Tuesday, July 31, 2007

Why the economics of Second Life fail

Chris Anderson, editor of Wired and writer of the Long Tail wrote critically about Second Life and wondered if he was too critical. My reaction to it can be seen below. I have visited Second Life, and I like the creativity that is displayed in it. I just don't think it can compete well with a combination of Real Life and other internet applications (WWW, IM, Wiki etc.). The reason for this as outlined below is that it lacks the proper economic basis of actually improving upon existing technologies and applications.

Chris, I don't think your being too harsh. James Au in his 'seductive long tail argument' sums it up quite nicely, a comparison should be done on the basis of: "length of engagement in SL, versus other ad mediums; quality of engagement, in terms of brand immersion and recognition; quality of potential participant, considering Resident demographics as content creators, bloggers, early adopters, etc." and "All that to one side, it is still nevertheless true that SL developers have yet to create an unambiguously compelling and unique example of real world advertising that is massive or effective enough to convince honest skeptics. (As I believe Chris and Frank ultimately to be.)" James believes that your opinions should be debunked and that a compelling case would prove him right. I however believe that the fundamentals are stacked even higher against Second Life than your articles already show.

There are certain rules that govern why a new technology becomes popular or not. These rules are deeply rooted in economics. The main rule is:

- It makes some part of your life easier/better (Optimizing of utility functions).

It does this by:
  • Lowering transaction costs for performing a certain function (Looking up train timetables has a much lower transaction cost than looking it up in a timetable book or calling a number)
  • It grants you more control over your choices. Though you might spend an equal or higher amount of time and money doing what you were doing before, it allows to reach a more optimal solution than you could before the introduction of the technology. (Travel sites, housing sites etc all tend to swamp you with options, but many people like that compared to the old situation)
  • You receive a higher level of service compared to the old situation.
  • It achieves some kind of network effect. Adding more users to the network increases the individual and total utility function of the nodes in the network at a higher than linear rate.
  • A new niche emerges big enough to cater to your needs (look at the long tail).
All in all it's about lowering costs and changing utility functions.

Now what happens if we look at Second Life and similar online worlds and measure them along this yardstick of making your life better, lowering costs and changing utility functions.
  • The main thing Second Life is good at is bringing people from different parts of the world together and let them interact in a relatively natural way, like in First Life.
  • A second thing it is good at is quickly building 3 dimensional representions of objects and allowing people to see and interact with them.

Now compare SL to some of the other applications we use the net for and we see why it is not a big a hit as some people would hope it would be for advertising and other applications.
  • For finding information and weighing different options etc, the plain old Web 2.0 is better and quicker. You go to Google and from there its two clicks away to the right destination. As various studies have shown... people are not willing to wait more than a couple of seconds to find the information they are looking for. In Second Life Just getting somewhere, orientating, interacting etc takes minutes. So if you want to find information, disseminate it the Web wins. Same thing goes for buying real stuff.
  • For communicating Second Life is bound by proximity in the Second Life world. It's almost like the real world in that regard. So in many situations it gets beaten by instant messaging, email, telephone etc. as a way of communication. It does have a bonus when it comes to chatting up complete strangers by allowing only a limited amount of people to step up to you (whereas on a chatsystem women often get swamped) So as a virtual bar it has some positive sides. - If one wants to interact with customers in Second Life, it is not unlike opening up a store on the main street and it should be run as such. 24 hours a day people should be attending to the shop. You need the right people there, they should be knowledgeable etc. There are no Coca Cola information stores on the main street, because it would be too costly for Coca Cola to do so and there doesn't seem to be a benefit, compared to their current way of doing business. Second Life might lower these costs by allowing you to open up one store and reach the world, but the question is what exactly would be the added bonus for Coca Cola, Fannie Mae, Home Depot etc of having a virtual store/information boutique that needs to be manned 24x7 compared to a combination of Website, information phone line (or IM on a site) and if they have such a thing a physical store. That question is very hard to answer.
  • As an advertising medium Second Life can house billboards. The advertiser hopes its as busy as Times Square or as well visited as Wired.com. The numbers are not such that this seems to be a very attractive proposition. Not too many eyeballs and not always the right demographic, plus like in Real Life people need to bump into it. The more Second Life grows the smaller the chance of bumping into the advertising (the reverse of network effects) So Real Life and Google Ads are probably a better way of spending the advertising budget for many.
  • Second Life can also be an advertising medium by realising a 3d representation of your products. However a website can often have the exact same possiblities, plus the added bonus of being able to control the look and feel of the experience.
  • Advertising through immersive mediums in Second Life (scavenger hunt, adventure type) is limited by the environment of Second Life itself and the amount of users it has. It's probably more effective and efficient building that world in Flash, without having to deal with all the side effects Second Life might have.

So where does this rant bring us. Second Life's usability for making things better is mainly limited to those situations where we want people to interact in a bar like fashion, but without being in the same physical location. A virtual book signing might work, but a well moderated chat session on Amazon might be alot more effective as it could let people join easier, without making avatars etc and still allow for it to be streamed and stored on Youtube and people could actually receive a signed copy of the book they bought. (BTW why doesn't Amazon have interactive sessions with writers? Or did I miss something)

A big advertising campaign however is probably much more effective when using flash and other such technologies on your own site combined with a proper on and offline campaign.
It's hard to see what kind of bonus SL has when it comes to working in project groups compared to an adequate set up of videoconferencing, group wiki's, IM etc.

All in all, the conclusion of my rant is: Economics doesn't support virtual worlds as a replacement for the web and the real world.

Wednesday, July 18, 2007

Yahoo's Earnings seen from Jim Collins' Good to Great

I reacted over at Giga-Om to this story:

Interesting numbers from Yahoo! I’ve been reading Good to Great by Jim Collins at the moment and it seems that Yahoo is showing all the signs of an also ran company. (have a look at http://jimcollins.com)

First, it didn’t have a level 5 leader, who selfishly looked at the best interest of the company. They may have ousted him, but one hopes the current management team is up to snuff.

Second, the question is whether they have the right people on board and in the right place. They’re hiring seems to be erratic and not really best of breed in the business.

Third, and really bad from my point of view. They don’t confront the facts. Fact is, Google is a better ad company than Yahoo will ever be. Google places its ads better, through better technology and because of that has commanded the biggest share of eyeballs. Yahoo has nothing to offer to potential advertisers on the technology front.

Fourth Yahoo doesn’t know what it wants to be: Is it the best content company in the business, or is it the best search company in the business? Well, it cannot be the last one. Google has taken that and outspends Yahoo in keeping that goal. Google has a clear focus, though it should dabble less and spend more time in achieving in coherently achieving the goal. Yahoo should focus on its content business, which in the US is the best it can ever be. Yahoo should make it their business to make sure that whenever somebody is looking for something that Yahoo does Google first points to Yahoo for the content, to such an extent that the user will go to Yahoo without even looking at Google (Yahoo financials is a great example)

Fifth, Yahoo should cut all the crap it isn’t willing to deal with. Sell the advertising business to Microsoft, they’re dumb enough to pay top dollar for it. Then move to Google’s Adsense and squeeze every ad dollar out of it. Advertisers would love it.

Sixth, keep focus, keep discipline, keep adding great content, keep focus, discipline, add more great content.