Virtual Worlds: Second Life


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Second Life is an example of a new digital good that follows particular patterns to be successful.

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  • High Threat of substitutes:
    The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases
    The customers have a high propensity to substitute with other activities (outdoors and other MMOGs Massive Multiplayer Online Games )
    The customers have high switching costs
    High level of product differentiation ?
    Low threat of the entry of new competitors:
    Although Second Life can be a profitable market, yielding high returns, the existence of barriers to entry such as patents ?? and high capital requirements as well as the network effects which will be explained later, enhances the possibility of Second Life to stay alone.
    High intensity of competitive rivalry:
    The industry is increasing at a high rate with a high level of innovation and marketing.
    There is a high number of competitors (Substitutes?) which are very diverse in nature
    High bargaining power of customers:
    The market of outputs.
    Customers may put Second Life under pressure
    Customers are very sensitivity to price changes.
    bargaining leverage
    The customers have low switching costs relative to Second Life switching costs
    Additionally there are a high volume of existing substitute products available
    Low ? bargaining power of suppliers
    The market of inputs.
    Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.
    supplier switching costs are lower than Second Life’s switching costs
    There is a High degree of differentiation of inputs
    High presence of substitute inputs
    supplier concentration to firm concentration ratio
    threat of forward integration by suppliers relative to the threat of backward integration by firms
    cost of inputs relative to selling price of the product
  • Very strong network effects throughout.
    Same-side effects:
    Users (Social networking)
    Advertisers (Competitive, agency pressure)
    Developers (Validity, legitimacy)
    Advertisers want to be where the most eyeballs are; users, in the case, appreciate presence of advertising because it brings more products/services and opportunity to participate in development process
    Developers can obtain funding from advertisers and advertisers use developers to build robust platforms that stand apart
    Users like developers because they continue to enhance the online environment
    And more users create more demand for development, which developers need to stay in business
  • Penetration pricing
    Switching costs
  • Unlike social networking sites, which have yet to develop a successful revenue model,
    Second Life has its own economy and even its own stock market!
    For network effects, this means that users, advertisers, and developers all have a vested interest in being on Second Life to get a piece of pie.
    This also creates moderate multi-homing costs. Users put a lot of money into the development of their personal avatars, advertisers into the development of their online presence (whether virtual store or island), and developers cannot transfer their applications to anything else that is currently out there.
    Interestingly, the demand for differentiated products and features strong. This is basically an online world which, like the real world we live in, can only continue to grow and expand its features and benefits.
    As a result of the strong network effects, moderate multi-homing costs, and strong differentiation demand this is not a WTA market.
  • Virtual Worlds: Second Life

    1. 1. Virtual Worlds: The Second Life Example Ibrahim Shafi Semantic Contexts, LLC
    2. 2. Massively Multiplayer Online Games (MMOG) In the video game genre Played online Supports thousands of players simultaneously Variety of gameplay types (role-playing, first-person shooter, real-time strategy) Virtual currency Unlike SL, most don’t trade into real currency Run by graphical, physical, and network engines Most charge a bimonthly fee Few have client-side AI like SL does Issues: server overload, hacking, internet delays
    4. 4.  Traditionally physical goods  Islands, buildings, clothing, food, nature  Social, entertainment, and cultural experience  Avatar interaction, music concerts, clubs, create and view art  Consumer experience  Shopping outlets  Marketplace  Information goods sold in Linden Dollars (250 L$ = 1 US $)  Corporate functions  Conferences, product testing, business ventures, promotion  Education  Holding courses, debates, conducting social experiments
    5. 5. Subsidize Content Creators Make platform code open source Encourage development of tools, creations, extensions Example: Creating a themed island in SL One island could potentially attract thousands of users Increases users’ willingness to pay subscription fee
    6. 6. L'Oreal in Greenies: popular Second Life site with 100K+ visitors
    7. 7. Long-term activity is a prerequisite for community; coolness is the gold standard.
    8. 8. Pictured: Kowloon, recreation of PlayStation game by Japanese studio
    9. 9. Pictured: Steampunk harbor in New Babbage
    10. 10. Pictured: Midian City, dynamic interactive cyberpunk novel with thousands of players/storytellers
    11. 11. Strength of Network Effect Very strong across the board Multi-homing costs Low to moderate for both sides Demand for differentiated features High – limitless possibilities Platform enables customization Not a Winner-Take-All Market
    12. 12. Sole Sponsor: Linden Labs Controls who can participate in SL Develops rules Multiple Providers Many content creators Plays by the rules Compete for the market
    13. 13. Weak Substitutes Other MMOG’s Add SL-like features to existing games, e.g. World of Warcraft HiPiHi – Chinese SL MetaPlace, Multiverse, etc. Weak Complements E-commerce transactions Vulnerable to intermodal attacks
    14. 14. Find a Big Brother/Build alliances Linden Labs is partnering with IBM SL Land auctions on eBay Bundling Hardware accessories to use with SL Merchandising Become the common platform for virtual world collaboration Education Meetings/speeches Showcasing Design
    15. 15. "Molotov Alva”, Coming Soon to HBO: Machinima as filmmaker's platform
    16. 16. Palomar West, Cisco's interactive demo of future hospital
    17. 17. IBM's 3D Data Center, for more effective server management.
    18. 18. Wikitecture, 3D wiki, four dozen people create Nepal health center design
    19. 19. Questions?
    20. 20. Online virtual world and social network People represented by “Avatars” Communication via chat/instant messaging Currently, attracting attention of retailers, film companies, music groups, hotel chains, and colleges/universities From an advertising perspective, offers: Product placement Market research potential (trendwatching) Product testing/Consumer feedback