Aviators, Moguls, Fashionistas and Barons: Economics

and Ownership in Second Life

Cory Ondrejka – Linden Lab
cory@lindenlab.com
Second Life is a digital world that relies on a unique combination of grid computing and
streaming technology [Rosedale03] to enable virtually all of its content to be created by
its residents. To maximize the quality and quantity of user-created content, Second Life
has embraced strong economic and legal connections to the real world. This approach is
quite different than conventional massively multiplayer online games (MMOGs). Since
Second Life launched in June of 2003, significant changes have been made to the
business model and internal economic structure. These changes have shaped the many
approaches residents have taken to creating content, building experiences and making
real-world profits. This Article will discuss the evolution of Second Life’s business
model and internal economy, its entrepreneurial activities, and the impact of those
activities on Second Life’s residents and community.

To the Beat of a Different Drummer

MMOGs generally follow similar paths regarding ties to the real world and business
models. As spelled out in their End-User Licensing Agreements (EULA) and Terms of
Service (ToS), most digital world operators own all of the content in their world, own any
content generated by the player, and specifically deny residents the right to earn real-
world incomes while using of the digital world. Sony [Koster2002] and Turbine
[Castronova2004a] have followed through on their EULAs by banning the sale of digital
items and currency on eBay. Most MMOGs are also subscription services, requiring
ongoing monthly payments from all players in order to stay in the games.

Second Life takes a very different approach, recognizing residents’ intellectual property
rights to their creations, allowing them to generate real-world income [Linden03], and
selling them as much digital real estate as they desire [Linden04]. As a user-created
digital world, the ultimate success of Second Life is coupled to the innovation and
creativity of its residents, not to ownership of their intellectual property. This is also a
practical decision, as MMOGs establish economic links to the real world independent of
the wishes of the developers or world operators. Land sales allow a more efficient and
equitable allocation of resources and enable entrepreneurs to speculate in ways not
previously available to them.

Heads in the Sand

MMOGs tend to be extremely time-intensive experiences, with players often spending 20

or more hours per week [Yee04] in world. Players with more money than time generate a
demand for high-level characters, items and currency, while players with more time than
money have an opportunity to supply all of these. Markets thus exist whether the EULA

Aviators, Moguls, Fashionistas and Barons 1

permits it or not. As Sony discovered, banning EverQuest sales on eBay simply moved
the trade to other sites, such as PlayerAuctions and IGE. In fact, despite the nearly
universal prohibition on legitimate digital item trading, the global market is
conservatively estimated at $75 million [Castronova2004b] and experiencing very strong
growth.

Game publishers continue to officially ignore the reality of item trading [Reynolds04],
despite the untested, but intriguing, legal implications of failing to enforce their EULAs.
Further muddying the water, some publishers have talked openly of monetizing digital
item sales [Combs04], although it is interesting that the target is not subscription
MMOGs but rather single and multiplayer games that have an online component.

Digital Property

The ownership of digital property is also an important question. Even leaving aside the
debate about whether digital goods are property at all [Lastowka03], definitive answers
do not exist about the enforceability of EULAs that retain ownership of everything
created by players within MMOGs [Dibbell03a]. In fact, examination of hosting,
colocation and bandwidth providers’ EULAs show that it is simpler to allow customers to
retain their intellectual property rights.

From an economic standpoint, property rights are critical to strong markets

[Bernstein04], businesses [DeSoto00], and innovation [North94]. The already large
digital item market would undergo dramatic growth if its participants were able to move
out of the current gray and black markets. Additionally, strong and efficient markets also
lead to rapid evolution of user-created content, as observed within Second Life.

Revolting Taxes
Second Life runs on an expanding grid of computers; however CPU, memory and
bandwidth resources need to be limited and allocated to residents in a predictable and
equitable manner. Initially, a complicated system of creation costs, taxes and stipends
was chosen as the best method. Objects and land that a resident owned in world would
generate a weekly tax burden. Residents would pay these taxes using Linden Dollars
(L$, Second Life’s internal currency) they had received from other users, by selling their
creations, and from their stipend. Their stipend was a weekly payout that changed based
on the resident’s reputation. Residents paid a flat monthly subscription fee in US$.

This system had numerous problems. In order for taxes to effectively balance load, they
had to be insanely high. As a result, very few residents were able to create on a large
scale, and it was extremely difficult to create experiences or games within Second Life.
Rich residents were able to generate severely non-uniform load on the system,
magnifying the inequities between the wealthy and the poor. Resident frustration
culminated in the “Second Life Tax Revolt” [Grimmelmann03], where residents picketed,
held Boston tea parties, and set fire to numerous structures.

Aviators, Moguls, Fashionistas and Barons 2

A New Model
Although some of the frustration could be linked to the general dislike of taxes, the revolt
forced an examination of the deeper problems. Residents had learned that creating
experiences on a large scale, such as creating a city rather than just a building, made
Second Life much more compelling. Similar to conventional MMOGs [Yee03] where
multiple accounts allow dedicated users to enrich their experience by spending more
money, Second Life residents and entrepreneurs demanded a mechanism to create on a
larger scale, even if it meant paying more.

The system of creation costs and taxes was removed, as was the monthly subscription fee.
Instead, the amount of land a resident owned acted to limit the scale of creation. If a
resident wanted to build more, they simply purchased more land. Since land was a scarce
resource, it was auctioned off continuously. Thus, land ownership consists of an up-front
cost, the auction price, and an ongoing cost in the form of a maintenance fee. Residents
can own as much land as they need and can change how much the own each month.
Those who want to create complete experiences even have the option of purchasing
estates that aren’t directly connected to the mainland and that have more advanced access
controls than normal land. Despite some initial concern over the dramatic nature of the
changes, virtual real estate has proven to be quite successful [MSNBC04].

Land values vary in Second Life because arbitrary teleportation is not allowed and some
global rules vary from location to location [Ondrejka04]. “Telehubs” provide a public
transportation system, so land closer to a telehub will experience higher traffic than a
more distant locale. Areas within Second Life are also divided into “Mature” and “Non-
Mature”, with appropriate changes in Community Standards, so depending upon desired
use, different types of land may be more or less valuable. Finally, aesthetic issues clearly
matter, as beachfront property in Second Life has consistently sold for more than inland
plots.

The stipend still exists. By providing residents with a steady income, the velocity of
money within the economy remains high and consumers have little incentive to hoard
what they have. The stipend has a minimum amount keyed to being a member in good
standing and is supplemented by daily dwell awards. Dwell awards are L$ payments to
the residents whose land receives the most visitors during the previous day. L$ drains
also exist, in the form of land that is auctioned for L$, upload fees for adding textures,
audio, and animations into the world, and listing fees for the in-world find functionality.

Economic Strength

While inflation could be a concern in this economic model, Second Life’s rapid and
sustained growth in 2004 has actually resulted in a mild reduction in median and average
balances. More importantly, unlike other MMOGs, the L$ has actually appreciated
against the US$. Second Life’s internal economy has also grown significantly since
changing models, with monthly internal economic activity passing US$1 million at

Aviators, Moguls, Fashionistas and Barons 3

current L$ to US$ exchange rates. Transactional volume has undergone dramatic
increases as well.

Digital Entrepreneurs
Second Life had the pieces in place to generate sustained economic growth at the start of
2004. Residents owned their creations, were free to profit off of their activities within the
world, and could speculate and experiment with large creations simply by purchasing
land. The opportunity to earn real-world profits was enabled when third party sites
connected Second Life’s L$ to US$.

Currency Trading
IGE (http://www.ige.com) and Gaming Open Market (http://gamingopenmarket.com)
have both supported L$ trading since late-2003. Both have seen strong growth in sales
volume, and currently trade well over US$100,000 worth of L$ between them per month.
Second Life has not experienced the “mudflation” generally seen in other online games
due to duplication bugs, shortcuts in the treadmill, and commodification. This stability
has made the L$ a worthwhile investment and allowed in-world businesses to generate
significant real-world wealth. In fact, going shopping with your friends has become a
major activity within Second Life.

Trendsetting

Clothing and avatar stores were the first businesses within Second Life. Because the
built-in avatar creation and customization tools are the first skills learned upon entering
the world, virtually all residents learn that they are able to create clothing and avatars.
Obviously, the quality and desirability of clothing will vary, but many residents attempt
to inspire the next Second Life fashion craze. The transition to the new land model
allowed speculators and entrepreneurs to build stores that supported large and varied
displays, so designers with complementary skill sets began working together to improve
the shopping experience. The ability to buy more land has allowed creators to explore
franchising, multiple locations, advertising, and branding. Second Life’s approach to
intellectual property also means that budding fashionistas actually own their creations,
whether in the digital or real worlds. One real world firm is even taking advantage of this
to “cool hunt” within Second Life [STD04], exporting content from the digital to the real.

Clothing and accessories often act as a gateway to other retail opportunities. Storeowners
can distinguish themselves from their competition by offering vehicles or weapons, or by
selling clothing that matches other creations. Alternately, small outlets are often added to
existing clubs and other popular location. Sellers quickly learn that the realities of a
digital world, such as no marginal cost of reproduction and no need to keep inventory on
hand, allow them to be flexible and experimental in their sales approaches.

Aviators, Moguls, Fashionistas and Barons 4

Shoppers are able to choose stores based on text searches, the popularity of the store, and
the recommendations of other residents. This results in a virtually infinite supply of new
clothing ideas and options, sold in environments ranging from shopping malls to remote
boutiques floating in the sky. For many of the storeowners, the shopping experience is as
important as the actual clothing they sell, so meeting and greeting the clientele is a big
part of their business.

All Dressed Up

Of course, once the perfect clothes and accessories have been purchased, seeing and
being seen becomes the next important activity. Clubs and events are very popular in
Second Life and make up another common business venture. As with stores, bigger is
often better and many residents have chosen to make large land purchases in order to
fully explore their visions.

Clubs, ranging from Wild West saloons to science fiction cantinas to clubs that would
make Las Vegas blush, provide destinations and meeting grounds. Clubs consistently
receive the most traffic within Second Life, and are often used to launch or sell other
products. Clubs earn L$ for their owners and operators both through dwell awards and
through goods and services sold within them. Clubs often act as locations for various
events, although events also occur at private homes and public stages.

Resident-run events within Second Life are a common way to meet large numbers of
other residents. They also can have economic motivations, as many give out prize money
or are used to generate higher dwell awards. Events of all types exist. Costume parties,
trivia contests, themed chat, open houses and game shows are quite common.
Educational events, where residents teach new users about the best ways to accomplish
various tasks within Second Life, are also extremely popular. Residents who entered
Second Life without any formal programming training now teach hundreds of people how
best to create airplanes, weapons, and other scripted objects.

Inventing the New

The ability to truly create within Second Life, and the rapid commoditization of content
within MMOGs in general, provides a real opportunity to profit for those who come up
with new ideas. The scripting language and creation tools can be used to provide features
and behaviors not yet built into the system, to implement ideas better than everyone else,
and to simply explore design space.

Second Life doesn’t yet implement multiple avatar animations but several enterprising
residents independently solved the problem [Au04c] by using the scripting language and
user-created animations to allow avatars to hug each other. In each case, multiple groups
of residents worked together and combined various skills and expertise. Their products
have sold quite well and have served as the inspiration for the next round of animation
scripts.

Aviators, Moguls, Fashionistas and Barons 5

The popularity of shops, clubs, and events has also created a high demand for architects
and those with a strong industrial design sense. While many residents can create a home
or a store, fewer are able to design one that shows items well, allows avatars to move
through it smoothly, and consumes minimal system resources so that more people can
visit and enjoy it.

Come Fly With Me

In Second Life, everyone can fly. Despite (or perhaps because of) this, wings and flying
vehicles have generally been on the cutting edge of user development from early in
Second Life’s Alpha. Although vehicles of all types have been created, flying vehicles
have always been dominant, from the early jetpacks and wings, through the hot-air
balloon races, to the current high performance aerobatic and dog fighting aircraft.
Residents with a passion for flying have taken great advantage of the new economic
system as it allows them to build airports and aerodromes.

Recently, a skydiving craze has swept though Second Life [Au04b]. The owners of
“Abbotts Aerodrome” have created one of the most complete experiences within Second
Life, allowing other residents to take skydiving classes, join groups for multi-person
jumps, compete in contests, purchase upgraded equipment, look at screen shots of jumps,
and even buy a jump plane to take up their own groups. The skydiving equipment
utilized the skills of scripters, modelers, texture artists and animators, as well as in-world
jumpmasters, teachers, and community organizers. Even more importantly, skydiving is
just part of the experience of visiting the Aerodrome. New vehicles appear almost daily
and the owners are usually around to talk about flying, scripting, or how to make
something new.

Capitalism at Play
With a healthy and stable market for L$, many Second Life residents are actively trying to
generate real-world profits. Some are using those profits to augment or replace their real-
world jobs. Unfortunately, markets also offer opportunities that range from unpopular to
illegal. Like all other online services, Second Life has to deal with credit card fraud,
identity theft, and, of course, the PayPal chargeback. This last happens when the thief
purchases digital goods using PayPal and then, exploiting a quirk in their chargeback
policy, reverses the payment. This leaves the thief with both the digital goods and his
original money, while the victim has neither. Even worse, the victim generally has no
recourse [Dibbell03c]. This particular exploit has been documented [Cringely04] and it
is likely that eBay and PayPal, in conjunction with digital world operators, will find an
appropriate solution.

Land Barons

Land in Second Life is a scarce resource and is released to residents via auction. Some
residents quickly determined that they could purchase land, subdivide it, and resell it in

Aviators, Moguls, Fashionistas and Barons 6

world for a profit. Land barons have proven to be unpopular with the other residents and
discussion threads about the problem have shown up regularly in game forums.

The problem is both one of perception and of fact. The reality is that the speculators are
so efficient and motivated to win auctions that other residents have been largely squeezed
out of the auction system. For example, over a recent 30-day period, only 5% of those
residents who purchased land had purchased it from the auction system. The other 95%
buy land from the land speculators.

This gives rise to the perceptual problem. Although many speculators spend time and
effort subdividing the land, performing small terraforming tasks, and generally preparing
to sell the subdivided parcels, most residents don’t feel that any value is added in this
process and that the new land is exorbitantly expensive. In reality, the price increase is
only about 10% above the auction price. More importantly, the smaller parcels are cheap
enough to be purchased by a much larger percentage of the residents. Second Life
recently added a “First Land” feature that greatly simplified land purchases for new users.
As a result, speculators are changing their approaches to land resale.

Going forward, it seems certain that virtual real estate agents within Second Life will
have to compete with each other for business. As in the real world, agents who add value
by correctly staging property, doing research about the property’s location, and who
actively manage their client lists, will be able to charge a premium for their services. As
the world continues to grow, the ability to connect buyer and seller will be increasingly
valuable.

Bringing on the Lag

Second Life’s open-ended building and scripting tools provide residents with ample
opportunities to stress both the client rendering and server simulation. These stresses are
broadly classified as “lag,” where the client’s frame rate drops or updates from the server
are delayed or blocked. As in other MMOGs, properly timed lag can be used to gain an
advantage over other players or to interfere with their businesses. Second Life does allow
residents more opportunities to generate lag than any other MMOG, but it isn’t possible
to eliminate this without greatly damaging the flexibility and culture of experimentation
so critical to growth. Instead, creations within Second Life always indicate both their
creator and current owner, generally allowing residents to quickly determine the source
of problems. In addition, malicious use of the system is a serious violation of the
Community Standards. Much like the real world, an arms race exists between business
owners and criminals, and much of the continuing development effort in Second Life is
focused on ensuring that businesses are free to operate.

Timeshifting
The average person has a very full schedule. For the average American, television, work
and sleep, are enough to take most of the hours in the week. While people have begun to
exchange television viewing for game playing [Loftus04], the high time cost of MMOG

Aviators, Moguls, Fashionistas and Barons 7

play is still a significant problem for many. The very real possibility of generating an
income within Second Life can change that.

As Julian Dibbell can attest, it is possible to make a living selling digital goods
[Dibbell03b]. Several of Second Life’s more successful creators are using their profits to
pay for tuition or as income while unemployed [Au04a]. For many of these digital
entrepreneurs, the ability to make money doing something that they enjoy is a new
experience. Residents often join Second Life with no idea that they possessed the
creative skills or business acumen needed to make and sell digital items, but the ease of
experimentation and readily available in-world educational resources lead them to
explore the possibilities.

Some have even setup databases in the real world, tracking inventory, sales, and customer
data from their multiple stores within Second Life. Using this data, they adjust product
lines, prices, and advertising, acquiring skills and knowledge that would be acquired at
far greater financial risk in the real world. For example, residents have discovered that
Sunday is the largest shopping day in Second Life and that attractive but simple displays
generate more sales. Undoubtedly, some will eventually transfer their newfound business
acumen back into the real world.

Conclusion
Second Life’s transition from a simple subscription model to one based on land and
intellectual property ownership has profoundly changes creation within the world.
Residents are able to create on a larger scale, to explore new ways to earn real-world
profits, and to leverage their early successes into more land and opportunities. Trade
with the real world, in the form of currency exchanges on 3rd party sites, has increased
steadily and the L$ has appreciated in value against the US$. Economic temptations have
also increased as more residents supplement their income via Second Life, and both
unpopular and fraudulent behaviors have been observed. Most importantly, the primary
goal of the change, increased quantity and quality of user-created content, has been
conclusively observed.

Second Life is proving that users truly can create a world, as well as compelling
experiences within that world. Leveraging user-creation is far more than simply
providing users with the correct tools. A complex set of economic and legal choices exist
and any project that expects quality output needs to carefully consider the interaction of
all of them. Economic factors provide a powerful selection pressure for high quality
content while property rights provide creators with the incentives to work on large
projects over significant periods of time. Filtering and search functionality required to
separate the wheat from the chaff becomes increasingly important as the content creation
scales up with the world population.

As the world of Second Life grows and new functionality improves the experience for all
residents, its markets and connections to the real world will also grow and strengthen.

Aviators, Moguls, Fashionistas and Barons 8

This is a different path than conventional MMOGs, but an absolutely necessary one for
building a truly user-created place.

Further Reading
For more information on law, economics, and digital worlds, the references provide a
wealth of information. In addition, the following websites and mailing lists are excellent
sources of data and debate.

• http://terranova.blogs.com/terra_nova/ Terra Nova is home to many great thinkers

and writers at the intersection of research and digital worlds. It also maintains a
great set of links to useful digital world web sites.
• http://secondlife.blogs.com/nwn/ Wagner James Au maintains New World Notes,
a first hand account of life in Second Life and a great resource for information
about the new and interesting in world.
• https://www.kanga.nu/lists/listinfo/mud-dev/ MUD-Dev, the granddaddy of them
all. Everything you ever wanted to know about digital worlds, although historical
discussions are often hard to find.
• http://ssrn.com/ The Social Science Research Network is home to many papers
about digital worlds, their residents, and their economies.

References
[Au04a] Au, Wagner James, “Post War Reconstruction, Part 1” available online at
http://secondlife.blogs.com/nwn/2004/04/postwar_reconst.html, April 26, 2004.
[Au04b] Au, Wagner James, “Taking a Dive” available online at
http://secondlife.blogs.com/nwn/2004/07/taking_a_dive.html, July 19, 2004.
[Au04c] Au, Wagner James, “Permission to Hug” available online at
http://secondlife.blogs.com/nwn/2004/08/permission_to_h.html, August 19, 2004.
[Bernstein04] Bernstein, William, The Birth of Plenty, McGraw-Hill, 2004.
[Casronova04a] Castronova, Edward, “Veteran Virtual World Bans Ebay,” available
online at http://terranova.blogs.com/terra_nova/2004/05/veteran_virtual.html, July
27, 2004.
[Casronova04b] Castronova, Edward, “Data,” available online at
http://mypage.iu.edu/%7Ecastro/home.html#Data, September 2, 2004.
[Combs04] Combs, Nate, “…The Dam Breaks” available online at
http://terranova.blogs.com/terra_nova/2004/05/the_dam_breaks.html, May 14,
2004.
[Cringely04] Cringely, Robert, “PayAcquantance – When It Comes to Selling Virtual
Property, PayPal Isn’t Always Your Pal,” available online at
http://www.pbs.org/cringely/pulpit/pulpit20040506.html, May 6, 2004.
[DeSoto00] De Soto, Hernando, The Mystery of Capital, Basic Books, 2000.
[Dibbell03a] Dibbell, Julian, “Serfing the Web” available online at
http://www.juliandibbell.com/texts/blacksnow.html, January, 2003.

Aviators, Moguls, Fashionistas and Barons 9

[Dibbell03b] Dibbell, Julian, “Play Money” available online at
http://www.juliandibbell.com/playmoney/, March 11, 2003.
[Dibbell03c] Dibbell, Julian, “On the Nature of the Intangible: A Dialog” available online
at
http://www.juliandibbell.com/playmoney/2003_10_01_playmoney_archive.html,
October 17, 2003.
[Grimmelmann03] Grimmelmann, James, “The State of Play: Free As In Gaming?,”
available online
http://research.yale.edu/lawmeme/modules.php?name=News&file=article&sid=1
290, December 4, 2003.
[Koster02] Koster, Raph, “Online Worlds Timeline,” available online
http://www.legendmud.org/raph/gaming/, February 20, 2002.
[Lastowka03] Lastowka, F. Gregory, Hunter, Dan, “The Laws of Virtual Worlds,”
available online http://papers.ssrn.com/sol3/papers.cfm?abstract_id=402860, May
29, 2003.
[Linden03] “Your Second Life Begins Today,” available online
http://lindenlab.com/press_story_8.php, June 23, 2003.
[Linden04] “Now Selling: Real Estate on the Digital Frontier,” available online
http://lindenlab.com/press_story_14.php, March 30, 2004.
[Loftus04] Loftus, Tom, “TV execs try to lure gamers back – Golf players watch golf, but
will video game players watch games?,” available online
http://msnbc.msn.com/id/4778773/, April 30, 2004.
[North94] North, Douglas, “Economic Performance Through Time,” available online
http://members.shaw.ca/compilerpress1/Anno%20North%20Econ%20Perform%2
0thru%20Time.htm, June 1994.
[Ondrejka04] Ondrejka, Cory, “A Piece of Place: Modeling the Digital on the Real in
Second Life,” available online
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=555883, June 7, 2004.
[Reynolds04] Reynolds, Ren, “EAs Eyes Wide Shut” available online at
http://terranova.blogs.com/terra_nova/2004/08/eas_eyes_wide_s.html, August 13,
2004.
[Rosedale03] Rosedale, Philip, Ondrejka, Cory, “Enabling Player-Created Online Worlds
with Grid Computing and Streaming,” available online
http://www.gamasutra.com/resource_guide/20030916/rosedale_pfv.htm,
September, 2003.
[STD04] “Future Fashion 04,” available online
http://spacethinkdream.com/files/FF04.pdf, July 28, 2004.
[Yee03b] Yes, Nick, “Number of Accounts,” available online
http://www.nickyee.com/daedalus/archives/000343.php, February 11, 2003.
[Yee04] Yes, Nick, “Hours of Play Per Week,” available online
http://www.nickyee.com/daedalus/archives/000343.php, February 21, 2004.

Aviators, Moguls, Fashionistas and Barons 10