UPDATED! Editorial: Decentraland Is Paying for Contest Entries (And Why This May Backfire)

On Nov. 8th, I wrote about the Decentraland Builder Contest, which is currently underway and runs until Dec. 15th, 2019. You can refer to my previous blogpost for all the details on the contest, or you can check the Decentraland website.

One thing that I did not know about the contest is that each accepted entry will receive 200 MANA, which works out to about US$5.00 at the current exchange rates. I understand that you can submit up to 20 entries per person, which means that a user who submits the maximum number of entries earns 4,000 MANA, worth about US$100. (This information comes from a recent blogpost on the DCLPlazas blog, which is a good source of news about Decentraland.)

This reminds me of how High Fidelity was offering US$300 per accepted entry to an avatar contest at one of its final big events (this was before its abrupt pivot earlier this year to promote business use of HiFi for remote workteams, and an attempt to rein in runaway costs). For a while there, High Fidelity was spending money like a drunken sailor, and I am starting to wonder if the same thing is starting to happen over at Decentraland, which has been extremely generous with its contest prizes this year.

I have absolutely no problem with large cash prizes for contest winners, and I know that contests encourage the creation of good content, which drives usage of the platform. But in my opinion, paying for every single contest entry is only going to encourage a flood of people gaming the system with the maximum number of contest entries, just to collect the most money they can and then cash it out.

This is essentially bribing people to use your platform, which means that as soon as the money stops flowing, fickle users, who were there only because they were paid, will abandon the platform (which is exactly what happened to High Fidelity).

One of the things that is starting to concern me about blockchain-based virtual worlds like Decentraland is how they seem to encourage a rather mercenary approach to their in-world economy. It doesn’t help matters that land is such an expensive commodity in DCL, which almost makes it imperative to be able to use it to generate revenue. (A year ago, DCL even launched virtual land mortgages, for those who could not afford to pay for their LAND up front.)

Want to play a hunting game? You’ve got to pay for the arrows. Want your choice of avatar username? You’ve got to buy one. One person on the official Decentraland Discord server recently asked whether they would be allowed to erect a paywall in front of a constructed scene, so you couldn’t even look at it without paying. Everybody seems out to make a buck.

The blockchain/cryptocurrency community is a world apart, and most current Decentraland users and investors do not see this sort of setup as strange. But I wonder how well this will play out with the casual, non-crypto visitors which DCL needs to attract in order to survive and thrive long-term. Will potential users be put off by having to pay for everything, even buying their username? I guess we’ll find out once the doors open to the general public.

UPDATE Dec. 6th, 2019: Ari Meilich, the Project Lead at Decentraland, says:

The idea behind subsidizing content creation is trying to crack the chicken and egg problem. A lot of people have been building in the absence of incentives, but other are more likely to create better scenes provided they receive tokens, particularly before we have launched and there isn’t an immediate flux of users. In the previous contests it has worked out great. This contest will be the last one before launch, Ryan. And it’s looking like there’ll be enough interactive content to put us in a good position to open the world publicly soon 🙂

Thanks, Ari!

Ebbe Altberg Talks About Social VR as a Platform and Economy for Entrepreneurs in an Interview for ZDNet

Ebbe Altberg, the CEO of Linden Lab (the makers of Second Life and Sansar), recently gave an interview to Tonya Hall of ZDNet:

A couple of quick facts from the fifteen-minute interview:

  • Ebbe Altberg’s previous employment history includes stints at both Microsoft (12 years, working on Microsoft Office) and Yahoo! (where he was a senior vice president);
  • Last year, Second Life users cashed out $64 million in earnings;
  • Second Life has had over 200,000 virtual marriages in its lifetime!

Ebbe spends the bulk of the interview discussing the in-world economy of Second Life and Sansar (which Linden Lab is currently building based on the lessons learned from the 16 years of experience the company has gained by operating Second Life). He also talks about recent corporate branding partnerships in Sansar, such as Monstercat, Sanrio (the brand behind the Hello Kitty phenomenon) and Levi’s.

It’s clear that Ebbe wants to pursue more corporate partnerships and branding opportunities with Sansar. One thing that puzzles me is that this video, posted on Sept. 24th, 2019, had only had 22 views so far on YouTube! So please give it a watch, and spread the good word. Thanks 😉 perhaps we can send a few more companies Ebbe’s way, to strike a few more deals!

Linden Lab Is Extending Its Lower Cashout Rate for Early Adopters Another Year, Sparking a Debate on the Overall Economy Setup in Sansar

What’s the Best Way to Grow the Sansar Economy?
Image by Nattanan Kanchanaprat from Pixabay

Last Wednesday, the following notice was posted to the official Sansar blog:

From our earliest days, we at Sansar have worked hard to build a virtual world that feels free and accessible to all – one where our amazing creators don’t have to worry about the constraints other platforms impose: a paid subscription just to cash out, for example, or fees for individual in-world transactions. We want to put you and your incredible work first, which is why we limit the kinds of fees we gather from our community. 

When we made the decision last year to change how we process credit, we understood it would be an adjustment. But we know that it is a necessary change to make in the long run: one that would help scale and grow our incredible virtual universe, and ensure our community remained strong, vibrant, and self-sufficient.

Through this change to our fee structure, we can continue to keep Sansar free for all to play, while still covering the costs of day-to-day operations: server maintenance, R&D, all that good stuff. We’re able to maximize the total content available to you without resorting to the fees  similar games enforce – in some cases, as much as an 80-20 revenue split.

We know that this may be unexpected for some, especially those that came to us through Second Life, where fees to process credit are lower. We also recognize that SL relies on a variety of fees to cover costs, including land ownership, upload fees, etc. By focusing our revenue model on our marketplace instead, we can limit the other fees we’d require in order to make Sansar a success.

We’re incredibly grateful for all the work you’ve contributed to Sansar so far, and we know the future is bright. In recognition of that, we’ll be extending the legacy exchange rate for early adopters for another year. If you became a creator before January 1, 2019, you’ll get to keep your lower exchange rate until December 31, 2020.

This sparked a lively discussion on the official Sansar Discord channel:

Because economics is not my strong suit, I have asked EvoAv to explain the current situation as concisely as possible. EvoAv has given me some clarification around the numbers, and what it actually means for the Sansar economy:

Linden Lab is increasing the exchange rate from 143 per 1 USD, to 250, for selling, while the price to buy remains at 100 per 1 USD. This setup used to mean a 30% cut of sales going to LL, while now it will be going up to 62%.

Landon said the reason is Sansar does not sustain itself with the previous rate, and they mentioned “similar platforms” charging a similar rate or higher, though I’m not sure which they were referring to. They announced yesterday they will extend the grandfathered rates period for another year, and my sense is they are doing that because its too early for them to lose creators such as Medhue. After the announcement, they setup a mini product meetup with Landon with a 30-minute notice to discuss the news.

For creators like Medhue who are making a decent amount from sales in Sansar, the commission hike would mean an instant 43% cut in their revenue when it happens, easily pushing something profitable into the red. And he argues its impossible to get creators to sell here because 62% is ridiculous compared to other 3D model stores. Though in my opinion he is only partially right.

The commission hike could result in two things, 1) most creators will increase their prices to compensate for the commission, making the Sansar store more expensive to shop in, or 2) Fewer creators will sell in Sansar, leaving more sales to the few that remain selling in Sansar. In both of these cases there is some equilibrium, where there are enough sales to justify selling in Sansar despite the commission percentage. If someone is making 3,000 USD in Sansar a month, after commission, does it really matter how much LL is taking? If you think 62% is too much, then you are just letting someone else enjoy 3,000 in sales, there will be an equilibrium which the higher commission simply pushes the creator/regular user ratio towards less creators in Sansar, but for sure [it’s] not an absolute all leaving scenario.

One thing to keep in mind, is the items on the store have no cost per unit sold, the only cost is the fixed amount of man hours used to create the product. The risk is much lower than RL products, or selling on other model stores, especially because items sold in Sansar are contained to Sansar itself, unlike selling a 3D model on the web which can be used for anything and even resold/stolen and involves some risk.

Medhue is arguing that it is not contained in Sansar entirely because others could sell for Sansar outside of Sansar, such as he is doing, and bypassing the extreme commission rate, resulting in a lower price for users and a higher profit for the sellers. He would also prefer if he could sell everything within Sansar because of the risks i mentioned above, but says the margin difference becomes big enough that it is worth it.

Medhue says (and I do have his permission to quote him here):

The Lab can set the rate at whatever it wants, but that doesn’t somehow mean anyone will use it. If the rate isn’t reasonable, no creator need even use the currency. Therein lies the issue. I have my own website. If LL wants to charge 62%, then I would just sell the same product I would in Sansar on my site, at an even lower price that I would in Sansar, because I’m not paying that 62% tax. I’m’ just using myself as an example. Any creator can do this. I literally pay $30/month for Shopify to handle everything.

It’s great that they [will] keep the rate lower for another year, but the way the system works, it is super risky to sell in Sansar anyways. If you allow others to resell the item, then you could wind up with a situation where the Lab doubles the rate eventually, but you can not double your rate, because anyone can sell it for cheaper than you, your own product, because you didn’t set the resale price high enough initially.

See, the Lab can change their rates at any time, but us, our resale rates are set for LIFE.

Linden Lab CEO Ebbe Altberg got into a discussion with Medhue about this, reiterating his key points: that Second Life is a very different platform from Sansar; that SL has many other ways to collect fees, such a land charges, which Sansar does not have; and that it’s not really fair to compare Second Life and Sansar just using a single number (the commission percentage). Medhue replied:

Sansar though, I think mostly because of the commission, makes LL look kind of anti-creator, and anti-SL. That is how important that commission rate is. If it is too much, people can only assume the Lab is shafting us all…

Just saying there are many reasons why people are so passionate about SL. It was able to enable so many people, including myself. A good portion of that centers around making some money. For many, it was the first time they ever started a business, and SL helped them to learn a lot about business. I was there in the early years. It was all about people starting businesses. SL broke down barriers that kept people from doing these things in real life.

There is also alot of fear in the SL community, especially within the creators. Many look at Sansar as eventually stealing all their customers and income, and many fear they don’t have what it takes to make it in Sansar. It was the same way when Mesh was introduced. Many hated it because they feared they would not be able to learn, and they would loss the business they worked so hard for.

When those same SL creators look at the commission rate here, they are justifiably fearful of their futures. Me, not so much, but I have a good history outside of SL. When I argue about the commission, I’m generally concerned about the economics of it all, and what rate is best for the Lab to make as much as possible.

Sansar is a different beast, for sure, but for us creators, it isn’t entirely different. The part that is really different is the pay structure, which was and still is great for us in SL, but quite dismal here. That is the major difference from a creators view, IMHO. For a technical view, Sansar is way better. Better materials, better frame rates. An all around better experience, or at least some day better than SL for many. Personally, I just wished Sansar felt a little more like the early days of SL. It was like a gold rush. IMHO, that was why so many were pouring in. If we had a really low rate, the same would happen here. And I don’t mind the rate going up over time to cover costs.

Medhue’s underlying fear here is that the 62% commission is going to scare a lot of would-be content creators away, and backfire on Linden Lab. And it’s a valid fear. But the fact remains, how do you organize Sansar the best way, so that Linden Lab makes money off it, and content creators can also make money off it? It’s a thorny question, and it might take some trial and error to find the magic formula for Sansar to prosper, just as it took some time for Second Life to take off.

So, what do you think? Please feel free to leave a comment below or, as always, you are welcome to join the freewheeling conversations, arguments, and debates about social VR and virtual worlds taking place on the RyanSchultz.com Discord server, the first cross-worlds discussion forum! We’d love to see you there.

Guest Editorial: What’s Wrong with High Fidelity

The following guest editorial is by Dale Glass, who had an interesting perspective on the economics of the social VR platform High Fidelity. I asked him to write up his thoughts to publish on my blog, and here they are:

What’s Wrong with High Fidelity

by Dale Glass

I showed up at High Fidelity a some months ago, looking for greener pastures. Second Life isn’t living up to its potential in my opinion, so I started looking for alternatives. I checked out several, and HiFi is the one I fell in love with. The source code is available, the system is far more flexible than SL, it actually supports VR, JavaScript is far more sane than LSL, the community is amazing… but unfortunately, there had to be problems.

I quickly found the Federated HiFi Users Discord, and one of the first questions I had to ask was: “This is very neat, but how is it going to make any money?”. Not only is HiFi free to use, but it’s pretty much impossible to give the company any money if you wanted to.

High Fidelity is a bizarre thing for a business to make. If it had been named something like “Open Metaverse” and was run by a volunteer group, it would have made perfect sense. The very structure of HiFi seems to be made to resist corporate interests and to be usable by a group of random people spread around the globe. The entirety of the source code is open, the architecture is distributed both for hosting domains and assets, and the local currency is a cryptocurrency. Now, none of those things are in the most anti-business state possible (for instance, HiFi has exclusive control over the cryptocurrency), but it’s not a terribly business-friendly design either. Normally such designs come either from projects that are Open Source or Free Software from the start, or from projects that normal people aren’t expected to be interested in paying for anyway and that expect primarily corporate clients, like databases. But HiFi decided to try to target the average person at first, and that’s where things get weird.

The main issue for High Fidelity in its original incarnation is that there is no business plan in sight whatsoever. Accounts are free. Charging for hosting content won’t work because domains are self-hosted, and so are assets. And skimming off user-to-user transactions isn’t a viable plan because it requires a huge, thriving economy which has yet to materialize, and that the company doesn’t seem to be trying very hard to support.

Compare this with Second Life. I used to think that SL’s model of selling people virtual land was a weird idea that should be done away with, but now I think that it was actually a stroke of genius. Virtual land provides a huge incentive for people to reliably pay a fixed amount into Linden Lab’s coffers, and businesses just love that sort of periodic, predictable payment. And the way SL land works provides an incentive to buy more of it: right after you buy your first parcel you find out you have limited space and prim counts, and start thinking: “if only I had a bigger one…” Even SL’s deficiencies work in its favor here. Should one want better frame-rates or a bit more privacy, it’s possible to build in the sky. But most people want to keep something on the ground, so that of course that quickly eats into one’s prim limit, which adds yet another reason to give LL even more of your money. And there’s just that people can see how big your parcel is, so having a large one can certainly be a point of personal pride. SL’s model very nicely reproduces the impetus to keep up with the Joneses.

The benefits of this model don’t end there – Second Life land allocation corresponds directly to server usage, so as the user base grows or shrinks payments and the needed resources stay in sync with each other. And since the payments are periodic and automatic, Linden Lab also derives some benefit from people who pay for resources and then forget to use them.

Of course, Linden Lab also took care of ironing out any issues that got in the way of making money – such as stopping the fluctuations of their currency, and making it as convenient as possible to get money into and out of Second Life.

This is why despite being old, not making the news anymore, and slowly shrinking, SL is still chugging along and doesn’t seem to be in any kind of imminent danger.

So let’s review how High Fidelity could possibly make money from the way things are right now:

Accounts? No, accounts are free. And in the current state, nobody would pay for one.

Hosting? No, HiFi delegates that entirely to users. It’s the likes of Amazon and Digital Ocean that make the profit here.

Registrations? True, HiFi does charge $20 per year for place names. But I can’t imagine this paying for much more than HiFi’s coffee budget. There are way too few domains around for this to amount to anything.

Charging an amount for converting USD to and from HFC? They already do so, and this is often the suggested solution to HiFi’s woes, but it’s not viable. Let’s suppose HiFi taxed transactions at 20% (which would be very excessive and cause people to transact outside of HiFi). Let’s also suppose that an employee can be had for $50K/year (which would be unrealistically cheap in California in my understanding). Then it would take 416 people, using $50 worth of HFC each and every month to pay for that single person. Supposing HiFi could exist with just 20 employees (the current team page has 60 people), that would require it having 8,320 such users. People with such an intense desire for virtual goods are going to be very rare, meaning the number of active users in such a scenario would be far higher, probably at the very least in the hundreds of thousands. With HiFi currently being deserted and not growing any, this is a completely unrealistic expectation.

Then there’s HiFi’s attitude towards all of this. Even if HiFi suddenly became popular, for some strange reason the company seems intent on making it as hard as possible to give it any money. Buying HFC involves making an appointment (!), and even then you can’t pay for it the normal way: the company wants to be paid in Ethereum (!!). It boggles the mind that in 2019 a company working with the very latest VR technology is using a banking model out of the previous century, except for the cryptocurrency part, which while very modern isn’t particularly convenient. This of course puts a brake on what little economical activity there is in it, because even to get started one needs to find a cryptocurrency exchange, register, and prove your identity to it. I have paid another HiFi user and it was easier and faster to do it through their forgotten Second Life account. The fact that the state of HFC is so bad, that the best thing to do is to ignore it entirely, isn’t good.

So, that’s how things are. HiFi in its current incarnation doesn’t have a working business model, doesn’t seem to be making any real progress towards one, and is oddly apathetic about the one way it has of earning some cash. They are pivoting now and changing track to something else entirely, but it makes one wonder how they expected the old model to work out.

Thanks, Dale! Not too long ago, I had written about somebody saying that High Fidelity was making it difficult to give them money, but I couldn’t remember who first voiced that idea. It was you! It was such a succinct and memorable phrase that it stuck with me.