The Truth of the Matter

Today I found referenced on Slashdot an article in which the author compared Second Life to a Pyramid Scheme. At first I wanted to dismiss the premise outright. I mean, the cited source was Valleywag, which is slightly better then a supermarket tabloid, but the author promised ‘financial analysis’ of their conclusion. So I read on, and tracked the article back to the full version written by Randolph Harrison. Now I have never heard of Mr. Harrison before, but anyone who has a dual MBA from UC Berkley and Columbia in NYC deserves a careful review. Unfortunately, I have to say that I am disappointed with his characterization of Second Life. I did not find any of his criticisms untrue, but just surprising in the significance that he associated with them. So I have pulled a few of them out for our own review.

The first problem we encountered was one of counterparty risk. Yes, you are absolutely correct. Right now Second Life is the wild west of commerce. Just because you can reach it within minutes of logging into your computer does not make it any safer then the emerging markets of faraway places. I have heard of stories of manufacturing plant managers in China running one location for one employer, while they are redirecting shipments of materials down the street to the facility that they themselves have started up. Things are improving, just as they will in Second Life, but I hear CDs are still pretty cheap on the streets of Beijing. Volatile disruptive markets are messy, if they were already regulated to death there would be little potential for explosive growth. Especially exploring what Mr. Harrison calls “the appearance of a virtual ‘securities and exchange commission’, virtual banks, virtual currency exchanges, and even virtual venture capitalists and REITS.” He himself points out that these institutions are run by individuals and not Linden Labs. Not to be glib, but do you also buy stock from spam email links that litter you email?

Although he eventually concedes that despite this risk factor he was able to make a good return on his investment, he was unable to remove at one time significant amount of the capital gained.

Enter the second problem, the L$ exchange markets are effectively rigged. In a nutshell Mr. Harrison was put off by the fact that the exchange system effectively prevented him from removing more then a few thousand US dollars at a single clip. Thank goodness it does. This is an incredible new developing market, and requires significant influx of cash to fuel its rapid growth. Now I am for open markets, and the article points out that the exchange “is actually not a virtual currency exchange market so much as it is an open auction”, but his problems sound like a free market self regulating effect to me. The rate system prevents destabilizing and totally destructive transactions larger then the market can handle at this point.

I think that there is potential for all of Mr. Harrison’s criticisms to be resolved in the future, and Second Life has the capacity to grow to meet his expectations, but it is just beginning. If you look at the statistics provided by Linden Labs, there are less the a hundred individuals making more the $10,000 US a month. Now that number looks like it is doubling every month, but it is still relatively small. In the end, all we can do is wait and see. I, myself, am not waiting on the sidelines. You can find me and mine setting up shop in Big Mushamush region of tomorrows 3D Internet. See you all there, eventually. :-)