Is the Second Life economy in a boom or a bust?

It seems a simple sort of question doesn't it? Is the Second Life economy in a boom or a bust? Is it stagnating or recessive? What the heck is it doing, exactly?

Well, life is never simple, and the Second Life economy certainly isn't. In the main, the Second Life economy follows the same basic rules as any national economy might, because well ... it is full of people doing what people do with and within economies. The differences are in the axioms. The Second Life economy is to regular economies what geometry would be if pi were (for example) equal to exactly three (circles would have a whole lot more sides, for one thing). The familiar set of rules produces vastly different results if the underlying constants are different.

All economies have some level of striation. There's always more than one kind of economy operating under the hood. The fundamental circumstances of the Second Life economy, however, lead to a greater disparity in the striated economy than is the norm elsewhere.

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The recessive economy

In an atomic economy, almost everyone spends, whether that spending is in currency or barter. In the Second Life economy users don't have to spend. At all. You can spend years in Second Life without spending a notional dime within the economy. The kinds of activities you pursue may simply not require it.

The number of users in this class is uncertain, though it is anecdotally suggested to be the majority. These users are -- for all practical purposes -- in a constant state of recession.

Sure, there are a lot of factors involved in a recession, but the most straightforward one is that people just reduce their spending. That money goes into banks, or stays in purses or gets stuffed into socks, mattresses or teapots rather than crossing the counter for goods and/or services.

Our recessive user isn't putting money into the economy, completely independently of how much disposable atomic currency they may have available. They don't acquire Linden Dollars, and they don't spend them.

A second class of recessive user are those who hold premium accounts, and rarely -- if ever -- spend their weekly stipends. Periodically, they may sell accumulated currency on a currency exchange to other users for US dollars, covering the cost of their account and making a slight profit. Even though they may spend a little, their participation in the economy is minimal.

A third class involves businesses, universities and other organizations. They have a presence in Second Life and derive significant use from it, but may not involve themselves in the economy. MDCs and other service-based businesses are usually paid in atomic currencies outside of the virtual environment. Some organizations do however pay for teachers, ad-hoc staff, event-hosts and some tools in Linden Dollars. Tool spends are rarely ongoing. Some few of these organizations shade into the non-recessive goods and services economy.

The goods and services economy

The goods and services economy is the next major economy stratum. Leaving the land economy aside as a third grouping, goods and services consist of event hosts, paid staff, many teachers, content-creators, scripters, sex-industry workers, clothing, furniture, accessories and more. All manner of work-for-hire activity and the produce of content-creators. There's a lot of money moving around here, though Gwyneth Llewelyn observes that this portion of the economy appears to have reached saturation. We're inclined to see it as more elastic, but this sector of the economy continues to remain saturated even as it grows.

The land economy

The land sector is the third economic stratum, and mostly focuses on rentals. Rental operators provide land for those who are unwilling to switch to a premium account, or who seek a more controlled environment for their Second Life home or business. Second Life land is largely a commodity market, where the margins are low. There is a little more differentiation in land than there is in accepted atomic commodities, but that seems to serve primarily to confuse the market rather than to provide opportunities for improved margins.

Per-square-metre income in the Land business tends to take a beating as land prices fall. Linden Lab halted the production of new mainland space some time ago in order to allow supply and demand to bring the per-square-metre price of land back up to what they felt were an agreeable level.

All the signs indicate, however that the demand simply moved 'offshore' to the purchase of non-mainland sims. This suggests that the Lab's target per-square-metre purchase price, while too low for those in the land-industry, remains too high for buyers -- or that non-mainland simulators have some additional attraction in the market. Perhaps both.

And the rest

Both of these latter economies are supported by an uncertainly-sized group of spenders. Spenders are those who do not make money by other means, but instead purchase Linden Dollars from a currency exchange on an as-need basis.

Spenders are a key metric that was measured and followed by the resident experience team at Linden Lab, especially those who are involved in the New User Experience. We presume that they still do this as assiduously as ever. An increase in the number of spenders among new Second Life users has always been a hallmark of success in Lab circles.

So, Boom or bust?

It seems reasonable to say that the Second Life economy isn't booming and hasn't been for some time. Parts of the economy are in a permanent recession, and probably always will be. Much of the rest seems to be hovering at or near the saturation point, though there are still opportunities to provide for niche markets to grow and expand.

Land, as a commodity, remains a profitable sector for those with large quantities of cash who have already achieved high-efficiency operations. It is doubtful, at present, if the newcomer to that sector could reach the necessary scale and efficiencies to achieve a profitable business model without substantial seed capital; capital which would take a considerable amount of time to earn back.

None of this adds up to a bust at this stage, though there doesn't seem to be a lot of wiggle room in the economy at present.

As for Linden Lab, who is getting a piece of the action at nearly every level, probably things aren't booming either. Growth would be fairly flat for the Lab, and probably has been that way for quite some time now. If that is indeed the case, you can expect to see a new revenue stream emerge from the Lab in the near future.