“If only,” I hear you cry, “land in Second Life was less expensive! Why things would positively boom!”

But would they? Let’s look at the scenario more closely. You’re not going to like it.

So, let’s say that through the Awesome Might of Rod, Second Life land fees drop – let’s say a full 50% across the board. There’s our hypothetical scenario, and isn’t it a doozy?

Estate holders and large land-owners throw their hats into the air! Everyone cheers! A big ticker-tape parade for Linden Lab, for delivering exactly what people are asking for!

But then there’s reality to deal with, and reality bites.

What doesn’t happen? Well, here’s one thing that doesn’t happen: there’s no seismic (pardon the term) shift in land-sales for one. Got a big estate that’s now costing half as much? Are you going to suddenly expand it? No, you probably aren’t. There just aren’t enough users – yet – to support any rapid expansion.

You might get a noticeable bump as individuals and tiny holders buy up some lots and parcels nearby them… and then they stop. They’ve eaten their fill.

Now, here’s the hell of it.

You’ve got to cut your prices.

If you don’t slash your prices by 50%… well, there’s no shortage of other estate-owners that will. Competition is fierce. It may take a little time, but what you can charge for the use of your land will rapidly become half of what it was – and people can now DIY or become your competitors for half the ongoing costs.

You’re now paying half as much, but ultimately in percentage terms, little will have changed on your month-to-month bottom line – except that if you were running at a loss, your loss is halved. If you were running at a profit, your profit is halved.

Here’s another thing that doesn’t happen: Your workload is not reduced. Not by a single hour. You still have to work as hard to bring in the money as you did. Your costs have been halved, but land-based revenue has been halved as well. Everything has scaled, except your workload.

There’s maybe a small upside here, and that is, that land without business-models becomes a little more affordable for short-term projects (like fund-raisers and art-installations), but as a larger player in the land game, you’re in competition with your peers for that business, and some people might be happy to take it on at a loss, just for the PR. There’s likely little or no direct revenue there.

What about Linden Lab? In this hypothetical price-cut, it’s just slashed its revenue in half, effective immediately. Now, the bulk of Linden Lab’s costs run to people, not premises or equipment. People cost money, and lots of it. So, Linden Lab would be forced to cut back and slow down right away to balance the payroll. Even if it was a short-term cut, those people are largely lost, and any recovery in the revenue stream would mean hiring newbies later on to fill the empty chairs. You can’t just shove skilled staff in the closet for a few months and then air them out again when things improve.

Without a more diverse portfolio of products unrelated to Second Life, Linden Lab just doesn’t have any buffers to soak up jolts from bumps and potholes (or global economic climates or rate reductions, for that matter).

What if you’re not a major land-owner, but instead a major content-creator with a big store full of product?

Your costs have halved, but your revenues aren’t based on land. Instead they’re based on your content sales.

Yay! You only have to sell half as much to pay your costs – or you can double the size of your outlets.

Do you really need to increase your holdings, and/or the number of your outlets? Probably not. It might make sense offline, where people don’t routinely teleport to the shops, but without some special need or circumstance, you’re probably going to be happy with the holdings you’ve got and the reduced costs.

Your losses are much reduced (if you’re losing money) or your profits are greatly increased (if you’re profiting). Hooray! Less work for you!

Except, that the same holds true for smaller players in your field. They have more to gain, now, and lower bars to clear by eating your collective lunch.

Take a rest, take it easy, slack off, stop innovating – and those little fish will eat up your market, leaving you struggling to break even again. A much smaller fish than you were.

And during all of this, the economic pool doesn’t get any deeper without improved retention. There’s only room in the market for a certain total mass of fish, whatever their various sizes.

Now, bear in mind that this scenario is pretty sound for a 50%, across-the-board reduction. You can toy with the idea of larger or smaller reductions, if you like, trading reductions in profit for reductions in losses, for those whose revenue comes from land rather than from goods/services.

Or, as an alternative, you can toy with the idea of a rate reduction that isn’t fair – that is, one that doesn’t apply equally to everyone. A reduction where some people get it and some people don’t. I don’t know about you, but I’m finding it hard to see any scenarios where that’s better, except for say, reductions for non-profits or for educators, which are still sorely missed.

Second Life is profitable and successful, but it isn’t booming and it isn’t easy to make ends meet. In the current economic climate, it’s more difficult to make ends meet anywhere, and Second Life is no exception. Superficial solutions sound superficially tempting, but they don’t necessarily hold up to significant scrutiny. As tempting as it might seem, there’s no magic bullet or miracle cure that lets you put your feet up and relax, while boosting your profits and cutting your costs.

Don’t much care for the prognosis? Would you like a second opinion? Would you like to read more about how the reduction in private regions is affecting Second Life and tier economics? Well, then, Inara Pey’s got you covered.

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Tags: Economy, Inara Pey, Opinion, Rod Humble / Rodvik Linden, Second Life, Virtual Environments and Virtual Worlds