Jan 23, 2009

Linden Lab's Acquistion: It's Good

Can I buck the trend here and make the case for why Linden Lab's acquisition of XStreet and OnRez is not the End-Of-The-World-As-We-Know-It? Again.

Having held off blogging anything about the purchase so that I could get a feel for how people are responding, I'm unable to hold back any longer. It seems that everyone and his dog has spilt blood over this so it's my turn to open my veins.

Before starting on the essay (Oh yes, there will be ink!) let me just toss out a perspective that may serve to frame my comments.

The Psychology
It’s a curious phenomenon that many of the people who are involved with Second Life become tremendously emotionally vested in all aspects of its operation. There is an almost religious fervor generated when LL does something - as if the Olympians had decided to interfere, once again, in the affairs of mortals. You only need to stop over at the officially Linden forums to sample the raw passion and violence of the average Second Lifer. And this is no "Dear Sir, do you think you could...?" environment; this is bloodbath of epic proportions. It's a serious vampire fest.

But there are two things that stand out like nipples in a wet shirt in Alaska - Linden Lab is a very open company and it is perceived as being hopelessly decadent. Like End Times prophets, the scribbling banshees of the forum and the blogs scream about the impending death of Second Life over and over again. And like the End Times prognosticators, does the continued existence of Second Life change their minds? Hell no! Maybe the grid didn't close its doors today, but tomorrow... just you wait and see!

Linden Lab release so much information about what they are doing to their customers that I am stunned anyone has the time to keep up with it. You'd actually learn less about the company if you were to have an actual desk there! They are - whatever people believe - a privately-owned company and have no legal need to release as many details as they do. None. When they go public (oh yes, there will be shares!) it'll be different. I bet they'll clam up!

This glut of information encourages a feeding frenzy. Pundits and Prophets circle the boat waiting for a piece of information to flop into the water where they can tear it apart, word by bloody word, to satiate their bloated egos.

And it is always bad news. Always. Even good news is bad news because bad news is better. Bads news sells. Bad news feeds the soul and anger makes people happy.

Price changes? Bad. Policy change? Bad. Free accounts? bad. Paid accounts? Bad? Growth by acquisition? Bad. See what I mean.

There is NO company on the planet that is perfect. Everyone fucks up and Linden Lab is no different. But I suggest that the emotional ties that are almost engrained in many SL residents means that they (a) feel they own the company and (b) are unable to objectively handle change - good or bad.

That's why the XStreet/OnRez acquisition is causing so much chatter: many folks can't be objective about it. So let me move on to the business of Business.

The Acquisition
The over-arching aim of SL is for Linden Lab to make money, and if a small number of others can profit from the platform, then that’s great. Of course, in order to do this you have to offer a product that people want and that can be sustainable. But from the business perspective, you have to satisfy the big shareholders.

Individual customers are NOT shareholders. I read sometimes in blogs and comments that "we own part of the company," but "we" don't. The money you send to LL for tier fees or whatever do not buy you a piece of the company; they buy you the right to use the product - Second Life. The feeling of entitlement in SL residents appears to be very strong - much stronger than for other companies. I drive a Jeep but don't feel I own a piece of Chrysler. I eat Heinz baked beans but don't expect a dividend check every year. I bought Bret Easton Ellis's Lunar Park but I can't call him up with an outline for the next novel I want him to write for me.

So when LL make a business decision as a corporate entity, they have a duty to their shareholders, the venture capitalists who put money into the business, and not directly to their customers.

I know, some of you are thinking that this is preposterous and wrong: the customer is King, always right, and the whole point of doing business, yes?

Er, well... no! Scary as it seems, few of any of us do something for nothing. We want a paycheck. But, you scream, I give freely of my time to the local soup kitchen, and I don't get paid for that. No, you don't. But the only reason you have the spare time to do that is because you have a job that pays you enough to HAVE spare time. Without the job that pays you cash, you'd be back at the soup kitchen - but on the other side of the counter.

Enough. I've bludgeoned this dead horse into a bloody pulp. The point is that LL can acquire just about who the hell they can afford without having the permission of customers. Period.

And it's not like we didn't know this sort of thing was on the agenda. When Mark Kingdon took over the helm at LL last year, one of things he pledged to do was to expand the company. When you have venture capital cash to spend, one of the fastest ways to grow is through acquisitions. If the figures are correct - and there is no reason to assume they are not - SL residents traded $360 million in virtual goods and it doesn’t take a Warren Buffet to see that snagging a percentage of that is a good thing!

But, you may be wondering, if XStreet and OnRez were so profitable, why did they sell to LL? Well, individually, the margins for each company may suck, but the margins for the two - along with some savings (for “savings” read “redundancies”) - may be much better. You can buy two or three under-performing companies and combine the best bits to make one good enterprise.

Another reason for selling may be that the respective companies need to raise capital for other ventures they want to pursue; ones that they feel are more profitable. So you sell your assets and use the cash generated to buy your new stuff. Happens all the time.

The second point, therefore, is that acquisition of related companies is a good move. There is risk involved, but then again that's part of doing business. If you want a risk-free job, good luck with that!

Phew, Possibly my longest blog posting in Second Life. I try to limit longer tracts to articles for which I get paid! Hey, an avatar has to make a living, right - and I am not the right sort of material for the model/stripper/escort/sex industry.

The majority of other posts currently being tossed around are pretty negative, but it's much harder to find a sober assessment because for the Second Life blogging pundits, the affect clouds the analysis.


Roslin said...

I agree with you that as a privately held company, LL is technically not obligated to share information or bend to the will of their customers. There is a very strong (and unreasonable in some cases) sense of entitlement among SL residents. You made a gods/mortals analogy that I found very amusing and interesting. I also think that a parent/child analogy is appropriate for LL/residents. LL has been a permissive parent, telling the children, 'your world, your imagination,' establishing close personal connections with residents, failing to establish clear boundaries on MANY issues, failing to properly punish (hello content theft running rampant)etc (seriously, I really could do a whole post about this). So now Daddy has gone and done something we don't like, of COURSE people are going to feel entitled to pitch a fit. Yes, I agree that LL is a business and as such is entitled to a piece of the pie but concerns about monopoly aside, I'd like to point out my personal issues with what they've done. I don't like Xstreet, plain and simple. I don't like the interface, I don't like their failure to properly address content theft, I don't like that they have disclosed personal info, etc. I also don't like that there is a commission based system for a product that I simply don't like. Onrez has better UI, and I wouldn't even mind paying commission for them but I prefer their setup of charging for bells and whistles on your listings. I certainly don't like the idea of having to move my product over to Xstreet, something that would be VERY time consuming and we only have a tiny fraction of our product listed with Onrez. I don't even want to think about what some content creators are going to be going through, having to move their whole inventory over (like Janie Marlowe of Mischief). The thing is, Another point I'd like to make, I am far from some expert in business but I've thought of a number of ways for LL to make money that does not involve acquiring resident companies. How about offering REAL benefits from paid membership, and tiers of membership? As a content creator, I would love to be promised priority access to the grid and I can think of tons more perks that I'm leaving out for brevity. How about getting rid of sinks and charging credit cards directly? I'm sorry if I've gone a bit off track here and I applaud you for presenting a counter and creating some healthy debate.

Siggy said...

Thanks for the comments - and you'll get no disagreement from me here on what you say. Although LL have no "obligation" to do anything customers suggest 9asn some of those suggestions are anatomically impossible) they would do well to listen and act on some. I job i would hate would be to be sitting at Linden Lab trying to catalog all the suggestions and complaints. My God, that has to be a HUGE task! SO I don't think LL ignore suggestions, but there are so many it presumably takes time to prioritize.

In a recent comment to Dusan Writer, I did offer my personal list of things that I believe need addressing:

1. Stability
2. Stability
3. Stability
4. More scalable land prices
5. Prim purchases
6. IP protection
7. Better quality graphics

IP is important; when folks spend hours creating things to sell, only to have them stolen, where's the long-term incentive? That wouldn't work in the real world so what makes anyone think it's tolerable in the virtual?

As to the interface on XStreet versus OnRez, I'll defer to you and others. I don't produce goods (unless you count my articles as "product" - I do get paid for them) but as a consumer, I have used both XStreet and OnRez and been able to buy what I wanted without any hassle. I guess anything that makes it easier for a buyer is good - but I'm the wrong person to comment as User Interface stuff is not my bag.

Thanks for stopping by!

Anonymous said...

I dunno...given the paucity of good ideas Bret Easton Ellis has had in the last twenty years he might very well take you up on that offer of an outline for a novel....

Ciaran Laval said...

I bet they won't clam up when they go public, which is what selling shares means. They have a duty to shareholders not to clam up, they have a duty to stock exchanges not to clam up, they have a duty to shareholders to try and increase the value of their investment, they will certainly not be clamming up.

Linden Lab's bottom line is to make a profit, how do you measure profit in terms of Linden dollars? That's what they'll be getting commission from the real money comes from tier charges and this is where there could be a short term issue. A small store could easily replace inworld land holdings on a 1024M parcel with a 512M parcel that hosts their SLX box. That is very much a concern.

Move that along further to a mall on half a sim's worth of land struggling to rent out store space because people find more value in a SLX box location than displaying their wares and we could have bigger problems.

Think this isn't an issue? Take a look at the way local shopping centres all over are struggling to justify their expense as web shopping grows, the difference is that tier is the backbone of the Linden Lab business model.

So if tier takes a hit they'll need to generate more revenue from everyone else, and that could be painful.

Siggy said...

Ah, they may not "clam up" to shareholders but they can certainly "clam up" with customers! The board of directors may well want to restrict the free flow of the sort of information that currently goes out. If you were a board member or shareholder, the chances are that you wouldn't want your company washing its proverbial dirty laundry in public. Such actions are also apparent to your competitors - and I'd be damned it I'm going to do my competitors intelligence for them!

Yes, there are obligations to report activity, but the amount that is legally required falls short of the hemorrhaging of data that currently happens. Too much information can be worse than too little.

I'm with yah on the tier pricing. It's the "cash cow" of the business. In essence, all LL sell is server space - the contents of that space is neither here no there in real terms. The value of that space is relative to the perceived value put on it by the purchaser.

Sales of virtual goods is an extra to that. If Bob uses his 1024m to sell widgets, and Andy uses it for building a house, LL get the same from each. Where LL begin to lose is if Bob can't sell widgets and decides to dump his plot.

So ultimately, it is in LL's best interest (and I mean financially) to ensure Bob stays and ships widgets. Of course, now they can get extra benefit if Bob sticks his widgets XSTreet/OnRez.

Hmmm, I think I'm drifting... sorry, it's early and the caffeine hasn't kicked in and I have a flight to catch. Thanks for stopping by Ciaran.

Mony said...

On rez and XL, its just a tale of a good idea, and two quests to achieve it. One that can't keep going and one that can absorb it and continues.

Hi Siggs !!

Mony said...

On your list

1. Stability
2. Stability
3. Stability
4. More scalable land prices
5. Prim purchases
6. IP protection
7. Better quality graphics

Mine would be different. As you might imagine :)

I don't mind stability that much, truly, I see more pressing issues.

*1* Like giving the folks the option to display their real identities, as stated in your credit card.

This sounds easy, and also has many benefits. You see SL today its good for entertainment, but really bad for business or education. Where it totally sucks! Whats going to say on my virtual Standford Diploma? Mony Markova? Yeah right I can use that in RL, I will just tell them its an alias and that Professor Juan453 Metadone has ugly hair.

Being behind a masquarade its great for entertainment. Hence we are in a game.

*2* More scalable land its a great choice.

*3* I would like to have some more preparation for new players. On what they are coming into. You know which topics included in that preparation.

*Better quality graphics, mmhh. I rather have other stuff.

*4* This ones will not be popular... I would totally limit the number of hours basic accounts can play, for 2 reasons, first their own safety and second revenue into the company or better yet into the economy.

A problem its not only with ppl that does not import money into the system by buying it. But that spending its not connected with the economy created by, as Siggs mentions, land prices and specially ongoing land maintaince prices.

Actually the killers are the ongoing land prices, not the one time payments. LL has to be one of the most expensive Hosted Application Companies in the world.

Well its fun!

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