Friday, November 18, 2005

Brave New Virtual Worlds

I attended an MIT/Stanford VLAB event called A Brave New (Virtual) World: Commerce and Community in Virtual Societies on Tuesday night. It was fascinating -- something's going on that I wasn't aware of, still don't fully understand, but think probably matters. I'm not sure yet if it's a Major Trend or a fun fad; either way it's interesting.

My executive summary: the boundaries between the physical world and the online world are continuing to blur. More and more things that used to require atoms can now be done with bits. Therefore, people are spending more and more of their time and energy online, which is creating a demand for even more elements of the real-world human experience to be available online. Figuring out the right ways to satisfy that demand will create a lot of value; figuring out the right ways to monetize it will capture a lot of wealth.

See below for a (long) writeup that includes a lot of the data and anecdotes presented at the event, some pointers to other resources, and some half-baked musings over what it all means. If you're interested but short on time, I suggest just looking at the "surprising stats" a little ways below. If you have a little more time, continue by skipping down to the musings at the bottom. And of course, feel free to read it all.

Presenters were:
  • F. Randall Farmer, Virtual Worlds Pioneer & Community Strategist for Yahoo!
  • Philip Rosedale, Founder and CEO, Linden Lab (creators of Second Life)
  • Will Harvey, Founder and CEO, IMVU; Founder, There
  • Bill Gurley, General Partner, Benchmark Capital
  • Daniel James, Founder and CEO, Three Rings (creators of Puzzle Pirates)

Some surprising stats:
  • FRF: In Korea, >90% of all Internet-connected people have avatars.

  • PR: Second Life users spend ~$3M/month (dG: all currency figures are in US dollars, not play money) buying virtual products and services from each other, and exchange ~$400K/month between US dollars and Linden dollars. The average purchase size is just over $1; the average purchase rate is 1.3 per user-hour; the average amount of currency exchanged is $20-30.

  • PR: There are ~450 people making >$1000/month of income 'in-world' (and one, Anshe Chung, making $150-200K/year buying and selling virtual real estate). Businesses include building and selling virtual products (e.g. clothes, guns, vehicles) and offering virtual services (e.g. wedding planning, including setting up an island to host your event).

  • PR: The Second Life world contains ~8M total objects (~1.7M of them interactive user-created objects), is hosted on 1400 CPUs with 1 Teraflop of aggregate crunch, and occupies 90 square kilometers of virtual real estate.

  • PR: The real-world demographics of Second Life participants are ~40% women (~50% by usage hours), ~25% international, and have an age distribution that matches the general population. (dG: That's surprisingly out of step with my "D&D geek" stereotypes.)

  • BG: A Korean virtual racing world, Kart Rider [Korean language site], is expected to generate $250M of revenue this year selling virtual accessories. And - some real-world advertisers are paying the better racers to put decals on their virtual cars.

Some entertaining anecdotes:
  • Bill Gurley said his 'aha moment' in the space came in a 1994 meeting with Pony Ma, CEO of Tencent, a company with 200 million active IM users in China. At the time, Tencent was making $100M a year selling digital content for avatars (including branded content - e.g. Polo shirts). Their new innovation was realizing that virtual clothes could, and therefore should, wear out over time just like real clothes. Bill said "I was hooked at that point."

  • There's a long list of crossovers between Second Life and the real world, including a dating site (DigiLuv) for Second Life avatars, a "real newspaper for a virtual world" (the Metaverse Messenger) covering in-world happenings, an in-world book signing for a real book (Cory Doctorow's Someone Comes to Town, Someone Leaves Town), and in-world fundraising for real-world causes (run by Vertu).

  • Many (all?) kinds of real-world mischief occur in virtual worlds, and therefore many kinds of governance mechanisms are being experimented with. Example: somebody bought some virtual land and built something on it; their neighbor was unhappy and built big walls around it so nobody could see it. Example: somebody put up a for sale sign in front of property that wasn't theirs, and collected money for the equivalent of selling the Brooklyn Bridge. Example: some people have started a utopian socialist community in a neighborhood of Second Life. Example: somebody built a cryptographically secure virtual notary system for Second Life.

  • The distribution of time and money spent online is very broad - many people spend a little; a few spend a lot. (For example, one player won $4M in the Texas state lottery, and gave a lot of it away to other players in There.) That non-flat distribution is why the industry has evolved towards non-flat pricing - people who get more value choose to spend more money; other people can do a lot of exploring for free.

  • There's a big difference between the World of Warcraft model and the Second Life model. In WoW, the game company paid an army of designers to create a world and user experience up-front (with an estimated cost, according to the panelists, of $20-40M). In Second Life, the company just created a framework; the power-users are building the entertaining user experience(s) and competing for the eyeballs of the casual users in-world. That has the benefit of putting a lot of hands to work - they estimate they have the equivalent of 2700 full-time content developers uploading ~12,000 assets daily.

    It also has the benefit of allowing emerging complexity that couldn’t have been predicted/designed up front. For example, 4-5 months ago fishing became popular, so users created the infrastructure (bait stores, rod-and-reel stores, taxidermists, etc.) to capitalize on the new trend.

    The business model is very focused on the success of a community of power-sellers - if they win, the whole Second Life world wins. That model is, in many ways, similar to the eBay business model. (You don't have to pick one of the two extremes - other companies at the event allowed their users intermediate amounts of control over the world.)

  • Philip Rosedale believes that, given today's technology, "it's better to do stuff in 3-D", meaning that a 3-D user experience should actually be easier and better for end-users than a flat one. Our brains work better at keeping track of things in 3-D. He asked "how many of the things in your My Documents folder can you remember? How many of the the things in your kitchen can you remember?" If correct, that means that a 3-D user experience should actually be easier and better for end-users than a flat one. (dG: Maybe - I like the idea, but have seen too many bad implementations of over-forcing a physical metaphor to be an easy sell.)

  • IMVU realized that there were two categories of developers out there - tens of thousands who knew how to use 3-D modeling tools, and millions who only knew how to use Photoshop. Therefore, they made it possible (and lucrative, by an appropriate revenue split) for one object-developer to make a derived product out of another developer's product. That enabled one tier to supply the 3-D models, and a much bigger tier to make multiple derived products from those models. That's turned out to be very powerful - the best 3-D modelers are very incented to make models, since it's highly leveraged.

To read more:

For those of you who are still with me, here are those half-baked musings I promised at the top. I walked away from the event feeling "there's soemething happening here - what it is ain't exactly clear." I think there are a few different things going on, and IMO nobody has yet figured out which ones are essential when. They include:
  • People invest a lot of themselves in their online identities. In many of today's systems, I barely have an online identity (e.g. my 8-character OS login and email address), and it's barely visible to other people (e.g. nobody knows that you're reading this blog right now). Humans are very interested in how they appear to other humans, which means that any time systems allow online identities to be seen by other people, users care. I think IM away messages is a great example of how much energy people are willing to put into even a very limited identity-personalization tool.

    All of the companies mentioned here give users many ways to invest their money in tailoring their online identity. In Bill Gurley's words, "people covet a particular type of representation of themselves", and therefore "spend a lot on things to affect how other people perceive them" in the real world (e.g. cars, clothes) - why should the virtual world be any different? IMVU is probably the purest play - their entire focus is heavily personalized avatars for use in rich chat.

  • Building value by harnessing OPH (other people's hands) is very leveraged. In many environments, a crowd of independent agents can think and do a lot more than almost any centralized entity. The trick, of course, is making sure the agents have enough incentives to align their local/selfish goals with some global/societal goals, enough information to make good decisions, enough ability to carry out their decisions, and enough coordination to keep from stepping all over each other. (Note that Randall Farmer's day job with Yahoo includes driving the idea of 'social media', which is all about harnessing OPH.)

  • 3-D is compelling. As I said above, I only partially buy this one -- it definitely is compelling, but it also feels limiting to me. I think the trick is going to be figuring out where the benefits outweigh the costs (e.g. a 3-D face is way more expressive than an emoticon; a 3-D filing cabinet might just be an annoying way to get to a spreadsheet). There was more consensus among the panelists about the benefits of "3-D local geography" (places I'm in feel like real-world places) than about the benefits of "3-D global geography" (places are all connected to each other in the same way as real-world places).
My bottom line (for now) is that successful virtual worlds (including stories, books, movies, command-line interfaces, and 3-D immersive environments) need to appropriately emulate the real world and appropriately improve on the real world. Technology keeps moving the line of what's possible in a virtual world, and therefore keeps giving us the chance to find a new winning balance between emulating and improving. I'll write more about the drivers of that winning balance in the future.


David said...

What a wonderful and detailed summary of the MIT/VLAB event! There is little doubt that MMOGs are on an exponential growth curve. This evening's events and personalities are certainly Ground Floor. Though I track this area closely, flying to CA from MI was just not possible. So it's great that you put it all down where I could read about it. Thanks again.

Michael Teper said...

Interesting. There's poignant mention of virtual worlds in James L. Halperin's "The Last Immortal" (now available as free download from author: He describes a near-future world in which nanotech is responsible for providing for basic human comforts and, in a sort of a background detail, he describes how large numbers of people loose themselves in cyberspace. While Halperin is not the greatest writer, I think both his SF novels are worth reading (The Last Immortal is the successor to The Truth Machine, also now available as a free download).

In any case, I think the basic premise holds true: since one must invest significant time to derive significant value from a virtual world (just like the real world), it must be possible for large numbers of people to be able to sustain themselves in the real world while spending just a fraction of time in it. A major (bio?)technology shift might be required to make that possible.