Gwyn Llewelyn has an interesting article, nearly hidden among the brilliant Uri vanity pieces, bukkake exposes and PN drama, positing that Linden Lab is really "barely profitable" but that it's going to have a hard time saying so unless it stays in a Ponzi-like growth scheme. Uri adds that its business model is merely to experiment and play with software while they make widgets they quietly patent such as to pwn the Metaverse's infrastructure.
I think she's seriously underestimating both their profit and their expenses (and losses), and also completely misses the boat about their true intentions, which are *not* to make a profit. And Uri's part-spoof article that the Lindens are in this for the patents and pwning the Metaverse is also seriously discounting the prevalance of their ideological motive versus their profit motive -- there's no point in pwning the Metaverse with widgets unless it's *for* something. That something is to push their Better World stuff.
First of all, just to do some back-of-the-envelope correctives to Gwyn's math, we have to figure that the Lindens have 12,000 servers (a few hundred more by now) which they collect $295 a month on tier. If you think that's an error, because they still have mainland tier coming in at only $195, and old islands at $195, you're missing the fact that since November, all new islands have indeed been sold for $295 monthly tier, and there are way more of those now than old-tier islands (and possibly even more than mainland, I don't have a way to check that). Furthermore, those few thousands of tiered mainland sims don't fetch only $195, the bulk discount rate for a whole-sim tier, but many smaller tiers that people pay of $25 US for a 4096 -- meaning more like $400 per sim tier. It's hard to calculate how many of those part-sim tiers are out there, so that's why I've simply decided to use the rule of thumb of 12,000 x $295 -- which is still probably an underestimate. $42.5 million per year in tier alone (yes, there is all that Governor Linden land, but no more new continents have it anymore, and in any event, it's an income potential that could be sold.)
Next, we have to figure what they sell those islands and mainland sims for. Let's figure that they can get $2000 per mainland sim -- except not any more, if you look at the auctions, and see they are now back to selling more like $1500 (which is why they raised the opening bid, they're not stupid, and it wasn't to cut the land barons a break, but to cushion their losses after the gambling ban). Still, let's give them $2000 x 100 x 12 or $2.4 million for mainland sims per year, because they sell a fair number of smaller parcels in dollar amounts that often fetch much higher amounts, and the prices could go up again if they print less of them. And let's figure they add 850 islands a month as they did in July (probably a low number) x $1695 x 12 -- my God, that's $17 million a year right there for the island sales!
So add $19.4 from land sales, $6 million for Supply Linden's printing and selling of at least $500,000 in Lindens a month to stabilize the money supply (erm the license-to-transact supply), and $42.4 million for island and mainland sim annualized monthly tier. That's $67.8 million in revenue, not $60 million as Gwyn estimates. Now for costs.
Here, I'm surprised that Gwyn, good socialist that she is, has forgotten...taxes! Let's start with payroll tax and insurance benefits, which can make a $35,000 a year employee cost something like $48,000 to hire. But let's figure all those liaisons are part-time contractors, who can be booked as 1099s without any payroll tax or benefits, precisely because they are contract employees. There are 200 Lindens, but how many work in the offices? 100? 75 only? I have no idea. And I have no idea whether programmers earn the $100,000 that Gwyn says they do, but hiring them and paying the mental and dental they absolutely must have at LL, chewing on their pencils and going mad, plus payroll tax, will be more like $121,000 for an employee of that type. I don't think there are even mailroom employees that are going to earn less than $30,000 per year in the socially-enlightened Lab.
There's only 200 Lindens I think, not 250. That's 4 million for 30 expensive employees at $125,000 for programmers and executives (and the range there might be big despite their egalitarianism) and perhaps 4 million for lesser employees in the $55,000 bracket and another 4 million on contracts not amounting to more than $35,000 per year -- that's $12 million just for payroll for 200 and I've probably seriously underestimated it. Calculating only $5000 per month, or $60,000 a year in salaries for all 200 or 250 Lindens may give you a serious underestimation due to payroll tax and benefits -- and let's not forget Workmen's Compensation insurance required by law. We do have *some* socialism in the U.S. So rather than $15 m for 250 Lindens, I'm saying $12 million for 200 Lindens.
I have no idea what the *corporate taxes* are for a company like Linden Lab, but profit or not, they still have to pay them, someone tell me what that figure could look like in Silicon Valley?
The office rental (only $840,000 a month?!) is seriously underestimated as it also leaves out all kinds of concierge, cleaning lady, etc. services commonly tucked into office rentals, and it leaves out insurance that all companies really have to have in a place like San Francisco with its earthquakes. No, I'm thinking that figure, which also has to include things like leased or purchased Xerox machines, postage meters, etc. is more like $12 million a year.
I'm betting Gwyn undestimates the colocation rental fees, too, although I figure her estimates of the cost of the servers is in line with what the Lindens themselves claim ($1000 per server, and they need 3000 servers to run the 12,000 simulators, assuming 4 per server, even though these days, you see 2 per server, so I'm not certain about that), and her estimate of server purchase, plus rent the for the colo and bandwidth total is then just $1.7 millon per month. It's hard to believe that the central material asset of Linden Lab -- its servers, rental for colo space, and bandwidth -- is less than $2 million a month, but perhaps that's the case. That's then $20 million a year for the servers and storage using her figures.
Yikes, I'm up to $44 million for the cash burn each month for this joint, and I'm not even done yet -- $23.8 still to account for...but watch how it evaporates on categories Gwyn didn't include:
Because she's forgotten *the travel budget, recruitment of new employees, exhibition, and conference costs*. My God, for people hawking a platform that's supposed to cut those costs for *other companies*, these folks burn through travel budgets like Sherman through Georgia. Hotel costs are enormous for the kinds of places these Lindens travel -- New York, Washington, Boston, London, Amsterdam, Singapore, doing demos, participating in expensive conferences like Virtual Worlds 2007 where a $1000 conference fee is the norm and $350 a night would be the minimum of a hotel per day. Airfare would be in the thousands; I don't imagine they travel economy. I can't really quite put a figure on this but it's hard to go to Europe for a week for under $3000 even when you just take Polish airlines and eat at the local McDonald's. At any given moment, at least 2-3 of the main Lindens are in orbit. I'm going to take a wild-assed guess and put the travel budget at $2 million a year minimum.
And executive lunches and dinners which are probably expensed on the Lab dime. Local meal costs for executives who take others out to wine and dine -- that's easily half a million a year even if only a handful of execs are allowed to do that.
The other thing that these Lindens do is yak on the phone. They have Texas, Boston, London to talk to constantly just for their own operation. I think they probably have some integrated phone system and don't have to pay per call what we lesser mortals pay, but they sure don't do it all on free Skype. Phone bills are the real killer of any operation and very hard to tame no matter how much you police staff. Should I put in a $1 million for this, too, adding faxing and FEDEX costs?
Then there's the outsourcing costs -- billing, and now accounting. These service contracts might save money from hiring staff, but they aren't cheap. $3 million?
Legal and accounting fees. Getting an independently-audited financial statement -- a must for any corporation. That and other legal fees such in the Bragg case -- thousands and thousands of dollars a month. Let's put $2 million for this.
Other professional hired hands -- foreign-language service, developers such as the Wind Light people they bought out and put in the Boston office -- again, saving on those payrolled benefited staff, yet still, costs. I find it hard to estimate what these consultants cost, like the PR firm. I can't imagine they are bargain rates. Another $4 million?
Now comes miscellaneous. Office supplies copier toner and paper -- and yes, they probably still have to print their stationery and write letters sometimes. Pizza deliveries. The water cooler contract. The impressed cash fund for petty cash. And there's always some wierd whim factors in every office -- the incredibly expensive limousine tab that somehow an executive got the office to pay for, that kind of thing. Let's add another $1.5 million for miscellaneous.
Ok, $9.8 million left -- but mind you, that's NOT reflecting what ever corporate taxes the Lindens have to pay for Linden Lab, even barely-profitable as it is, and probably other costs I haven't added or have underestimated, especially legal fees and outsourcing and even travel or server costs.
Having that much revenue over expenses might be called "profitable" -- but this income isn't enough to pay back the venture capitalists, who are in to Linden Lab for way more than $10 million -- it's more like $50 million, isn't it? I'm too lazy to go back and study all the press releases. Indeed, a company cannot rightly be said to be profitable until it returns the investment of the original angels.
And that's why we have to focus on what the Lindens *real* plan is, which is to make a non-profit corporation that sustains its own costs, and provides a model not for business, but ideological control.
Furthermore, Gwyn, like many people, leave out their greatest cost savings and "human capital" asset -- volunteer labor. There are 1,500 mentors alone. Thousands of volunteers. Hundreds of bug testers. And then all of us -- the half million or so load testers who regularly log on. Incalcuable savings in labour costs. Incalcuable benefits in evanglizing capacity, as all these people are motivated and loyal and work long hours for nothing.
My conviction is that Linden Lab, something like Mozilla rather than Google, is in the Better World business, not business business. People like Pierre Omidyar or Philip Rosedale, who are already as rich as God, don't need to make that much money and don't care if they are looking at a $5 or $6 million a month cash burn machine with a huge propensity for liability to litigation. It's not that they're going to put in their own money -- that's not likely. But they know that they have sure-fire recipes for taking people's desire to socialize, buy, sell, have sex, and be entertained and convert it into things like E-bay or RealAudio or for that matter Lotus 1-2-3 that can make lots of money for them, be sold, and free them up to do what might be called philanthropic pursuits, but is really something much more widespread. If it goes sour and the Gambling Commission of the State of California shuts them down, they can re-open merely as an education or business meeting grid, having shaken loose all the load-testers who helped them make the software but then...*got in the way* with the sex and clubs.
They want to convert hearts and minds. Do you convert them with Mozilla, which pretty much everybody likes and downloads without too much criticism, or with Google, which makes money, everybody is forced to use, but increasingly resents? Of course they'd rather be in the business of developing not only software, but a way of life -- the Tao of Linden, the Love Machine, the JIRA, the edu-sims, the creepy sycophantic volunteers system -- these are as important to them to sell as mind-memes as sims are for people's cyber nests; indeed, their genius is merely figuring out how to get the latter to keep funding the development of the former, which is all they need to do -- break even, or make even a little less, which can be made up with foundation and government grants.
When the Lindens IPO and/or open source, they're likely to have already prepared for themselves a 501-c-3 type of not-for-profit entity that will enable them to take the sales proceeds and go on doing all the thinking and coding and influencing they like, and promoting various showcase projects in the third world. They can set themselves up to be the ICANN of the Metaverse and work on standards and cross-platform protocols and all kinds of stuff. They may go on providing services, and be the sort of Associated Press of worlds (the AP isn't a profit-making corporation, but a not-for-profit service that all newspapers subscribe to -- it's a cooperative that makes it possible for local newspapers not to maintain foreign or capital news bureaus, but use the news feed from this organization that does -- AP isn't an independent media corporation itself making a profit from its fees for the use of its stories and pictures. Becoming the AP-like news/views/ideology cooperative of the Metaverse providing hook-up or sim prototyping services is an extremely attractive role for Linden Lab.
You never seen Lindens use the word "Metaverse". They never talk about the "Metaverse". It's not in their vocabulary, if you study their words carefully. This may be due to them planning to *becoming* the Metaverse and making sure it then becomes called Lindenworld or Lindenverse, or they may have some other term of art they'd like to use. By the time something called "the Metaverse" is a household world with every home having a $37/month subscription to it like cable, the Lindens will be in every warp and woof, having influenced every aspect of it -- though of course in fierce competition with Sony, Blizzard, etc.
If Second Life isn't mass media, and you can only get 40 people on a mainland sim or 100 on an island, what on earth is the possibility for them influencing people, you ask? If they have 40,000 log ons or half a million real people showing up at most, how could they have any impact?!
Leave aside the idea that you don't need 8 or 10 or 20 million people for influence, the way World of Warcraft influences; you only need about 1 million really smart urban professionals who run old media, corporations, and parliaments, and you're done.
Their franchising concept isn't based on old mass media with its TV sets. It's more like an even older method of tent revivals, preachers -- evangelists -- but on high octane that memes and spreads very virally through social media. Like Amway or Tupperware or men's Bible study or Oprah Book Clubs. The Lindens know that the most intensive experiences people have are in their living rooms with 12 people at most, or in small seminars and local church meetings or clubs. They aren't sitting in massive soccer stadiums. The things that change people's minds, or help them make income, or help them adapt to the harsh changes of the modern world happen in their living rooms or church basements or barber shops, where there are no masses. Oh, to be sure, there might be a TV on in the corner that represents the old mass media, with its Oprahs. But the catalyst that grabs hearts and minds isn't on the blue screen, that makes people not just watch about Oprah's book but buy the book and make their own book club is in the room itself, between people, people who evangelize, and people who are converted. The altar call doesn't have to take place in a physical living room; a simulated one online in your house or club or seminar in SL is enough. For that 40 people is even too many, it reduces the time for speech -- and the ability to hear and be converted.
When you run something like the Catholic Church, you might need the central iconic figure of Jesus, the leader, and the Holy Spirit for mass conversion gel, but you also really need the 12 apostles groomed in the inner circle then going out and preaching to all mankind. Each-one-teach-one. Most of the modern technological evangelizing isn't done on TV or in soccer stadiums, it's done in small groups of people or conferences with no more than 200 at them. All of this will be in place, working really well, and accessible to any world capital really a lot sooner than people who kvetch about their lost inventory are willing to admit.
The Lindens and their backers believe that their ideals for a Better World involve cooperatives and not blunt profit-making businesses; not individual entrepreneurial spirit -- even their own, as that's usually in a small collaborative group. Their vision involves collectivism, suppression of the individual's interests for the collective's interest, education in a certain set of politically-correct subjects championing the technological approach and code-as-law, and lite environmentalism (burning electricity is ok), oh! -- and also destructive Art (Burning Man).
These goals don't require the making of widgets to make money or pwn the whole Metaverse, as Uri is assuming, but require making widgets to make evangelism of ideas easier. Video. Voice. Open-sourcing. (which isn't open or democratic, but is a set of collaborative, interlocking elite coding communities). Making the world as compelling and as immersive as they can to compete with TV (Wind Light, flexiprims, sculpties).
The Lindens don't advertise or do much press work so much as counterpropaganda work (pushing a series of stories on religious uses of SL to counter the bad press about "ageplay"; pushing stories about education to counter the gambling press, etc.). They don't have to be on TV; they *are* TV for the next generation.
If our own beloved Lindens don't have these deeply-thought-out plans for world dominion, and are only bumbling along with a portion of them, it doesn't matter; if their own VCs or board members aren't available for the job, someone who does have those plans will be along shortly to work with them or buy them out.
Transforming and evolving human beings is serious business. To wire up everybody not only cerebrally but even physically is a big job -- and a job that has to have an ideology to go with it or people will resist. Compelling immersive interactive worlds, and then teledildonics is a way to get them to avidly seek being immoblilized by a computer rather than to fear it.
Is this evil?
And BTW, LL doesn't need to grow SL constantly; they only need to grow it fast and get it IPO'd or sold within a year to convert more fully to their non-profit activity.
Posted by: Prokofy Neva | 08/17/2007 at 09:59 PM
You forgot to add what the office spends on the overnight hookers and blow too, thats easily another million a year.
Thats the only reason the grid monkies can work hours and hours at night! :)
Posted by: Brennan Planer | 08/17/2007 at 11:26 PM
Er, anyways being more serious now, Robin Harper did one day a couple of months ago that Linden Labs was just starting to make a profit and paid off previous initial investors.
Posted by: Brennan Planer | 08/17/2007 at 11:36 PM
The real social task here is how we, the residents, with our $40 million plus contribution to the revenue stream, can get more stake in how the company is run and how the ideology is shaped.
Posted by: Prokofy Neva | 08/17/2007 at 11:55 PM
What does the "Harpies" picture have to do with the topic of this article except that Gwyn's back is showing in the picture? Actually, WHAT IS the topic of this article?
Posted by: Lem Skall | 08/18/2007 at 01:13 AM
Brennan, I'm not sure that she said they paid off investors. That really doesn't seem likely.
This is a picture I have dubbed "Sim Harpies" because it shows Gwyn and Extropia, who I think of as the harpies of the Thinkers, trying to extract intellectual conformity of all participants -- both of them usually run the sessions. I came there to challenge some of their "singularity" nonesense one day.
So this picture served the purpose of both showing Gwyn, even with her back turned, and me, but more emblematically, it shows how evangelizing in small groups is done on sims with only 12-15 people much of the time -- Thinkers is a good example of that sort of phenom I write about in the article.
Posted by: Prokofy Neva | 08/18/2007 at 01:26 AM
I am a member of the Thinkers group and for the benefit of those who never attended any of our discussions I will just say that they are some of the most intelligent, intense (and fun) debates in SL and that I have met many interesting people there.
But what do I know, I was probably brainwashed by the Harpies.
Posted by: Lem Skall | 08/18/2007 at 02:04 AM
You were. I've been to numerous meetings, too. I stopped going, because they became completely ideologically left and even kookie with Extropia running them and peddling the singularity stuff. Of course they're fun for Lem Skall because they are all singing from the same hymn sheet as he does. The minute anyone like me comes and tries to debate them seriously, they become all upset.
More debated is needed, as they have undue influence. Gwyn's favourite method of debate these days is to say "I agree with you" when of course she doesn't.
Posted by: Prokofy Neva | 08/18/2007 at 03:36 AM
"...trying to extract intellectual conformity of all participants..."
You must be bullshitting me, right? I hardly ever agree (ask Lem) and yet I was not asked, coerced, forced or bribed to be conformative at all.
I wasn't there when you were, but I guess it was not your 'non-conformity' which upset them but your boorish manners.
Posted by: Laetizia Coronet | 08/18/2007 at 06:59 AM
Um, you're already unconsciously in a total strait-jacket already agreeing and conforming with them, so you don't feel forced ROFL. That's the problem.
Posted by: Prokofy Neva | 08/18/2007 at 07:57 AM
I agree with you :)
Actually, the Thinkers group is not a good place for brainwashing, nobody ever agreed on anything (and that's the whole point of those meetings ;) ), and the "kookie" and "wacko" opinions are part of the package. It's actually mostly arguing for argument's sake and not much else really. I mean, even Lindens like Soft got bored after two or three sessions :)
In any case, I *do* agree with you that I have forgotten a lot of costs on my own calculations, and your idea that LL wants to become a non-profit in a short timeframe (1-2 years), ie. a "Metaverse Foundation", and outsource the running costs of the grid to someone else, makes a LOT of sense, and would be pretty much consistent with their strange mission listed on the lindenlab.com site, which is not unlike Omidyar's own (one of the largest investors in LL). So am I not allowed to agree that I also believe that LL is taking that "easy way out"? :)
Posted by: Gwyneth Llewelyn | 08/18/2007 at 10:01 AM
It's too bad that a side discussion began on a mere picture to illustrates the article, when this isn't an article about the Thinkers (that will come another day on a post I'm planning called "The Geek Religions" lol).
Gwyn, I wonder if you take into account now some of the expense categories you had left out, whether you still believe LL is profitable.
The Thinkers are a good place for the mind-memers to meme and find each other, seen it happen many times.
Posted by: Prokofy Neva | 08/18/2007 at 10:19 AM
"The minute anyone like me comes and tries to debate them seriously, they become all upset."
Debate seriously, my foot. With you, it's not a debate. It's a fight to the death and those who oppose you are evil and enemies of the world. There is no dialogue with you, you never listen to anyone who disagrees with you, you only try to crush them. And when people get upset because of your "boorish manners", that is also their fault.
Posted by: Lem Skall | 08/18/2007 at 03:20 PM
Prokofy pointed me at this article via private IM. I read most of it.
A general rule of thumb about corporate culture is that an organization's ideals and values are profoundly influenced by those of its leadership. So, a corporation with an honest, egalitarian CEO with make-the-world-better ideals will find that those values trickle down into the ranks, and the company will attract compatible employees, partners, and investors. I believe this rule holds true for Linden Lab (LL).
LL is a for-profit company; I do not foresee it ever becoming a non-profit. The owners of a company ultimately have a lot of say about such high level business decisions through the board of directors (BOD). The venture capitalists (VC's) who have invested in LL are considered partial owners of the company and hence hold or influence positions within LL's BOD. All VC firms are for-profit, however some influence their investment decisions with ideals about making the world a better place. I suspect that LL has VC's that sprinkle the spectrum between being ALL about profit and ALL about making the world better.
Collaborative virtual worlds hold great promise to make the world a better place. LL has employees who are interested in using SL to make the world better through education, communication, and economics, however on the issue of free/open-source software (FOSS) I think the better world aspect is of secondary concern the company. That is, across the company individual's approval of FOSS in principle is all over the map, however when an entire company bets its business on a FOSS strategy the skeptics within cannot be convinced by ideals -- they must be convinced by a promise of direct benefit to the company, such as profit. I think that LL's current (and hinted at) FOSS strategy is ultimately supported by a belief that it is good for the company -- better-world side effects are just a rare case of true synergy (for lack of a better term).
Posted by: Andrew Linden | 08/18/2007 at 04:02 PM
Thanks for that intersting comment, Andrew.
So, does the "egalitarian" culture mean that you all have equal salaries? Or more equal than most companies? Less disparity, at any rate?
Is Linden Lab profitable?
Do these costs and expenses that Gwyn has outlined, and I've written various correctives for, seem at all relevant to the actual cost of LL? I suppose you can't answer that if it is proprietary information while you're a private companty, but I thought I'd ask.
I think it would be beneficial for you to read (skim) Erik Bethke's attempts to make a more enlightened EULA for Go-Pets (see my link to the right about "the game god makes a bill of rights).
He claims that corporations simply can't do anything *but* be concerned about their bottom line and there is no room for idealism.
I would tend to agree. I would think that if you need to do do-good stuff, form a non-profit.
That's why I think the model for LL could be a not-for-profit service business like the Associated Press. It takes in revenue to cover expenses, but doesn't seek profits like other media companies, and that gives it a trusted reputation. Ultimately, Second Life is a form of media, and it is a form of media upon which many others will depend if its aspirations for being the platform for the Metaverse are based in reality.
The only way that I can envision open-sourcing as being a benefit to a for-profit organization is if in fact what I have said about OS all along is true: that it is really a tightly-knit undemocratic cabal of elite coders postulating an accessible and collaborative structure to be the same thing as "openness". So as long as you pick the right friends in the coding group, you'll be fine, and won't be giving away the store.
What Gwyn is saying is that the growth of the company is so dependent on the heavy cost of servers and maintenance and the land-revenue model inworld, that it is not sustainable as a company. And that's why I'm going further and saying it needs to become a non-profit service corporation like the AP.
Posted by: Prokofy Neva | 08/18/2007 at 04:50 PM
By "egalitarian" I meant "shallow hierarchy" as well as "more equal salaries". Employees at LL tend to have more responsibility for prioritizing their own day to day activities. There are fewer bosses and hence fewer decisions are passed down from on high. By empowering employees to take more responsibility for steering their little corner of the company it shifts the valuation of work away from the more familiar "executives decide workers do" model, hence salaries more correctly reflect the value that each employee contributes to the company.
In practice each employee is not a lone wolf doing whatever they want. Employees usually fit into some group, such as engineering, ops, QA, web, support. Some groups work in smaller teams on relatively short lived projects -- when the projects are done they disband and collect around new projects. In such cases many of the day-to-day or week-to-week prioritizing is worked out with the team, and many projects have a leader or two that help manage resources and provide input on prioritizations.
Non project oriented groups, such as support or human resources have more stable teams and division of duties but still tend to govern their own daily decisions and resource management than a traditional company.
It isn't all chaos. There is value in coordinating multiple groups or teams, and some people own those jobs -- some of them might be called project managers or product managers. Employees typically do not prioritize their list of things to do in a vacuum -- they're working with others. Everybody has some responsibilities and if they are deciding to neglect those duties then they'll get feedback from someone, because everybody is supposed to be transparent about what they are working on.
"Transparent" basically means publishing somewhere what they intend to get done this week, and what they got done last week -- accomplishments and objectives (A&O's). They can publish A&O's via email, blogs, or other means, but they strongly encouraged to do it, and the records are available to everybody else. So last week's hire is able to view what the CEO has put on this week's A&O's and visa versa.
Another "egalitarian" practice is to distribute some "power of the paycheck" to everybody in the company, rather than just the executives and middle managers. Every quarter LL allocates a certain amount of money to pay as "bonus" above salaries. Each employee is given some number of "points", half of which is pure bonus on their own paycheck and the other half is to distribute to any and all others in the company, as they see fit. You might expect this system to be gamed, however most people enjoy the opportunity to reward their colleagues who have been most helpful or productive, the final results are published in an anonymized format (part of that "transparency" theme), and there is some oversight of the details by a select few, so obvious large tit-for-tat exchanges would show up.
Rumor has it that LL is profitable.
No comment on the cost of business estimates.
Speculating into the distant future, when there are multiple interconnected but independent virtual worlds... LL might spin off a non-profit association to govern some chunk of FOSS code (like Mozilla from Netscape), or might join the Association of Metaverse Companies, however I doubt it would itself become a non-profit.
Posted by: Andrew Linden | 08/18/2007 at 06:42 PM
Hi Andrew :) Cool that you bothered to reply to the provoking article of Prokofy's.
For the sake of the argument, I always believed the "rumour" that LL *is*, in fact, profitable. Sadly I'm far too organised to keep track on the several posts I did in the past with different calculations on LL's possible profitability (many were buried in the now defunct LL forums); I managed to find a very old one here: http://www.mmorpg.com/discussion2.cfm/post/502041 (post #16) which is basically along the same lines. Costs were way underestimated, specially office space costs :(
The whole issue here is that there is a world of difference between being "very profitable" vs. being "barely profitable". The problem I see on "barely profitable companies" is how easy they can adapt to a contracting market. In SL's case, what would happen if, say, half the users went away, or half the estate owners would leave, or half the mainland would be laid waste? Under a "safe" model, this would imply half the costs for half the revenue, and the company would obviously survive.
The dependency on a *continued growth* to be barely profitable, is, however, a very high risk operation — specially if the profits are not *huge*. The problem in this case is not that SL does not grow, but that it grows much slowly — and that there is a *new* ratio of growth (ie. say, half the current one), slashing a big chunk of every month's projected revenue. Under this model, LL cannot hold for long *unless* they're able to capitalise on further venture capital and/or have enough reserves to weather the "bad days" until SL grows again at its usual rate. Here, I believe, lies the trick — having a magical "Plan B" up your sleeve that allows you to increase growth again to the required ratio to remain profitable. Ideally a "Plan C" should be on stand-by to simply change the revenue model entirely and thus elude a market growth that grows depending on the users' psychological and irrational perception of SL's success.
What could this "Plan B" be? Well, you had one — introducing voice in SL. All marketing studies show that the introduction of voice in MMORPGs have dramatically increased the ratio of new accounts (although never the ratio of *paying* accounts, though). Sadly, you used that card in your deck at the same time your removed the casinos — and the introduction of voice in SL was not featured on any recent press release and not picked by the media. This mostly means that its effect on increasing growth was mostly gone. I don't know if you have another "Plan B" ready.
What would a "Plan C" look like? The answer seems pretty obvious: get more avatars per CPU, or, put into other words, get more sims per server. Since there is a cost of replacing all existing hardware, the alternative is — better algorithms on the server software. In plain "residentese" this means: Havok 4.5, Mono, having textures be loaded outside your grid, an enhanced communication protocol, and all sorts of tricks that allow you to run, say, 16 or even 64 sims on a single quad-CPU server. Just quadrupling the current density would be more than adequate to deal with a SL with four times the number of users — the only cost that would go up would be bandwidth costs, but you'd save literally millions by not having to buy 300 physical servers every month — for about 2 years or so. And in two years — quadruple the density again, and live on the same hardware for another two years. By then you'd reach the mystical value of 160 million users supported on the *current* hardware, and I claim that once you've come to that point, there is nothing that can shake SL's continued sustainability :)
Prokofy, I don't agree that all corporate ventures have necessarily to be *hugely profitable* and have to take the approach of "profit over corporate culture". This is even more true on a privately held company. LL does NOT need to be as profitable, as, say, Electronic Arts or Blizzard; they just have to be profitable *enough* to give their business angels and venture capitalists a ROI in a reasonable amount of time — and if Amazon managed that after a decade, I'm sure that Jeff will agree that the same could be said about LL as well. After all, LL is one of the lowest-funded projects on the Internet ever to reach the current level of impact in the media. There hardly seems to be any reason not to keep a "low profit" company going on for ever and ever, instead of making it "non-profit" as you imply. In fact, although I find the concept of Linden Lab turning into the Metaverse Foundation unlikely, what I'm almost sure about (95% confidence level!) is that once someone sets up the Metaverse Foundation, LL will be on its board :)
Posted by: Gwyneth Llewelyn | 08/19/2007 at 04:07 PM
Hmpf, where I typed "I'm far too organised" please correct and read "I'm far too disorganised"...
Posted by: Gwyneth Llewelyn | 08/19/2007 at 04:10 PM
Profitable as a TRUE|FALSE value is not the whole picture, especially for a growing company. If there is a huge market potential then it usually makes sense for the company to spend any profit on expansion, eliminating the aforementioned profit. So a company in a market that requires strong growth typically won't post a big profit, if any.
A more vague but perhaps more meaningful question is: Is LL doing well? I'd say "Yes", but it is also faces significant challenges, all the stuff you've probably heard already: scale the service, make it more robust, scale the company without losing the culture.
Voice was not a plan B -- there is no plan B or C! Instead, plan A changes as necessary. As I mentioned, most of the development teams work on short-lived projects. By "project" I mean some deliverable piece of work that can called "finished". A project lasts from about a week to a month, few go more than a few months. Long-term projects are usually broken down into smaller pieces. So, if LL needed to make a drastic shift in strategy it could do so on the order of a week or a month -- the same timescale that projects end. As projects finish the members of their teams would migrate to new teams focused on new project that were part of the new hypothetical plan.
Voice was not plan B -- voice was a feature project. Surprisingly enough, the voice project took very little of our development resources. On our end it had a vice president as the project leader, a contractor as its lead developer, an internal developer off and on, later a program manager and one or two internal developers to wrap things up and fix various UI bugs. It took several months, but there wasn't an army of developers working on it. Compare that to the overhaul of the message system which has had five or six developers on the team, and one or two smaller teams orbiting it on various tangential pieces.
There are two big current projects I know of that have taken several months as monolithic pieces of work (such as Windlight) but I'm not including the overhaul of the message system in that category, despite the fact that it has taken several months and still isn't done yet. The message system changes have already been partially deployed in several stages, and more stages are on their way as distinct projects.
More avatars per CPU isn't plan C -- it is a project. Internally we call it "Object Transport", which reflects the fact that the main bottle neck to more avatars per CPU has to do with the streaming of the data of what content is visible. Object Transport will start sometime after Windlight is done. Yes, any savings in hardware costs would be nice for the bottom line, but we're not anticipating any sudden stops in purchasing of servers. Expect Object Transport to be rolled out incrementally.
Now, to address the hypothetical scenario where SL suddenly lost half of its paying customers, or more likely, suppose it just stopped growing and reached some static size. I doubt this would change our plans much, since I think we've already identified the next year or two's worth of work it will take to keep scaling the system. Any slowdown in SL's growth would not be caused by a lack in the system's features, but in a lack of stability and quality service. Solving these problems is where most of our energies are already focusing. The above scenario would probably see LL stop hiring in an attempt to hover somewhere around zero burn on the corporate money in the bank.
Way back in late 2003 LL had some layoffs when a VC we were courting suddenly got cold feet and bailed at the last minute. At the time we were ramping up on hiring in anticipation of more money in the bank. Our burn rate would have given us only about three months, but with the layoffs we had more like six. We kept as much of the developer team as we could and held a series of internal design meetings (that included EVERYBODY in the company) where we came up with the land-sale-lease model that replaced the stipend-tax system. So an absolute worse-case scenario where SL suffered some mass exodus would probably mean layoffs at LL and some re-organization of SL service to deal with the problem.
Posted by: Andrew Linden | 08/19/2007 at 08:11 PM
Andrew,
I'm not certain that the culture is worth preserving, it may be a hindrance. I'm working now on a long exigesis of the Tao of Linden. For example, something like losing 5800 premium accounts simply because they can't pay the bills due to billing mess-ups is a big loss, and avoidable, and I wonder if that's an example of someone "failing fast and big" that works for the culture, but not the platform.
And you *are* aware, I imagine, that you have already overbooked all sims like an airlines. If all the people who purchased land on a sim were to try to come home, there may well be more than 40 people. And in fact, on any sim with a club that fills that little parcel with 40 routinely, they've exercised a veto on everybody else's purchase. I can't help thinking that any more stacking of sims even with a faster server will be disastrous. It already *is* a disaster for many sims with no ready remedy, i.e. charging for the greater use of CPU on a sim for those that routinely hog it on one parcel.
Constantly expanding due to customer growth seems to leave any company terribly exposed. Those of us with microcosms of LL's own land model can see that easily, as the temptation to keep adding sims is a terrible set-up; all it takes is a few bad days and the customer loss is huge, and the land unrented. You can't respond and reduce fast enough given the monthly tier cost regime.
Posted by: Prokofy Neva | 08/19/2007 at 08:43 PM
You completely forgot classifieds. They make up _a lot_ of cash which makes LL easily a profitable company.
Posted by: Anonymous | 08/20/2007 at 11:11 AM
You need an SL name to post here. Classifieds are sinks -- they are burned Lindens like group fees and texture uploads. They aren't a source of revenue for LL. You can see them reflected on the sinks category here:
http://secondlife.com/whatis/economy_stats.php
Posted by: Prokofy Neva | 08/20/2007 at 03:38 PM
That's bullshit. We pay for classifieds, no matter the currency. And LL makes a buck with it. If those Lindens weren't "burned" they'd have to buy them back in another way, which saves them USD which means it's basically income for LL.
Posted by: Anonymous | 08/21/2007 at 09:06 AM
You need a first and last SL name to post.
And the concept of sinks and sources is not "bullshit"; it's economics. Go back to college.
LL doesn't make any buck from them. And it isn't LL that "buys back" Lindens. Other residents do on the LindEx. There's no income for them in classifieds.
Posted by: Prokofy Neva | 08/21/2007 at 05:34 PM
Very valuable comments Andrew, and very insightful.
I've worked in places that operated very similarly with regard to bonusing, and especially with respect to 'publish what you did last week, publish what you will do next week'. I used to manage teams exactly that same way myself (well, they had to say it in a meeting not publish it).
The effect is powerful - people take pride in backing up their statements, are embarrassed when they fall short, and often push themselves harder than a manager would (though that isn't ideal long term).
I think the 'Tao' is a bit deceptive-sounding in light of the corporate behaviour you've described, because it sounds a lot more 'sunshine and daisies' than the reality of the situation probably is.
I've seen many people burn out of positions, often software dev, and find new life and new successes doing other things within the same company. Rather than simply getting fired or quitting under the narrowly defined 'software guy' title, for instance.
With the great side benefit that over time, sometimes the left hand may actually know what the right hand does, by virtue of having done that job in the past.
Posted by: Desmond Shang | 08/22/2007 at 03:13 PM