Inside Out: The Realities of Virtual Business

J@pan Inc’s column concerning business possibilities outside of Japan

By Peter Harris

Second Life: how far do the possibilities go?
Copyright 2007, Linden Research, Inc All Rights Reserved

“Open a nightclub, sell jewelry, become a land speculator; the choice is yours to make.” No, not the text of one of Donald Trump’s entrepreneur seminars, but the opening invitation on the business page of virtual community Second Life’s website. Increasingly, Second Life (SL) is becoming a place where businesses naturally want to extend their operations to, or entrepreneurs decide to try out one of their latest ideas.

There are thousands of businesses operating in SL including some of the world’s biggest brands from Adidas Reebok to Domino’s pizza and from Calvin Klein to Mercedes Benz. However, there are really two meanings to doing business in SL. For the majority of real world companies involved in SL, the driving force behind their actions is marketing. As Web 2.0 becomes the catchphrase of the marketing consultancy world, and predictions fly around that by 2011 80% of internet users will be members of a virtual community, companies such as Dell want to be among the first to have a stake in this exciting PR-friendly new territory. Other companies see it as a space to experiment with a new brand, as Starwood Hotels have done. As to the value that brands actually receive from opening in SL, there is much debate. According to Brandweek magazine, companies launching in SL need to innovate rather than follow when they launch into new virtual space. A number of skeptics have voiced concern over the ability of SL marketing ventures to attract consumers and many have even questioned how high the number of users actually is. American Apparel who opened up in SL last year to much media fanfare have apparently already shut up shop, perhaps indicating that interest in virtual worlds was more of a fad than a long-term trend.

However, other companies, real and virtual, have set up in SL to actually trade and make money. Clothing manufacturers, for example, make money out of selling items that can be worn be users’ avatars. There is a real exchange rate for the SL currency, Linden dollars, and Reuters told us that the reason that they set up their SL News Center was to “contribute objective financial news and data to help a growing economy, and to experiment with an important new medium.” Last year Ailin Graef—often referred to by her SL name, Anshe Chung—achieved celebrity status by becoming SL’s first millionaire, largely as a result of what is ambiguously termed her ‘real estate’ dealings in SL. Many users, businesses or consumers, can’t really get fully involved in the community without buying some land and so real estate services is one of SL’s most lucrative sectors. Markus Breuer of the virtual world’s consultancy group Otherlands elaborates on his own business: “We buy server space in large amounts and rent it out in smaller packages. This business is presented as ‘real estate’ as an easy to understand metaphor within the context of a virtual world…Owning land means that you are able to create or place a certain amount of virtual objects in a persistent way and use a certain amount of processing capacity.”

There are no securities in virtual worlds, there is no oversight, no transparency, no accountability

So, while there is something to be made from retail, profitability in SL lies predominantly in the services industry. Recently, there have also been a number of law firms who have started to offer SL services, particularly in the field of intellectual property. Bootlegging is widespread in SL and many operations sell fake versions of real world brands. According to Attila Berry in Legal Times, firms such as Greenberg & Lieberman are helping with patent and trademark applications. The legal landscape of SL is very much in the hands of the site’s owner Linden Lab but the volume of commerce has created a demand for real life legal expertise. The UK firm Field Fisher Waterhouse has a strong presence in SL and according to partner David Naylor, the virtual world “has introduced critical problems for content and rights owners. For example, it is almost impossible to purchase an in-world media player that does not come preloaded with infringing copies of music videos, TV programmes and movies.”

There is clearly some benefit to be gained from keeping an eye on SL and plenty of opportunity to try new ideas there. For those thinking of conventional investment however, Breuer of Otherlands emphasizes the need for clear-headed thinking: “Investing in virtual banks and stock exchanges is pure roleplay. There are no securities in virtual worlds, there is no oversight, no transparency, no accountability. It is gambling or playing.” In many ways SL sounds more and more like the real world. JI

J@pan Inc Magazine, Nov/Dec 2007