PDF: Virtual Goods Live from San Jose: Metanomics Transcript September 24, 2009

METANOMICS: VIRTUAL GOODS AND LINDEN LAB LIVE FROM SAN JOSE - SEPTEMBER 23, 2009 ANNOUNCER: Metanomics is brought to you by Remedy Communications and Dusan Writer’s Metaverse. ROBERT BLOOMFIELD: Hi. I’m Robert Bloomfield, professor at Cornell University’s Johnson Graduate School of Management. Today we continue exploring virtual worlds in the larger sphere of social media, culture, enterprise and policy. Naturally our discussion about virtual worlds takes place in a virtual world. So join us. This is Metanomics. ANNOUNCER: Metanomics is filmed today in front of a live audience at our studios in Second Life. We are pleased to broadcast weekly to our event partners and to welcome discussion. We use ChatBridge technology to allow viewers to comment during the show. Metanomics is sponsored by the Johnson Graduate School of Management at Cornell University and Immersive Workspaces. Welcome. This is Metanomics. ROBERT BLOOMFIELD: Hi. And welcome to our special mixed reality version of Metanomics here at the virtual goods track of Chris Sherman’s Engage Expo in San Jose. I’m your host, Robert Bloomfield, Beyers Sellers in Second Life, and I can’t imagine a better way to start our fall season, our third year of Metanomics. We’re spreading our wings a little bit this year, and we’re getting a broader view of Virtual Worlds within the larger context of social media and generally internet technology and economics. So thanks to Chris Sherman for allowing us to broadcast from the Engage Expo, and welcome to all of you who are here in the room, those who are watching live on the web and those at our growing constellation of event partners within Second Life: New Media Consortium, Rockliffe University, Confederation of Democratic Sims, Orange Island, Muse Isle and our newest event partner, Virtual Ability. Before I introduce our panel, I’d like to mention just briefly what’s ahead for our season. On the social media side, next week we’ll be talking with Chris Abraham, who’s been a real innovator in public relations and this week introduced me to the intriguing term “reputation dismorphic disorder.” So tune in next week to learn what that means. On the policy side, we have Adam Thierer, from the Cato Institute and the Progress and Freedom Foundation, and Beth Noveck, Obama Administration Deputy CTO and author of the book Wiki Government: How Technology Can Make Government Better, Democracy Stronger, and Citizens More Powerful. We also have design expert Matthew May, author of In Pursuit of Elegance, and Tyler Cowen, author of one of my favorite blogs Marginal Revolution and also author of the book Create Your Own Economy. Create Your Own Economy is actually a pretty fitting title for today’s panel as well. Yesterday Linden Lab announced that Second Life residents have transacted over a billion dollars of virtual goods and services over the course of a billion hours in a World that boasts two billion square meters of virtual land. So today we’re going to try to bring those numbers to life, getting insights from four people with four

different perspectives. Philip Rosedale is the founder and chairman of Linden Lab and doesn’t need much more introduction. Philip joins us from Second Life, and, while Second Life’s residents may have spent a billion dollars on clothing and hair and other goods, you can see Philip wasn’t exactly part of that. I think he’s wearing exactly the same T-shirt and hair that he was in, I don’t know, 2004. So, welcome, Philip. Tom Hale, sitting next to me in real life, is just finishing his first year as chief product officer of Linden Lab. Second Life’s economy is driven not just by a culture of innovation and entrepreneurship, but by a platform that allows free expression, and so Tom is going to play a huge role in Linden Labs’s and Second Life’s future. We’re also joined by two residents who are intimately involved in creating and selling content. Harper Beresford is the chief marketing officer and business manager for Second Life fashion house RFyre. And they’re one of the most successful purveyors of virtual fashion in Second Life. Harper also brings an academic slant to the conversation, with graduate work in anthropology from Duke University. Our final panelist is Jeaniesing Trilling, and, when I talked with Jeanie and with Harper last week, Jeanie asked, “I’m just a hobbyist. What am I doing on this panel?” And Harper said, “Well, you know how at the State of the Union Address there’s always some ordinary citizen-done-good sitting next to the First Lady or the Secretary of Education, someone who exemplifies a point the President is going to be making that night.” Well, Jeanie is that person. Jeanie lives in a town of 400, in rural Pennsylvania, by day a public school teacher, music teacher, and by night she makes virtual goods in Second Life just for fun, but it’s fun that also brings in enough revenue to support her family’s other hobbies. So join me in welcoming our panel. Okay. So we’re going to start out by allowing the panel members to make some brief opening remarks, and then we’ll turn to questions. I’ve got some questions, of course. I’m sure those of you here in San Jose have questions as well, as do the many people who are using our ChatBridge technology on the web, to communicate with one another, with the people in Second Life and ultimately with us. So keep those comments and questions coming in text chat. We’ll be tracking them and feeding them to the panel. So for opening remarks, whenever Second Life residents log in, they see something called the Message of the Day so I’d like to ask each of our panelists just to give us a sense of how they see their role in Second Life’s economy and give us the message they’d like to convey today. You can make your message a little longer than the one on the login screen, but not a whole lot, because we are pressed for time. So, Philip, let’s start with you. PHILIP ROSEDALE: Let me start [AUDIO GLITCH]. Well, it’s a good question: my role in Second Life economy. Well, to keep my hands [off of it as much?] as possible. I guess that’s one liner I can give you. ROBERT BLOOMFIELD: Okay. I guess we can, for now, leave it there. I’m sure we’ll hear much more from you shortly. Tom?

TOM HALE: That was a great message of the day, “I’ll keep my hands off it.” I’m certain we should probably actually go with that at some point. ROBERT BLOOMFIELD: You sound like the Real World government actually. TOM HALE: Yes, of course. We would never, never have a TARP in Second Life. I think my role, honestly, has been as a consumer and as somebody who’s been humbled by both the scope of creativity in the scale of Second Life economy. So I guess my message of the day would be, “A billion is a really big number.” ROBERT BLOOMFIELD: Okay. Harper? HARPER BERESFORD: I’m a consumer as well, as well as a person who uses Second Life as a place for learning about marketing techniques in-world like this and learning about social networks. So it’s a little more than just selling cute clothes. It’s about selling virtual goods and understanding how that works. And if I had an intro screen to Second Life, it would say, “Welcome to Second Life. It’s so much more than you think.” ROBERT BLOOMFIELD: Okay. And Jeanie? JEANIESING TRILLING: I saw somebody on the text bridge say that I’m Joe the Plumber, and, yeah, I’m Joe the Plumber. So I think if I had a message to say to everyone, it would be that “Nothing comes from nothing. Make something of yourself here.” ROBERT BLOOMFIELD: Okay. Great messages. I’d like to pick up actually with the in-world residents. I mentioned Tyler Cowen before, and, in his book, Creating Your Own Economy, he quotes a Portuguese author Fernando Pessoa, who says, “The buyers of useless goods are wiser than is commonly supposed. They buy little dreams.” So I guess I’d like to start with the residents on this one. Let’s start with Harper. Where do you see the value of virtual goods, as both a producer and a consumer? HARPER BERESFORD: Well, we’re at a conference for virtual goods so I don’t really need to speak about the point and the importance of virtual goods and how they add up, how these micro payments that people use for virtual goods add up. But, in a bigger theme, there’s a deep need in our culture for consumers to distinguish and differentiate themselves and display their class and belief systems outwardly. The use of cultural goods is a cultural communication and a cultural discussion, which is the same thing that people do when they choose a special ringtone on their phone. So you’d asked why people buy our clothes. A lot of people ask me, “How can you be selling virtual clothes?” But it’s a sort of cultural display that people can customize, that’s made for them using the creation tools that Second Life provides. And this cultural display is much more easily afforded in Second Life than our first lives so we can fulfill our fantasies of having beautiful clothes and interesting lifestyles and amazing homes relatively inexpensively, and we can communicate our

tastes and values to others. So that’s why customers spend money on our clothing at RFyre, to customize their self-representation and their experience and to engage in cultural discussion at a very low cost. ROBERT BLOOMFIELD: Thank you, Harper. I’m wondering, Tom, if I could follow up with you. When you talk about virtual goods in Second Life, the first thing people think about is, in fact, clothing, but I know you’ve been looking in detail at a lot of the economic statistics and exactly what types of goods are popular, what the distribution of revenue is like. Can you just give us some insight into that? TOM HALE: Sure. I’d be happy to kind of characterize it. One of the interesting things about the size of the Second Life economy is that it defies any kind of really, really fine-grained understanding because it is so complex. You have to start to simplify it. And, if you were to sort of look across the span of it, the first thing you recognize about it is that there’s a tremendous concentration of it around a virtual good, which is of the type called land. This is actually a persistent place that people own, customize, personalize, and make their own. That’s sort of a high kind of part of the histogram. And then, if you look across all the rest of what you might consider the items, where those items are things you use to customize your avatar or games that you play or diversions or things that you use to enhance your game play, whether it’s a HUD that enables you to participate in a combat system. The interesting thing about it is that it’s an incredibly broad distribution without very many high spikes. What you see is that it’s an incredibly distributed economy of very, very, very small cost things. And that kind of sort of histogram is very broad. It makes me think there’s something in Second Life for everyone, which is to say, people come to this economy, they search for whatever it is that they’re interested in. They find it. They make a transaction. And that breadth, I think, is something we need to really, I think, characterize and recognize about the Second Life economy is that it is not one thing. It’s not like, “Oh, I come to play games, and, therefore, everything I do is related to games.” If you look at it in its totality, it’s incredibly broadly distributed. That’s kind of the first thing. The second thing, of course, is the average transaction size is relatively small. I mean we’re still talking about one- and two-dollar transactions. When you flip it on its head and you look at the merchants, the merchants in this economy, the people who are creating goods, creating value, whether it’s houses or clothes or games or weapons, those merchants they’re making very, very interesting businesses. Now certainly not everybody makes it. If I were to characterize it by percentages, I might say something like, “The top five percent does more than half of the overall business.” So it is very concentrated in terms of merchants, but the things that they create and the things that people consume is very, very broadly distributed. Then there’s a set of merchants, and maybe we can put Jeanie in this category or not, but they’re about 25 percent of the population, maybe about 25 percent of the revenue. And then the balance of the merchants really are participating and making a small amount of money. What’s interesting about that to me is that, if you look at that top chunk, maybe call it the top 30 percent, there’s a good number of those people who not only are making their living, not just paying their mortgage or

paying their rent or having a good time, those people are making bank. So let’s put that in terms that people can really appreciate. When you look at maybe the top merchant in Second Life, the top person who creates things and sells things, and there’s a handful of them making on an order of eighty to ninety thousand dollars U.S., not Lindens, a month. And you look at somebody like Harper, and we’re not going to ask Harper to disclose any information about her business, but she’s employing many people in her shop. That’s a reasonable business. Now certainly that’s not for everybody. Not everybody has either the skill in merchandizing or content creation, but that kind of market opportunity and that kind of business, that’s something that Second Life economy affords people, and I think that’s pretty interesting for people to latch onto. Certainly it’s not everybody, but that opportunity exists. And so I guess there’s something in Second Life for everybody, that can be for consumers and also for merchants. And I think that’s a pretty compelling case for people to be involved in Second Life. ROBERT BLOOMFIELD: And, Tom, I’m wondering if you can clarify one aspect of the statistics for me, which is in this billion dollars. Residents give money to Linden Lab in exchange for land, and that is or is not counted within that billion? TOM HALE: The way that we count the billion, it is the sum total of all exchanges between users and objects in-world. So actually it doesn’t count the money that we collect, if you will. But, if there’s an exchange between users, maybe they’ve said, “You know what? I’m done with this parcel of property, and I’d like you to have it, and let’s have an exchange around that.” Or, “Hey, I built this thing, and I’d like you to buy that. Let’s have an exchange around that.” Or, “I’m paying rent. You own and pay Linden Lab, and I pay you. That rental payment from me to you is counted.” So again, you have to notice that land is a concentration in that amount. It’s the majority, but it doesn’t capture the entire breadth of it. PHILIP ROSEDALE: Linden’s revenues, which are mostly land revenues, represent only about ten percent in the size of the economy. So whether or not it’s representative in a particular statistic is not too meaningful because it is, happily, I think for the economy, is a very small portion. ROBERT BLOOMFIELD: Okay. Philip, since you chimed in, I’d like to follow up with you a little bit. The payments for land from residents to Linden Lab may be small in the context of the Second Life economy, but they’re pretty important in the context of Linden Lab’s revenue model itself. I’m wonder if you could talk a little bit about your perspective on what it means to sell land. How do you see yourself positioned relative to, say, other social media sites like a Facebook, which you could say is giving real estate away to its users, or to an eBay, which is providing a platform for commercial transactions? PHILIP ROSEDALE: Well, I think there’s a lot to be said there. One thing is, because I think Second Life is something that genuinely enables people to create value, whether monetary or not, I mean as we’re talking about--a bit today, some of these virtual objects are things that people are selling to make their living, and others of them are purely expressions of art, the fact that those two things can kind of happen side by side in a Virtual Worlds is delightful. We still, as a company, make a relatively large amount of money, if you look at it sort of on a per-person basis, from the

people who are using Second Life, people also spend a great deal of time in Second Life on average a lot more than, for example, a [working?] site. I think that that speaks to two things. One is simply that Second Life is a platform for people creating content. And the more complicated and interesting content you allow people to create, the more they tend to do it. I mean the sort of upper end of how creative as humans we want to be is apparently not found yet. We seem to be almost infinitely creative in our desire to use these virtual systems of different types that offer any kind of user-created content to make content. So I think the fact that we allow people to create really--the most complicated content, I think, that there is, kind of in digital form, is probably why they spend a lot of time there and why we, as a company, are able to make some money from them, and on a sort of per-person basis we do fine. The fact that we’re big and profitable and able to keep growing as a company is testimony to that, given that there are still relatively few people using Second Life as compared to something like Facebook. The second thing I’d say is that, from the very beginning--to your question about the specific revenue model the fact that Linden today makes the majority of its money from land, recurring land fees basically on real estate in Second Life--the model there, I think, will change over time. But it fundamentally was based on the assumption that, if people were able to create anything they wanted in a Virtual World and they were allowed to buy it, sell it, own it, do whatever they wanted with it in the same way that you do in the Real World, that was my original vision, it seemed logical that there would be some reasonable manner in which, as a company, we could collect some of that kind of total economic value that was transacted. Now the best way to do that may actually evolve as time goes by and as the scale of this thing grows. As I’ve said many times, my belief is that it’ll grow by two or three orders of magnitude in the coming years. I suspect that the business model will change as well. Today, as you say, we basically sort of sell hosting. We’re charging people by the acre for virtual real estate, as a fee, a recurring monthly fee, and that basically makes us look like a web-hosting service of some kind. But I think that though different parts of the way the business works will evolve and change over time. I think it’s always reasonable to say that we can, as a company, find a way to collect some small part of what goes on in the total economy. But that will probably change over time. As this whole thing grows, I would expect that the percentage of the total economy, if you will, that Linden Lab is basically accepting in revenues, will go down. I hope. I think that we can survive as a company on an extremely small percentage of the total GNP, if you will, of the Virtual World. ROBERT BLOOMFIELD: That’s basically a volume story, right? Lower margins on greater volume, which is going to require a thriving economy. And so I’d like to turn toward discussing, I guess, the state of the economy right now, from the perspective of the in-world residents. So, Harper, if I could start with you, what is your take on how the Second Life economy is doing this season? HARPER BERESFORD: Well, Tom talked about making bank, and I would have to say right now that a lot of creators and land sellers, etcetera, are not making bank online. I mean we’ve seen that the competition has ramped up in-world, and that’s important because competition drives an

economy; however, the individual creators are feeling the pinch right now, the ones that I know, and RFyre’s feeling a little pinch too, and part of that is the real life economy, I think. So I think when I see the statistics from Zero, I’m a little skeptical sometimes about what the effect has been on the individual residents or the content creators. But I think we have a ton of people in the marketplace right now selling much more quality goods and much more great virtual products than ever before, and that’s really exciting to me. ROBERT BLOOMFIELD: And, Jeanie, what’s your experience with the economy in Second Life these days? JEANIESING TRILLING: My experience is that my sales stayed pretty stable. I know when the economy kind of tanked out in the Real World, I actually had more work to do in-world. But a lot of what I do is creating animations and scripts for creators who have other skill sets. And so I think that there were a lot of people who were forced out of their real life situations and looked to Second Life to make and meet here and there, and to do that, of course, they probably had to make an investment in the portions that they couldn’t handle, and that’s where I came in. So I did a lot of animating and scripting right when the economy was tanking for folks that, as we talked, I knew were laid off from their other jobs. So I’m a terrible example, if you’re looking for the “economy is terrible,” blahblahblah, but I think that Second Life was a crutch for a lot of people for a long time, and that’s great. ROBERT BLOOMFIELD: Okay. Tom, do you want to get in? TOM HALE: I think it’s really interesting that you’re always going to get a range of responses from any individual when you’re looking at something as broad as an economy. In the most recent quarter, $144 million. And you look across that—if the transaction sizes are sort of 50 cents and two dollars, and the merchant size is big as this, you’re going to have a very, very diverse pool. And I think one of the things that we were looking at when we were talking about this particular presentation and topic was, there is this phenomenon that we’ve observed in the last year or so, which is that the size of our economy has both grown and accelerated. There’s lots of factors for this, and I think maybe one of the factors is that people have more time to spend so they’re spending more time in virtual experiences, to sort of divert themselves or find entertainment or make connections or whatever value proposition they get from their experience in Second Life. But I think another phenomenon is that you’re right. Somebody mentioned earlier today: cheaper consumerism. I may not be able to afford something in the Real World, but I may be able to afford as a fantasy item in Second Life. I think one of the most interesting things from the perspective of this is, we’ve seen a reasonably good growth over the last year, in terms of users, in terms of user hours, kind of on the order of 30 percent year over year growth. But our economy has seen an acceleration on the order of 90 percent, in terms of its size. And some of that is, okay, maybe an artifacts of accounting. It may be that some things are double-counted, but that trend, as you measure it over time from the 2005 days when the economy was $22 million a year and now it’s north of $500 million, that kind of trajectory of growth, there’s something incredibly vital about that.

And I want to echo Philip’s point and also kind of Harper and Jeanie’s sort of role as creators. That’s one of the fundamental acts of Second Life is creating something and then putting it out there. Some people are incredibly sophisticated. The makers of the Scion Chicken, which has a life and decays and dies over time if you don’t take care of it, sort of a Tamagotchi for the Virtual World. That’s a very complicated product, but there’s very simple products at the other end, which are just beautiful. They’re just elegant. They’re well designed. It’s a beautiful dress, a beautiful object. And what’s interesting is, in that range, that range of expression’s very, very wide and very, very rewarding. And what’s interesting to me is that there’s people on the other side who consume that and are interested in finding utility and paying money for those things. No one’s paying dramatic sums of money here for these items. If you were to sort of aggregate it, it’s kind of like two movies a month, which is not a tremendous amount of money to pay for a relatively deep entertainment experience when you consider the average time of a user in-world is roughly 40 hours a month. So for roughly the same kind of time that you’d get for, I don’t know, call it 20 movies give or take, you’re paying for two. So I don’t know. It’s hard to parse the kind of entertainment value proposition for people and put it in economic terms because so much of it is just about consuming and creating beautiful things. But there’s something very compelling about the fact that the economy’s doubled in size, and we’ve only grown the whole kind of universe of hours and people by about 25 percent. It’s interesting. ROBERT BLOOMFIELD: Yeah. Which brings us into the world of demographics, and there are a couple things I’ve noticed, one which my wife has pointed out to me is that Second Life has a lot of women in it. I know, Harper, you had some thoughts on why that is. Would you share those with us? HARPER BERESFORD: I did. Well, a friend of mine, who writes a blog about MMOs, pointed out that Second Life is a class-driven MMO. And he pointed out that studies have shown that middle-aged women tend to be social hubs in MMOs. And Second Life is all about being social. There’s no big points that you score. There’s no big quest that you go on. It’s about being social and about connecting to other people. And social business in cultures like ours is played out in appearance and possessions. And, as I said before, the business of consumerism and representation is very important here, and it’s commonly in the hands of women in our society. So Second Life is the ultimate consumer and self-representative culture so it makes sense that it’s a woman-dominated place. Tom was talking about micro payments, and micro payments are what women engage in around the world. Consider that most micro lending is done to women rather than men. We typically engage in women’s--in small payments in any exchanges that we do, and we make most of the small day-to-day expenditure decisions in real life. In addition, in our culture, while we make most of the small ones, the big ones usually involve men, like buying a house or a car or whatever. But when it comes to going to the grocery store, it’s women who usually do it. I’m not going to say always, but usually. And, in our culture, we’re the consumers that advertisers target. So it makes sense that the micro economics of Second Life are the domain of women.

ROBERT BLOOMFIELD: Okay. Thank you. Another demographic feature that I’ve noticed and heard people talk about is, there aren’t a lot of people from the big cities. There are a lot of people spread out throughout rural America and rural parts of other countries as well because, of course, it’s very international. Jeanie, you mentioned you live in a town of 400. Our avateer, JenzZa Misfit also does. Jeanie, I wonder if you could just talk about what Second Life means to you, how it fits into your lifestyle where you live? JEANIESING TRILLING: Absolutely. I do live in a very small town, and it takes about an hour to drive to the nearest mall. The social outlets just aren’t there for those of us who live in a really rural area, and especially that I have a four-year-old at home, I’m not able to go out every night. I’m not able to do some of the things that, for instance, my brother’s family can do living in the outskirts of Cleveland. And so I love Second Life, when I log in, after my son goes to sleep, for the fact that I can go to a live music concert. I can chat with other adults. And since I do teach high school and middle school all day long, chatting with adults is at a premium. And then I can also, in another window, be creating something. And, like you said before, it really helps out with the other hobbies and habits that my family has. So the social aspect is wonderful. It’s also wonderful to meet like minds. It’s also wonderful that, before I started Second Life I had no programming experience whatsoever. I taught myself LSL because I wanted to teach myself that, and it’s just such a broadening thing for me. I’ve learned. I’ve taught. I’ve done everything I love to do. I socialize, listen to music, and all after 8:00 when my son goes to bed. TOM HALE: That is a very common demographic actually. I don’t think it’s all scienced out from our perspective, but that is one of the core demos of Second Life is the 8 to 10, kids are in bed, husband’s watching TV, and the wife gets to step out and have an adventure in Second Life. I think the comment that I would make about it is, again, looking at it in the aggregate because that’s always our view, right? We’re not looking through the lens of individuals except for ourselves. Looking at the aggregate, what you see is that there are two predictors of a sort of a long-term resident who will stay in-world and will expend some amount of money over that life cycle. And that is they do two things. One is, they make more than one friend, and, two, they buy something. And I want to come back, like those may be the two canonical applications of Second Life, which is community and shopping. And I think there’s creation on the other side of that which feeds both of those, but those two applications are for the broad net of users of Second Life. Very, very profound applications. ROBERT BLOOMFIELD: I see a comment in the chat that Gubatah Tigerpaw is saying, “I thought this was going to be about business, but they’re talking about social issues.” Well, those who have been watching Metanomics for the last couple years know how closely these are intertwined. Philip, I’d like actually to turn to you because I brought this up for a reason, that demographics are a result of strategy and drive strategy. So I guess two questions. One, is this the type of demographic that you were expecting? And, two, given your understanding of the demographics you have now, how does that affect your strategy? PHILIP ROSEDALE: Well, first, Robert, I wasn’t expecting any particular demographic. My passion

in starting the company was to create a Virtual World. I felt like it would be interesting to people. I didn’t know exactly who or why. In fact, I would say that I’ve learned a lot about people, about how we interact with each other, about what’s meaningful to us as I’ve watched things unfold during the growth of Second Life. I wanted to say on the demographic stuff, we’re having a conference here, and we’re talking about primarily the economic aspects of selling virtual goods, but echoing a few things that have been said already, first off, Second Life is not--what’s going on there, like the beginnings of the internet itself really cannot be simplified too much. There’s just a tremendous complexity of things going on. Stereotyping users as being specifically one kind of person, others saying it’s women who are using it and not men or whatever, those statements are just inaccurate not because it’s not a statistical center point, there always is, but because the standard [deviation?] is so incredibly broad. There’s really no similarity amongst Second Life users perhaps other than the fact that they got enough time to commit to Second Life, to have it be meaningful to them. It’s an extremely diverse environment. With respect to women using Second Life, I’d just like to point out that I think there are profound and fascinating sort of implications and observations to be made about the fact that women are extremely involved and successful not just in Second Life but in other sort of open-ended content-focused experience-focused things. Sorry if everybody can hear that vacuum cleaner. There’s somebody vacuuming outside my room at this very moment here in San Francisco. So I think that we sort have to be careful to make assumptions about something that’s as broad as or almost as broad as the Real World. TOM HALE: You’re being griefed in the Real World, Philip. PHILIP ROSEDALE: Yeah, I’m being griefed by a vacuum cleaner. Okay. I just walked in another room so I can’t see my avatar but I can talk. I was going to say I think the fact that, within the evolving infrastructure of Second Life, women are as involved and dominant as they are. It’s absolutely fascinating from a social science standpoint. I think that it says something much, much deeper than the fact that women are sort of the primary drivers in consumer behavior, which I think is probably true as well. But I think what’s more interesting is that, in evolving societies where there’s a tremendous amount of change and a tremendous sensitivity to evolving social networks, so this would be moving west in the United States or the early days of society that are evolving very, very rapidly and undergoing a lot of change, I think that Second Life is a kind of a demonstration of an historical fact, which is that women tend to largely shape the evolving structures of those societies because they are the ones who are more concerned and more capable of social architecture. They’re modifying their relationships between people. And the relationships in any kind of an event where collective action can be more material than individual action is very, very important material. I don’t want to wander

too much into anthropology, but I also would just say, yeah, you can’t really simplify a lot of this stuff, and that’s part of what personally makes me so delighted to be involved in everything. ROBERT BLOOMFIELD: Actually we had a comment when the vacuum cleaner was sucking up whatever it was sucking up in your real life. Ann Otoole commented in the chat, “That’s the sound of content being stolen.” And that takes us to another topic, which is that intellectual property protection, digital rights are a huge issue in this day, regardless of what digital medium you’re talking about, but there’s certainly been heightened concern about it in Second Life. Tom, as you know, a lot of this is on the actual product site, the platform, and so I’m wondering if you could talk a little bit about what you think Linden Lab needs to do protect the intellectual property rights of creators? TOM HALE: Well, that’s a great question. It’s one that we spend a lot of time and energy discussing. Certainly one of the great kind of innovations of Second Life was the idea that creators and residents in the World would own their own intellectual property, and that’s a very kind of novel and interesting idea, and I think it’s one of the things that sort of has snowballed into the economy that we’re talking about today. It’s also tricky because, in any digital context, the notion of intellectual property is a slippery one, and it’s made all the more slippery by the fact that digital artifacts can be programmatically copied and can be programmatically transferred from one IP address or one computer to another. So certainly we have a challenge between our desire to have an open environment and an open platform for people to be expressive and creative and to innovate on that platform. And then also the obligation to our residents, whether they be merchants or consumers or just people who are creating for their own interest, to balance between those. It’s a classic problem of the needs of the few and the desire for us to make it as open a place as possible. So we take this very seriously, and we’ve certainly been engaged on this topic quite a lot. We’ve kind of started to roll out little bit of a roadmap about how we want to manage this. So I think the first thing that we’re thinking about is, “Let’s actually just start to set some expectations about what is actually expected of people, what’s the norm.” So we’re starting to do this, and one of the sort of objects of this would be, or the outcomes of this, would be a teller registry. So you would actually know who was a trusted seller and who wasn’t. You could start to manage that. Other things that we would be doing are more programmatic in nature, and I think that’s where we’ve been spending a lot of our energy trying to figure out what the right balance between those two poles are and what the right technical strategies are. But rest assured, we certainly feel very strongly about the rights of our intellectual property creators and holders and want to protect those as much as we can in a Virtual World. ROBERT BLOOMFIELD: I’m wondering if we can get some reactions. Actually we have a question. You can say it there, and I’ll repeat it. AUDIENCE: [QUESTION INAUDIBLE]

ROBERT BLOOMFIELD: The question was, you talked a lot about measuring the economy. But how are you looking at influencing it, helping it grow, and, in particular, are you tracking and planning strategies surrounding the velocity of money? TOM HALE: Well, to start with, what are some of the things that we have done to help it grow, I’ll just echo the previous conversation about intellectual property. Economies thrive when the rule of law dictates that transactions are trusted on both sides, and I think we’ve done a lot to enable that, and that’s sort of the path that we’re on. To get into the specifics of your question, like what are kind of the levers and dials here, Philip described it accurately. It’s an incredibly broad and vast thing and to try and characterize it as one thing or another is to reduce it to sort of absurdum. But what’s most interesting to me about this whole thing is the money supply. This predates my arrival, but there’s sort of a classic moment in Second Life history when the company started to take steps down the path of actually fixing the value, if you will, the exchange rate between the currency and U.S. dollars. Of course, there are a couple things that make Second Life. You need to generate content. You can cash out. You get your money back if you want, or if you can trade and build up a sum of money, you can actually extract your profits. I mean those are all very unique things. But, in order to manage that, one of the interesting evolutions in Second Life was the concept of a currency trading marketplace called the LindeX, and most Second Life people are very familiar with this because this is where a good deal of the exchange of Linden’s and dollars actually happen. So to look at that sort of slice of the economy, we actually look at that from the perspective of what’s the money supply, and is there enough demand to kind of support the current price of a Linden dollar. We manage that in a couple of ways. We manage that with [syncs?], on sort of consuming dollars and removing Linden dollars from circulation, and of sources, things that add Linden dollar supply. And we look at that aggregate supply, and we manage it, and we make sure that the right size of the price doesn’t fluctuate too greatly. But we’ve also got a very interesting phenomenon around currency traders. Maybe this is not a very well-known fact, but when you come to cash in your Linden dollars, we’re not on the other side of that transaction. We don’t give you your U.S. dollars. It’s somebody who holds Linden dollars and sells them back to you at maybe a slight premium to make a little bit of a profit, and that’s how you get your U.S. dollars. There are currency traders. To go to the demographics, one of the currency traders is extremely young. He is a young man, not a 40-year-old woman or a 35-year-old woman. He’s a currency trader, and a lot of people have done this programmatically. So it’s a very interesting phenomenon that there is this marketplace where there’s a supply of Linden dollars, and there are people who are trying to either buy those Linden dollars with U.S. dollars or convert their supply of Linden dollars, sell those for U.S. dollars. That marketplace is a very, very rich and interesting part of it. You asked about the velocity of money, and, of course, we do look at that because you look at the

money supply. It’s probably about--now about $25 million U.S. dollars is the size of the money supply. The velocity of that is roughly 2X in a month. And that’s a fast moving economy, and I think it goes down to that, well, wow, yeah, it’s a billion-dollar economy, and it’s moving around. People are exchanging Lindens back and forth all the time, in small numbers and large numbers. It’s pretty interesting. So that’s a way of looking at the economy from the metrics of gross domestic product and the money supply and the kinds of supply and demand things you would do to goose it. As Philip said in the beginning, we tend to try and keep our hands off. Because we can’t program-drive the economy. It’s just not something that can be done. ROBERT BLOOMFIELD: So just to summarize it in a couple words, it’s the sort of Milton Friedman monetarist libertarian philosophy. TOM HALE: I wouldn’t take the name Milton Friedman in vain. I’m certainly not going to make that presumption, but I think there is definitely--and we talked about it--we have a desire to see our residents and the people who are innovating on our platform, we want to give them the freedom and the leeway to do that, but we also need to make sure that there’s stability and that the currency doesn’t inflate or deflate, and people’s investments are devalued or overly valued. I don’t want to call it the invisible hand. That’s invoking yet another great, great economist, but it is something that we look at and try and make sure--we keep the beta within a manageable envelope. ROBERT BLOOMFIELD: Do we have other questions from the audience? AUDIENCE: Do you have an idea of what’s the percentage of creators versus consumers? What percentage actually creates [INAUDIBLE] TOM HALE: And this is classic. It’s like most user-generated content sites, although it is slightly more skewed towards the creators in our case. So if you make the kind of case that most user-generated content sites you have one percent who contribute who actually are content creators and ten percent who contribute a comment and ninety percent who consume. That’s roughly the same. We have more people who are creators. I think that speaks to the value of Second Life as a platform for creative expression, the amusement of creating things and then the economic prospects for creators. It’s a sizable number. ROBERT BLOOMFIELD: Yes, in the back. AUDIENCE: [QUESTION INAUDIBLE] ROBERT BLOOMFIELD: So the question is: Where are the top three places to go in Second Life to see the economy in action? I don’t know who on the panel wants to offer suggestions. I would, of course, suggest watching all of the Metanomics archives for starters, but maybe we should start in-world with this. Harper, Jeanie, what would you suggest? HARPER BERESFORD: Well, I’d like you to come to RFyre and see economics in action. I’d like you to act economically at RFyre actually. JEANIESING TRILLING: I was going to suggest the same thing. You’re welcome to come to my

store and see the economy in action, but I don’t know if it’s one of the best three spots. HARPER BERESFORD: It’s very spread out, the economics in Second Life. There’s no one hub for shopping or anything else. Actually the hub has been displaced onto the web into Xstreet Second Life owned by Linden Lab right now. And that’s one place where you can see economic action going on too. ROBERT BLOOMFIELD: And I actually step out of my role as moderator for a second and just second that comment. First of all, we talk about the invisible hand or avoid the term, but, really, Second Life has a largely invisible economy. It’s very difficult to see what’s going on. In economics, we often talk about search costs and how easy is it to see your competition, to see what’s available for purchase. In many ways, Second Life is like doing business in a fog. Prokofy Neva, the blogger, I think was the first one I read who used the term “search is broken.” That is, it’s very difficult to find things now. Linden Lab took a big step forward with Xstreet, and I would say right now that probably the best way to see what’s going on in the goods economy in Second Life is to go onto the web and go to Xstreet. Otherwise you just have to get in-world and click around and ask people. But it’s a very interesting issue. Do you want to talk about whether there are plans to improve search and so on? TOM HALE: Well, yes, I would like to talk about our plans to improve search. Thank you. Actually I was going to answer the question, but then I’ll talk about the plans. I think, again, as I said, there’s something in Second Life for everybody, but one of the characteristics of real time interaction online is orchestration to get people not only into the same place, but the same time is actually the trick. And I go back to the “people who stay are the people who find friends.” And so they go online, and they look on their friends online page on SecondLife.com to see who’s there. And, if someone’s there, they go and say, “What’s up?” “Let’s go.” “Where are you going?” And, all of a sudden, it’s two people who know each other, and they’re together, and then they go shopping, or they go do whatever they want. But, to answer your question, like are the places, there’s a couple of big stores. Of course, RFyre is a place to go. But one of the places to people watch, there’s probably two categories that I spend time doing because I’m an inveterate people watcher, is, one, all of the welcome areas. People kind of coalesce in the welcome areas, and that’s because as news users that’s kind of where they end up, and it sort of has the characteristic of a bus stop with the kids are hanging out, and there’s interesting dynamics that are highly volatile sometimes. But the other place are the most successful stores. And the way you can find those generally are the ones that are advertising. We sell advertisements on Xstreet so merchants can promote their brands. Someone’s going to ask about brands, and I’ll say the brands of Second Life are the places where you find people aggregating. An example: Emelia Redgrave, RFyre. You go to these stores and what you’ll see is that there’s generally, no matter what time of day you go there, there’s 50 people shopping. And you can see what they’re wearing and what they’re doing, and it’s a great kind of lens into the economic activity. The other place is, of course, Xstreet. And Xstreet is interesting because every transaction’s recorded, and we can actually look at it and see what the trends are, what products are hot, what’s

rising or falling, what categories are interesting, where are people adding things, where is the business slowing down. So it’s a very interesting view. It’s a slice. It’s only one percent of the overall economy, but it’s a very interesting slice. The other thing is, of course, just where the population congregates. I just pulled up a quick report. Right now the top Sims are Italia Milano, and Italia Torino, and these are sort of mirror World sims, which are communities for Italians, which have features of those actual places. So I guess whenever, it’s probably relatively late at night, I guess, in Italy, so that’ll probably makes sense. There’s probably some degree of social activity that’s going on there as people are congregating to find people who are Italian and would like to have conversation. Number three: Surprisingly, Torino Italy is the third one. Dance Island, Brazil Rio, Infernal View, Rockville. You start going down. These are the places that are populated with 60, 70 people, which is a group assembly. Many of them are nightclubs. Some of them are stores. Some of them are just venues where people get together. It is interesting to look and see where the stacks of green dots are on the map and just surf them. That would be my best advice. I’m sure Philip has some thoughts too. ROBERT BLOOMFIELD: Philip, do you want to speak to that? PHILIP ROSEDALE: Oh, I’ve been listening and I could talk all night about all this stuff. I do think the welcome areas are fascinating especially given how diverse Second Life has gotten. If you actually do want to get a slice of everybody coming in, you go to a welcome area. And you know, it could be the wild west. It can be crazy, scary. People can be angry sometimes, which is kind of a daunting problem in the growth of Second Life. You do see a little bit of everything, and it does give you a quick view of how incredibly big the whole thing is, to sort of watch people coming in the front door, and the people that are hanging around that are meeting. There’s just lots and lots of stuff to say. You were talking about the economy. To reiterate what was said, the economy’s growing, and what that means is that you have to put more money into circulation. That’s kind of a complicated thing. It’s the domain of macro economics essentially how much you have to put in, but, yeah, we basically just increase the money supply, with the goal of keeping the exchange rate constant. Like Tom said, the exchange rate is floating. People are just buying and selling Linden dollars from each other, and so you can watch because it’s floating, and anybody can charge any price they want, and the market is essentially made by the people willing to sell to the lowest price. You can watch the price that people are selling Linden dollars for and use that as a reliable kind of an economic indicator. And as the value of the Linden dollar goes up against the dollar, you know need to put more Linden dollars into circulation. That’s what we do. We have to be careful about that and very transparent because we make money from that, in part. One of the ways we make money is from selling those new Linden dollars, and that’s a little bit like how, in the Real World, some countries that are managing their own currencies kind of make money from the relative growth of their gross domestic product. China is a popular example lately where a lot of people around the world are debating what China’s monetary policy should be. So again, very interesting

stuff. But I would say the overall goal, one of the opportunities overall from an economic perspective is that virtual currencies could potentially be more stable than real currencies, especially under conditions where monetary policies in the Real World are, frankly, not the greatest things around. The Linden dollar has moved less in its value over the last couple of years than the dollar against, say, the yen or the euro. I think that’s a remarkable and interesting thing, given how much smaller our economy actually is. Going back to the comments on content protection, it’s critical that we figure out how to help people best protect their content. I would jump to point out that--and I think sometimes this difference is lost on people--there are both policy issues to regulate content protection, like telling people that they cannot move content off a grid or they’re going to face consequences or potentially legal consequences from that, if they don’t have rights to that content. Then there technical affordances that allow you to try and control content so that would be things like you can’t copy a script off an object because the script kind of lives, if you will, on the server and not on the main system. So there’s a difference between the electronic versions of these things and the policy versions, and that’s something that I think is important to think about. ROBERT BLOOMFIELD: We’re just about out of time. We only have a few minutes left. I’d just like to give the opportunity for everyone to make some closing remarks, whatever point they were burning to say and didn’t have a chance to, very briefly. And, Jeanie, let’s start with you. JEANIESING TRILLING: Thank you. I appreciate being here. I think content theft is a big problem. There’s no doubt about it. But I think probably Linden Lab is almost as frustrated as we are when we look at it because how do you stop it? Where do you draw the lines between freedoms and freedom of expression for you and I and then take that away so that nothing can be stolen? Just a really tough thing. But I don’t have anything else that I’m really burning to say because this has been a lot of fun for me. Thanks. ROBERT BLOOMFIELD: Harper? HARPER BERESFORD: I just wanted to thank you for allowing me to talk about RFyre and talk about the business that I do in Second Life. And I want to thank the Lindens for providing this platform for us. I don’t have a big axe to grind about what’s been given to us in this business. I understand that they run a corporation. They have to make a profit. They feed their families too, as well as we do, and they’ve given us a lot here for us to do and play with and discover ourselves and make money. And so I have to thank Philip. Thank you for giving us this World. PHILIP ROSEDALE: Thank you. You’re very welcome. ROBERT BLOOMFIELD: Tom? TOM HALE: We’re at this conference, and I look at the people in the audience here in front of me,

many of whom are entrepreneurs or game creators or social media creators, who are innovating around this concept of virtual goods. I would say this: I would say there’s a tremendous amount to be learned from the example of Second Life. We have a lot to teach and share about that. I also think that there’s tremendous opportunity. There’s 25 million U.S. dollars in our currency, and, if you would like to come and tap it, welcome to Second Life. Come on in. Create and innovate on our platform. One of the means of Second Life in the last year is, we’ve focused 2008 and 2007 on stability and kind of locking down the platform and preparing for scale. And now what we’re doing is, we’re focusing on the user experience and getting people in and more comfortable in-world, making it more of a consumer friendly, more approachable platform. I think, over the coming months, you’ll see more and more of that, and you’ll see more and more focus on the kind of end user and consumer experience. I think it presents a very interesting opportunity both to learn, but also potentially to innovate and even potentially build businesses for people in this room. So I think it’s an interesting and exciting time for us. ROBERT BLOOMFIELD: And, Philip, you get the last word. PHILIP ROSEDALE: Well, I think we’ve said a lot already, and it’s great. I mean to the extent that people would say thanks to Linden Lab for building the platform, I don’t know, I’d certainly say thanks to everybody for just coming and being on it and putting up with the challenges that we do have to suffer as this thing kind of emerges, everything from these questions of how do we best protect content to just the stability of the thing running. People often ask me whether I knew things would go the way they did, and what I always said was that, well, I knew personally, and this is what drove me, that things would end up the way they did, in the end, that, in the end, the Virtual Worlds would be this enormous phenomena. But I continue to always be delighted and thankful that anyone gets it and has the energy and is charmed enough by Second Life to be willing to put the kind of time that people put into it, to create the content that’s there. For it is surely the case that its ultimate growth and its rate of growth is really determined only by the people who are willing to create content there. So I guess I’d just say thanks to everybody for being a part of it and hanging in there and continuing to do that all these years. ROBERT BLOOMFIELD: Okay. Well, thanks to our panelists, and thanks to TreetTV, who has been filming this, broadcasting it to, I understand, 600-odd people watching the stream. So thanks for all your comments. Sorry we didn’t get to them. Treet, if you want to go ahead and roll the credits, I’ve just got a few closing remarks to say. I’d also like to thank Engage Expo for allowing us to broadcast this opening session of Metanomics for the fall season. Our regular time, for those of you who want to tag along for the rest of the season, is going to be noon Pacific Time on Wednesdays. Next week, Chris Abraham, an expert in virtual communities and the growing role in public relations

through Twitter and maybe soon through Virtual Worlds. We’ve got archived 80-odd episodes over the last couple years covering everything from economics to anthropology. And actually arguments between them, which a lot of people might find entertaining. And I guess I get the last word, which is bye bye. Thanks everyone. And I’ll see you at the reception. Thank you. Transcribed by: http://www.hiredhand.com Second Life Avatar: Transcriptionist Writer

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