Second Life: The peasants are revolting

A quick note to virtual gods: If you create a virtual world, you’re probably going to wind up with virtually everything that occurs in the real world, and that includes crime, sex, economic upheaval and so on. No one knows that better than Linden Labs, the creators of Second Life, which has seen a variety of such behaviour over the years. This time, the virtual proletariat are up in arms about an increase in what might be called virtual taxes — the fees that Linden Labs charges for various features inside the world/game. In this case, it’s a fee increase for what are called “Openspaces.” Here’s a description from the Second Life blog:

“An Openspace is a type of private island that we made available for light use countryside or ocean … but Openspaces differ from normal regions in one particularly significant way; unlike normal regions that effectively get a CPU to themselves on the server, there can be up to four Openspaces on a single CPU (so 16 on a quad core machine), sharing the resource (hence them being ‘light use’).”

The issue, Linden says, is that people are using the Openspaces for things that they weren’t intended to support, and that is putting a strain on the company’s infrastructure. Just as cities and states raise taxes to pay for repairs to highways and so on, Linden clearly feels that it needs to charge more to offset the cost of maintaining these private islands. Sensible enough, yes? Not if you’re a Second Lifer. Or rather, not if you are a Second Lifer who has built a business based on the services and features that are attached to that Openspace. Here’s the problem as one person sees it:

“There is demand for the ‘original’ OpenSpace ‘void sim’ application: lower primcount, very few scripts, very few avatars–just very light load, and only in areas surrounding other, full-primmed sims. There is also a clear demand for heavier use OpenSpaces–still much lower density than full-primmed sims, but posing much more demand on the backend services than does the ‘void sim’ application. These need to be separated into two distinct products with different fee schedules; let’s call them ‘Void’ and ‘Low-Density’ sims.”

Don’t feel badly if none of this makes any sense to you. I’m pretty familiar with Second Life, and a lot of it makes my head hurt too. It’s a little like reading a science-fiction book, in which the author has made up new words for everything, and you have constantly flip to the index to figure out what everyone is talking about. The issue is whether Linden underestimated what people were going to do with Openspaces and priced them too low, or whether people are misusing the world somehow and should therefore be expected to pay more. Regardless, people are upset.

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Sequoia etc. close barn door after horse

It’s nice that the smart folks at Sequoia Capital are ringing the “good times are over” bell for their portfolio companies, as my friend Om Malik is reporting on his blog (other venture capitalists are sounding a similar warning, says Mike Arrington). My only question would be: Why the hell did they wait until now? The meltdown of the banking sector and the collapse of global credit markets is undoubtedly worse than many people (including me) expected, but it’s not as though it was a lightning stroke out of a clear blue sky. The U.S. has likely been in a recession for most of the past year, if not longer, and plenty of people have noticed. What were Sequoia’s portfolio companies doing up until now?

Seriously, though — isn’t it a little late (not to mention ironic) to be telling companies that they should cut their burn rate, refocus, etc.? They arguably should have been doing all of those things for the past six months, if not longer. Venture capitalist and entrepreneur Howard Lindzon has a good take on things on his blog, where he says the savvy players have already become as small and nimble as they can, and are preparing to look for opportunities. “Too Small to Fail” is Howard’s new motto. Silicon Valley’s venture firms may be just coming to that realization, but by the time you get one of those letters from Ron Conway, it’s probably too late. If you’re a Canadian startup and are feeling nervous, Jevon has some good advice worth reading.


Om has posted more details on the Sequoia meeting, with comments from several of the senior partners, including Mike Moritz and Eric Upin.

Is online advertising heading for a cliff?

As the markets see-saw between concern and outright panic over the fate of the U.S. financial bailout, the credit shock that’s rippling through not just North America but most of the Western hemisphere, and the potential for a severe economic downturn, anyone with a Web-based business that depends on advertising has to be asking: Is this the beginning of the end? If the U.S., Canada and to some extent even Europe are in the depths of a recession (or possibly even worse), what does that mean for online ad spending? The answer could mean life or death for some startups.

This debate has been going on for almost a year now. Google’s stock price came under fire around the end of last year and the beginning of this year because of concern that the search giant might see a downturn in ad spending that would hit the bottom line. Has it? A little, but not a huge amount (although some say that could change). In fact, there are those who argue that search-related ad spending is likely to be the most durable even in a shaky economy — in part because businesses can get more bang from buying AdWords than a newspaper ad or TV spot.

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Video: The “gridlock economy”

I don’t like to delve too deeply into economic theory and that sort of thing on this blog — I leave that to my friend Paul Kedrosky and his gang — but this video, which Paul wrote a post on recently, was so fascinating that I watched the whole thing, and it’s over an hour long. Michael Heller, a lawyer and professor at Columbia who used to work at the World Bank, isn’t exactly the world’s most thrilling speaker, but his talk about what he calls the “tragedy of the anti-commons” and how it has led to a “gridlock economy” in many specific markets — including pharmaceuticals, the cellular telecom business and the airline industry — is really thought-provoking. My favourite part is when he talks about going to Moscow after the fall of communism to advise the Russian government on how to create a market economy as quickly as possible.

A market develops in Facebook apps

It’s interesting to see that a market for Facebook applications — or widgets — is developing, although the prices are still small. In one of the latest transactions, Inside Facebook notes that (run by PayPal co-founder Max Levchin) has bought the app Favorite Peeps for a reported $60,000. Another site, FaceWatch, has also written about the purchase — and Josh Catone has a look at the phenomenon at Read/WriteWeb. Update: Fred Wilson has a good post up about it as well.

snipshot_e41cliqw0fja.jpgFavorite Peeps apparently has over one million users and was developed by Dennis Rakhamimov, a software engineer at a company funded by Peter Thiel — another PayPal co-founder, who is also an investor in Facebook. Inside Facebook notes that the deal values each user at less than five cents, compared with the $25 per user paid by Viacom for the Xfire gaming site and the $36 per user paid by News Corp. for MySpace. Another Facebook app, Extended Info, was recently bought by a travel company called SideStep — although no purchase price was disclosed. The creator of the app, Trey Philips, just finished his third year of university and said he put the widget together in a few hours at the Facebook F8 hackathon. Within days it had 60,000 users. VentureBeat has also noted the rise of the Facebook app-buying market.