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Any other business

The promise of real profits from a weird virtual world

Cosmo Lush explores the bizarre byways of Second Life, the latest internet phenomenon, and explains how big brands plan to make money out of it

8 November 2006

5:23 PM

8 November 2006

5:23 PM

My name is Cosmic Finucane. I have lots of money, a body to die for and I’m building my dream house on an island with an ocean view. At least, that’s my alternative persona — sadly, a far stretch from the real me. He inhabits the internet’s hottest new phenomenon, the virtual world of Second Life. Cosmic is an ‘avatar’ — a computer-generated 3D human lookalike who makes friends, throws parties, goes shopping and has the potential to help me earn real money.

Launched by San Francisco-based Linden Labs in 2000 with backing from the founders of eBay and Amazon, Second Life is now hitting the big time. Its population has just exceeded the million mark and it is receiving increasing real-world media attention. It even has a US Congressional committee investigating whether to tax its activities.

Given the mixed reputations of online social networks such as MySpace and Facebook, you’d be forgiven for assuming the worst about Second Life. What kinds of weirdos inhabit such a world? It certainly has its share of dangers, including gambling haunts. But it is Second Life’s broader business objective that is causing such a stir.

For Second Life is not just a website for meeting people; it is a fully-fledged virtual economy. Based on a currency exchangeable for real-world US dollars, Second Life business is booming. Shopkeepers, property speculators and bankers are all setting up shop. Many of them are already virtual millionaires. It won’t be long before some of them are real-world millionaires too.

So how does that work? Second Life is often referred to as a Massively Multiplayer Online Reality Game, a family of increasingly popular online games which many thousands of participants around the world play at the same time. Most of these games, including the most popular, World of Warcraft, maintain a divide between paying players and the provider who develops the virtual arena. By contrast, access to Second Life is free and it is the residents themselves who create their surroundings. The result is a virtual cross between the beach-front real estate of Dubai and the cocktail bar in Star Wars: a sprawl of fantasy homes and commercial complexes populated by stylish but bizarre humanoids.

It’s a strange place for the uninitiated, but behind the freakish façade are the workings of a vibrant economy. All Second Life products — from building materials to avatar clothes — are ‘made’ (that is, created in virtual reality) and sold by Second Life residents. Trading is rife and there’s the smell of speculation in the air. This is the internet’s wild frontier.

At the heart of the Second Life economy is its currency, the Linden dollar, currently trading at L$274 to $1. Residents buy Linden dollars with real-world credit cards and use them to buy and sell real estate and other Second Life goods. They can also be exchanged back to US dollars on the LindeX, Second Life’s very own currency exchange. Currently some $150 million is traded on the exchange every month.

Linden Labs acts as central banker, managing the supply of money and land. Second Life at present covers 60,000 virtual acres — growing at 8 per cent per month, roughly the same rate as the population and the money supply. The company makes money by leasing land, trading currency and charging tax on property. In October Linden Labs responded to growing demand by hiking the price of its private islands: a small one now costs $1,675, plus a $295 monthly management fee. That is the top end of the market: the typical enthusiast might pay $300 for a more modest property, and $80 to $100 per month to maintain a virtual lifestyle.

All of which is good news for Second Life entrepreneurs. Several thousand residents are now trading on the site. Queen of this community is Anshe Chung (real name unknown), an avatar who runs a Second Life property brokerage worth more than $250,000. Anshe buys and develops land, then sells or rents it to other residents. Current prices for a plot in one of her ‘Dreamland’ zones start at L$10,000, or just under $40. She accepts either currency, and runs a currency exchange on the side.

Other prominent businesses include Ginko Financial, a bank with the Linden equivalent of $230,000 on deposit in 10,000 accounts. Other less traditional Second Life businesses include shops selling everything from avatar clothes to outlandish body parts, and ‘in-world’ services ranging from interior design to cinemas and sex clubs (yes, avatars can — but don’t ask me how).

Most significantly, Second Life commercial activity is not limited to in-world businesses. In the last few months more than 30 real-world brands have set up shop in Second Life, keen to experiment with its marketing potential. Toyota caused a stir this summer when it scattered virtual models of its new Scion people-carrier across Second Life for residents to test-drive. General Motors owns a Second Life island called Motorati showcasing its latest vehicles. Adidas and Reebok have shops selling sports shoes for avatars and American Apparel sells avatar outfits in-world with a discount if you buy the same item in the real world.

The media are also moving in. This month Sony BMG is showcasing its rising star Ben Folds with live performances in various virtual locations. At its complex on ‘Media Island’ Sony has rooms where fans can mingle, listen to music and watch videos. Meanwhile the MTV television channel has opened a virtual beach where fans of its show Laguna Beach can hang out and meet the stars. Why are companies doing this? The internet is now the fastest-growing advertising medium as big brands find it increasingly difficult to reach audiences through traditional television channels. Popular sites like MySpace and YouTube now play a central role in innovative marketing campaigns, as brands experiment with new ways to grab people’s attention. Second Life is the next wave, offering a rich new medium.

It’s still early days for Second Life, with a relatively small audience (MySpace has 50 million users in the US alone, compared with Second Life’s one million worldwide) and technical challenges sufficient to deter all but the most digitally proficient. The activities of brands in Second Life still have an experimental feel to them. But there is no doubting the seriousness of their intent, or their willingness to invest big money if the medium proves effective.

In all likelihood, it will. Technically, sites like Second Life are limited only by the power of personal computers and the reach of broadband internet access. Freakish avatars aside, Second Life is a far more engaging internet experience than browsing a text-based website and it’s easy to imagine what it could do to online shopping, for example — trying on clothes at a 3D virtual Gap store, or booking a safari holiday in a 3D virtual cinema. There’s every reason to believe that in the future we’ll be spending much of our online time in these kinds of virtual realities. With this in mind, it’s clear why brands are starting to experiment.

It should also be good news for Second Life entrepreneurs like Anshe Chung. The arrival of real-world brands should generate enormous rewards for these early speculators, with their accumulated virtual assets and expertise. Over time, the distinction between in-world and real-world businesses will blur. Anshe Chung recently hired ten staff in China to help manage her company’s rampant growth.

Second Life may feel like an outpost in the internet’s Wild West, but it has a vision and it’s gaining momentum. My exotic beach house is merely in Second Life; Anshe Chung has plans for a real one.

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