Sundry thoughts on regions, revenue, tier and platforms

A quiet afternoon at Hollywood Airport
A quiet afternoon at Hollywood Airport

The year-end brought with it a round-up of Second Life in terms of region numbers, courtesy of Tyche Shepherd and her excellent Grid Survey. 2014 continued to see the downward count in the number of private regions in SL, with some 673 regions vanishing through the course of the year (from 19,273 at the start of the year to 18,600 at the end of the year).

Expressed as a percentage, this means that the main grid has shrunk by 3.5%. That compares to an 8.2% shrinkage in 2013 (from 20,992 to 19,273 regions, a loss of 1719) and a 12% reduction in 2012 (23,857 to 20,992, a loss of 2865 regions).

There are likely to be a number of reasons for the slow down in losses, all interacting with one another. While  one ideologue opted to pooh-pooh it, in September 2011 I pointed to one contributing factor to the then increasing rate of decline in region numbers as likely being due to physical world economic issues. With their disposable income diminishing, people were finding an outlay of $125 a month for virtual land increasingly hard to justify, and so were divesting themselves of it; something which likely continued through 2012 and early 2013.

Private regions numbers through 2014 (source: Tyche Shepherd, SLU forums)
Private region numbers decline through 2014 (source: Tyche Shepherd, SLU forums)

While I’m not about to say we’ve turned the corner where the physical world economic situation is concerned, it is probable that by late 2013 we’d reached a point where those still with a residential homestead of their own were more willing to grit their teeth and pay for the land they hold, thus contributing to the slowing of shrinkage.

So what does that mean for the year ahead? While nothing is guaranteed, I tend to sway towards the view that the decline in region numbers will continue to slow, but at less than the rate we’ve seen in from late 2013 through 2014. I’m also inclined to think we won’t see any significant rise in region numbers through 2015 (unless some kind of external factor comes into play or the Lab does opt to do something quite unexpected to cause people to suddenly want lots of land).

One thing the slow-down will hopefully do is decrease future calls for tier cuts. As I explained back in January 2013, unless the Lab have a substantive means of compensating for the revenue loss resulting from any “reasonable” tier, any such cut will likely hurt the company (and SL) more than help. Nor is the Lab’s profit margin anywhere near the levels sometimes mentioned (e.g. the 200% recently claimed in this blog), such that they could simply “absorb” any tier cut without feeling the impact.

The decline in private regions, January 2012 through December 2013 (source: Tyche Shepherd, SLU forums)
The decline in private regions, January 2012 through December 2013 (source: Tyche Shepherd, SLU forums)

In 2008, estimates put the Lab’s earnings at around $90-95 million, and their possible profit margin at between $40-$50 million (48-50%) – see the articles here and here. I assume these estimates are for gross profits, as neither makes allowances for tax.

More to the point, there seems to be a slight flaw in both estimates: they only appear to reference the costs involved in running simulator servers. No mention is made of the various back-end services such as group chat, group management, asset management, login, transaction management and payment, (and today, the avatar baking service), the various web services (Marketplace), and so on. While the costs associated with all of these are obviously going to be a lot lower than those for the simulator hosts, they shouldn’t be entirely discounted. There’s also third-party support costs (in 2008-2010, for example, the Lab was paying Rivers Run Red and 80/20 Studio; today there’s the costs involved in using the Highwinds CDN service).

In running Second Life, the Lab must meet the running and maintenance costs of just the simulator servers
In operating Second Life, the Lab must meet the running and maintenance costs of more than just the simulator servers

Hence why, when responding to the 2008 profit estimates, Mark Kingdon was in all probability being entirely host when he stated they weren’t that high.

Looking at Tyche Shepherd’s Grid Survey estimates and taking pointers from the few bits of information the Lab do give, I’d say it is not unreasonable to put their annual revenue at around US$70-72 million. While the costs associated with running hardware, etc, have also fallen over the same period, it’s very unlikely they’ve done so at a rate that has allowed the Lab to maintain the levels of profit it may well have been generating in 2008-2010. I’d actually put the likely ceiling on their gross profits at around $20-22 million (including profits from Blocksworld).

Which, when all is said and done, may be a good deal lower than past estimates have allowed, still isn’t anything to be sneezed at. It’s likely to be enough to both drive whatever improvements can be brought to SL as well as driving forward the development of the Lab’s “next generation” virtual world(s) platform.

Nor should the latter be seen as “taking” anything away from SL simply because it money is being pumped into it.

New technologies are set to arrive which could revolutionise how we use virtual worlds, and as LL have indicated, while work is being done to add support for things like Oculus Rift to the platform, it not an “ideal” meeting of technologies. (image credit: Strachan Ofarrel, CtrlAltStudio viewer developer)

While SL is still currently in a position where it can be enjoyed and improved, the fact is that with the best will in the world, it is already hamstrung. LL themselves have often indicated that some of the deeper issues cannot be easily fixed without a complete rebuild. And as we’ve seen over the last few years, it is locked into an inflexible and vulnerable revenue model; one which cannot easily be be “fixed” or “replaced” without potentially doing greater harm to the platform and the Lab, and which is expensively burdensome to users.

We also shouldn’t lose sight of the fact that other people are starting to sit up and consider the opportunities offered by social virtual environments, and that it is growing increasingly likely that at some point something will appear to rival SL not just in terms of public appeal, but with us SL’s existing users. Just because this hasn’t happened so far, doesn’t by extension mean it won’t.

Put all this together and it makes a good deal of sense for the Lab to try to position themselves such that as other things do come along / as SL more clearly starts to approach the end of the road in a few years time (or really starts pricing itself out of the market), they’re in a position to present us with a platform free from many of the shortfalls inherent in SL, and which offers us the ability to transition over to it without losing all of the emotional, social and creative investment we’ve made in SL over the years.

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9 thoughts on “Sundry thoughts on regions, revenue, tier and platforms

  1. ANd still lots of income the lost because the extreme high sim prices. for me i would say 80% to expensive. Because the sims are so expensive people stop buying them. Thats another paying many times for the same hardware trick, because 1000$ is high. you can buy 1 u server for 700$ and guess, linden lanb is reusing the server many times. Then you get the tier 295$ + vat if your outside the USA, to get one you need a premium member ship if you dont like renting it.

    So, the row is complete. less sims that get buyed from LL is a driop in income Then offcorse the are missing tier. And on top of that many say why keep premium because premium really add nothing in sl. and to get immersive you really want your own space thats big enough, renting dont solve that btw, minimum land size todo something is a full prim sim.

    Maby im a bit low on prices, but USA is always more extreme in asking money for internet related things compared to europe. Bt maby i go a bit to low. but 100$/month is just also expensive. SL 1 is not going to win this round , question is how many years. i guess max. 10 years before the think about poulling to plug. or sooner.

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  2. There are platforms from the 90’th still alive.

    Yes, it is harder to make it perform better, but last Year we did see a lot of improvements and some things that we never thought possible are now common.
    In a near future Sl will be still a closed grid, but i hope it will join the hyper grid and be the center of the virtual worlds as we know them, cause there always be space for them.

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    1. Yes, there is at least one famous platform from the 90s still going – although the number of active users is exceptionally low. LL, as a private company, requires a vibrant, active community in order to survive, and Second Life has demonstrated it is not able to attract a growing number of users. So the risk is – as stated in the piece, that when something cheaper, fast, better, and more enticing comes along, is not that it will attract users from elsewhere, but will be seen as the place to be by those engaged in SL, simply because it offers all the advantages SL enjoys (including being a walled garden, due to the sense of security people feel vis their creations, etc.), together with new and broader opportunities for creation (content, experiences, socialising), without the associated drawbacks we, as SL users already see and “endure” with this platform.

      As to the hypergrid and while it may sound contentious, frankly, the hypergrid needs LL (or more specifically, its user base) far more than LL needs the hypergrid. Hence why Ebbe Linden said last year “I think for starters, I’m mostly focused to get the ‘verse’ part right, and then we can think about ‘meta’ later on; at least for me.”

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  3. Inara Pey, how many residents did Linden Lab drive out the previous years. How many hundreds of thousands got chased out? The retarded adult policy, screwing educators, scamming 10000 people out of their homestead island. Destroying the RL income of estate owners who did invest a lot in the platform. Rendering investments worthless. Screwing over the army and business partners such as IBM.

    Do I need to keep going on? Then you ask yourself: “ow my why are there no people coming?” could it be the technology?

    The technology is only a very small factor and does not weigh in against all the sleaze Linden Lab did commit in the previous years towards the userbase.

    Linden Lab has their reputation now and you can be sure many will walk in a large bow around Linden and their products.

    As for the technology, it is fine really. When I look at the Unreal4 engine or the Crytek engine I see small differences, it is more polished yes but that is never what Second Life has been about in the first place. You did not come for the fancy content and stunning visuals, you could find that somewhere else. The actual reason people did come did get trashed by Linden Lab who tried to exploit what people did build up to fill their pockets.

    There were plenty of good things in Second Life and some of it is still there.

    A good CEO would look at the in world economy and look to restore that, that is where the biggest damage took place.

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    1. No-one is denying the LL have made mistakes (some of which are perhaps more perceived in the eyes of those who behold them than they are genuine, while others – such as the OpenSpace / Homestead situation – are very genuine). But constantly raking over the coals and pointing to this and that isn’t going to undo history.

      And I think it fair to say that Ebbe Altberg is looking to restore faith in the Lab: he’s reversed the decision on educational discounts, he’s pro-actively been engage with the eduction community (and other communities in SL); he’s brought a new level of transparency and communications to the Lab (sure, there’s been a couple of missteps along the way – I’d point to the ToS “re-wording” being one – but on the whole it has been an improvement).

      As to the rest, I fear you miss the point. Whether we like it or not, SL is both becoming increasingly aged as less well suited to the adoption of emerging capabilities that people are liable to want in their social interactions with others and their virtual experiences. It is also destined to potentially be forever hobbled by various shortfalls which cannot be remedied without a complete re-write / rebuild. It is also (most importantly) tied to a highly inflexible revenue model.

      Ergo, as I’ve pointed out, it makes sense for the Lab to put time and effort into building a new platform. not only does it man they can harness their existing user base by offering us a potentially new and exciting, more flexible and cheaper environment in which to carry on our virtual lives whilst carrying keys aspects of those lives forward with us, rather than having the rebuild everything from scratch, it allows the Lab to more flexibility respond to future directions and developments in the fields of consumer-based VR, should they emerge.

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