demand in the first month to offset such a heavy initial loss in revenue? If not, what might the demand be, and would it be sustainable over time to offset losses and recover revenue to pre-cut levels, and how long might this take? Or would it simply lead to a short-term spike in demand before numbers drop once more, resulting in monthly revenue losses in the hundreds of thousands, rather than the tens of thousands?
Even a more modest tier cut of 10% may fail to offer a significantly brighter picture for the Lab. While the revenue shortfall is significantly lower than for a one-third cut, the question of sustainable demand for new land remains; particularly as a 10% cut is only $12.5 a month removed from tier for a new Homestead region. Such a relatively small reduction might not be seen as attractive enough to bring about sustainable demand for new land sufficient to offset a revenue loss which would still be significantly larger per month than had tier not been cut.
There is another factor which must be considered here as well: the huge amount of unoccupied land already available in-world. As I pointed out back in June, any tier reduction could very well stimulate interest in this available land first, rather than leading to a direct demand for new regions. While this may well be good for estate owners, it doesn’t actually initially result in any more revenue arriving in LL’s coffers – again leaving them uncomfortable with the idea of making any tier cut.
Nor should it be assumed that the Lab is in a position to absorb any reduction in revenue simply on the basis of their tier fees being so much higher than those levied by other grids, thus affording them greater margins to play with. While it is true that LL charge significantly more in terms of tier compared to other grid, it should also be remembered that they have significantly higher operating overheads (which other grid operator, for example, employs 175-200 people with all the attendant costs, corporate liabilities, etc?). Like it or not, these overheads do much to define LL’s fees – so any comparison based purely on tier only tells half the story.
An Elephant In the Room
The flip side to all this is that clearly, the current situation vis-a-vis revenue loss cannot be allowed to continue indefinitely, because there will come a point where it starts to hurt LL and possibly result in drastic action on their part.
So what can be done?
It has been suggested that a cut in tier coupled with an increase in prim counts / land capacity in regions would help. However, this would still mostly likely mean only a very modest reduction in tier which (again) might not be enough to stimulate the demand for new land. And that’s assuming LL could easily and acceptably increase region prim counts; this is by no means a given, even if OpenSim grids manage to do so.
Perhaps a better alternative would be to combine a modest tier drop with a reduction in region set-up fees. The precedent for such an option is already there. The October 2011 “Land Sale” saw set-up fees suspended for a weekend, with the result that 508 regions were added to the grid in just 48 hours. While this was subsequently eroded as the realities of tier kicked-in, it did demonstrate that such fees are a barrier where land is concerned. Therefore, cutting set-up fees to a “reasonable” level and coupling it to a modest tier reduction might strike more of a favourable balance – although the very big question of sustainability would remain.
The most viable option perhaps remains the “de-emphasising” of land as the major source of revenue generation. In this, LL need to look further afield than simply trying to push the Marketplace and Premium memberships as these are clearly limited options. Simply put, there are not enough users in SL for Premium membership to seriously compete with land, and it is questionable as to whether SL would be able to support the numbers required for it to do so. Equally, any push with the Marketplace can also only go so far; show merchants they can enjoy greater success through the Marketplace than with in-world venues, and they are going to ditch land holdings and impact tier revenues.
A more sustainable option lies in the company developing alternative revenue streams – such as via new products, as I again pointed to back in June 2012. But this isn’t going to happen overnight; it takes time for products to establish themselves, and right now none of LL’s line-up looks to be a major earner any time soon. Nevertheless, new products might encourage investment in the company, helping to both offset current revenue losses and possibly provide a means for LL to offer some tier easement down the road.
Ciaran Laval, in cogitating this very matter, has suggested a number of ideas for leveraging aspects of the SL platform itself as revenue generators, such as advertising through the websites and in entering into strategic partnerships with suitable companies. Advertising would appear to be well worth consideration, with both the Marketplace and my.secondlife.com offering potential, given their traffic numbers. They may not be huge earners if leveraged, but as the saying goes, “Every little helps”.
While tier / revenue is very much an elephant in the room for the Lab, it is by no means alone. There is also the matter of user retention – a subject which is actually intertwined with that of tier, but which I’ve deliberately avoided discussing here so as to keep this article to a manageable length. However, the reality is that it is unlikely that any single act by the Lab is going to resolve the issue of declining tier / revenue (or the issue of user retention). Rather, matters require a cohesive set of strategies in order to be resolved sensibly and in a manner that doesn’t unduly damage the company or SL in the process.
Therefore, perhaps the real question is whether the Lab is actually working on such a set of strategies – and when might they offer some assurances they’re doing so?
- The tracts of our tiers
- Shed me no tiers – Tateru Nino
- PrimPerfect poll results suggest tier is too damn high – Ciaran Laval
- Grid Survey – Tyche Shepherd
With thanks to Ciaran Laval in casting an additional eye over figures, etc.