Media in Second Life: A bad idea just got worse

For those of you looking to take your media company into Second Life and create a new revenue channel for your business, beware. It appears the whole thing is nothing but a pyramid scheme, but, hey, it is a great place for virtual sex.

Of course, anyone lingering in the world of SecondLife for more than a passing glance quickly discovers the real engine to the SecondLife economy: sex and gambling. A healthy share of micropayments are pumped into the system as customers engage in pulling the virtual slot lever or patronize one of the myriad virtual sex workers.

Ha — virtual hookers! That’s gotta be fun, right?

Then there is the inability to enforce contracts.

The first problem we encountered was one of counterparty risk. Put simply, you can seldom trust those with whom you’re doing business in SecondLife. Even supposedly well established, well regarded business citizens are prone to defaulting on any obligations which prove inconvenient. Whole banks will disappear over night, along with your L$ balance. Private businesses will simply refuse to make good on financial contracts. And individuals, pretty much all of whose real world identities are carefully guarded anonymous secrets, sometimes even will openly default, without recourse.

But here is the kicker: what looks like a pyramid scheme.

The private exchanges, however, are owned by the businesses which sit at the top of the SecondLife economic pyramid. The “Virtual Land Baroness� owns the largest such exchange. So it is not surprising that our attempts to trade our L$ for $ USD were met with confiscatory market reflectivity. Or, put simply, every time we attempted to transact more than a couple hundred dollars, the SLL/USD rate would spike to levels approaching or even greater than 500. Example: mid July 2006 SLL/USD was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade L$650,000 resulted in settlement bids of 350-450. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.

As we scratched our heads trying to figure out if there weren’t a more clever way of disguising our trades, or perhaps creating our own in-game banks and exchanges in order to arbitrage the other direction, it suddenly dawned upon me.

This game was just a pyramid scheme.

SecondLife is not a dramatic taste of our future, in which markets are virtual, currency is free from government control, taxes are non-existent, and normal people can become real millionaires simply by clicking their mouse a few times.

SecondLife isn’t even a simple virtual economy, with legitimate buying and selling, and opportunity for those who would compete.

No, SecondLife is a classic pyramid scheme. Or, more of an Amway-like pyramid: partially legitimate, partially ponzi. Sure, there are plenty of legitimate SecondLife customers who just like to go there to get their kicks, spend a couple dollars, and be on their way.

Is this the sort of thing you want associated with your media brand? What about the legal liability of using your brand to endorse Second Life, draw your real world customers into the site, only to have them get sucked into a possible scam?

I didn’t get creating a virtual news organization in Second Life before, but it seemed innocent enough. Now, if these reports reflect reality, it seems pretty darn risky.

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3 thoughts on “Media in Second Life: A bad idea just got worse

  1. Howard, there’s a fairly reasonable response to that Second Life critique here. Basically, the author argues that financial problems in Second Life are primarily the result of a lack of liquidity (and presumably of a central bank as well) rather than it being a pyramid scheme. He compares the game to doing business in a small developing nation — weak banking system, lack of controls, hidden costs of doing business etc.

  2. Thanks … that “lack of controls” sounds pretty scary to me, especially if you’re talking about getting a business involved, not just as a personal hobby.

  3. Agreed. Of course, as with a developing nation, there might be enough potential payoff to make it worth taking that risk (on a small scale at least), and some of the issues he describes could be cured by simply adding more liquidity, which theoretically will occur over time — theoretically :-)

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