Hamlet has an article on New World Notes about the loss of revenue we think the Lab is experiencing. See: Second Life’s Private Sim Revenue in 2013 Forecast at $48M, Down From $61M in 2010. Hamlet points to an article by Ener Hax: Second Life’s private sim watch, which is based on Tyche Shepard’s Grid Survey.
From the information we have it is pretty easy to surmise that 2011’s revenue from private sim leasing was about US$60 million. Using the same type of data we can surmise that 2013’s revenue is about $48 million. This is only region leasing fees income. That is a loss of about $12 million per year or about a 20% loss. Do you think management might notice that? For sure.
There are some other factors to consider in the overall equation. Wizard Gynoid points out in Ener’s article’s comments; in 2009 the Lab’s income was US$80-100 million with a 50% profit margin and roughly 2/3’s if the income was from region leases/tier.
Hamlet, and I, think this income loss means we definitely will not see a reduction in tier fees. There is a whole group of people that are clueless about how businesses work in a free market and they continue to rant about how the Lab must lower tier fees or die.
There are several factors that go into thinking about tier. A free market balances the provider’s desire to charge all the money in the world for their service and the consumer’s desire to get everything for free. The result is provided services that cost more than people are willing to pay disappear and are no longer provided. Or some smart person figures out how to provide those services at an acceptable price. The buyer/customer is free to decide.
As things are now, it is hard to say tier fees are too high or too low. Those paying tier feel they are getting their money’s worth. If they didn’t, they wouldn’t pay the fee. Nothing forces them to lease a region. They can spend their money on whatever they choose. They choose tier.
We can estimate the cost of operating a region. Kitely, In-Worldz, and OSGrid make the actual cost more apparent. It is somewhere between US$15 and $50 per month and there is even a profit margin in there.
So, why do people pay something like $250 more than the base cost? I can run my own region. I have 9 OSGrid regions that I used to run. I probably haven’t started them this year because I haven’t been playing with the build I was making, just too many other distractions. Whatever, my cost is basically just my time to set it up. So, why aren’t people saving the $300± per month and running their own regions? Customers is one.
A primary reason tier is paid to the Lab is to get access to customers.
When I first came to Second Life™ I found I needed a shop to sell things. I needed a place to keep a Magic Box if I wanted to sell in the Market Place. I needed land. It wasn’t just handy. It was a necessity. That requirement was lifted when the Lab instituted Direct Delivery and did away with the Magic Boxes.
I no longer need land where I can stash my Magic Box. I’ve always thought this change would reduce the demand for land. I can’t prove that is so. But, it seems to me that it is and we are seeing some measure of this change impacting land sales in Second Life.
My belief is that since I can reach customers without having to pay tier, I don’t need to pay it. I still have access to the customers. Since people are paying tier there has to be some value they are receiving. I still rent land.
I certainly can’t see where Direct Delivery has improved the Lab’s income. It appears to have lost them more income than improved market sales can make them. But, the numbers for how well the market place is or is not doing are hard to come by. I have no idea what percent of the Lab’s income comes from the market place.
Presumably the change was made to make SL easier to learn and use and thus increase player/user retention. Did it accomplish that? Not that I can see. User concurrency graphs like a ball bouncing down a hill. But, the change is part of Rod’s plan to make SL easier to use.