Life beyond Second Life
The popular online hangout gets a lot of buzz, but it's not the only Web community out there. Is there a real bubble in virtual worlds?
NEW YORK (CNNMoney.com) -- Second Life, the popular online world, is certainly getting a lot of attention these days.
The company's parent, Linden Lab, is generating revenue from transactions that take place in the Second Life world as well as advertising. Members can buy Linden Dollars to conduct business. Big corporations such as IBM (Charts, Fortune 500), Starwood Hotels and Resorts (Charts, Fortune 500) and Toyota (Charts) have set up virtual shops in Second Life.
And earlier this week, adult entertainment company Playboy (Charts) announced the launch of a Playboy Island in Second Life that will include a retail store, video lounge and virtual beachfront property where Second Life members can hang out.
But even though Second Life gets the most attention, it is far from being the only virtual community out there. Several lesser known sites are also attracting a lot of visitors.
In fact, sites such as Club Penguin, a popular virtual community for young kids, Gaia Online, Habbo Hotel and relative newcomers Zwinky and Kaneva all had more unique visitors than Second Life's stand-alone application did in May, according to figures from comScore Research. And another site, There.com, had about the same number of visitors as Second Life in May.
Ben Richardson, vice president of business development for Makena Technologies, a privately held company based in San Mateo, Calif. that owns There.com, said There.com, like Second Life, is getting sales from advertising and sponsorships as well as from virtual transactions. It has a currency called Therebucks.
But Richardson said he thinks his site is different from competitors since it has a younger audience that also attracts a lot of females. The youngest members at There.com are 13 and the average age is 22, Richardson said. He added that nearly half of the site's million members are girls or young women, which opens up the site to different marketers that might not be as interested in other online communities.
"Virtual worlds as a whole tend to attract more of a tech-focused male audience. But this is more of a mainstream akin to sites like MySpace," Richardson said, referring to News Corp.'s social networking site.
The popularity of online worlds has also attracted the attention of larger public companies.
Viacom (Charts, Fortune 500) owns Neopets, a virtual pet community. And IAC (Charts, Fortune 500) owns Zwinky, which lets people create avatars, called Zwinkys, that they can import to blogs or social networking sites as well as use in the company's own new virtual community, Zwinktopia.
Scott Garell, the CEO of IAC Consumer Applications and Portals, the division of Barry Diller's conglomerate that developed Zwinky, said that Zwinktopia also plans to cater mainly to a younger market, users between the ages of 13 and 24, and that fashion and music will be a big component to Zwinktopia.
To that end, rapper 50 Cent announced last week that he was opening up a boutique on Zwinktopia to promote his new album as well as apparel from his G-Unit clothing line. Garell said that the site will also have a rock vault with merchandise from bands like Slipknot, the Clash and the Sex Pistols.
Garell said he expects Zwinky to have 7 million registered users by the end of June. And he believes that one other thing that will set the site apart from others is its ties to IAC. Garell said a majority of Zwinky's revenue won't come from transactions but from advertising since the site has a toolbar that is powered by IAC's Ask.com search engine.
"What differentiates us in terms of our business model is that Zwinky comes with a toolbar so most of our revenue comes from search," he said.
Still, are too many virtual worlds chasing too few users? In other words, do these sites face the risk of a real bubble forming?
It may be too soon to say. After all, tech research firm Gartner said in a report earlier this year that it expects nearly 80 percent of all active Internet users will have a presence in a virtual community by 2011. Depending on various estimates, that could make the market as big as between 50 million and 60 million people.
Rob Frasca, chief operating officer of Kaneva, a privately held virtual world company based in Atlanta, said it is inevitable that more social networking sites on the Web will transform into interactive worlds.
"This is just the early stages. Everything is going to move toward a 3D world. Look at what Google is doing with their maps and satellite imagery. It's obvious that we will have a more virtual environment online," Frasca said.
Kaneva, which launched a beta version of its virtual world earlier this year, gives members a free virtual apartment equipped with a TV set they can watch videos on. Frasca said users can then buy credits (the company has no special currency like Second Life or There.com) in order to purchase more virtual goods.
And Kaneva has grown rapidly in recent months. Frasca said the site now has more than 300,000 members, up from 88,000 in January. He sees that as proof that people interested in creating their own avatar aren't necessarily looking only at Second Life.
"We are really trying to be mass market. What that means is the ease of use for virtual worlds has to be there. With us, you can create a character in as little as three to four minutes. We are focusing on the average Joe that wants to hang out," said Frasca.
But one analyst said that despite the growing popularity of Second Life and other online worlds, he's not sure the business model for these companies is sustainable.
"Virtual worlds have great application as marketing tools. But as a strict revenue generator, I'm really skeptical," said Billy Pidgeon, an analyst with tech research firm IDC. "Selling things in virtual worlds are micro transactions. These companies will require volume that is not yet happening."
Pidgeon adds that all virtual worlds may face challenges from other companies who are developing more life-like worlds online. He said the graphics and responsiveness of virtual worlds are "far inferior" to video games and said that Sony's (Charts) Home, which is being dubbed as a virtual community for owners of Sony's PlayStation 3 console, could be a tough competitor.
So this means that there are many virtual worlds that may have to close their doors. IAC's Garell said this may not happen soon since it is still the early adopter stage for online communities.
Kaneva's Frasca said that ultimately there probably will wind up being a handful of companies garnering most of the market share in virtual worlds. Think, for example, of what's happened in online search where three companies dominate.
And Makena's Richardson also concedes that eventually there will need to be a shakeout. But he thinks that There.com will be left standing after it takes place.