The year-end brought with it a round-up of Second Life in terms of region numbers, courtesy of Tyche Shepherd and her excellent Grid Survey. 2014 continued to see the downward count in the number of private regions in SL, with some 673 regions vanishing through the course of the year (from 19,273 at the start of the year to 18,600 at the end of the year).

Expressed as a percentage, this means that the main grid has shrunk by 3.5%. That compares to an 8.2% shrinkage in 2013 (from 20,992 to 19,273 regions, a loss of 1719) and a 12% reduction in 2012 (23,857 to 20,992, a loss of 2865 regions).

There are likely to be a number of reasons for the slow down in losses, all interacting with one another. While one ideologue opted to pooh-pooh it, in September 2011 I pointed to one contributing factor to the then increasing rate of decline in region numbers as likely being due to physical world economic issues. With their disposable income diminishing, people were finding an outlay of $125 a month for virtual land increasingly hard to justify, and so were divesting themselves of it; something which likely continued through 2012 and early 2013.

While I’m not about to say we’ve turned the corner where the physical world economic situation is concerned, it is probable that by late 2013 we’d reached a point where those still with a residential homestead of their own were more willing to grit their teeth and pay for the land they hold, thus contributing to the slowing of shrinkage.

So what does that mean for the year ahead? While nothing is guaranteed, I tend to sway towards the view that the decline in region numbers will continue to slow, but at less than the rate we’ve seen in from late 2013 through 2014. I’m also inclined to think we won’t see any significant rise in region numbers through 2015 (unless some kind of external factor comes into play or the Lab does opt to do something quite unexpected to cause people to suddenly want lots of land).

One thing the slow-down will hopefully do is decrease future calls for tier cuts. As I explained back in January 2013, unless the Lab have a substantive means of compensating for the revenue loss resulting from any “reasonable” tier, any such cut will likely hurt the company (and SL) more than help. Nor is the Lab’s profit margin anywhere near the levels sometimes mentioned (e.g. the 200% recently claimed in this blog), such that they could simply “absorb” any tier cut without feeling the impact.

In 2008, estimates put the Lab’s earnings at around $90-95 million, and their possible profit margin at between $40-$50 million (48-50%) – see the articles here and here. I assume these estimates are for gross profits, as neither makes allowances for tax.

More to the point, there seems to be a slight flaw in both estimates: they only appear to reference the costs involved in running simulator servers. No mention is made of the various back-end services such as group chat, group management, asset management, login, transaction management and payment, (and today, the avatar baking service), the various web services (Marketplace), and so on. While the costs associated with all of these are obviously going to be a lot lower than those for the simulator hosts, they shouldn’t be entirely discounted. There’s also third-party support costs (in 2008-2010, for example, the Lab was paying Rivers Run Red and 80/20 Studio; today there’s the costs involved in using the Highwinds CDN service).

Hence why, when responding to the 2008 profit estimates, Mark Kingdon was in all probability being entirely host when he stated they weren’t that high.

Looking at Tyche Shepherd’s Grid Survey estimates and taking pointers from the few bits of information the Lab do give, I’d say it is not unreasonable to put their annual revenue at around US$70-72 million. While the costs associated with running hardware, etc, have also fallen over the same period, it’s very unlikely they’ve done so at a rate that has allowed the Lab to maintain the levels of profit it may well have been generating in 2008-2010. I’d actually put the likely ceiling on their gross profits at around $20-22 million (including profits from Blocksworld).

Which, when all is said and done, may be a good deal lower than past estimates have allowed, still isn’t anything to be sneezed at. It’s likely to be enough to both drive whatever improvements can be brought to SL as well as driving forward the development of the Lab’s “next generation” virtual world(s) platform.

Nor should the latter be seen as “taking” anything away from SL simply because it money is being pumped into it.

While SL is still currently in a position where it can be enjoyed and improved, the fact is that with the best will in the world, it is already hamstrung. LL themselves have often indicated that some of the deeper issues cannot be easily fixed without a complete rebuild. And as we’ve seen over the last few years, it is locked into an inflexible and vulnerable revenue model; one which cannot easily be be “fixed” or “replaced” without potentially doing greater harm to the platform and the Lab, and which is expensively burdensome to users.

We also shouldn’t lose sight of the fact that other people are starting to sit up and consider the opportunities offered by social virtual environments, and that it is growing increasingly likely that at some point something will appear to rival SL not just in terms of public appeal, but with us SL’s existing users. Just because this hasn’t happened so far, doesn’t by extension mean it won’t.

Put all this together and it makes a good deal of sense for the Lab to try to position themselves such that as other things do come along / as SL more clearly starts to approach the end of the road in a few years time (or really starts pricing itself out of the market), they’re in a position to present us with a platform free from many of the shortfalls inherent in SL, and which offers us the ability to transition over to it without losing all of the emotional, social and creative investment we’ve made in SL over the years.