ANALYSTS FROM INFORMATION WEEK AND GARTNER ON METANOMICS

APRIL 21, 2008

ROBERT BLOOMFIELD: Welcome, everybody, to Metanomics, a weekly show on business

and policy in the Metaverse of virtual worlds. As always, we start by thanking our sponsors:

SAP, Cisco Systems, Generali Group, Saxo Bank, Kelly Services and Sun Microsystems.

Thanks also to my own institution, Cornell’s Johnson Graduate School of Management, for

supporting me in this effort, and to SLCN for filming and distributing these shows. I’d also

like to thank John and Rissa of UBM Think Services Metaverse for letting us hold

Metanomics here at the CMP Amphitheatre. I also want to remind everyone that Muse Isle

will also be the location of a new regular event, Metanomics Rewind, during which we will

have a special rebroadcast of today’s show, actually every Monday’s show, every Tuesday

at 3:00 P.M. Second Life time. This is a chance to catch the show, if you missed it, and

watch it with others who share your interests.

A quick word about upcoming shows: Many of you probably know that people active in

Second Life testified before Congress on April 1st, and, no, it wasn’t an April Fools Day

joke. One person to testify was Larry Johnson, CEO of New Media Consortium. And I’m

pleased to announce that I will be interviewing Larry on a special Metanomics show as part

of Clever Zebra’s vBusiness Expo this Friday, April 25th, at 11:00 A.M. Second Life time. I

want to apologize for the timing of this to the folks who run the excellent event Science

Friday. If you don’t know about this already, Science Friday’s an NPR show hosted by

Ira Flatow. And every week, Bjorlyn Loon pulls together about 80 or 100 people to watch the

show, and people can chat with one another, and they do and also post questions to the

host and guests of Science Friday. So this is an event that’s definitely worth going to. But, of

course, not this Friday because then you’d miss Metanomics.

Now another person to testify to Congress was Susan Tenby of TechSoup, the nonprofit

organization that runs the NonProfit Commons in Second Life and provides technological

support to countless nonprofit organizations, both in Second Life and Real Life. Well, Susan

was singled out by Jon Stewart who covets her Second Life name, Glitteractica Cookie,

saying now he knows why he had to settle for Glitteractica Cookie II. Well, I’m glad to

announce that Glitteractica Cookie, the original version, will be joining us on Metanomics

next Monday, April 28th, along with a representative of one of the largest and highest

profiling nonprofits in Second Life, the American Cancer Society.

Okay, now on to the show. Last week we had a fairly bullish discussion of the state and

future of Linden Lab, with two insiders Cory Ondrejka, the former CTO of Linden Lab, and

Wagner James Au, who wrote the book The Making of Second Life. This week we have two

independent analysts who I think are going to be more bearish. Mitch Wagner is executive

editor of Information Week, and Steve Prentice is the senior analyst of Gartner Incorporated.

Both of them have followed the Virtual World industry very closely.

So now, Mitch, welcome to Metanomics. Mitch and I had a chance to chat a little bit last

week and, Mitch, I’d like to follow up on a few of your comments. So you had indicated that

you see Second Life as being in not such a great place right now and that their future rests

on the choice of the CEO, which we are all waiting to hear, and that Linden Lab needs

to--your term was to “reinvent itself.” Can you elaborate a little on why you’re concerned

about Second Life and Linden Lab?

MITCH WAGNER: Sure. I mean look at all the problems that Second Life has been having

over the course of the past six or eight or nine months or so. You can start out the most

important problem it has is that signups are flattening, and the number of engaged users is

remaining pretty flat between five and six hundred thousand for the past several months.

They have difficulty deploying stable software, or perhaps I should say waiting until software

is stable until it’s deployed. The platform is still very insular. As we know here, it takes some

clever hacks even to just get streaming video in and out. Additionally, they have ongoing

communications problems. The latest issue with trademark enforcement is only the latest

example of the fact that, when it comes to communications, they seem to shoot themselves

in the foot and then reload and shoot themselves in the other foot. A lot of these things are

just basic business things.

It’s fairly ironic that these guys have just done some amazing, amazing, amazing innovation.

They were among the inventors of user-generated content on the web, coming into the

World about the same time as YouTube and the big blogging platforms did. They have

realized that you don’t need to wait until you can jack your brain into the web to have this

kind of immersive virtual reality experience. So they can do these amazing innovations

really well, but they just seem to trip over their own feet and fall flat when they do basic

business things. That’s why I’m hoping that a new CEO would be able to come in and be

someone who understands how a company should do these basics.

ROBERT BLOOMFIELD: You don’t have to name names of people you think would be

appropriate, but what would you see as being the profile?

MITCH WAGNER: It needs to be someone with experience running, hopefully, a large

business unit of an existing thriving Web 2.0 company. And someone who’s very familiar

with platform. It needs to be someone like, you know, when Google was experiencing

growing pains, they brought in Eric Schmidt who had experience running high level at Sun

and also running Novell and turning that company around before coming to Google. Way

back in the early days of the web and the internet, eBay brought in a CEO who had a lot of

business experience and shared in the vision. They need to do those two things. They need

to have the solid basic business experience of running any company, and they also need to

share in the vision. Because what you don’t want to have happen is have somebody like

John Scully or the other successor CEOs of Apple, who didn’t understand the business

model and just kind of blundered from one thing to another.

ROBERT BLOOMFIELD: I mean it sounds like, at heart, you think that the platform is one

that can function as the basis of a growing successful company, and it’s really just sort of

what they’re doing with it? Because I worry personally that they can be leapfrogged by

someone else who can, you know, sort of reverse engineer figuring out what Linden Lab

has done and saying, “Well, we can actually do this and make it work.”

MITCH WAGNER: Oh, yeah. I don’t worry that they can be leapfrogged. I just think that

they might be--and indeed I hope that they are because it’s a little discouraging at times to

see the frustration in Second Life and the lack of growth. Now the company that leapfrogs

Second Life could be Linden Lab, you know, Linden Lab Mark II under new management

could really revitalize the Virtual World.

ROBERT BLOOMFIELD: Would that take them essentially starting from scratch as

opposed to kind of the regular upgrades?

MITCH WAGNER: Well, they just need to approach upgrades in a more professional

fashion, release software when the bugs have been shaken out of it and not before.

ROBERT BLOOMFIELD: So let’s say a new world comes out. Do you think Linden Lab is

going to be able to still milk Second Life with its hundreds of thousands of users and millions

of square meters of land that they’re making some money off of? Go ahead.

MITCH WAGNER: No, I was just going to say virtual worlds MMOs never go away. Never,

ever, ever. You’ll still people who are active on MUDs and MOOs. You’ll still find people who

are diehard Everquest and Ultima online users. And there’s nothing wrong with that. People

get engaged to a certain platform and community, and they want to continue with it.

ROBERT BLOOMFIELD: I see Reed Steamroller is asking: How is Linden Lab supposed to

find the bugs in their software without actually testing it on the main grid? Do you think that

there’s anything about the nature of this technology that maybe forces them, more so than a

Microsoft, to push stuff out before it’s totally debugged?

MITCH WAGNER: Well, perhaps Microsoft is the wrong example to use--

ROBERT BLOOMFIELD: Okay. Point taken.

MITCH WAGNER: --push it out before it’s debugged. But certainly, I mean yeah, they have

to test it on the main grid, but they have to be testing it. They’ll come out, and they’ll deploy

new server versions, and then they’ll say, “Oops, it wasn’t ready after all.” They right now

have a release candidate that’s kind of pretty buggy. They don’t really seem to understand

that when you say “release candidate,” it means you think that all the bugs are out of it, but

you’re not sure, so you’re still calling it a “release candidate,” but you think it’s un-buggy. I’m

sitting here, by comparison, I’m using the Firefox 3, which is the Beta of Firefox. It’s not

even a release candidate, and I’ve been using that as my primary browser since December,

and that works just fine. So I realize that this software is far more complicated, but they just-

-again, it comes down to communication. They don’t communicate adequately that the

software still seems to be buggy.

ROBERT BLOOMFIELD: Okay. Let’s talk a bit more about that bugginess and bring

Steve Prentice into the conversation, from Gartner. Steve, welcome to Metanomics.

STEVE PRENTICE: Hi.

ROBERT BLOOMFIELD: Hi. So now you wrote a research report in February called Three

Challenges That Enterprises Face Using Second Life, and the three here are: limited

graphics card support, recurring technical glitches and down time. I guess they’re fairly

self-explanatory, but do you want to just elaborate a little bit on those and why you see

those being major problems for enterprises?

STEVE PRENTICE: Sure. All our client base is essentially enterprises, so we were looking

to try to point out some of the issues that we saw specifically that related to the technical

platform that Linden is supporting. Issues like graphics card support, particularly with more

and more people using notebooks, it’s quite possible that you can have--one notebook will

quite happily work with Second Life, another manufactured six months later with different

graphics chip on the board or not, and we’ve had all of those sorts of problems. The

problem, I think, is that Second Life is not really meeting the needs of enterprise users,

which really come down to sort of this availability and resilience, reliability and accessibility

and privacy sort of issues.

The availability one it’s great sort of setting up an environment in Second Life and started to

use it inside an enterprise on a trial basis, and then just as you want to do something, the

grid fails. Or they decide they can upgrade things. Someone comes in, and they’ve got to

spend a long time actually uploading a new version of the browser. Those aren’t the sort of

things that enterprises want. When you were talking a couple of minutes ago about testing

software on the grid. Sure, software has to be tested, but you don’t find that sort of approach

generally speaking amongst enterprise _____ software. You find ways to test it in a more

controlled environment before releasing on everybody.

ROBERT BLOOMFIELD: Your recommendation is fairly straight forward. If you are an

enterprise and you want to use a Virtual World, don’t use Second Life for anything more

than just a pilot program. Do I have you right on that?

STEVE PRENTICE: It’s very difficult to be sort of objective and so on because it always

comes out as very black and white. What our basic feeling is, is that Second Life is an

absolutely superb development environment. It’s got a lot of tools. It’s as available as

anything, although, as we just discussed, there are problems. But the reason really for us

not being able to go out to enterprises and say, “This is something you should be using

today for full-blown deployment,” is that there are some technical issues, but I think also it’s

a question of focus. And I still come across organizations that say to me, for example, “We

want to set up an island in Second Life, and we’re going to be selling products to

20-year-olds.” And yet whenever you look at the demographic data, such as it is, there isn’t

a great deal of chance of that actually happening, and the standard analysis that

organizations would do on demographics and all that just often doesn’t seem to get done

when people get carried away with Virtual World projects. And we’re trying to actually inject

a note of caution. Yes, it’s a great tool. Yes, I’m very bullish about virtual worlds as a

technology. But there are shades of VisiCalc, if you like, in where we are today with Second

Life. People say, “Is Second Life going to survive?” Yes, it could. Yes, it could be overtaken.

Yes, Linden could reinvent themselves, but it’s certainly one that needs guaranteed. And

we’re seeing an increasing number of other alternatives coming up that are targeted

perhaps more at an internal enterprise usage, which is where a lot of the focus for

enterprise usage is now heading. Organizations have become a little frustrated perhaps with

the problems they’ve been having and are starting to use internally based virtual worlds and

using for collaboration purposes rather than externally facing sort of customers focused

ones.

ROBERT BLOOMFIELD: Let’s talk about some of the alternatives that are out there for

enterprises. One of them is Qwaq. And, Mitch, you recently wrote an article about Qwaq,

and you had a few reservations, but it seemed that you see this as a pretty solid prospect

for enterprise software. Can you tell us a bit about what you like about Qwaq?

MITCH WAGNER: Well, Qwaq is basically you could almost think of it more as a WebEx

replacement rather than anything that replaces Second Life. You set up these small rooms,

they call them rooms instead of islands or anything like that. I think the limit is about 40

people per room, and it’s really designed to have corporate meetings in there. So you can

set it up with a conference table. You can set it up with a little amphitheatre. One of the

things that you can do that’s really neat is, you can very easily import and bring in like a

Microsoft Office format documents. They actually have server-based instantiation of Open

Office running right on the server. Everything is secured and encrypted. It costs about the

same as meeting--I’m sorry, WebEx, on a monthly basis per user. And it’s also very, very

easy to use. You just come in there. You have a default avatar that can just be this little kind

of cartoon character with an image of your own head that you upload or some other image,

or you can customize. You can import objects using standard 3D formats. So it’s a very

promising platform for holding corporate meetings in there.

I was actually, the other day, giving an impromptu demo of Twitter to some of my

colleagues. I didn’t really have time to prepare for it. We just set up a conference call, and I

went. And I remember thinking, “Boy, I wish we were doing this in Qwaq because it would

be so much easier to show people some of things that we’re doing.”

ROBERT BLOOMFIELD: And it is much more web-integrated, is that right, than Second

Life?

MITCH WAGNER: Not that I can recall actually.

ROBERT BLOOMFIELD: Oh, okay. I may have that wrong. I know Metaplace, I guess, has

been making that a hallmark of its design.

MITCH WAGNER: Metaplace has gone--and it was really interesting talk to Raph Koster,

who is the CEO of Metaplace, because--I talked to him in December, and I’d already been in

Second Life most of the year. I had sort of internalized all the common wisdom about

Second Life in thinking that Second Life was the way to go, and it was the wave of the future

and this whole Metaverse model based on Neal Stephenson’s novel, Snow Crash, was the

wave of the future, and Raph thinks it's going to go in completely the other direction. He’s

looking at very small virtual worlds that are embedded images and can be little tiny rooms

initially. He's just looking at what they call 2-1/2D, so it runs in Flash--your browser, and you

only get one view of the World. Very, very flexible. Designed to be very, very scalable, going

down to the cheapest computer, low-end devices, mobile devices. So it’s going to be very

interesting to watch that company and see where it’s going.

ROBERT BLOOMFIELD: Steve, what’s your take on Qwaq?

STEVE PRENTICE: I think I would agree with pretty much everything Mitch has said. I

mean the question of ease of use is absolutely critical. The learning curve for Second Life,

to many of the experienced users in Second Life, we've perhaps forgotten just how tough it

was to start. So if you're trying to get it to be used by people inside an organization, who

perhaps are resistant at the moment, it’s going to be tough. Qwaq is very, very simple to

use. It’s almost the opposite extreme perhaps to Second Life in that your avatar is two

blocks, someone on the chat was talking about gingerbread men. Sure. The purpose, I

think, and the whole point and focus of Qwaq is about collaboration on the content. So the

ability to actually create a very sort of elegant, very [variable?] avatar just isn’t there. Doesn’t

need to be there. But the user interface is very simple. It’s low on bandwidth and [AUDIO

GLITCH], which, again, is something that enterprises care about. It seems to work, all the

times I’ve tried it, very well through all VPNs and firewalls, which again is a big issue for

enterprise users. So it meets all of those set of requirements.

Having said that, it is strictly an internal or sort of closed environment. This is not something

you’re going to be able to extend in the future to build out to a full-blown island and start

selling, reaching out to the community at large. So it’s sort of comparing apples with

oranges in a sense. But it is very promising, I think, at this particular point in time, compared

with a lot of the other tools that are around there and that are still kind of in Beta or early

Beta or best toolkits so they can require [considerable?] amounts of effort on the part of an

organization to actually get something going.

ROBERT BLOOMFIELD: I’ve been watching the backchat go on as you two have been

talking. So one of the themes that I’m seeing from a number of people is that, as you

mentioned yourself, Steve, a World like Qwaq does not give a firm an outward face that

Second Life does. And so I guess one question I have for both of you is: How important do

you think that is for enterprises to have a World where the enterprise can actually engage

with the public, like we are doing now? And then, from that perspective, who is the next

competitor? Who’s the one that’s going to give Linden Lab a run for their money on that?

Steve, if you want to start.

STEVE PRENTICE: Yeah. In the short term, I don’t think, for most enterprises the ability to

reach out to the community at large is as important as getting an effective tool embedded

into the enterprise infrastructure for internal collaboration. In the longer term, it’ll be

absolutely essential. The long term, this becomes as viable, as critical a media channel and

environment as the Worldwide Web has become today.

ROBERT BLOOMFIELD: And, Mitch?

MITCH WAGNER: Yeah, pretty much what Steve said. Well, let me start with the short term

first. In the short term, I’ve identified three companies as being worth watching. We

mentioned two of them: Qwaq and Metaplace. I think the third one is Multiverse. That said,

there are a million various Second Life competitors out there and Virtual World companies

out there. And the way these things work, I would not be at all surprised if a year from now

we were looking at market dominance by a company that I’ve never even heard of now.

That’s just the way things are.

ROBERT BLOOMFIELD: So when you say short term, Mitch, what are you talking about?

MITCH WAGNER: Well, let’s say the next six months to a year.

ROBERT BLOOMFIELD: Six months to a year. It’s true, it seems like this industry moves in

dog years. So six months, that’s three and a half years in a normal industry.

MITCH WAGNER: Yeah, I think we’re in kind of a peculiar sort of--I want to say eye of the

storm, but that’s not the right metaphor. We’re becalmed at this point. Second Life’s growth

is flat. I’m trying to phrase this carefully: Not a lot of innovation that is interesting to people

outside the Second Life community going on right now. But, on the other hand, [AUDIO

GLITCH] companies that are just emerging and their technologies in Beta. So there’s not

really a lot going on in virtual worlds right now that is of interest to people outside the little

community. But as these other companies come out of Beta, we’re going to see a lot more

interesting things happen over the course of the second half of 2008 and the first half of

2009.

ROBERT BLOOMFIELD: The worlds you’re talking about are going to be user-generated

content Worlds like Second Life? That’s your thought?

MITCH WAGNER: Well, I think they’re the most interesting applications of the technology.

Somebody came by--in the chat there was some mention of Club Barbie and Webkinz.

Those are fine for the kids involved in them, but they’re not hugely interesting, I don’t think.

Similarly a lot of these Worlds where almost the very first thing they say to me when they

pitch them is, “We’re safe for companies to get into.” Safety is boring.

ROBERT BLOOMFIELD: Safety doesn’t excite you, huh?

MITCH WAGNER: No. When one of the first things you tell me about your company is, you

respect other people’s copyrights, it’s--oh, I don’t know.

ROBERT BLOOMFIELD: Well, we’ve heard representatives of companies say that on

Metanomics before, more or less right out of the gate.

MITCH WAGNER: Yeah.

ROBERT BLOOMFIELD: Now let me, I guess, move on just a bit to using these Worlds.

You know, I agree. Actually I’d love to do an entire show and have a completely different

discussion about some of these kids' Worlds. When people say, well, they’re safe for your

companies, I don’t know that they’re necessarily talking about trying to do the same type of

enterprise software that the two of you, and particularly Steve has just been talking about,

with collaboration and so on. So we’ll probably do another show on kids’ Worlds,

entertainment worlds, MTV, and so on. But when we think about enterprises doing internal

work--so, Steve, you had a recent research report--I believe this was just in the last month

or so--how to justify enterprise investment in virtual worlds. I know people can buy that from

Gartner for about two hundred bucks. But I’m hoping you can give us a taste for free. So

first of all, in light of your concerns about Second Life, my reading of that was this is really

for, you know, if you’re saying, okay, you’re going to use a Qwaq or a Metaplace or--I see

someone is mentioning Open Croquet--or Forterra. And you propose a three-stage method

for investment. Stage one, you recommend using the enterprise’s training budget to get the

project going. Can you talk about why you start there?

STEVE PRENTICE: Sure. A tremendous amount of discussion about virtual worlds always

seems to come back to the technology and which platform should I use, etcetera, etcetera,

etcetera. People will have detailed conversations. We’ve discussed already on the show

issues with the technology platforms. My view is really that organizations need to start

forgetting to think about--I'm getting a heck of a big echo now.

ROBERT BLOOMFIELD: Yeah, I think someone has their voice on. Maybe it’s better now,

so give it another whirl.

STEVE PRENTICE: Yeah, it’s gone again. Organizations need to be much clearer about

what it is they’re trying to achieve and then start to look on the [secondary?], the platform,

the technology they’re going to start doing that with. So what we were describing in the

report you referred to is--I’m not sure it’s sort of phased approach to how you go about

doing it. I’ve spoken over the last two years to a lot of organizations who've been very, you

know, household names, the big global _____ who've gone into virtual worlds, but

predominantly Second Life. And you asked me the question, “Well, was the project a

success? What did you achieve?” And, in most cases, I think it’s fair to say they can’t

actually tell you because the clarity objectives--they weren’t able to measure--they’re not

sure what they’ve achieved. So is it a success? Is it a failure? Who knows? And they were

carried away on a wave of enthusiasm perhaps.

And I think, as we move into some of the maturation of the use of Virtual World technologies

inside enterprises, you’ve got to be far more objective. And the reason for starting with

training is that role-based training scenarios are a standard part of training in many

organizations. virtual worlds provide a way to do that. The training department has a budget.

It is always a training budget in every organization. And you’ve got a budget, you’ve got a

clearly defined set of requirements and objectives, you know what it is you're trying to

achieve, it’s a good place to start. You’re building a somewhat constrained project. And

constrained projects are good from enterprise point of view. As soon as things start getting

very loose around the edges and expand, you lose sight of how much you’re actually going

to be spending and what the benefit was. So when your CFO comes along and says, “What

was the ROI?” it’s very difficult to determine that. It comes back to focus. Maybe when we’ve

done here, we should go back and talk very briefly about some of the kids’ games because

the question of focus, I think, has a lot to do with why some of those are very successful and

some other virtual worlds are apparently less so.

ROBERT BLOOMFIELD: And now there are you talking about the focus of the Virtual

World developer? For example, Barbie?

STEVE PRENTICE: Well, exactly. The point really is that virtual worlds are about the

community of people that they serve, and engage and support. They’re not so much about

the technology platform.

And if we take an extreme example: Barbie Girls. Mattel are absolutely crystal clear about

exactly what characteristics and the demographics and the requirements and expectations

of their target audience is, and hence they're able to pick up an awful lot of users very

quickly because they’re meeting their needs. And I think a lot of the kids’ worlds meet their

needs.

Now Mitch might say sure, they’re not very interesting, and I don’t find them very interesting.

But there, again, I’m not an eight-year-old girl. I’m not a Club Penguin user. I’m not

someone who’s into Habbo Hotel, and Habbo is pulling tens of millions of unique visits every

month, all relentlessly focusing, feeding up a complete stream of new and appropriate

content to actually keep people coming back.

If you want a Virtual World to be successful, I think you’ve got to know who you're targeting

at, where the focus is. And the question, and I always hesitate to give it out in this sort of

forum is: Where is the focus for Linden? Who is the audience, the community, if you like,

that Second Life is focused at and targeted to? Sure, there’s a community of users and

residents today, but, as Mitch has said, that’s kind of flattened off a little bit, and what’s the

next stage of development there.

ROBERT BLOOMFIELD: Mitch, you want to take a stab on behalf of Linden Lab answering

that question Steve just asked. Who is the target demographic for Second Life?

MITCH WAGNER: People who live on planet Earth. And this is only until extraterrestrial life

is discovered, then it’s going to be everybody in the universe. Linden Lab has a very

messianic vision of the future of virtual worlds and Second Life’s role in that. I don’t think

they’ve really--I don't like speaking for Linden Lab, but I’m pretty sure they haven’t got any

kind of vision of constraint at this point.

STEVE PRENTICE: I actually agree with Mitch there, and I think that’s one of the

fundamental problems.

ROBERT BLOOMFIELD: And, Mitch, would you agree with that, that that’s a problem?

MITCH WAGNER: Yeah. I think it raises the issue of people coming into Second Life and

asking, “Well, what do I do here?” And not having a really great answer for that at this point.

Now I think that Linden Lab, in their defense, would said that they’re looking to the

community owners to provide those answers. So if you’re the owner of a club that plays hip-

hop music, then your audience is hip-hop fans. I think they’re trying to provide tools to allow

the individual community owners to go out and operate more independently and bring users

in on their own, and I think that’s a very wise move for Linden Lab to be doing.

ROBERT BLOOMFIELD: Well, I would say I’m not atypical in the type of thing that I’m

doing on behalf of Johnson’s School here at Cornell, which is, I decided, okay, I want to

have what is basically a guest speaker series, and, of course, we have done the promotion

for this. We have really done everything except make the platform in the World. We rely on

Linden Lab for that, for better or worse.

And let me just move along. Whenever you guys want to jump in and feel like you have to

make a point, just do so. But I did want to get through the three stages of Steve’s proposal.

So we talked about starting with the training budget. Actually, let me just say one thing that I

don’t know if you emphasized quite so heavily right now is that one nice thing about the

training budget is, they usually don’t have the good stats, even if they’re not getting involved

in virtual worlds, but just doing standard training. No one knows with ROI of that stuff

anyway. I think you mention in your report that that tends to be pretty soft anyway.

Now stage two is, okay, it’s a mouthful here: Project Based Avatar Enhanced Collaboration.

So is that really just a WebEx type application?

STEVE PRENTICE: I think it’s going a little beyond WebEx. Qwaq would be a great

example of something that’s doing that. Basically, it’s a collaboration internal, using avatars

rather than just simple WebEx because you get a more immersive experience. You get a

range of additional information and relationships building up. And the reason we talk about

project based is to, again, keep things confined. This isn’t about creating a virtual presence

for the entire organization. It’s about creating a virtual environment for a specific project. So

you can start to get benefits like reduced travel time for meetings, whole range of sort of

things, which are a real problem in a large multinational geographically diverse organization.

And by keeping things tight, again, you’re restricting the amount of expenditure you need to

put in place. You’re not worrying really about creating large amounts of build. A simple

conference room is probably going to be enough. So again, it’s relatively easy.

You can start to demonstrate the benefits rather than what is a real issue in some

organizations with some more conservative management, which is about seeing virtual

worlds as playing games. And the whole point of an enterprise is, you have to actually get

beyond that concept that these are games towards that they’re a valid, useful business tool,

in the same way that we had to fight a decade ago to actually see this newfangled thing

called the Worldwide Web as being a useful business tool as opposed to anything else. It’s

only when you go on to the third stage that you start broadening it out into the general social

interaction collaboration inside the organization. And that’s where the benefits do return

from being somewhat hard back to being relatively soft benefits. But that’s really about

creating that sense of community. The phrase that’s been used is the serendipitous water

cooler conversations, the sort of conversations that we used to have when we all went into

the same office building every day, which, of course, don’t happen anymore in many, many

organizations because we’re all working from home, or we’re on the road or on different

continents or time zones or whatever. An organization has to be prepared before they can

move to that stage, otherwise, I think it’s just too big a leap.

ROBERT BLOOMFIELD: At the end of your article, you talk about the top five mistakes to

avoid. And one of them is this games syndrome. And this goes back to something you were

saying earlier. Earlier you were saying that the benefit when you’re doing this

avatar-enhanced collaboration, that you’re providing a more immersive experience. It makes

that serendipitous meeting a little more personal. But you talk about a mistake that

companies can make by providing users with too many choices, especially about

customizing their avatar. So I do have a few questions on this. One is: Isn’t that then sort of

fighting against the recommendation to have avatar-enhanced collaboration? And the other

is: Are you actually saying don’t spend a whole lot of time helping people in your enterprise

do this? Or are you saying take the time to make sure they can’t so they don’t get distracted

by it?

STEVE PRENTICE: I think the former really. I’m not a great fan of sort of prevention, using

IT as the function of stop people doing things. But really, if what you’re talking about is

focusing on the content as using this as a tool for improved collaboration, then the avatar

only needs to be relatively simple to enable people to understand who’s focusing on this

particular document, who’s present. We don’t need the full-blown expression of individual

personality that has become such a feature of some of the public virtual worlds. That has its

place, but it’s not the highest priority inside an enterprise in the early days when you may

well be fighting to actually put the investment in, and you don’t want the distraction of people

worrying about what their avatar looks like too much.

ROBERT BLOOMFIELD: Okay. And then the third stage, Steve, of bringing your enterprise

into Second Life is nonspecific social collaboration. What’s that?

STEVE PRENTICE: As I was saying, at the end of my previous sort of segment, if you like,

that’s when you move away from just worrying about a specific project to extending the

community, if you like, out from that one project to the entire organization. You need a

relatively mature organization, I think. You also need an organization that no longer needs

to be convinced of the benefits, that no longer actually sees virtual worlds as being a game

or a toy or a distraction or whatever. Then you can start to bring in the richer environments.

And I think you’re then starting to prepare an organization for going external basically. We

talked about three phases. I mean I would view stage four as being on what happens when

you actually take the organization externally, and you start reaching out to that broader

community at large.

ROBERT BLOOMFIELD: And actually, if I could quote from your report just a line here, in

your top five mistakes, the last one is, “Taking it external.” And you really don’t mince words

here. You say, and here’s the quote, “You’ll encounter pressure to build externally focused

Virtual World projects to give customers and partners access, to support e-commerce and to

strive for a wide range of public-related objectives. At this stage, resist these absolutely.” So

why do you see that as being such a big mistake?

STEVE PRENTICE: Because I think it diverts attention away from the more immediate

gains, and I’m not entirely convinced that there is sufficient of an audience out there who are

familiar enough with virtual worlds who necessarily want to interact with new enterprises.

We’ve seen throughout the history of Second Life, I think, a certain amount of

anti-enterprise activity. And many of the early entrants into virtual worlds have either quietly

abandoned them or actually pulled out because they simply weren’t delivering the sort of

responses and results they want. They're going external and failing to actually meet those

expectations, I think just damages the project and makes it much more difficult to go back

and do it again. Better to actually put things off for now.

ROBERT BLOOMFIELD: Okay. Great. Well, thanks so much for walking us through that

Gartner report as a bit of a freebie for our Metanomics audience.

So let me ask, Mitch, any takes or reactions to what you just heard Steve talking about?

MITCH WAGNER: I think Steve has done a great job of outlining some of the issues here.

One practical Real World application that does seem to have gotten a lot of traction in

Second Life is training and education. We see a ton of universities and colleges setting up

presences in here, and we also have seen a lot of training exercises. Mostly going on with

customer virtual worlds, especially some of the more interesting ones have to do with

emergency services, people offering training in trauma care when there’s a huge disaster or

just out in the field with disaster recovery preparedness planning. So training certainly, and

role-playing training is certainly a great example.

I think, in general, one insight that I’ve had over the past six or seven months is that

constraints are the key to success on the internet. There’s a temptation to want to be

everything to everybody, but Ev Williams, who co-founded Twitter and Blogger, pointed out

that really, for a lot of companies, the key to success has been just doing focus at first.

Facebook focused for years just on colleges. YouTube would not let anybody upload any

videos longer than ten minutes. Google just had that blank screen with one line of text entry

and two buttons. Twitter has 140-character limit per message. The companies that really

succeed in taking over and thriving are the companies that really have a narrow focus at

first.

ROBERT BLOOMFIELD: Let me ask, can you hear me?

MITCH WAGNER: I can hear you fine.

ROBERT BLOOMFIELD: Okay. Great. Because my Second Life has partially crashed

during this discussion of Second Life and its use for enterprise. But I think this only means I

will not see backchat or any instant messages, but we can carry on from here, I believe.

MITCH WAGNER: Are you using the production client or one of the release candidates?

ROBERT BLOOMFIELD: Well, of course, I can’t do Help About because I don’t think I can

use my interface, but I believe I’m on 1.19. So I’m mainstream Second Life right now.

MITCH WAGNER: Yeah, I’ve had my client freeze up a couple of times. I’m running the

production candidates. This only addresses the point about--this is supposed to be the

production candidate.

ROBERT BLOOMFIELD: And it’s really too bad because I talked Zee Linden,

John Zdanowski, the CFO of Linden Lab, and he, I believe, is listening to our conversation

and is willing to give a quick response, and I was just about to IM him. So I guess, John, if

you are out there, maybe you can work with JenzZa Misfit to arrange a question, and we’ll

get you on voice.

The question I would love to hear, given all we’ve discussed, the question I would really like

to hear the answer from Linden on is really about that target demographic. Do they really

plan on following this focusing on everyone on planet Earth until we find the extraterrestrials

so we can add them in too, and where they see that strategy having its strengths and its

weaknesses? So, JenzZa, or maybe Yxes, if you can help me out with Zee, that would be

great.

So we are getting to the end of our show. And, Mitch, actually one of the things that I

wanted to talk with you about is, we’ve had a very Virtual World focused discussion here,

when, in fact Virtual World are just one of a lot of technologies that we have access to, and

you have been covering Web 2.0, social networks and Twitter and all of this. Where do you

see virtual worlds fitting in the larger Web 2.0 industry? Are they a novelty? Are they the

future of what’s going on here?

MITCH WAGNER: I think that there are a lot of trends happening at this point, and virtual

worlds is one of them. I think ultimately we’re going to see virtual worlds as one channel

among many that are used to access the internet and to access our network of contexts or

our Real World friends and our internet friends around the world. Other channels will include

text messaging, email, the web, the flat web. They’re all good for different things at different

times. Just as one present day example: When I was giving that demo of Twitter to my

fellow employees at Information Week, I was kind of startled to find that I think more than

half of the people on my Twitter friends list are people I know through Second Life. So while

I’m not logging into Second Life as much as I used to anymore, I’m still keeping pretty well

in touch with the Second Life community through Twitter and through blogs.

One area that we haven’t touched on at all is the idea of augmented reality, some of the

things that people are doing to overlay images over what you see in the Real World around

you. So people are now working on using handheld devices and phones with built-in

cameras and hacking them so that, if you hold the camera up and you turn it on and you can

see what’s in front of you, you hold it up in a building, you’ll actually see the address of the

building and maybe a little bit of information overlaid over the building itself. [Ophelio Artes?]

said these information technologies are just communication tools to associate with whom we

choose. That’s pretty accurate. We’re going to be using a lot of different tools. As displays

gets larger and we start seeing some of the technologies that are being worked on in

Georgia Tech and elsewhere for really making the experience more realistic, the experience

is going to get a lot more immersive, as far as virtual worlds go.

ROBERT BLOOMFIELD: What’s happening at Georgia Tech?

MITCH WAGNER: They’re doing a lot of this reality augmentation stuff, where you could

have--you know, the idea being that you’d be sitting in a room, and some of the people

around would be really in the room with you, and other people would just be present virtually

as avatars, but they would all be visible to what you’re doing.

I guess the ultimate vision for this is something like you see in Charlie Stross’s novel Halting

State or Vernor Vinge’s Rainbow’s End, where the display looks like a pair of eyeglasses or

event contact lenses, and you’re just looking around you. You can’t even tell, if you don’t

think about it, what’s real and what’s virtual anymore.

ROBERT BLOOMFIELD: We have enough problem with people driving, talking on their cell

phone.

MITCH WAGNER: Yeah. Well, see, if you were driving, you’d actually, hopefully, images

that would help you drive more safely and accurately, “Watch out for this car. This guy is

drunk over here.”

Another technology I’ve been looking at, two more technologies. Even something as simple

as omni-directional treadmills look pretty cool. I’ve been trying to be more diligent about

exercise in the morning these days, and I think, “Man! It would be great if I could just walk

through Second Life instead of sitting here in my home office staring at the wall.” And

another thing that looks pretty interesting is some of the work that Mitch Kapor’s foundation

has been doing regarding using 3D cameras to navigate Second Life, using kind of some of

that same techniques that you use to navigate a segue. So if you leave--

ROBERT BLOOMFIELD: So now you just need the 360 treadmill Stairmaster so that you

can work while you fly. Is that--you know, use those muscles. We’re just about out of time. I

do have one last question for the both of you. So first, am I still here?

MITCH WAGNER: Yeah, I lost you for a second, but now you seem to be back.

ROBERT BLOOMFIELD: Okay. Wonderful.

STEVE PRENTICE: You’re a disembodied voice.

ROBERT BLOOMFIELD: Oh, I am no longer in a chair so SLCN is probably filming an

empty chair right now, which would not be the first time.

And so my last question for the both of you, it’s really sort of a Meta question because it’s

about your roles as industry analysts. I come from more of a Wall Street background, but I

don’t think Silicon Valley and the tech industry is all that different. Analysts usually want to

avoid being overly critical of the companies that they cover because they don’t want to

become pariahs. They want to keep getting access to management that gives them the

information that really is their life’s blood. So I’m wondering how do you deal with that kind

of pressure and potential loss of independence?

MITCH WAGNER: Well, first of all, I’m not really an analyst. I’m more of a journalist. I don’t

really worry that much. I do worry about access, but I don’t really let that be a factor in

influencing my writing. The fact is, I’ve been covering Apple a lot for the past year, and I

think that I’ve gotten two interviews out of them. So you can easily cover a company without

necessarily having access to the top executives. Of course, I prefer it. And Linden has been

pretty accessible, so it hasn’t been a problem.

ROBERT BLOOMFIELD: Well, we’ll see if they continue to be accessible after you’ve said

the things you have today. Steve, how about you?

STEVE PRENTICE: Like Mitch I don’t actually worry too much about it. I mean

[everyone’s?] concerned about objectivity so, at the end of the day, you look at a whole

range of factual information such as you can get it, and you infer from that, and what we talk

about is our advice, if you like, to our client base. I normally would draw back from being

overly critical specifically about an organization. It's much more sensible to to talk about

technologies. And you rely on maintaining a balance and keeping to the facts, and giving

organizations, when you are critical about them, an opportunity to respond before you

actually publish. That’s something that we’ve done on a number of occasions. With Linden,

where we've been talking about Second Life specifically, and it’s something that we do as a

matter of course. But we certainly don’t see ourselves as being in the pay, if you like, of

large organizations. Large organizations are our clients. Some of those are vendors. Some

are not. It’s not really an issue for us.

ROBERT BLOOMFIELD: Okay. Great. Well, we are nearly to the end of the show. We do

have time, really, for each of you to make any sort of closing comment you would like. A

summary prediction, a clarification of something you said earlier. Steve, you sort of still have

the floor. You want to wrap up?

STEVE PRENTICE: Second Life is not virtual worlds. There are more virtual worlds than

Second Life. A lot of the backchat has been around are we saying Second Life is going to

fail. That’s not the issue here. The issue for me is how can organizations effectively use

virtual environments, virtual worlds, of which Second Life is one. There are all sort of issues,

but this isn’t about the success or failure of an individual organization. This is about success

or the failure of what I believe is a tremendously exciting technology, which has got a huge

future.

ROBERT BLOOMFIELD: And, Mitch?

MITCH WAGNER: Well, I do want to believe in Linden Lab and Second Life, even though

the situation looks dire at this point. I think they have a lot of great people over there and a

lot of great energy, and I’m really hopeful and optimistic, perhaps against the facts, that they

will turn things around and get going. They remind me a bit of Yahoo today or Apple in the

1990s, a company that has a history of great innovation, and it still has a great many

innovative people in it, but at the moment seems to be stepping all over its own feet.

I did want to raise one other point here. I’m told that Zee actually said on Friday, in response

to something I had said elsewhere, that the company has--I forgot the exact phrase he

used--between like six million dollars in free cash in the quarter or something like that.

ROBERT BLOOMFIELD: Yeah. Six million dollars in free cash flow in--I believe that was

first quarter ’08.

MITCH WAGNER: Okay. And that’s terrific. It means that even though the engines of the

airplane are not currently running, they’ve got plenty of glide room to restart the engines and

resume powered flight again. But I’m looking at the numbers of engaged users, and, when I

start to see those ratchet upwards at a significant rate, I will declare that Second Life is

back.

ROBERT BLOOMFIELD: Benn Konsynski, a professor in IT at Emory’s Business School,

actually has been emphasizing to me a number of times that, in companies like this, you

don’t look at the first derivative. He’s a professor so he’s got to use calculus. You don’t look

at the first derivative, which is just how things are changing. You look at the second

derivative, which is the change in how things are changing. I think right now, if you look at

that, you say, “Well, there is growth.” But the growth isn’t growing, so you’re not seeing them

scale up exponentially but just linearly, which is not promising for an early stage company.

MITCH WAGNER: Yeah. Zee is saying in text chat here that, “The situation is not dire. We

have plenty of cash. We are growing very rapidly.” Not according to the numbers that you’ve

been releasing, Zee. Three percent month over month was the last number for overall

account growth. As far as I have been able to see, the number of engaged users has

remained pretty flat since December. Maybe there are numbers that you guys have

internally that we’re not seeing, but those two metrics alone tell me that the situation is dire.

ROBERT BLOOMFIELD: Well, that is a great point, I think, on which to close our formal

show. What I would like to do is, I’m going to log off and come right back in and ask SLCN

to stick around, and maybe we can get just a quick voiced response from Zee to what Mitch

just said.

So first of all, I would like to thank everyone for showing up, especially my guests

Mitch Wagner, of Information Week, and Steve Prentice of Gartner Incorporated. It’s a

fascinating show. I’d like to remind everyone that this will be replayed on Muse Isle

tomorrow at 3:00 P.M. Second Life time. Transcripts for any members of the press will be

available on metanomics.net, usually about a day and half or two days after the show. And,

Zee, thanks for giving that response so far, and I hope to talk with you in about a minute and

a half, if that’s possible. So off I go. I’ll be back in a moment. Thank you, everyone.

Well, that was a fascinating discussion with Mitch Wagner, of Information Week, and

Steve Prentice, of Gartner Incorporated. One of the central parts of the discussion was

about the future of Linden Lab, and Mitch actually used the word “dire” to describe Linden

Lab’s current situation.

INTERVIEW WITH JOHN ZDANOWSKI

We are delighted to have with us John Zdanowski, Zee Linden, CFO of Linden Lab, to give

his quick response to what he heard today. Zee, thanks so much for coming on the show.

JOHN ZDANOWSKI: Thanks for having me. I always appreciate your variety of guests

you’re able to get into Second Life.

ROBERT BLOOMFIELD: Yeah, well, it’s a labor of love. I’ve really been enjoying this. What

do you have to say to Mitch?

JOHN ZDANOWSKI: Well, I think Mitch is probably commenting about a couple of the

active user stats and the unique user stats that we publish. So active users have been

relatively steady at about 500,000 users logging in for more than an hour per month over the

last year. And our, you know, just people logging in has been in the 800,000 to a million

unique users per month.

The number that I think we look at that ends up having much more sort of financial

relevance to us and to the residents of Second Life is total user hours and then total

concurrency. And both of those have shown linear growth since about a year ago. For the

six-month period between sort of Q4 of 2006 and Q1 of 2007, it was faster than linear

growth, but I think there were some unsustainable components of our growth there relative

to sort of the blog post that I recently made about our 15 percent growth from Q4 to Q1 of

this year. I think this is at a much more sustainable level of growth.

The other number that I think people get confused about at times is premium subscriptions.

Originally, premium subscriptions were a great way for us to basically stimulate the

economy by giving people Linden dollars long before there was a LindeX. Over the last year

and the year before, we significantly reduced the stipend, which had the intended effect of

slowing down the growth of premiums, and those have been flatted around 90,000. At this

point, a premium subscription, as currently configured, is really just the right to own

mainland and then a small Linden dollar stipend. I think we’ve seen more of the growth in

island users and kind of a much more diversity of usage on private islands themselves. The

mainland though has also continued to grow, with the average parcel size that each

premium user owns continuing to increase.

I think the key point here for Mitch is that, when your revenue grows from four, ten to forty in

the first quarter, about 70 million on a run rate basis, I’m not sure that there are a lot of

private companies that achieve that level of growth at the same time as achieving

profitability. And so if our situation is dire, then I just wonder about a lot of other companies

that don’t really have that kind of financial performance. And it really is kind of surprising to

hear that, being the CFO here and looking at our numbers, and also being quite transparent

about those numbers. Probably more transparent than any other private company on the

planet.

ROBERT BLOOMFIELD: And we appreciate the transparency, especially the economic

statistics that you do provide for the in-world economy. And actually one question I had:

When you were in the Metanomics group chat channel last week, you talked a bit about the

money that residents are taking out of Second Life. And I’m wondering how important is that

to you as something to be tracking and keeping a finger on as part of your numbers

tracking?

JOHN ZDANOWSKI: It’s very important. Can you still hear me?

ROBERT BLOOMFIELD: Yes, I can.

JOHN ZDANOWSKI: It indicates the overall health of the economy, and that was really the

focus of my most recent blog post--was the 15 percent growth and the user-to-user

economy from Q4 to Q1. Then the 17 percent growth in the LindeX volume from Q4 to Q1.

I mentioned in the chat while you were talking that, since inception, the users have traded

over $600 million worth of virtual goods inside Second Life. I’m not sure there's anybody

with a tenth of that in an open way like Linden Lab and Second Life have, or maybe even a

hundredth of that, and I think that’s sort of the most important thing about Second Life is that

in-world economy because that’s what attracts a lot of creativity and a lot of really great

builders and people providing great experiences.

In terms of people cashing out, it’s pretty consistent that the LindeX volume as it

represents--the sellers on the LindeX primarily represent successful in-world businesses,

and so you can look at the 9.2 million, I think, that were traded on the LindeX last month,

and then roughly about 45 percent of that in any given month is cashed out by residents.

Another 45 percent of that is paid back to us in fees. (There’s a little echo there.) --in fees

for land and other things. And the fees that come back to us from basically sellers on the

LindeX also translate into more than half of our overall revenue billings. And so the success

of the in-world economy is tied intimately to our own success. I think some of these numbers

also get confused when compared to last year and some of the--the three main problems of

last year were sort of hyper growth and then fraud and then shutting down gambling and

then implementing the VAT. And clearly, shutting down gambling significantly reduced

user-to-user transactions. But, as you can see on the charts on the LindeX, it had absolutely

no impact on the value of the Linden dollar relative to the U.S. dollar. And that, to me,

meant, yeah, well, it was about 40 percent of the user-to-user transactions because often

gambling transactions are quite circular in nature, and the net is quite small, the overall

impact of gambling on the money supply was only about three percent. And the money

supply growth slowed about three percent for one month and then returned to its normal

growing pattern.

So all the indications that I see, and I’d be happy to sit down with Mitch personally--I think

he’s here in the Bay Area--and walk him through some of these numbers and say it’s hard to

imagine certainly--we’ve got lots of problems with stability and definitely some growing

pains, but I think our focus is in the right area. The IBM announcement indicates that we’re

looking for an enterprise solutions provider like IBM to really help us make Second Life and

the technology enterprise ready. We’re working with the architecture working group to

establish standards in the space. And all the while we're continuing to support and maintain

a rapidly growing in-world economy and continue to add in great features like the upgrade of

Havoc and the implementation of Wind Light. There’s definitely a lot going on, and certainly

no one would like our stability to be much greater than it is than me. But I think, in

comparison to the size of other Worlds and the size of things like that, I think the situation is

far from dire, from that perspective.

ROBERT BLOOMFIELD: So I’ve got two more questions. I know we’re just about out of

time, but I hope you’ll be able to give some responses. The first one, one topic during the

show was: What is Linden Lab’s demographic focus for Second Life? Who are the targeted

residents, users, clients? And I think the consensus of Mitch and Steve was: everyone

human on planet Earth. And that that may indicate a lack of focus that is causing some of

the problems that they saw with Linden Lab. Do you have a response to that?

JOHN ZDANOWSKI: Yeah. First of all, I think I mentioned in the backchat there that, yeah,

there has been a broad focus for Linden Lab, but certainly, I think it’s a thick client to

download, definitely requires a high speed internet connection. It definitely requires a better

than average computer. And we haven’t, though we could do things like get it to run in a

browser and things like that, I think, there’s quite a number of challenges to solve there.

People have gotten it to work on a mobile phone, but really, that’s just through our Open

Source capabilities that that’s been possible. So I think that, at the end of the day, the folks

that end up using Second Life are definitely more technically savvy than the average

person. And I think that’s an indication that virtual worlds in general are still at the earliest

stages of adoption.

At that early, early stage of adoption, I’m not sure that any analyst on the planet could

predict exactly or define which demographic to target. And certainly we look at the

demographics that we have and kind of the international split that we have. And I think

there’s lots of different use cases inside Second Life that have contributed to its growth. In

the back channel or somebody mentioned like if there’s a person who has a jazz club, then

their target demographic are jazz enthusiasts. And I think there are just so many of those

micro communities that I think that, at the end of the day, that really is--our focus is on

providing a Virtual World place where you can engage with a small group of people or a

larger group like your Metanomics group, who are interested in similar subjects and

collaborate and discuss things with them in a way that’s not really enabled by other

technologies. I think humans have diverse interests, so I think they like the fact that you can

jump from a jazz club to a Metanomics session. I think we’ve empowered quite a few people

to engage with people and information in ways that they couldn’t before that. In terms of the

lack of focus causing us problems, I don’t see that happening.

I think we’re really focused on broad stability and reliability, and we have been for some

time. It has improved. I think the implementation of Havoc reduced physics-related crashes

some 99 percent and overall crashes on simulators of more than 68 percent. The crash rate

of the viewer itself is still far too high. There’s definitely a complex problem with the way

Open GL is implemented on a variety of different hardware platforms. We have statistics on

all the different hardware platforms, and we’re working to beat down the major sources of

those crashes. And I think, in the upcoming release candidates, I think we’ve seen a

20 percent decline in viewer crash rates.

But still, I think we’ve got such a long way to go. I think virtual worlds have a long way to go.

I think Linden Lab is going to be a part of that, and I think, at this point, certainly the

economy of Second Life is the largest Virtual World economy, and we’re going to do all we

can to protect that lead.

ROBERT BLOOMFIELD: Thank you. I have one final question that takes us back to the

economy, which is about the change in land prices. So there was a decision by Linden Lab

to dramatically reduce the up-front cost of new land, while keeping the monthly rental, the

tier fees, largely the same. One question is: What was the motivation for that change? And

related questions: Why change the up-front cost rather than the tier? And how do you see

those changes ultimately affecting the Second Life economy?

JOHN ZDANOWSKI: Yeah. Changing prices in Second Life is extremely difficult. I started

in September of 2006, and the company was not profitable, and I looked at the analysis and

said, “Look, in order to get profitable, we had to make a significant price increase.” At that

time we raised prices from 1250 up front to 1675 up front, and we were looking at higher

hardware costs for better simulators that we had, and that contributed to that. Then we also

looked at the monthly fee and raised that from 195 on islands to 295. And, of course, that

wasn’t greeted with excitement from the community either. Oddly enough, reducing prices

also has been greeted largely kind of negatively by existing landowners. And certainly I can

understand that. It does feel like that we’ve taken some value out of the land by lowering our

up-front fees, but I think that the major driver for that decision was a recognition that the

hardware costs for us in 2006 were over $1,000 per region, had come down to kind of below

$400 per region and that there are many sort of applications in Second Life for which that

up-front cost was prohibitive.

The recurring fee I think for us at this stage is probably accurate where it is relative to the

cost that we incur for hosting the servers and things like that and the way that we do it. I

think there’s other technology changes such as hosting more regions on a CPU, and we’ve

done that with the open spaces so that you can get sort of a lower prim, lower cost region. I

think there’s more we can do in that area, but for a full region with full prim and full

permissions and full estate controls, I think 295 for now is the right price, and that will

probably maintain stable for some time to come.

So I think the way it’ll impact the economy, just based on what we saw before, interestingly

enough our revenue per user hour has been about 20 cents for more than the last three

years. And I think that translates into--I think some of the in-world business owners will be

able to cash out more and still expand their property holdings, or they may be able to

purchase more. So I would expect either that the profitable in-world businesses can buy

more land and cash out more at the same time or that we really enabled a variety of more

applications to be developed in Second Life.

On the up-front fee, I think that is a number that will probably continue to fluctuate as the

system changes and as some of the dynamics of the hardware pricing change. So just

based on what we saw before, there was definitely resistance to the price change in 2006.

There’s definitely resistance to the price change in 2007. And I think the cries have been the

same, that changing prices were going to destroy the Second Life economy. But it didn’t

happen before, and we’re certainly not expecting that to happen again.

ROBERT BLOOMFIELD: Thank you so much for being generous with your time, joining us

in the Metanomics backchat channel last week and joining us here to respond to what you

heard on today’s Metanomics show. So I guess we’ve gone way over our time. I would like

to remind people that, immediately after this show, we have Cybergirl Oh, who is going to be

on her show, Real Biz, talking with advertising agency GSD&M Idea City. So that should be

a very interesting show starting in about 20 minutes. We’d better let SLCN get there and get

set up for that.

Thank you, Zee. Thanks to everyone who showed up, and we will be up again on Friday

with a special Metanomics, talking with Larry Johnson, CEO of New Media Consortium,

during the Clever Zebra vBusiness Expo. So see you all on Friday, 11:00 AM, Second Life

time. Bye-Bye.

JOHN ZDANOWSKI: Thanks, Beyers. Great show.

Document: cor1017.doc Transcribed by: http://www.hiredhand.com Second Life Avatar: Transcriptionist Writer