It's not a game (cont.)

By David Kirkpatrick, Fortune senior editor

They think Second Life may be next, and some respected tech pundits agree. Says Mark Anderson, author of the Strategic News Service newsletter: "In two years I think Second Life will be huge, probably as large as the entire gaming community is today."

In the case of IBM, it's not just a matter of touting the wonders of Second Life; it's really using it - both as a business opportunity and as an internal tool. Ian Hughes, one of the company's "metaverse evangelists" - an actual title - says Second Life stimulates collaboration among a dispersed workforce. ("Metaverse," a word coined by Neal Stephenson in his 1992 novel, Snow Crash, is gaining currency as the generic name for virtual worlds.)

"We're all used to teleconferences," says Hughes. "But in Second Life we gather and mingle before the meeting, and when it finishes, some people stop and talk again. We start to form social networks and the kinds of bonds you make in real life." Hughes, whose Second Life handle is ePredator Potato, often attends IBM meetings as a pudgy avatar with spiky green hair.

But while the immersive 3-D environment that Second Life is pioneering could shape the way we interact online, it's not certain that Linden Lab will be the main beneficiary. Second Life's software is so hard to use that fewer than one in six who try it are still online 30 days later. Linden's servers frequently falter under the weight of its growing audience, and critical functions such as search sometimes break down. Though Second Life is the biggest virtual world, the company remains minuscule - 2006 revenues were less than $11 million - and competitors are nipping at its heels. They, too, smell opportunity.

When Second Life opened in June 2003, there was nothing there, nowhere to go, and nobody to see. CEO Philip Rosedale had made the surprising decision to leave Second Life empty. Colleagues argued for inventing a game to show what was possible, but Rosedale, now 38, thought the service would work best if it let users create their own world.

Says venture capitalist Jed Smith, an early investor who sits on Linden's board: "We decided then to be a platform and not a game." Not incidentally, that meant Linden - unlike the purveyors of popular online games such as World of Warcraft - wouldn't have to spend any money creating its content.

At first, Second Life seemed destined for oblivion. Only 1,000 people were regularly visiting after five months, and money was running out. Smith and Kapor, who had invested the lion's share, considered pulling the plug. But they were astonished by the creativity of Second Life's few denizens. They were dreaming up cities, jungles, games, clubs and all manner of idiosyncratic avatars.

Impressed by this passion, Kapor wrote another seven-figure check, and Second Life relaunched in January 2004, this time with more focus on user creativity and in-world entrepreneurship. Linden took the advice of Lawrence Lessig, the Stanford Law School guru on intellectual property, who recommended letting users own their own content. That, he argued, would encourage them to create more.

The company also made it possible to exchange Second Life's currency, called Linden dollars, for the real thing (taking a fee along the way). Residents could thus build, own, or sell their digital creations. Second Life had become a real economy.

And Linden changed its business model. It began generating revenues primarily from the sale of virtual land. So far Linden has sold 3,500 private islands, each equivalent to 16 acres in the real world. (The world inside Second Life currently occupies about 150 square miles. But it's growing, and as population increases, Linden simply creates more digital real estate.) Each island costs $1,675 to purchase and $295 monthly to maintain; some buyers subdivide their land and rent or sell it at a profit.

In essence, customers are renting space on the 1,750 servers that store the digital representation of the land. One of the biggest landowners is IBM, which rules over 24 islands. Since Linden revamped its business model to focus on real estate, users and revenues have grown at least 10 percent every month.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.