Aviators, Moguls, Fashionistas and Barons: Economicsand Ownership in Second Life

Cory Ondrejka – Linden Labcory@lindenlab.com

Second Life

is a digital world that relies on a unique combination of grid computing andstreaming technology [Rosedale03] to enable virtually all of its content to be created byits residents. To maximize the quality and quantity of user-created content,

Second Life

has embraced strong economic and legal connections to the real world. This approach isquite different than conventional massively multiplayer online games (MMOGs). Since

Second Life

launched in June of 2003, significant changes have been made to thebusiness model and internal economic structure. These changes have shaped the manyapproaches residents have taken to creating content, building experiences and makingreal-world profits. This Article will discuss the evolution of

Second Life

’s businessmodel and internal economy, its entrepreneurial activities, and the impact of thoseactivities on

Second Life

’s residents and community.

To the Beat of a Different Drummer

MMOGs generally follow similar paths regarding ties to the real world and businessmodels. As spelled out in their End-User Licensing Agreements (EULA) and Terms of Service (ToS), most digital world operators own all of the content in their world, own anycontent generated by the player, and specifically deny residents the right to earn real-world incomes while using of the digital world. Sony [Koster2002] and Turbine[Castronova2004a] have followed through on their EULAs by banning the sale of digitalitems and currency on eBay. Most MMOGs are also subscription services, requiringongoing monthly payments from all players in order to stay in the games.

Second Life

takes a very different approach, recognizing residents’ intellectual propertyrights to their creations, allowing them to generate real-world income [Linden03], andselling them as much digital real estate as they desire [Linden04]. As a user-createddigital world, the ultimate success of

Second Life

is coupled to the innovation andcreativity of its residents, not to ownership of their intellectual property. This is also apractical decision, as MMOGs establish economic links to the real world independent of the wishes of the developers or world operators. Land sales allow a more efficient andequitable allocation of resources and enable entrepreneurs to speculate in ways notpreviously available to them.

Heads in the Sand

MMOGs tend to be extremely time-intensive experiences, with players often spending 20or more hours per week [Yee04] in world. Players with more money than time generate ademand for high-level characters, items and currency, while players with more time thanmoney have an opportunity to supply all of these. Markets thus exist whether the EULA

permits it or not. As Sony discovered, banning

EverQuest

sales on eBay simply movedthe trade to other sites, such as PlayerAuctions and IGE. In fact, despite the nearlyuniversal prohibition on legitimate digital item trading, the global market isconservatively estimated at $75 million [Castronova2004b] and experiencing very stronggrowth.Game publishers continue to officially ignore the reality of item trading [Reynolds04],despite the untested, but intriguing, legal implications of failing to enforce their EULAs.Further muddying the water, some publishers have talked openly of monetizing digitalitem sales [Combs04], although it is interesting that the target is not subscriptionMMOGs but rather single and multiplayer games that have an online component.

Digital Property

The ownership of digital property is also an important question. Even leaving aside thedebate about whether digital goods are property at all [Lastowka03], definitive answersdo not exist about the enforceability of EULAs that retain ownership of everythingcreated by players within MMOGs [Dibbell03a]. In fact, examination of hosting,colocation and bandwidth providers’ EULAs show that it is simpler to allow customers toretain their intellectual property rights.From an economic standpoint, property rights are critical to strong markets[Bernstein04], businesses [DeSoto00], and innovation [North94]. The already largedigital item market would undergo dramatic growth if its participants were able to moveout of the current gray and black markets. Additionally, strong and efficient markets alsolead to rapid evolution of user-created content, as observed within

Second Life

Revolting Taxes

Second Life

runs on an expanding grid of computers; however CPU, memory andbandwidth resources need to be limited and allocated to residents in a predictable andequitable manner. Initially, a complicated system of creation costs, taxes and stipendswas chosen as the best method. Objects and land that a resident owned in world wouldgenerate a weekly tax burden. Residents would pay these taxes using Linden Dollars(L$,

Second Life

’s internal currency) they had received from other users, by selling theircreations, and from their stipend. Their stipend was a weekly payout that changed basedon the resident’s reputation. Residents paid a flat monthly subscription fee in US$.This system had numerous problems. In order for taxes to effectively balance load, theyhad to be insanely high. As a result, very few residents were able to create on a largescale, and it was extremely difficult to create experiences or games within

Second Life

.Rich residents were able to generate severely non-uniform load on the system,magnifying the inequities between the wealthy and the poor. Resident frustrationculminated in the “

Second Life

Tax Revolt” [Grimmelmann03], where residents picketed,held Boston tea parties, and set fire to numerous structures.

A New Model

Although some of the frustration could be linked to the general dislike of taxes, the revoltforced an examination of the deeper problems. Residents had learned that creatingexperiences on a large scale, such as creating a city rather than just a building, made

Second Life

much more compelling. Similar to conventional MMOGs [Yee03] wheremultiple accounts allow dedicated users to enrich their experience by spending moremoney,

Second Life

residents and entrepreneurs demanded a mechanism to create on alarger scale, even if it meant paying more.The system of creation costs and taxes was removed, as was the monthly subscription fee.Instead, the amount of land a resident owned acted to limit the scale of creation. If aresident wanted to build more, they simply purchased more land. Since land was a scarceresource, it was auctioned off continuously. Thus, land ownership consists of an up-frontcost, the auction price, and an ongoing cost in the form of a maintenance fee. Residentscan own as much land as they need and can change how much the own each month.Those who want to create complete experiences even have the option of purchasingestates that aren’t directly connected to the mainland and that have more advanced accesscontrols than normal land. Despite some initial concern over the dramatic nature of thechanges, virtual real estate has proven to be quite successful [MSNBC04].Land values vary in

Second Life

because arbitrary teleportation is not allowed and someglobal rules vary from location to location [Ondrejka04]. “Telehubs” provide a publictransportation system, so land closer to a telehub will experience higher traffic than amore distant locale. Areas within

Second Life

are also divided into “Mature” and “Non-Mature”, with appropriate changes in Community Standards, so depending upon desireduse, different types of land may be more or less valuable. Finally, aesthetic issues clearlymatter, as beachfront property in

Second Life

has consistently sold for more than inlandplots.The stipend still exists. By providing residents with a steady income, the velocity of money within the economy remains high and consumers have little incentive to hoardwhat they have. The stipend has a minimum amount keyed to being a member in goodstanding and is supplemented by daily dwell awards. Dwell awards are L$ payments tothe residents whose land receives the most visitors during the previous day. L$ drainsalso exist, in the form of land that is auctioned for L$, upload fees for adding textures,audio, and animations into the world, and listing fees for the in-world find functionality.

Economic Strength

While inflation could be a concern in this economic model,

Second Life

’s rapid andsustained growth in 2004 has actually resulted in a mild reduction in median and averagebalances. More importantly, unlike other MMOGs, the L$ has actually appreciatedagainst the US$.

Second Life

’s internal economy has also grown significantly sincechanging models, with monthly internal economic activity passing US$1 million at