Monday, January 28, 2008

They Keep Growing, and Growing...

Although there is no overall census of the size of virtual worlds, two of the heavyweights recently released new numbers. First, World of Warcraft has now reached the 10 million mark. That’s an impressive milestone for a game that went live in November 2004. More than half (5.5 million) of those users are from Asia; 2.5 are based in North American and 2 million in Europe. That is a large number of subscribers. However, it pays to read the fine print:

World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees' territories are defined along the same rules.
So, in theory the 10 million figure, for the most part, includes only paying players, though not necessarily monthly subscribers. Large differences exist between the Chinese market and the Western market for WoW. In the West, players pay $15 per month for a subscription. In China, players pay on an hourly rate, and generate only 15% of the revenue of their Western counterparts. In other words, it’s a lot easier to boost the number of players when hourly fees can fall as low as 4 cents an hour.

Now onto the other release, the December and year end statistics for Second Life. Second Life has, undoubtedly, grown tremendously in a short period of time. According to Linden Lab, there are roughly 12 million resident registrations. While Linden Lab acknowledges that there are many users with multiple registrations (I have two myself) as well as many users who sign up but never again visit. According to stats on the Second Life website (updated through 1/26/08),

Residents Logged-In During Last 7 Days


Residents Logged-In During Last 14 Days


Residents Logged-In During Last 30 Days


Residents Logged-In During Last 60 Days


Total Residents


However, outside skeptics, like Clay Shirky, question the validity of such population statistics.

An alternative measure of user activity is hours spent in world. Second Life also releases monthly data which provides a good deal of demographic and geographical detail. The latest release, posted to their Economy Blog, covers December 2007. In December, users logged 25.6 million hours in Second Life. That is a an impressive statistic when compared to December 2003, when users hours totalled less than 80,000. While a small number of heavy users can influence this figure, it does provide a better metric of growth in the virtual world than user registrations. The graph linked below shows how hours spent in Second Life ha grown over the past years. The second graph looks only at the past two years: January 2006 to December 2007. It still shows strong growth, but by excluding the earlier years it provides a more balanced look at Second Life expansion. As can be seen, there was actually a significant decrease in hours used in November 2007, and hours logged in December were lower than those logged in October. (Sorry for the poor image quality. The blue line indicates user hours; red is user registrations.)

Second Life Population: Sept. 2003 to Dec. 2007

Second Life Population: Jan. 2006 to Dec. 2007
The bottom line is that growth in these two heavyweights remains strong. In light of the amount of amount of venture capital financing streaming into virtual worlds (15 firms received $425 million last quarter), it looks like the prognosis for virtual worlds remains strong.

Tuesday, January 15, 2008

Bye Bye Banks

Linden Lab made headlines recently by announcing a ban on banks in Second Life that lacked government certification, effective Jan. 22, 2008. This move was brought on, according to the announcement itself, by the collapse of Ginko Financial and the existence of virtual banks offering "unsustainably high interest rates" of up to 60% APR. Investors reportedly lost $750,000 when Ginko went under.

What Linden Lab did was to, in effect, pass off the business of bank regulation to real world governments. Rather than developing their own standards and rules, or allowing such standards to develop organically in-world, Linden Lab passed the buck, claiming "Linden Lab isn’t, and can’t start acting as, a banking regulator."

There are a couple of important observations to make, one relating to the big picture of virtual world regulation and the other to one aspect of this ban. First, the big picture. Virtual worlds have, heretofore, existed without significant government regulation and oversight. While actual crimes, like fraud in the case of Ginko, should be prosecuted by law enforcement, this lack of regulation is, IMHO, a good thing. By stepping forward and imposing their own regulation (albeit by simply adopting existing governmental regulations), Linden Lab is demonstrating the capacity for self-governance and self-regulation. My own sense of things is that regulatory bureaucracies tend to want expand their scope of oversight. Regulation is, after all, their raison d'ĂȘtre. If there is a vacuum, they will move to fill it. Whether you like the specifics of this particular ban/regulation, at least it shows that virtual worlds are capable of and willing to fill the regulatory vacuum themselves.

A second point worth making is that the Linden Lab policy does not specify which government certification must be met. According to the policy:

We will not apply this [ban] to companies who submit a registration statement, charter, or other applicable license from a governing regulatory authority, or who are merely conducting marketing or education, but not accepting payments. (emphasis added)
Thus, a bank could choose to incorporate in a country that has lax financial standards, such as some African or Asian nations. That is, merely requiring government certification in no way guarantees that strong, consumer- and investor-friendly regulations apply. Investors still need to be on guard against the same type of fraud that brought down Ginko. In fact, one could argue that in some ways, things are now worse, since investors might (erroneously) assume that this ban means all functioning banks in Second Life are well-regulated since they meet a government's standard for operation.