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Summary:

Om just passed me the most recent attempt to deflate the Second Life hype bubble, a Valleywag post which is actually an excerpt of a longer post by financial analyst Randolph Harrison. Essentially, Harrison argues the internal SL economy is a pyramid or Ponzi scheme, and […]

Second Life Om just passed me the most recent attempt to deflate the Second Life hype bubble, a Valleywag post which is actually an excerpt of a longer post by financial analyst Randolph Harrison. Essentially, Harrison argues the internal SL economy is a pyramid or Ponzi scheme, and unsurprisingly, that assertion has provoked strong replies, from Tateru Nino at Weblogs’ Second Life Insider (“Way to compare Buicks to boysenberries there, boys“) to Mark Wallace of 3pointD (the analysis is “not about SL,” Wallace observes, “but is only a conversation about a conversation“) to renowned online game developer Raph Koster (who notes that SL content creators are not “necessarily running a pyramid scheme themselves, and I think it’s irresponsible to say so“.)

I’ve already written a lot on the eternally recurring subject of Second Life backlash (as here and here, and do note my full disclosures of personal and professional interests in SL therein), so I’m inclined to let Tateru, Mark, and Raph do the heavy lifting in this case. I will say that Harrison’s post reminds me of a saying scientists have: “That’s not right. That’s not even wrong.” The analysis contains so many fundamental errors and omissions, in other words, it’s nearly impossible to map it onto the phenomena it’s supposedly describing.

Here, for example, is an excerpt taken within two of the first paragraphs:

Upon entered the world, a new customer is immediately assaulted with a variety of clothes, jewelry, shoes, hair styles; and that’s only the tip of the iceberg. But nothing is free, not even in virtual reality… New L$ are distributed to customers as they pump real money into the virtual world. Nearly all customers utilize the game’s built-in “buy money” feature, which allows them to charge their credit card or PayPal account “micropayments”.

Two paragraphs, three errors, and for regular users, obvious ones at that. Quite a bit of content in Second Life is free, actually, from the sample items available in Linden Lab’s welcome area kiosks, to objects created in the free-build sandboxes, to the numerous “newbie junkyards” hosted by veteran creators, where a vast variety of content (clothing, weapons, vehicles, etc.) is free or extremely cheap for new users. (Not to mention the social gift economy and informal barter conducted through surprisingly diverse networks.) It’s not true that L$ is added to the economy in direct relation to the amount of real money coming in. Rather, it’s distributed— and withdrawn— by Linden Lab through a vastly more complex system of sources and sinks according to the total population of active users, and includes stipends, and until quite recently, incentive bonuses for popular sites. Finally, it is absolutely not true that “nearly all customers” purchase Linden Dollars through the company. Last December, at a time when SL had some two million total accounts and about 220,000 active users, just 90,000 of them had done this.

Perhaps there’s something recoverable in Harrison’s analysis, especially as it relates to how robust financial markets function, but factual errors like these are a strong disincentive to go wading in. Only so many hours in the day, and all that. Harrison mentions nothing about “camping chairs” (which landowners pay new users L$ to sit in, as a way of boosting their site traffic), nor IP rights to user-created content (which enabled one developer to turn his Second Life game into a lucrative Nintendo GameBoy and TV show spinoff), nor the various social and technical mechanisms which exist to enforce user-to-user contracts (which would include at least one user-created public notary system.)

Oh, why not one more shot: last December, when there were some 220,000 active users, over 17,000 of them were making a profit from their content-creation— profit defined as L$ income retained, after land use fees and other expenses are covered. (With 90 of them earning over $5000 a month in internal transactions.) I’m not sure what what Harrison’s notion of a pyramid scheme is, but one which has 7% of the population at the top sure doesn’t seem like a very pointy one to me. (Is there such a thing as a ziggurat scheme?)

Just for starters. Even at a brief glance, however, it reads like a Soviet economist trying to figure out how Wall Street works.

  1. [...] James Au pauses a moment to tear the pyramid-scheme hype apart with facts and figures at [...]

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  2. This needs to end. Every single fuckin’ time i read about something in defense of SL, it sounds like FOX News. Your efforts conveniently stopped short of disproving that most of the L$ transactions are circular, for one thing.

    And much like the SL economy, nobody cares about SL itself save for the people already involved with it.

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  3. Funny, Jon R., I was thinking just the opposite — every attack on SL sounds so much like a Fox News report …

    I’m not saying SL is perfect. But what you’ve got here is an economist working off the assumption that currency exchange and e-commerce are SL’s primary reasons for existance — which is just wrong. I might as well complain that I don’t get $$$ from using my Sony PS3.

    Harrison’s article ends by saying all you get out of SL is a pretty looking avatar. well that’s all you’re supposed to get, imho.

    Not everything in the world exists so that you can make money off it. This angers people like Harrison. Which is fine, but I don’t see why that should be an indictment of SL.

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  4. [...] Second Life a Ponzi Scheme or a sham economy? Wagner James Au explains. No comments Share/Send Sphere Topic: Reporter’s Log Tags: Second [...]

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  5. What the shit are you talking about? Currency exchange and e-commerce IS the entire point of the game. Literally everything in SL is based on that concept. The only other major activites are cybering and… acting like there’s something more to SL than cybering. And even one of THOSE has its roots in currency exchange and e-commerce.

    What’s more of an indictment is that the best you could come up with is “Well, all you’re SUPPOSED to come away with is a pretty avatar”.

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  6. No, I’d say creativity is the point of SL.

    No wonder you’re so mad, Jon … you’re like someone who goes to a football game and wonders where the ice is, and asks why the players don’t have sticks…

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  7. The amusing part is you don’t need to deal with the in-game currency at all. I’ve commissioned and outsourced plenty of work that involved USD directly.

    So financial analysts, pro- and anti- SLers can dissect this all they want, but the fact remains that people pay for things they want that someone is willing to sell.

    Kinda like music. Graphic Design. And XBOX Strategy Guide. /me inserts any ‘only digital’ and ‘fake stuff’ example here.

    You can pay me to punch you in the face if you like. My rates are affordable. And thanks for not making a value judgement on the economic transaction.

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  8. Oh good, an analogy made by someone who speaks in excessive ellipses. There we go. Nothing gives words bite like the inadvertent admission that you can’t quite manage to see an entire sentence through.

    And Eric’s half right. Financial analysts could dissect it all they want, but it’s all moot. The instant they did, even the beginner SL user can just jump the logic train to a completely different track.

    How much would it cost to quarantine the lot of you? Can i PayPal that one through direct?

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  10. [...] James Au pauses a moment to tear the pyramid-scheme hype apart with facts and figures at [...]

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