Monday, August 27, 2007

Virtual Entrepreneurship in Second Life: the New Pioneers

I just attended the Second Life Community Convention in Chicago and I’m happy to say that the pioneering spirit at the edge of the electronic frontier is not only still alive and well, it is thriving in the form of virtual entrepreneurs.

For those of you who haven’t heard of it, Second Life is an example of a metaverse – a virtual 3-d world that exists only out on the Internet. It’s been around for a few years now and over the last year there has been a lot of press (both positive and negative) about it in the last twelve months – though I think for the general population the idea of living an entire virtual life on the internet, complete with virtual businesses, virtual art, virtual relationships, is still a fairly fringe concept. Unlike many “games” there isn’t necessarily a game-plot in second life – i.e. your goal is not to kill monsters, but rather to live a virtual life (which might include killing monsters if that’s your thing). There are no points – but there are dollars – which you can make, buy, sell, and you can spend – just like in the real world. You can join and create both formal and informal social networks, or just make friends and socialize.

My mission was to find entrepreneurs in the virtual world and to assess the possibilites of starting and growing businesses based on this virtual world. What I found was that the convention and the businesses I ran across remind me alot of how the Web was perceived in 1995/1996 - a small but dedicated group of initial pioneers who are working on the cuttng edge but are still relatively low key.

There is no single event yet which marks the beginning of a “mad rush” into this new frontier by the investment community, like the Netscape IPO represented in the nineties. One candidate is the first time a virtual person – Anshe Chung – appeared on the cover of Business Week as a real estate mogul who was eventually worth at least a million US dollars but who owned no real land outside of Second Life, a lot of eyes (and eyebrows) were raised. For lots of investors, this was the first time they had even heard of Second Life.

In fact, despite this rush of users, the term pioneer is still a very good one for a vrtual entreprenuer – most businesses I encountered were small, doing pioneering work building new gadgets, location, clothing, etc. out in the virtual world. The landscape is evolving all the time – as users add new islands, new shops, new cafes, new dance clubs, etc. It still reminds me a little of the Old West – a relatively open landscape that is being shaped by dreamers and innovators that will eventually become something all of us have to pay attention to. There are now lots of more settlers, but the character of the place hasn't quite changed yet.

Altough there has been a large rush of users in recent months, the total number of registered users is still pretty small when compared to users of the web, or of social networking applications like MySpace or Facebook. While these social networking companies have been the poster boys for the “web 2.0” hype, I might argue that the real pioneering work of inventing a new kind of Internet which is used for collaboration, social interaction, education, marketing and business is going on virtual worlds like Second Life. This is “internet 2.0” – and may someday be more important than static web pages.

So here are some of the things that I found:
  • Today, most transactions within second life are small by real-life standards. This is because they are conducted with Linden dollars, and the exchange rate is 266 linden dollars for each US dollars. However, the fact that there is an easy to find exchange rate and as the sheer volume of transactions adds up, more and more transactions within second life can add up to real money. Entrepreneurship is alive and on the rise. Today, there are a very large number of shops and vendors within second life who are selling and trading in virtual goods. Some of these have become well established, but many are new and just scraping by. To date, some of these kinds of businesses are making enough money to sustain their owner’s lifestyles but a few are rising beyond that level yet.
  • The ability to build a community within the virtual world is one of its main strengths. While we talked about web 2.0 communities, the communities and interaction within a 3-d world allow a level of interaction that is unparalleled and so the communities formed tend to be stronger and more intimate than simply email or web based communities.
  • The real money today and the largest companies in the virtual world are made by “builders” – who take real life corporations and build a presence for them in the virtual world. These projects today range in size form $20K to $100K – which again parallels the cost of establishing web presences a decade ago before it became mainstream.
    Real life companies like IBM are using shared collaborative spaces in Second Life rather than spending the money to go to actual physical locations to collaborate. Real life movies (300, Transformers) and publishers and authors (William Gibson for example) are starting to launch books and do special marketing events within Second Life. Reuters has a presence within second life as well.
  • While the numbers are still small, the impact of an event in a Second Life can go well beyond the number of people who are actually at the event. For example, a book or movie event may only have 60 people attending in Second Life. That event is then rebroadcast on blogs, vlogs, podcasts, and described on blogs which start extending the reach to many thousands of end users.
  • Think of the web and the metaverse as co-existing and working together; many applications which require more compl.ex interactions than can be done in second life today (such as the stock exchanges) start with a Second Life transaction, and then take you to web sites to implement the complex business logic. Expect to see more of this.
  • The metaverses are going through growing pains and not yet mainstream, but given the growth rates they will be soon. The current infrastructure won’t hold up well as the numbers on virtual communities grow like the numbers on the web did.
  • The amount of time spent by a consumer in Second Life paying attention to new products and spaces is significantly higher than the time spent by a user of the web on a web page or a banner ad. In some case, a Second Life user will spend 20 minutes before they decide whether a shop or a product is right for them – on the web think seconds.
  • Initially the real opportunity long term may be in leveraging the virtual worlds not simply as a place to sell – but as a place to promote, provide thought leadership, cutting edge music and movies, and educational tools and tying into real products. However as the numbers and dollar volume of transactions grows, expect to hear about more businesses that have limited “real-life” presence at all but are thriving within virtual worlds. Expect that at some point, for certain sectors of the economy, having a presence in a metaverse maybe as important as having a website for your business is today. Remember even 10 years ago that most businesses did not have websites and today it is a requirement in certain industries.

While some of the numbers that exist on second life today might look “smallish” to a venture capital and entrepreneurial community that is used to seeing millions of US dollars invested in software and new media companies, my main point is this: Just Wait.

Conclusion: The metaverses today still represent a ground floor opportunity .. .they are still a bit like the wild west in the second half of the nineteenth century, and the World Wide Web in the last decade of the twentieth century. If you’re a pioneer you should be looking at it seriously…

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