Premium accounts and the Second Life business model

Much has been made of a statement recently by Linden Lab's new CEO, Mark Kingdon, that 'Premium subscriptions are immaterial in our overall business.' You see, in a sense that's pretty much spot-on. Unless a premium account owns more than 512 square metres of the Linden Estate (colloquially known as the Second Life Mainland), that account is either only very small revenue for the Lab, or actually represents an ongoing cost to them.

Linden Lab's CFO, John Zdanowski said, 'The revenue we generate from premium subscriptions is largely offset by the stipends we pay out to these account holders, so this decline doesn't have a material impact on our business.'

Either you're on an older premium account with a 500 Linden Dollar per week stipend grandfathered in, or you're on a newer premium account with 300/week. There's also a choice of plans, ranging from monthly to annual. Let's take a look at the relative values.

The chart below shows the monthly gain or loss based on the type of premium account (old or new, by stipend) and the billing plan. The US Dollar figures show how much Linden Lab gains or loses each month based on a conservative Linden Dollar exchange rate of L$265:US$1 (lately the Linden Dollar has been trading rather better than that, in the vicinity of 262:1). Losses, we've highlighted in bold.

So, for a premium account that holds 512sqm of Mainland or less, the best Linden Lab can pull in is US$65 per year (plus change) after stipends. At worst, a loss of US$18.48 per year. Are low-or-non-landholding premium accounts common? Zdanowski seems to confirm this: 'We have many premium subscribers who are not land owners. As such, a decline in premium subscriptions does not mean we have a reduction in the number of land owners'

There are, of course, additional costs. Storage, bandwidth, electricity and customer support (the latter is only available to premium accounts).

The Lab's main business drivers are islands and Mainland tier.

Mainland simulators attract at least US$195 per month in fees (it can be higher if the whole simulator is held by more than one person), whereas non-void islands draw a flat US$295 per month. The major difference in costs to Linden Lab is Concierge Support. Concierge support is automatic for owners of an regular non-Mainland simulator, or for users who hold more than half of a simulator's worth of land area on the Mainland.

We cannot begin speculate as to the actual cost of Concierge Support. There is insufficient data to do so. Nevertheless, for a user that holds one Mainland simulator in land, versus a user who holds one non-Mainland simulator, Linden Lab receives an extra US$100/month from the latter at no additional cost to them.

There's also a new Enterprise Level Support with expedited response and additional benefits, but we have no information on the costs associated with obtaining it, nor of the profit margins -- but we doubt that the scheme would have been initiated if it represented an actual loss to the Lab.

Moving forward, the smart business strategy for Linden Lab would be to cut or eliminate premium account stipends, including grandfathered types, and instead offer alternative benefits to premium accounts that cost the Lab less than the stipend amounts (or, ideally, cost nothing at all).

Indeed Zdanowski hints that something of that nature is in the works: 'We are currently in the process of evaluating ways to make premium subscriptions more valuable to Residents and less dependent on Linden dollar stipends.'

That's quite a telling way of phrasing it. After all, if you were planning to add benefits to make premium accounts more attractive in addition to the existing stipends, you'd say that -- it would sound a lot more appealing.

Our rede is that the Lab is planning to take the smart business option and prune stipends, replacing them with one or more other, cheaper benefits for premium accounts. Quite what however is more difficult to say. The Lab has always been adamantly opposed to reducing functionality for basic accounts (well, unless you count access to Customer Support).

What inexpensive benefits could Linden Lab be planning?

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