Second Life Tier – Again?

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. 

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.

Profit

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.

Market Place

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.

28 thoughts on “Second Life Tier – Again?

  1. “meaning I can see no reason to motivate them to lower tier and cut off the income they have. Doing so would be foolish.”

    Both you and Hamlet seem to believe cutting tier prices equates to cutting revenues. I disagree, and suspect many supporters of tier reduction do as well.

    Rod has stated a few times that Linden Lab was “extremely profitable”. We see evidence of it in all the acquisitions and investments made during his tenure. When a business has slacking sales and demand issues, its not at all uncommon to cut profit margins in order to increase total revenue and total profit.

    Were Rod stating instead “we’re barely profitable but making it”, and not acquiring companies like Desura, not funding external companies like High Fidelity, and not funding the development of half a dozen new products, I think it’d make sense to defend Linden Lab’s refusal to budge on tier pricing and even outright claim they can’t do it. Considering we live in a totally opposite reality however, Linden Lab seems like a terrible candidate of a company to suggest can’t leverage price cutting to increase demand.

    I think the reality is simply Linden Lab is fine with the grid shrinking for whatever their reasons. Maybe they’re working on a Second Life successor, maybe something completely different, either way they seem content to have the grid slowly dwindle towards 0 in the years ahead.

    • The thing is you have no numbers to back up your position, that cutting tier fees would increase revenue. Managements job is in part to maximize revenue.

      • “The thing is you have no numbers to back up your position, that cutting tier fees would increase revenue. ”

        And you have no numbers to back up that cutting tier would reduce revenue, yet that doesn’t stop you from sharing your opinion, does it?

        As consumers the best thing we can do is give feedback; if Linden Lab charged less, I’d pay them more. That may not be your stance but its mine and others, and so its fine that we believe if Linden Lab slashed prices, Second Life would start growing again along with Linden Lab’s revenues and profits.

        • Actually I do have numbers to show revenue would drop. Lowering the fee is an obvious reduction in revenue. that is simple math.

          What you lack is the numbers and data to show that more people would want regions at a lower price. That is opinion.

          My numbers are suggested by Kitely, which has a lower price. Look at the number of people buying regions there. Do you have any information that shows more people than the number purchasing there would buy regions? No you don’t. That means the Lab’s drop to Kitely prices could not be made made up by taking even all Kitely’s customers.

          My point is simply you have nothing supportive to convince Linden Lab you are right. I have very simple math and sales rates of lower priced regions.

          • “Lowering the fee is an obvious reduction in revenue. that is simple math.”

            Wow. That’s really surprising to read from you. Have you never heard of economic tenets such as “price elatisticty of demand”? http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm ?

            The basic idea is that revenue is only maximized when a product or service’s price is correct. Finding what’s correct sometimes means lowering price to raise demand and raise revenues. That’s elementary, not really debatable whether or not its apart of common sense economics.

            Two quick ways to raise revenues is either to raise prices or increase sales, and the Law of Demand dictates we lower prices to increase sales. Raising prices isn’t an option for Linden Lab; they’ve tried it before and what’s resulted is years of years of dwindling region counts.

            Another option of course is Linden Lab improve the value of their offerings. But despite Second Life receiving some of its biggest improvements ever during Rod’s tenure, even venturing into competing with customers, region counts are still dwindling and user concurrency is still stagnant.

            Maybe Project Interesting will reverse things. Or Fitted Mesh, but probably not. It’s going to come down to evaluating pricing eventually, or shuttering. The free market dictates that.

            “What you lack is the numbers and data to show that more people would want regions at a lower price. That is opinion.”

            I’m sure you know no matter any numbers or data, no business can guarantee the success of price cuts. So yes, its my opinion, but not I’m sure how that matters given its impossible even for those most in the know to say for a fact whether tier price cutting would or would not work.

            “My numbers are suggested by Kitely, which has a lower price. Look at the number of people buying regions there. Do you have any information that shows more people than the number purchasing there would buy regions? No you don’t. That means the Lab’s drop to Kitely prices could not be made made up by taking even all Kitely’s customers.”

            When drawing comparisons like this, “all else being equal” is a very important idea in basic economic principles like the Law of Demand. Kitely and Second Life are too different to state that because Kitely’s prices don’t work for Kitely, they won’t work for Second Life.

            “My point is simply you have nothing supportive to convince Linden Lab you are right. I have very simple math and sales rates of lower priced regions.”

            In actuality we’re both just consumers with no real numbers or data to state one way or another whether price cutting would work. You aren’t any sort of an authority, and nor am I. The only difference between you and I is I don’t care about convincing you that your opinion is wrong; you may be right, but you also have no proof that I’m wrong other the economics you’ve attempted to skew, that I can’t agree with.

            • I know about elasticity in economics. But, you can’t show any numbers to indicate the amount of elasticity in Linden region pricing.

              Also, while the economic rule you are quoting and looking at holds true for large markets almost without exception, in small market segments there are numerous variations to the rule. There are scenarios where increasing the price increases sales and reducing price decreases sales. The theory allows for positive and negative elasticity. For instance the price of pacemakers does not increase or decrease demand. Pricing can shift market share but demand is controlled by other factors. There is no idea in the concept of elasticity in pricing that it drives sales in only one increasing direction. So, quoting the theory does nothing to prove your point.

              A Lexus costs more than a Chevy. People buy Lexus cars. Decreasing the price would sell more Lexus cars, increase demand. But, would the company make more money? Car prices are elastic. Manufactures figure out what price gets them the highest profit margin. You simply have not shown that calculation for Linden region sales.

              Not all markets have a high degree of elasticity or variability in demand and supply. So, unless you can provide some numbers to backup your thinking that elasticity and current pricing is not optimal, you are just voicing your opinion.

              Since changing the tier fee requires convincing the Lindens your position is correct, the burden of proof remains with you. My claim is current pricing is set by the free market and reflects seller/buyer agreement on the value of a region and there is nothing to suggest lowering the price will increase the Linden’s income via increasing demand. Simple math says income will reduce in proportion to fee reductions without a corresponding increase in region sales. There is a lack of demand as proven by Kitely’s lower prices. If people were flocking to Kitely in large enough numbers that a Linden price cut could be competitive and gain enough customers to offset the revenue loss, they might be able to make more money. But, you can’t show that is the case. Since I don’t see the demand for regions, I cannot see demand being increased by the Lab cutting prices. The people just aren’t there and Kitely shows that.

              Theories are nice. Economic theories are well proven. But, not all theories apply to all situations and specific products are often exceptions. Economic theory is not a causative thing. It is a descriptive thing and can be predictive if you have all the pertinent aspects correctly accessed. Unless you can show some significant proof that cutting price will increase the Lab’s region sales, you are just hypothesizing which theories you think will apply and that is a miss use of the theories. You have no proof they will work as you think for this specific product in this specific market segment with its unique economic characteristics. You have nothing to base the predictive qualities of the theory on.

              I am pointing you to RL data that the market is not there and that regions sales are inelastic. Thus it is a simple math calculation.

  2. er… LL takes a percentage from MP sales they can’t take from an in-world sale.
    Why pay tier? Here be humans, Open Sim is great for being completely alone and isolated. Why be here? Here is stuffs that would get ripped (more) in other worlds.
    Tiers are getting lower each year, as they remain the same.

    • Your point that tier is getting lower has some merit when one considers inflation. But, inflation is supposedly below 10%. So, $300 last year and paying $300 this year should feel like paying $270. But, it doesn’t because wages are not going up 10% per year. So, unless you are seeing a 10% gain year to year, your thinking doesn’t really hold up.

      • Considering the average annual Consumer price increase of 2% between 2006 to 2013 a sim would cost us$3.540 in 2006 and would have cost us$4.066 in 2013 but in 2013 the price is still us$3.540 while the server specs have improved dramatically. We get a lot more sim for less the price.

  3. I often wonder why the lab doesn’t subcontract coding and implementation out to the IT powerhouses of south/southeast Asia. Wages for equivalent skill-set/work hours would be slashed, and policy direction, proof of concept and QC could still be run from the USA if desired. Leasing servers where costs are lowest would also seem financially prudent.

    • Well… HealthCare.gov might be a reason.

      The coding and tech in Second Life are very unique. They tried contracting out the SL Viewer once, that I know of. That was a disaster.

      You probably have never written a software coding agreement. Trying to come up with a specification for what one is buying and is to be provided is a major obstacle. Add in language problems and I think outsourcing would be a major headache.

      I don;t see SL as a good candidate for outsourcing.

    • If LL would have 1000 coders at work outsourcing would be an option. LL has just 50 or so coders at work. The rest (approx 200) is support. The servers that run SL are not typical TB storage servers. They are high end fast machines and the prices for high end fast machines doesn’t differ from near or far. For connectivity they need to be near fast backend bones so that limits options for location.
      LL has outsourced (parts of) “support”.

      • They use open source on the viewer, which is a type of outsourcing I suppose.

        But, I just don’t see the server side as a good candidate for outsourcing.

        • Open Sim was created by Linden Lab, something that is forgotten too often too easy. It’s not retro code as it’s stated in some articles, it’s LL code that was open sourced.

          The outsourcing of support was something that has gone wrong in the past but now with a different party it’s ok-ish.
          The Linden Lab practice is to take over, incorporate and eject redundancy. (feeds, marketplace, windlight for instance) It works but leaves maintenance holes that are quite hard to fill. Most holes are not in the critical code but anything web based.

          Linden Lab is a company with a luxury product. When economy goes down so go sales. When the US economy went bad, the EU kept SL up. Now the EU is bad and the US hasn’t recovered completely yet.

          • I suppose that depends on what you mean by created.

            http://opensimulator.org/wiki/History

            • The starting point for OpenSim was libsecondlife, a project that was (informally) endorsed by Linden Lab. Or, someone left something somewhere or something without approval.

            • Linden and IBM worked together for a time. But, I don’t think the code used by Opensim came from SL. Do you have any solid hard information otherwise?

  4. I believe that LL are working on lots of alternative ideas – and as is often the case only one or two will make it. A mobile cut-down sl, another gaming-based product utilising the created products in sl with the user experience features, and eventually the products of High Fidelity are all possibilities. The thing they need for all these projects to work is a good user-base ready to populate it, otherwise it becomes an empty world, which no matter how good it is it will struggle (i.e. Cloud Party or Open Sim).

    The best way to keep the user-base and income stream is to keep tier at the present levels – any increase, or indeed fall, causes that very large amount of people who own land but log in once or twice a year to ask why they are here – just think how many subscriptions you think about cancelling when they notify you of a change in costs.

  5. Can you explain the maths that lets you conclude that there is a 20% drop in one year? For me the timeline from 2010 to 2013 are three full business years. So it is a 20% decline in 3 years and roughly 6,5 % – 7 % per year (I am aware that it’s not correct to just divide a number when it comes to percentages). An almost 7% decline certainly should be worrying any business, but it’s not as dramatic as loosing one fith of your business in one year.

    • From 2011 to 2013 there has been a 20% loss. You are welcome to convert that to annual losses.

      • I guess it’s a typo im your text then. You write “That is a loss of about $12 million per year or about a 20% loss.” Shouldn’t it be “…of about $12 million in three years or…”?

        • The advantage of a free world is each person can do what they want based on what they think ‘should’ be. You seem to think things should be annualized. I don’t. I prefer to look at the overall loss in that period.

          • You wrote “per year” in your article and I am trying to hint you to this mistake. Taking your unfriendly tone up, I’d say: It’s a free world and you can continue to ignore that.

            • Ah! you are right… I probably shouldn’t have structured the sentences that way. But, it is a $20 million loss for the year in 2013 from the income level of 2011.

              The ‘unfriendly’ tone is your inference.

  6. Your comments on this blog post are arrogant and narcissistic. You have formulated something wrong and then you’re making fun of those who make you aware of it? Very weak!

    I also get the impression that you still haven’t understood that your simple math is wrong. Both in your article and in your comments.

    • Well, that is your opinion. I’ll respond with mine. I think you said a lot about your self.

      The arrogant behavior is in your assuming you knew what I intended to write in the subject article. As I explained to Estelle, I did a poor job of writing the sentence. The omission of a single ‘article’ in the sentence meant my failure to get my thought across.

      I’ll explain it another way to you. In 2013 $12 million was lost in a single year from 2011 income levels or 20% less from those levels for that year. As I conceded to Estelle, I did fail to make my intended thought clear in the article above.

      The narcissistic behavior you accuse me of is described most aptly in the second paragraph here. So, I just see your comment as transference.

      That you chose to attack me personally rather the discuss the subject on a point-by-point or expression of support for Estelle’s position show a lack of civility and manners, common in those with narcissistic personalities. Transference is revealing.

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