Pyramid of Confusion: The Latest Second Life Backlash

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.


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