Updated 2010-06-14 – 2 Added

Tateru Nino at Massively wrote an article on why she thinks the layoffs are an indication of a cash crunch at Linden Lab (LL). See: The Virtual Whirl: The bottom line

The Second Life cash supply is very much like the real world cash supplies of nations. They all print money as they think it is needed… or to serve their various agendas. But cash supplies are not absolute control. One can print lots of money, but if no one buys/takes it then nothing happens. Citizens have a say… or at least an effect on cash supply.

Money is very much a commodity like corn, but easier to make. That is why we see currency markets in the real world. LL and governments are somewhat like a big brother. They are the big kid and none of us individually can beat him up, we get our clock cleaned. But if all the little brothers and sisters gang up we can get him. As part of the 9, 10, and 11 year old coalition I realized we still were not an over whelming match for our older brother at 16. Stalemates and ties were likely if we teamed up. Threatening to rat each other out to mom and dad was a major strategy all about self interests. The Linden money supply is politically can practically very similar. The point being as long as they can sell the mom and dad threat they can keep the crowd under control. But once enough people move or are determined… they can’t control things.

SL Regions - Metaverse Business

LL cannot just print or erase Linden currency. Someone has to buy a L$ for LL to make any money from currency sales. The money they do make from L$ sales is pure profit, or nearly so. Tateru explains in more detail. Since the first of the year L$ sales have hit a plateau and profit from those sales is like US$0.00. Tateru’s belief is that loss of income is the reason for LL layoffs. She could be right.

When one considers the fees coming in from tier and region rentals (hosting fees) one wonders. The income from those is significant. At $195 to $295 per region with around 31,000 regions (Reference) that is say $245x31k=$7.6million per month… that needs to be adjusted for mainland regions and various tier payments and yadda yadda yadda… So, the $1 million are so per quarter or $300k per month that L$ sales brings in does not seem that important.

If one considers a game server can be rented for $2 to $4 per slot, which is something like $40 to $80 per month for something like an SL region, and voice servers are $3 to $5 per month… one has to figure some goodly part of the monthly region fees is profit.

However, it probably is not the dollar amount as much as it is the trend of things. One quarter of losing a million dollars and it looking like a repeat in the second quarter could be chilling to a CEO. My experience is it takes more than a small loss to make layoffs happen. Managers so hate to layoff staff. However, smart CEO’s react when they see writing on the wall.

OSGrid Regions - OSGrid Stats

I think what is going on is somewhere between what Tateru, Gwyn, and LL are saying with the truth being closer to between what Gwyn and LL are saying. The signal from lost L$ sales profits and a slight decline in or little if any new regions being added over the past month may have precipitated layoffs at this time. But, the world’s stats at Metaverse Business are not all that alarming.

I suspect more alarming is this little tidbit of news in Alphaville Harold.  See: OpenSim Regions Predicted to Overtake Second Life in 2011

Citing an annualized OpenSim growth rate of 177%, Maria Korolov predicts the OpenSim grids will overtake Second Life in early 2011 in an article in Hypergrid Business. Ms. Korolov made her prediction after comparing the 29% increase in OpenSim regions between September and December 2009 with an anemic 6% growth in Second Life resident-owned land in 2009. Are the projections sustainable – and believable?

The Alphaville story is a bit old. Hypergrid Business has a more recent article, not as dramatic but announcing record growth. In February this year growth was outstanding. In May it was still astounding. Way ahead of SL’s growth. At a third the size of SL OpenSim is growing much faster. A linear projection suggests OpenSim will overtake SL in a couple of years. This has to be known to LL CEO and management. Especially when you consider this growth is happening with alpha version simulator software. SL and Blue Mars management have to be wondering why they are not achieving this kind of growth.

Gwyn sees a change in management’s direction and thinking. She suspects management has learned they made a mistake chasing after businesses as the new residents and income source. Now the plan is to focus on existing residents and converting new signups to long term residents. I think the layoffs and some of the specific people laid off support this idea more than the cash crunch motivation idea.

Consider that the new viewer is not doing what it is supposed to, attract and hold new residents. Information so far is that LL management thinks their advertising and the AVATAR movie have done more to bring in new residents than the 2.0 viewer. I think it is still too early to know for sure but chances are good that thinking is correct.

The shift to LL developing a web based browser/viewer and the layoff of Tom Hale and the 2.0 viewer team may very well indicate that management has recognized a problem with the 2.0 viewer. If this is correct, the plan is likely to have LL focus just on the web based browser/viewer, which is what LL is saying, and allow residents to continue developing viewers. After all who knows better what is needed in a viewer than those that use it daily?

LL’s interests are in getting new long term residents. A simplified web browser/viewer is likely to do that while any simplification of the existing SL viewers would drive existing residents crazy. (Have you tried to clear your cache in viewer 2.0?) LL has proven that however they are approaching the SL viewer design, it is not creating the intended result.

The Emerald viewer is replacing the SL viewer as more and more residents find it.  Kirsten’s viewer has awesome graphics and performance and is the choice for photography and machinima. As the new SL 2.0 features make it into the Emerald and Kirsten Viewers I suspect they will be even more popular. LL has to be aware of this trend. Why would a company pour money into a viewer residents are abandoning? Now they have acted on it.

Also consider the layoffs in remote offices, marketing, community development, and other marketing areas… none of these were bringing in the new residents as hoped. If it is not working, do something else. So, while financial reasons may have set the timing of the layoffs, it is likely many of these resource shifts would have happened in any event.

Whether the layoffs signal a pure change in direction or a pure financial crunch is likely just setting the outer limits of the real reality. Some mix of the two is likely more realistic. time will tell.

Additional Links

(Upate 6-14 #2<) ImagiLearning – Take A Deep Breath… – Points out a practical aspect of how business models work and the wild speculation in academic circles.