Friday, August 14, 2009

Second Life Growth overstated, Ignores Crash

Linden Labs, the developer of the (supposedly) addictive Second Life online game, reported this week that Second Life's economy grew by 94 percent in the last year. The report even converts the game's in-game currency, Linden dollars (L$) to real US$, a sample process because a real exchange market for the two currencies sets a price just like that between dollars and Euros. Yet putting together the information in the charts provided in the release shows that this virtual economy per capita grew at 18, not 94 percent, over the last year.

There are two main problems with the analysis done by Linden.

First, the report also gives the number of user-hours in Second Life. This is essentially a measure of population. I use user hours because in reality we cannot extend our days. In Second Life more time online essentially expands population.

Figure 1 shows the value of user-to-user transactions per user-hour.

It’s very clear that back in 2007, the Second Life economy crashed. In fact the per user value of the Second Life economy, fell in 8 of the last 14 quarters. This decline beginning in Q2 2007 through Q2 of 2008 is about as long as the current US recession. It also resulted in the per capita economy contracting by 27 percent, a level more akin to the Great Depression than the current US recession.

Second, the report gives the value of all user-to-user transactions in Second Life. Notice that I have not shorthanded any of his with GDP. That’s because real world metrics like GDP measure only the value of final goods produced. This means that computer circuit sales are not measured directly but as a component of the price of computers. I don't know what people are trading on Second Life but if any of them are trading for things that they then use to create new products, actions, or environments then the report is double counting. The available data doesn’t provide a way to correct this error but the real per economic value is likely lower than reported.

The lesson from this is likely that the Second Life economy is more volatile than the actual one. The turn-around in Second Life that began in Q2-2008 seems to signal little for the real economy.

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