Doing Business in Second Life: Considerations for Small Businesses

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Table of Contents

Section Page

1Executive Summary

"Every human being is interested in two kinds of worlds: the Primary, everyday world which he knows through his senses, and a Secondary world or worlds which he not only can create in his imagination, but which he cannot stop himself creating."

—W.H. Auden

Second Life (http://www.secondlife.com) is a 3D “virtual world” that allows people to interact with others in the same environment through the use of avatars. An avatar is “an Internet user's representation of himself or herself, whether in the form of a three-dimensional model used in computer games, a two-dimensional icon used on Internet forums and other communities.”¹ Since its inception in 2003, membership in Second Life has grown exponentially, now boasting nearly 13 million residents, with nearly 500,000 residents visiting Second Life in rolling 7 days periods.²

Due to this growth and participation in the community, businesses have sprouted up all over Second Life, with nearly 55,000 businesses appearing in Second Life as of the end of February, 2008. Furthermore, over 328,000 of the residents in Second Life spend money.³

With this growth story, the allure of Second Life seems to be irresistible, and the promise of quick profits draws in companies both large and small to establish a presence in Second Life. Many companies underestimate the cost of establishing a vibrant presence in Second Life,⁴ and those who understand the costs do not get the short-term ROI that investments in the tech bubble of the early 2000 time period did.

Still, the trend in moving towards virtual worlds is clear and nearly inevitable. As personal computers gain processing power and the ability to rapidly generate the complex graphics inherent in virtual worlds such as Second Life, more users, particularly those who regularly utilize the Internet, will begin to inhabit those worlds. As Gartner reported, by the end of 2011, “80% of active Internet users (and Fortune 500 enterprises) will have a ‘second life’, [although] not necessarily in Second Life.”⁵

Therefore, a company that wishes to either establish or grow its online presence in selling goods and services to consumers will be wise to consider the implications that Second Life and other virtual worlds have on the future of consumer interaction with the Internet. Furthermore, doing business in Second Life is not as simple as setting up a website, nor does it have all of the same parallels of opening up a brick and mortar retail store. This paper will discuss the implications of doing business in Second Life and what businesses not currently in Second Life should consider when deciding if and when to establish a presence.

2What Is Second Life?

Second Life is, according to their website, a “3-D virtual world created entirely by its Residents.”⁶ In practice, Second Life is a standalone computer application downloaded from the Second Life website (http://www.secondlife.com/join) and run on a person’s computer. In this computer program, the user interacts with a server-based representation of an alternate world, meeting other people, represented by customized images altered by the individual users, “walking” around, and conducting business. In many senses, it is a computerized replication of a real world, blending science fiction, fantasy, and computers into a visual, and increasingly auditory representation of a fantasy world come to life on one’s computer. It is reminiscent of role-playing games, except there are no quests or goals in the world. One joins with the purpose of interacting rather than dragon slaying, puzzle solving, or artifact finding.

Furthermore, the representation depicted by Second Life does a good job of symbolizing actions as they occur in the real world. While not meant to replace a physics-based computationally intensive engine, Second Life does create a workable version of the basic physics laws, which enables modeling and prototyping of products and buildings and allowing users to interact with these objects in a similar fashion to how they would do so in the real world. Some of the activities that users undertake, such as flying and teleporting, do not represent the laws of physics, at least as we understand them, but they are certainly workable enough for basic prototyping.

The computer-generated images that appear on the user’s screen end up being reasonably realistic, if cartoonish, representations of what the user would look like if he lived in a computer world rather than the real world.

Figure 1: Second Life Screenshot⁷

2.1Demographics of Second Life

As of March 9, 2008, there were 12,775,992 total residents in Second Life, of whom 486,715 had visited Second Life within the past seven days.⁸ 59% of the users are male, and 41% of the users are female⁹, although females spend more time on average in Second Life than males do, with females spending an average of 43.2 hours a month in Second Life and males spending 25.5 hours a month on Second Life.¹⁰ The plurality of the population is from the United States, representing 37.7% of the population.¹¹

While the population statistics are impressive, it is important to take into account what the usage means to those who are interested in doing business in Second Life. With the top end numbers, many who open businesses in Second Life expect to see bustling streets teeming with activity, envisioning an online equivalent of a Turkish bazaar. However, Second Life has a virtual land area approximately twice the size of San Francisco, with, at its peak usage periods, approximately 40,000 residents online at a given time due to server constraints.¹² Second Life has an approximate population density of 23,000 per square mile, compared to Manhattan, which has a population density of approximately 143,000 per square mile.¹³ That population density is based on the entire population of registered Residents; however, given that server constraints limit online populations to approximately 40,000, this means that only .31% of the entire population of registered users can appear on Second Life at any given time. With a size of approximately 83 virtual square miles,¹⁴ this means a density of approximately 482 residents per square mile, between Malta and Bermuda in terms of population density.¹⁵

2.2Why is Second Life Important?

Second Life represents a trend towards increasing virtualization within an Internet user’s experience. Established in 2003, Second Life is one of the early pioneers of the virtual world segment of the Internet, and while its population is still small compared to massively multiplayer online roleplaying games (MMOGs)¹⁶, it represents a niche that the MMOGs do not. According to Gartner, “80 percent of active Internet users (and Fortune 500 enterprises) will have a ‘second life’, but not necessarily in Second Life.”¹⁷ According to Steve Prentice, vice president at Gartner and the lead analyst on the virtual worlds report, “The collaborative and community-related aspects of these environments will dominate in the future, and significant transaction-based commercial opportunities will be limited to niche areas, which have yet to be clearly identified…However, the majority of active Internet users and major enterprises will find value in participating in this area in the coming years.”¹⁸

While the population is currently small and Second Life may or may not be the dominant application of the future, it does house some of the thought leaders within virtual worlds. According to Dan Light, head of interactive for marketing firm Picture Production Company (http://www.theppc.com/), "The people who use it regularly are creative and tech-savvy, they're what Seth Godin called 'sneezers,'” or people who spread viral marketing campaigns.¹⁹ For a business, this means that the influencers who can provide information and marketing insight about a brand or a product are centrally located in one online location—if they can be found, corralled, and queried about their thoughts. Just as trying to get the opinions, and, hopefully, the viral marketing of a product in the real world takes coordination, intention, and effort, so it works in Second Life.

3Second Life For Business

3.1The Economy of Second Life

From a procedural point of view, conducting business in Second Life is the same as it is in real life. Money is exchanged between parties for goods and services, and an open market helps set the value of those goods and services. The difference between real life and Second Life is that the currency is, just like Second Life, virtual. Users purchase Linden Dollars, annotated L$ from Linden Labs, the company which owns Second Life, which they can then use to buy and sell goods and services within Second Life.²⁰ $1 U.S. buys approximately 269 L$, and that rate has been reasonably consistent over time.

Figure 2: L$/U.S. $ Exchange Rate²¹

The economy of buyers has been growing and vibrant. In January, 2008, over $8.2 million was used to purchase L$. This represents nearly a 60% year over year growth trend.

Figure 3: US$ Purchases of L$ (in US$)²²

Until January 8, 2008, it was possible to deposit Linden dollars into Second Life banks, get interest, and withdraw cash from ATMs. However, because of the lack of regulation, many banks were reinvesting the money into speculative ventures, losing the deposits of many of their customers. Because of defaults, Linden shut down approximately a dozen financial institutions with deposits of approximately $750,000 U.S. Real life banking institutions do not conduct business in Second Life due to banking regulations requiring banks to know their customers, which is tenuous, if not impossible in Second Life.

Figure 4: Notice At a Closed Second Life Bank²³

3.2Buying Habits of Second Life Residents

While the predominant activity of Second Life is socializing—meeting people and discovering things, a majority of users are also interested in buying things. According to a study by Second Life market research firm Reperes, 91% of Second Life residents surveyed say that they are interested in discovering new things on Second Life, followed by 81% who are interested in meeting people. 52% are interested in buying things, and 33% are interested in selling things.²⁴

Those who do make purchases often have the same criteria and complaints that shoppers in the real world have. Second Lifers find out about what to purchase through their friends. 48% of users buy on Second Life based on word-of-mouth recommendations. 13% are influenced by billboards. 66% want assistance while they are shopping in a store, and 96% of buyers want original, creative items, with 86% wanting a lifelike representation of products, and 93% of them wanting customizable products. Importantly, only 14% of them are looking for Second Life equivalents of real world brands.²⁵

Figure 5: Second Life Shopping Habits²⁶

They also have the same shopping experience criteria that most real world brick and mortar and online store counterparts. The typical complaints of a Second World shopper include:

• Communication

  • The users want more interaction either with a sales representative or with the business owner(s)

• Lack of product information

  • Oftentimes, it is difficult to discern what an item’s use actually is, and often instructions are missing or incomplete

• Facilities in shop

  • Many shops offer too many items, which make it difficult for slower computers to load up the shops in a reasonable amount of time

  • Many stores have low visual appeal

• Too expensive

• Lack of product diversity

• Low product quality

• Difficulty in finding shops²⁷

While many Second Life residents spend Linden money in a given month, the economies of scale are quite different. In February, 2008, 362,359 residents spent money in Second Life, and 94.2% of those residents spent less than $200 U.S.

Figure 6: Second Life Resident Monthly Spending Habits²⁸

3.3Businesses Within Second Life

As is to be expected with a new and innovative sector, initial opportunities to make money are much fewer than the number of people who think that they can make money. According to Gartner vice president Steve Prentice, “[S]ignificant transaction-based commercial opportunities will be limited to niche areas, which have yet to be clearly identified.”²⁹ While the opportunities to grow a significant business are not rampant and do not bring to mind the parallel of the economic opportunities of Eastern Europe after the Iron Curtain fell, there are plenty of businesses which are making money, although the number of businesses making significant money is much lower.

In order to conduct business within Second Life, a Resident must purchase a premium account. The growth of the population of Premium users has stagnated in 2007, showing a potential slowdown in the number of new businesses appearing in Second Life.

Figure 7: Premium Resident Population Trends³⁰

While it appears that the number of premium residents, and, by inference, the number of businesses, is stagnating, those businesses which are in Second Life are making money. In February, 2008, 54,747 Second Life residents had businesses with positive Linden cash flow.^31,32

The true numbers of business cash flow present a different picture. In January, 2008, 55,235 businesses had positive Linden cash flow; of those, 88.5% had revenues of under $100 U.S. Only 156 businesses had monthly revenues over $5,000 U.S.

Figure 8: Businesses With Positive Monthly Revenues³³

The vast majority of the businesses in Second Life are associated with purely Second Life activities. These involve creating objects for avatars or creating activities for people to do while they are in Second Life. As we will detail in the next section, there are other business opportunities available in Second Life.

4Second Life Activities and Their Business Parallels

Because of the nature of Second Life and its 3-D representation capabilities, businesses can do many things much more cheaply than they can in real life. They can also roll out marketing and test campaigns and conduct market research much more cheaply than they can in a real-world campaign.

4.13-D Modeling

Because of the nature of Second Life, mathematicians, architects, and builders have the capability to model and prototype structures and items in a virtual world without needing to build an actual physical prototype to determine both usability and viability while expending a fraction of the money needed to do the same in the real world.

Seifert Surface³⁴ is a graduate student in mathematics at Stanford University. He utilizes Second Life to model his experiments and theories in three dimensional topology and geometry. By writing programs in the Linden Script Language,³⁵ he is able to quickly prototype his experiments and determine their viability.

Figure 9: Model of a 3D Hypercubed House³⁶

Coldwell Banker decided to utilize Second Life to remove the need for people to come to its listed houses by replicating them in Linden’s virtual world.³⁷ By spending less than $50,000 to build a presence in Second Life, with both land and offices,³⁸ Coldwell Banker was able to bring in 3,500 visitors to the house in Second Life,³⁹ and has led the Realtor responsible for the listing to opine that “[T]he actual home is sort of a launch pad for more information.”⁴⁰

Figure 10: Coldwell Banker’s $3.1 Million Home on Second Life⁴¹

Virginia Beach, Virginia-based company Fabjectory (http://www.fabjectory.com) utilizes a process called telemetric printing to create 3-D printed objects based on designs created in Second Life. By laying down plaster powder one 400^th of an inch at a time, the company builds actual objects from models created in Second Life’s virtual environment. Companies are making jeans and models in Second Life and subsequently creating them in real life; the jump to real world fabrication is not that far away, particularly as telemetric printing improves.

Figure 11: Fabjectory Model and its Original Avatar⁴²

Starwood Hotels took the idea of 3D modeling to a full implementation, modeling its new aloft hotel entirely within Second Life and then opening up the model to the residents of Second Life and taking feedback both within Second Life and in a weblog. The model allows avatars to come into the hotel, walk around, and interact with the features, such as furniture and waterfalls, while avatars from Starwood Hotels observe the interactions, take notes, and refine the prototypes.⁴³ Starwood got feedback from users on many aspects, including some which they did not expect, such as sliding doors in bathrooms.⁴⁴

Figure 12: Second Life’s aloft Hotel By Starwood⁴⁵

4.2Brand Testing and Awareness

Since the population of Second Life inhabitants are, in Seth Godin’s terms, “sneezers,”⁴⁶ they are a good group of people against whom to test new marketing ideas and brand campaigns. While the ties between Second Life and real life are sometimes tenuous, Second Life still remains a good sandbox for testing out new ideas—as long as they are indeed connected to real life brand experiences in some way. Many ventures that attempt to make a splash in Second Life are aiming more for public relations notoriety than for brand impact, and they cannot make a strong link between what they see in Second Life and what will happen in the real world.⁴⁷

The technology in Second Life makes it possible for people to have virtual physical interactions with the products that they will encounter in real life. Having an object interaction rather than seeing merely a static image or text improves memory associations in the person experiencing the interaction. Consequently, people “remember more attributes and features after having a virtual product experience.” However, in addition to remembering more attributes and features, they also have more false positives and tend to attribute features that the product did not actually have.⁴⁸ While it is a double-edged sword in terms of brand promise, the opportunity to increase unaided recognition of features is one that most marketers will approve of, even if the risk is of the perceived brand promise disappointment.

As one commenter on a technology weblog notes, the virtual world allows companies to test out new product ideas long before they would actually have to develop the product.⁴⁹ This would potentially reduce the research and development costs of the product by allowing users to select which of the ideas has the most resonance with the Second Life population. While there are inherent dangers in extrapolating the findings from market research conducted in any such demographic, the findings can at least eliminate potential definitive market failures. An example of such a test would be for a restaurant to set up a virtual restaurant in Second Life. People could come in, order from a menu of items which the restaurant has thought about but not pursued, and in exchange, receive a coupon for an actual item at the real life restaurant location.⁵⁰

4.3Meetings and Conference Space

IBM was one of the first large real world companies to make a splash in Second Life when they announced that they would spend over $10 million on virtual worlds in 2007.⁵¹ The company holds many of its major meetings in Second Life and conducts conferences and meetings with roughly 20 major clients.⁵² Utilization of Second Life also provides a cost-effective alternative to video-teleconferencing.

Because of the ability to have voice chat⁵³ and to have private chat conversations,⁵⁴ companies are using Second Life as a proxy for real life meetings, particularly where the employees are geographically scattered. Similar to the difficulty that people experience in not paying attention when they feel like the speaker is looking at them when compared to another medium such as a conference call, Second Life replicates the same feeling of being in the same room as the other people. The simulated reality available in Second Life is close enough to the real world that the University of Texas is using Second Life to provide therapy for suffers of Asperger’s Syndrome, a form of autism where sufferers have a hard time detecting emotional subtleties and social cues that non-suffers process subconsciously.⁵⁵

Figure 13: An IBM Second Life and Real Life Meeting⁵⁶

4.4Education

Because of the ability for avatars to interact and to see three dimensional models, write notes, have private conversations, and hear the instructor from afar, Second Life has gained popularity as an alternative to the traditional classroom. A sample of universities which hold classes in Second Life include:

• Harvard University⁵⁷

• New York University

• San Diego State University

• Stanford University

• Texas State University⁵⁸

Figure 14: Harvard Law School in Second Life⁵⁹

As trainers and educators seek to expand their horizons both intellectually and geographically, the use of Second Life—and other virtual worlds—will continue to grow, as those virtual worlds allow users to remain in their hometowns, or, often, their homes while interacting meaningfully with classmates, assistants, and professors. Oftentimes, they can do more in a virtual world, such as creating models on the fly or putting up ideas on whiteboards or in physical form, that they could not do in a real classroom in the amount of time usually allotted to a class.

4.5Rehearsals

Because of the physical nature and voice enabled capabilities of Second Life, groups can conduct rehearsals of physical activities without having all of the participants in the same location. The industry which has taken the biggest advantage of this capability is the entertainment industry. With activities ranging from reproductions of Shakespeare plays⁶⁰ to full-blown movie production,⁶¹ directors and actors can create their clips at a fraction of what it would cost to build the same sets in real life.

Figure 15: Screenshot From HBO’s “My Second Life”⁶²

In the future, analysts envision that Second Life could be used for everything from training medical students to rehearsing convoys for military missions.

Figure 16: Emergency Training For Mauritius Government Conducted in Second Life⁶³

5Tips For Doing Business in Second Life

5.1The Costs of Doing Business in Second Life

As is the answer provided by most consulting firms to most questions, the answer to the question of how much it costs to do business in Second Life is “it depends.” However as is often the case when estimating costs in projects, ranging from software to construction, the cost estimates will usually be off by an order of two.

On the low end, a resident can sign up for a Premium account for $9.95, buy land for cheap (as low as $5 for 512 square meters and a minimal maintenance fee, and build a cheap building for under $50.⁶⁴

On the high end, a business can buy an island, costing $1,675 up front and $295 a month for maintenance, pay a high-end developer between $5,000 and $10,000, and then engage a Second Life marketing firm such as crayon (http://www.crayonville.com/) to create buzz for the new venture.⁶⁵

The biggest costs involved in doing business in Second Life are often not the direct costs provided to external agencies such as Linden and crayon, but, rather in the hours that employees of the business must spend in Second Life maintaining the presence, learning about Second Life, and ensuring that the benefits accrue beyond an initial buzz-generating launch or party to draw a large group of residence. While some automation is possible to create automated customer service representatives, customers want to talk to real people. Just as Citi’s campaign to reach a real person when you called their toll free customer service number resonated with customers, the same holds true in Second Life. Even though there are avatar representations, when conducting business, spenders want to know that they are indeed connecting with a real person…somewhere.

5.2Establishing a Business Presence in Second Life

Once the initial spending is complete and the building, store, or experience area is complete, the work to establish the business has just begun. The most important activity—which actually should be an extension of the decision to enter Second Life in the first place—is to define the brand experience in Second Life as it relates to the original intent of entering into Second Life.

Many companies enter Second Life expecting to turn a quick profit, or even for incremental revenue. Given that few companies are making significant money in Second Life, it is a better strategic decision to define the core values of the brand being promoted or built, particularly as it relates to the carryover between worlds.⁶⁶ According to Gartner vice president Steve Prentice, “Do not expect to undertake profitable commercial activities inside most virtual worlds in the next three years.”⁶⁷

Much of the buzz generated in Second Life is through the use of giveaways. These usually take the form of “bling”⁶⁸ which is something which the avatar can wear or carry with him. In creating these freebies which avatars can get and give to others, businesses would be wise to keep in mind that they want these freebies to have some attachment to a real world value, such as a coupon or a connection to a real world brand.⁶⁹

Figure 17: Second Life Bling⁷⁰

5.3Other Tips For Second Life Businesses

Marketing in Second Life is different than marketing in real life. Second Life has aspects of brick and mortar stores because of the virtual reality and 3-D concepts utilized in Second Life, but, because of the technology used, it also has aspects of Internet marketing. However, business owners would be wise not to apply a cookie-cutter approach from either genre of marketing to their Second Life efforts.

Some tips which others have utilized and spoken about include:

• Tie your Second Life experience to a real world experience. Unless one plans on being the next Second Life millionaire, the purpose of entering into Second Life is to build brand equity in the real world brand. Whether testing concepts or creating buzz about a product or a service, one of the best uses of Second Life is to provide a low cost outlet for marketing. In order for this marketing effort to have value, it must tie to the real world activities of the company, whether driving traffic to a website or shaping customer behaviors towards more profitable activities. The consummate example of how not to do this is auto insurance provider Unitrin Direct. They created a store with kiosks that generated insurance quotes, but then failed to even provide a link to their website; people had no idea where to go for follow-up or questions.⁷¹

• Keep your events to a manageable crowd. Linden’s servers can handle between 60 and 90 people at the same time in the same location. The American Cancer Society had to turn down potential donors from an event because it could not handle the traffic. If you expect a lot of traffic, look at spreading out the times and invitations.⁷²

• Take a leadership role. Second Life is still young, and even virtual worlds are young. There is still much fertile ground to be tilled, and the Second Life—or leading virtual world of the time—of five years from now will be much, much different than it currently is. By getting deeply involved now, businesses “have a chance to shape the market, culture and politics of an important online space -- an online space that will become the face of the Internet in the years ahead.”⁷³

Finally, the most important tip that many business owners and inhabitants of Second Life have conveyed is:

• Spend time in Second Life before spending money. Second Life is different in many ways, and no amount of reading about Second Life can prepare a neophyte, or “newb” in Second Life terms, for what they will experience in Second Life. Unless a person is very familiar with technology, and, more specifically, acting in a virtual world, the learning curve is significant. Then, a second learning curve exists for understanding Second Life culture and its citizens—a curve which is crucial to get up to have a chance of realizing the goals that a business may have in going into Second Life.

5.4Challenges and Downsides

Second Life is not without its challenges. Seeing flying penises⁷⁴ and people representing themselves as animal avatars rather than humans can be disturbing, particularly if one is trying to conduct a serious business conversation. It takes a period of adjustment, and businesses must consistently guard against negative brand implications as a result of the challenges to Second Life. After all, as the name implies, Second Life is an avenue for people to experience some existence other than the one that they inhabit in the real world. As a result, there are deviant behaviors ranging in levels of seriousness, throughout the world. However, vendors experience some similar challenges both in brick and mortar—unruly customers, weather, bricks through the window—and in online—denial of service attacks, spamming, and domain hijacking.

Additionally, the technology still has constraints, both on the Linden side and on the personal computer side. On the Linden side, the main constraint is the number of people who can inhabit a given space in a given time.⁷⁵ On the personal computer side, many personal computers simply do not have the computing power to handle the graphics generated by Second Life. As a result there is often a space between the user initiating an action and seeing the action on the computer screen, called lag. Fortunately, over time, as technology improves, these issues should resolve themselves.

5.5Alternate Virtual Worlds To Second Life

Though it is beyond the scope of this paper to provide in depth comparisons, no study of Second Life would be complete without at least a brief glance at other virtual worlds. Examples include There (http://www.there.com), an online virtual world similar to Second Life; Gaia Online ((http://www.gaiaonline.com), a popular website with teenagers; Entropia Universe (http://www.entropiauniverse.com/), a massively multiplayer online roleplaying game; and Cyworld (http://us.cyworld.com), a Korean website that merges MySpace and Second Life.

6Conclusions

Those who go to Second Life with dreams of making big bucks fast are in for a disappointment. Even for people with enormous artistic talent, the opportunities are scarce, so much that only one millionaire has emerged from doing business in Second Life.⁷⁶ The population density in Second Life simply is not yet there to support a massive economy. Most experiences in Second Life will be more sparse, with the occasional interaction outside of travel to an event or a dance club, which always seems to draw visitors, although one may find all of the avatars greyed out if the event reaches Linden capacity.

Instead, the smart businessperson will realize that the future of human computer interaction resides with 3D virtualization. Second Life might not be the one to emerge from the pack as the market defines itself better. However, most, if not all of the lessons learned from building a business in Second Life (or another virtual world) will be portable to whatever platform emerges as the champion. Netscape did not win out in the browser wars, but those who learned how to market on the Internet through using Netscape carried over those lessons to become successes in the Internet economy.

Go in with a realistic mindset, and do not expect a positive ROI. Instead, use the experience to build brand, test concepts, ideas, and products, and to learn, most importantly, about how to market in a virtual world. The concepts are new and different, and generating buzz, and more importantly, stickiness and importance is not a simple exercise to be done in a few steps or with little human capital investment. However, as the technologies and platforms improve, having a leg up on the competition and being a first mover and leader in conducting business in a virtual environment will have great importance and advantage over a longer term horizon. After all, the killer app for Second Life has yet to be built.

Venditor emptor.