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On December 2nd, 2019, commission rates on Marketplace sales will become 10% of the item price. This will be the first commission increase since the Marketplace debuted a decade ago. This new rate remains significantly lower than most digital content commissions across the industry. Apple and Google charge a 30% commission on sales in their app stores, as do many other popular virtual worlds, VR and gaming platforms, such as Oculus and Sinespace.
Many SL users have grumbled that the 10% figure (which will be double the previous 5%) does not accurately reflect the complete picture of how Linden Lab makes its money. Some have pointed out that comparing the 10% figure against the 30% commission charged by Apple and Google is misleading, given all the other transaction fees LL has implemented.
If I buy 2500L$, it cost me $9.73, and with transaction fee of US1.49 the final cost is US$11.22
If I sell an item on the MP for L$2500, I now get L$2250 for it. (10% LL commission as of Dec 2nd 2019)
When I sell the L$2250, I get US$8.13. (3.5% transaction fee to LL)
When I withdraw the balance to my bank, I get US$7.72 (5% Transaction fee to LL)
So if a SL member buys L$2500 and the merchant cashes it in, we are seeing a transformation of US$11.22 to US$7.72, and LL are effectively taking 31.2% for themselves.
LL say in their blog post: ”This new rate remains significantly lower than most digital content commissions across the industry. Apple and Google charge a 30% commission on sales in their app stores, as do many other popular virtual worlds, VR and gaming platforms, such as Oculus and Sinespace.”
They refer just to the 10% MP commission, but we see that LL is actually creaming off over 30% if you follow the money from start to finish.
10% MP commission is one thing, but then all the other charges just add up to something that is somewhat unfair.
I found this explanation very instructive, so I wanted to share it with you. If you want to read the entire thread on the forums, here it is. You might also find this conversational thread interesting.
So, what do you think? Is this a price gouge on the part of Linden Lab, or a necessary cost of doing business? Please feel free to leave a comment below, or even better, join us on the RyanSchultz.com Discord server and tell us what you think there! We’d love to have you.
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.
I still find it somewhat ironic that I have done a complete, 180-degree change of direction in this blog: going from swearing that I would never cover Second Life at all (because hundreds of other bloggers do it already, and do a much better job than I ever could), to actively carving out a niche for myself, blogging about the various steals, deals, and freebies in SL.
So, I guess you could call me a freebie expert, or a freebie fashionista if you prefer. And this December has been the usual bountiful bonanza of advent gifts and hunt prizes. But sometimes I stop and ask myself: this is steady rain of freebies actually hurting the Second Life economy, and the livelihoods of SL content creators? In other words, are people not making as much money as they could and should be because of the abundance of free and inexpensive items in-world and on the SL Marketplace?
I would argue that freebies, if handled properly by the store, can be an extremely effective way to promote a brand. For example, an attractive, well-made free item placed at The Free Dove (which usually includes a SLURL in the package) will often prompt my visit to the mainstore location to see what other products are for sale. In fact, I first learned about the store Alaskametro through their mini hunt at The Free Dove last summer (sadly, I have learned that The Free Dove has decided to stop having designer mini hunts as of January 2019). I had never heard of Alaskametro before, even though I had been an avid consumer in Second Life for over a decade at that point!
You could argue that the reason that powerhouse Second Life brands like Scandalize, Addams, and Blueberry became so well known is via freebies and inexpensive hunts, like the current reindeer hunt currently taking place at various stores on the Scandalize sim. (Technically, it’s not really a “hunt”; some store owners like Scandalize didn’t even bother to hide their reindeer.)
You pick up one colour of an item of clothing for only L$15, try it on, and like it so much that you land up going back to the store later to buy more colours, maybe even the whole fatpack! I’ve done it. You’ve probably done it too. Admit it.
Savvy marketers know that freebies and cheapies can effectively drive traffic to their stores, and increase overall sales. True, many of the people who pick up a free item won’t (or can’t afford to) buy a full-price item. But enough do so to make it worth the store owner’s time and trouble to create and promote freebies. Why else would a store like Alien Gizmo’s regularly offer free L$200 gift cards to their customers?
So, no. Freebies are not the reason for an economic downturn in the SL economy. If anything, freebies are helping content creators get the word out about their brands, and thereby earn more money.
In fact, I seem to remember a closed (i.e. not Hypergrid enabled) OpenSim-based virtual world (I believe it was Avination) which strongly discouraged vendors from offering freebies, thinking that the policy would lead to more people actually buying goods and leading to greater vendor profits. Well, I’m not sure if that was the main reason that Avination eventually closed (they had a couple of fraud scandals, and OpenSim grids tend to be rather precarious enterprises at the best of times), but I’m pretty certain that a ban on freebies didn’t help with user retention any.
My point here (and yes, in a very roundabout way, I am trying to make one!) is that freebies are a good thing. Freebies promote brands, encourage newbies to become full-fledged consumers, and lubricate the SL economy. So get out there and pick up some freebies today! Tell’em Ryan sent you 😉
Only 22.7% of the merchants said that the current month’s sales are better than the average of previous months. 39.1% say that sales were about the same, and 38.2% say sales are worse. It would sound as though the majority of stores are experiencing at least a mild downturn.
What was surprising to me was that 42.3% of vendors stated that Second Life was their full-time job and their main source of income, much higher than I expected! Only 29.7% said they considered their store to be more of a hobby.
When asked if they were planning to move to Sansar or other, newer virtual world platforms, most merchants said that they were staying put in Second Life. Only 1.8% of store owners surveyed agreed with the statement that “Sansar is a great next-generation platform for my virtual business, I started creating content for it already”. Another 9.1% said they were planning to move to other platforms, such as Sinespace, VRChat and High Fidelity. More than half (51.8%) stated that they’ll stay in SL “till the end of the world”.
So, it would appear that rumours circulating that SL vendors are having a rougher time of it than usual appear to have some basis in fact. Sales are down for many, if not most, merchants. Only about 20% of Second Life store owners report better sales than average.
Another thing I found particularly interesting was that the overwhelming majority of merchants have an in-world store location (only 7.3% of those surveyed relied exclusively on the SL Marketplace and/or shopping events).
