The Economist : Second Life Blues

Friday, August 17, 2007

  IN VIRTUAL worlds you may be able to fly, but the laws of economic gravity still apply.  Last week, when real-life financial markets suffered a credit crunch, Second Life, the much-ballyhooed 3D online world, experienced its first bank run.  This featured avatars, electronic alter egos, lining up in front of virtual teller machines, trying to withdraw so much money that it forced the bank, Ginko Financial, to cease operations and turn deposits into perpetual bonds. Some predict that the virtual economy is in for its first financial crisis.  Such fears seem overdone.  In contrast to real life, financial institutions do not play a big role in Second Life’s economy.  It is dominated by land speculation, the sale of digital objects, such as attractive body parts for new avatars, and gambling—until it was outlawed last week for legal reasons, possibly triggering the bank run.  That said, Second Life is certainly gripped by irrational exuberance, paralleling all those risk-blind investors in dubious derivatives.  When a new audience discovered the virtual world last autumn, it seemed to have found a second paradise.  The press loudly sang its praises.  Not wanting to miss out on the next big thing, scores of well known real-life companies, such as Coca-Cola and IBM, set up shop in the virtual world.  Attracted by features, such as teleportation and the possibility to make some Linden dollars (which can be exchanged into real bucks), new users signed up at a rate of nearly a million a month.

All this transformed Second Life into an extremely fast-growing economy, if you believe the numbers of Linden Lab, the service’s San Francisco-based owner.  It grew by 15-20% a month during the past two years.  And until recently, Linden Lab could not add servers fast enough to meet the demand for additional virtual land, which must be bought for real dollars, an important source of revenue for the outfit.  The digital territory has thus expanded to more than 700 square kilometres—about eight times the size of Manhattan.  Yet even before Ginko’s collapse, public opinion had turned against Second Life.  This was in part because of the media backlash typical with an over-hyped technology, but also because reality has intruded online.  Many users experience this parallel world as a lonely one, despite the existence of 7.7m registered residents as of June.  Only 10% of new users are still active after 30 days and at any given time only between 20,000 and 50,000 are logged on.  Most corporations hardly attract any online visitors, which is why some firms have already closed their branches.  Real money is being made by only a happy few…..

Reference : http://www.economist.com/displaystory.cfm?story_id=9661900

One Response to “The Economist : Second Life Blues”

  1. JBW Says:

    You can always rely on these fossil-head economists to come out with this kind of superciliously delivered scepticism 😉


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