Economies of scale don't apply to virtual worlds?

The Economist returns to Second Life, exploring several facets of the fascinating virtual world. If you've been asking yourself, "What's the big deal with Second Life?" the article answers that question by giving several examples of how the virtual world makes an impact.

The piece is too big for us to break it all down here, so instead we'll use this space to argue with Philip Rosedale's statement that, because Second Life lacks economies of scale, local artisans are safe from the likes of Nike in the Second Life marketplace. He argues that local artisans who craft shoes are protected from Nike because producing one digital pair of shoes costs the same as producing two billion pairs of digital shoes.

That's not actually true. First, Nike's presence in virtual worlds will never be separate from its presence in this, the real world. Nike's brand-building activities on Terra Firma do benefit from economies of scale: because Nike buys so much advertising, it pays less per unit than a company that buys only limited advertising in a local market. As a result, Nike's cost of per unit of advertising is lower than the local artisan's. This means that Nike will always have a scale-granted advantage in brand building. That advantage then spills over into virtual worlds where Nike's brand recognition continues to influence consumer behavior.

Second, it takes time to design, produce and market shoes. Nike's already got teams of people who do just that, day in and day out. Because of the size of these teams, they've got spare capacity that they can tap for new ventures in virtual worlds. There's no incremental cost to that labor, as they've already paid for it. Here again, Nike's got an advantage as a result of scale.

Second Life's denizens are concerned that the entrance of big business into the world will drive them out. They're right to be concerned. Their businesses are as at risk as the local bookseller's business before Barnes & Noble comes to town.

[Thanks, substrate9]

[Image from SL]

This article was originally published on Joystiq.