A Nation With $36 Million Annual GNP

In public group chat today in Metanomics, a group of 779 people interested in attending the Metanomics series organized by Prof. Robert Bloomfield of Cornell University, Zee Linden (John Zdanowski, CFO of Linden Lab in real life), made a number of quite interesting statements that haven't been publicized before:

o In response to several queries from concerned residents fearful of media and blog rumours that LL is going under or going to IPO or merge, he said Linden Lab had a free cash flow of $6 million in Q1

[9:14] Zee Linden: We had over $6m of free cash flow in the first quarter...I don't think we're going anywhere...

The back-of-the-envelope figuring for LL's revenue always starts from the premise that it has $60 million in income from tier alone, figuring that 16,000 islands currently (private islands make up more than 75 percent of the grid) at $295 a month in tier equals $60 million. That's not even counting then the figures for sales at $1695 for islands, and as much as $3500 or $4000 for mainland sims with $195 monthly tier. LL also makes money from special licensing fees (the Sheep, in order to stage the CSI event; and IBM to run SL behind a firewall).

I asked the group to tell me if a company that has 300 employees (think of the payroll and benefits cash burn there) and server farm fees and such could be considered in the black with $6 million cash flow free and clear each month, i.e. not going to costs. Several said "yes" -- but I'd like to hear it from some real people now too : ) Insurance, rent, fraud, legal fees, overseas office start-ups, travel, PR firm -- they take their toll on the bottom line too : )

o But here's what *else* Zee said that is even more intriguing -- LL pays out $9 million a month in PayPal fees to customers cashing out. That would be $36 million total in payouts to customers.

[9:25] Zee Linden: in Q1 we sent over $9m out to customers through paypal.

Of course, they also cut checks, and there may be some other European services that aren't PayPal they pay out to, so of course that figure of $36 million in payouts isn't quite the figure I asked for in my blog the other day: the total cashout remittance to real-life payment lol.

However, $36 million, or even $50 million or whatever it is -- it's big, but, not THAT big.

Because, we can't quite understand how tier payments factor in.

Some people take a PayPal cashout at the beginning of the month if they have customers (I do that) because then it can sit in PayPal money market. But...by the end of the month, they may be running up a bill again with Lindens if they buy more land and tier up, or buy Lindens if they seem to be cheaply available, or whatever. So it's not the case that the $9 million cashed out represents what is free and clear cash flow for residents -- some of it comes back in tier and currency purchase even later that month; annualized, the percentage may be greater.

But let's look at this number for a moment as if it had no buybacks and was free and clear.

It's basically a nation of 358,000 people (because these are the only number of people who spend more than $L inworld, so therefore are in the economy).

That means the third-world country-in-transition of Second Life has a per-capita income of US $100 per person. By contrast, oh, take the poor people of Turkmenistan, coming out of poverty and dictatorship for decades -- they make US $140 per month, soaking wet, with basically nothing but sand, bread, and tapped government gas to resell. African countries have far less -- but I don't think there's a country that survives on per capita of only $US 100 per year although some of the LDC's might fit that category.

However...if you imagine that this $100 a year income is an extra on top of real-life salaries, it's quite something to be introducing into various countries in the world economy. $100 is a phone bill for some people; it's a whole month's rent for other people, depending on where they live. It's real money.

The income distribution is of course very skewed, and doesn't circulate out like that lol. So some people make $1000 and some make $100,000, and we can't even get that information because the Lindens won't include the land business.

And how much does that make up of Second Life's economy? Well, you remember the other day, I came up with the figure of $29,000 a month only from the Positive Linden Flow businesses -- and that's taking the high end of their spectrum. $87000 a quarter is very different than $9 million a quarter, wouldn't you say?

Of course, $87000 is terribly low, given that the Lindens created a hippie category of $5000 and above instead of $100,000 and above to actually reflect Dreamland, Azure, Otherland, and other big rental companies.

So what makes up the different between $29,000 a month and $3 million a month? That's not included in the Lindens statistics about inworld business?

Land.

There isn't anything else (remember, these PayPal or check cashouts LL makes to residents is not what it is paying to them in licensing fees or any kind of other FIC type payouts (consulting) because those won't show up in this Linden-dollar-based system and study of the economy.

Well, the first thought that pops into my head about this -- correct me if I'm wrong -- is that if the Lindens were faced with an amazing resident engine that was generating $36 million a year, mainly in land sales, enriching land barons, and their bottom line was...only $24 million (Lindens, taken as a company, not making as much money as their customers, taken as an aggregate), the first thing they would have to do is...

Slash land prices so that they can have a higher volume of sales, to more end users, to get more $195 tier themselves, rather than letting land barons collect it on behalf of renting customers.

Since the inworld economy generates some 66 percent more revenue than the Lindens, then, oh, a figure of 60 percent slash in land prices might be helpful to "balance this out".

Of course, the Lindens could take a longer view, and say, hey, isn't that great that our customers do better than we, as well they should, as there are 320,000 more of them than us lol. But, we do have a conflict of interest here, as long as land remains the coin of the realm.

Comments

[none]

Good analysis :)

Usually, free cash flow represents what is available for a company to actually invest, after everything is paid — so the US$ 6mio per quarter is what LL has sitting in cash on the bank after not only paying all their running costs (and that would certainly include "insurance, rent, fraud, legal fees, overseas office start-ups, travel, PR firm" too) and employee costs, but even provisioning for future upgrades, acquisition of infrastructure for further growth, etc.

So I would say it's not that bad at all (and that the rough figure US $60 million/year is grossly underestimated, as you also agreed it is). Of course, without looking at LL's book-keeping, it's hard to judge if exactly they're doing so well :)

For instance, was that FCF just for Q1 2008? Jeska said that LL has been "in the black" since March 2007. Did they generate that amount of FCF for a whole year? Is it growing? Or was this just an isolated "spike" the past quarter, thanks to some licensing fees with IBM (or, as you claim, CSI:NY?)?

In any case, one of the main points of your article seems to be that as an average, residents are very, very poor — except for a very few who are very, very rich :)

The other point just confirms a prediction made in late 2006 by some Linden (I wish I could remember if it was Philip) that "in 2007, LL will not be the organisation making the most money from SL". We all thought they had Anshe and/or the Sheep in mind (or even RRR, MoU, etc.), but perhaps what they *did* have in mind were... the residents themselves.

If the conclusion you came was that the residents were making too much money and LL thought they had to cut down their revenues, well, I'd say that the numbers seem to indicate that, even if doesn't make any sense.

It would be as silly as Microsoft trying to undercut their resellers' margins by dropping prices, so that they (Microsoft) will always be the largest company making the most money out of selling Microsoft products. In reality, their resellers — which also offer add-valued services on top of Microsoft products — all put together and all their revenues combined, make far more than Microsoft.

No, I don't think that the numbers explain the reason why the new islands are getting a price cut :)

[Prokofy Neva]

I understand that free cash flow is what the Lindens have after expenses. That's why it's called, uh, free cash flow. Not rocket science.

The 60 million is only a baseline of island tier. It doesn't include the sorts of things we've calculated before:

o island sales
o mainland auctions
o currency sales and LindEx fees
o licensing
o merchandising
o consulting/fees
o interest

So adding that all up on the envelope, it could well be another $32-40 million, and that means they are something like a $100 million a year operation I guess.

So that's why I wrote this post here:
http://secondthoughts.typepad.com/second_thoughts/2007/08/linden-lab-is-a.html

I don't think you've been paying attention to all my blogs, or perhaps you've only read this one:

the point is, the Lindens do not like the land business. They don't like it as the engine of the economy as a whole; they don't like it as their own model for revenue.

They don't like it because it means more and more servers requiring more and more programmers and a grid that becomes harder and harder to maintain as their own centralized grid.

They desperately need a system that is decentralized, that is not run like the Soviet Union, from one Politburo.

But they need a way to make an Ottoman Empire or Holy Roman Empire to control culture and traditions for centuries to come. So they will find a way to break the back of their own model their own way that best suits them.

Their slashing of island prices this fast over night is a combination of insularity -- they are out of touch with what this really means for people; ideology -- they hate the land business; pragmatism -- they are competing with others; volume as a solution for sales -- they have lagging premium accounts and this method will boost them.

Their theory is that if they can destroy the land business, and make land cheaper, they will fete creativity instead of land, and that will force people to frog-march to the future of Creative Happiness, making happy little content on their sims to make people come and experience/look at/interact with it.

Happy little tree content would include education and various do-good stuff of the Glitteractica type.

[Prokofy Neva]

BTW, there isn't some speculation that the Sheep paid a licensing fee; this was reported. They did. The only thing not known is the price.

[Desmond Shang]

There seems to be a subtext here that I find very interesting... a sort of progression in the demographics; a change of habits.

We all know the exponential new user 'big boom' of winter 2006/2007 is over; people are coming in but not at rates like before.

However, their spending may be a different story, and worth watching.

Two forces at play here.

The first - the big spending spike by some of the new residents on arrival: Land! Avatar Stuff! Vices! Alts!

The second - steady state spending of oldbies. Land tier for the business, classifieds, the old family estate, investment in land or content creation.

Leading to a third: the general sense that 'spending inworld' is normal, natural, everybody-does-it.

Historically, not everyone was comfortable with spending money on the internet at first; then it became part of the culture. I think we are seeing that consumer culture really settle in now inworld.

* * * * *

I still think the real boom is yet to come. Like a broken record, I keep using this phrase: 87 million of the first 100 million haven't arrived yet.

I've gone out on a limb to predict this perhaps. But not much of a limb though, if you consider that Habbo Hotel has 80 million people online and a concurrency of 100,000. And these users are growing up and coming into their own.

Citation: http://www.gamasutra.com/php-bin/news_index.php?story=15397

- the demographics mentioned in this article are a goldmine of insight.

[JeanRicard Broek]

Thanks for the capture and posting of Lee Linden's comments, very interesting numbers to fiddle with.

Looking at your comments I thought about your analogy to a country. Mine would be more like a tourist town or country that depends on tourists for almost all GDP. There are the locals, the residents, landlords and the merchants. At peek resident population is vastly outnumbered by the tourists, sightseers and shoppers. Based on this analogy trying to figure out the per capita the population would not include the tourists, just the locals. I looked for another number to use for to approximate that population.

The best number I could find was the number of people making a positive cash flow to represent the residents, both rich and poor. (Estimated In World Business Owners Unique Users with Positive Monthly Linden™ Dollar Flow) since these people are not on vacationing, sightseeing, just spending or passing through. The average of that number has grown in the 1st Q to approximately 56,000. SL is quite some tourist destination, with more visitors them most RL countries ~LOL~ http://unwto.org/facts/eng/pdf/indicators/ITA_emerging04.pdf

I understand per capita would include others not just the business owners and wage earners but you would have to consider that more then one of those 56,000 accounts is an alt and add back in some prim babies and non working housewives and hobos but thankfully there are no children to count. (It is a shame Bloomfield has not published any data or analysis or cannot help here)

Using that number, 56,000 then as a guesstimate lets see.

This would make the per capita approx $640/Y just shy of India and on par with Pakistan according to CIA figures. Considering distribution and the long tail demonstrated by the numbers, It is easy to conclude some people are making a lot of real money in SL beyond the hundreds of Lindens.

[Prokofy Neva]

JeanRicard,

If you look at the footnotes on the PMFL businesses, the Lindens explain that these are unique avatars, where the alts have been taken out.

I said US $100 per capita, not Lindens.

And when people measure per capita income, they include those not generating income in the numbers. I'm taking the number of 358,000 as those spending more than $1 in world because I consider them "part of the economy."

There are 1.2 sign-ups, and they claim 1.2 million who visit. These might include people coming to visit a lecture or a corporate build because they were told to. I could reduce the per capita income by counting those people, but that would be like counting the number of people at the airport of a country in transit to other countries. I don't see any reason to count them.