Cover Story of Bussiness Week -- about Second Life

from Bussiess Week:
MAY 1, 2006 issue

Virtual Land, Real Money

Second Life is an online world where a savvy avatar can make a bundle. Its best known "land" developer explains how

Anshe Chung is the online identity for a Chinese-born language teacher living near Frankfurt, Germany. She's the best-known executive in Second Life, an online world run by Linden Lab of San Francisco. Known inside the world as the Rockefeller of Second Life, she prefers to keep her real name private to deter intrusions into her human life.

Chung runs a very real business buying plots of virtual land, developing them into communities complete with houses, beaches, mansions, and other features, and reselling or renting those properties to Second Life players. Since she began two years ago she has amassed land and Second Life currency -- which is convertible into real U.S. dollars -- worth more than $250,000.

Even Chung acknowledges that it's a strange business. Recently, Chung's avatar, or graphic character, met Rob Cranes, the avatar of BusinessWeek's Silicon Valley bureau chief Robert D. Hof, at her home inside Second Life for a chat about how she started the business and where she's headed. These are edited comments from that conversation.

Do you generally spend most of your time in-world in a particular place -- like this?
No, I am very nomadic. In fact, for more than one year I did not have a home, despite being the biggest land owner. I am always busy with developing land, selling land, buying land, or meeting with my team. I lived on one small 1,008-square-meter piece for six months, then was homeless one year.

What do you do on a typical day?
I usually get up very early in morning, then get in touch with the sales team to finish transactions they prepared. After this is done and information is passed on to the billing department, I have to deal with many quality-control issues with the development teams. Then I also get in touch with Guni (my husband), who is managing our development team, discuss projects and the market situation of the day. I also spend a little too much time with media.

How big is your team?
We have seven people in the U.S. and Europe who work like freelancers for us, kinda fun work. So they play the game with us. We have 10 people employed full-time in our new studio in China near Wuhan. That is just since this month. China is our main location now: management, billing, accounting, and development.

Offshoring, even in virtual worlds?
This is not a new concept. When I played Asheron's Call [another online game], the world where "Anshe" was born, I was the richest avatar of my server. I was kinda lucky with trade skills. Then the Russians took over the economy [inside the game]. Nobody knew, because they hid they were Russian. I found out after they hacked my account. This time we decided that we are not going to wait for Russian or Chinese people to come here.

Why China? Less expensive in terms of people?
We are able offer competitive salar[ies] there, yes. And of course I have very good connections there.

How much will the China operation allow you to expand your business?
This is difficult to tell. But we are ambitious. Honestly, once the team is trained completely, I think the land-trading sector might be hard for others [to] compete with us in. Right now, our plans are limited by how fast we can train people.

Are you looking at expanding into other virtual worlds?
Yes, there are other platforms, most of them in development. We are looking very carefully at those and we are in touch with some of the companies that work on them. On the other hand, Linden Lab is very good to work with. Second Life is still the most advanced one and has very big potential.

What do you like about how Linden Lab manages Second Life? You were quite unhappy in December when the company started allowing people to go directly to specific points inside the world, bypassing "telehubs" where lots of people gathered. That devalued your land, right?
Yes, the telehub situation was big mistake where Linden Lab screwed up in many ways. Basically, they acted like a government that decides to build one big dam and flood one city. However, they finally realized what they did and changed their policies. They made a buyback offer for devalued land. That way we still all took some loss, but within what one can call acceptable business risk.

Can you tell me how you first heard about Second Life, and also how you decided there was a business opportunity?
I read about Second Life on Terranova [a blog about virtual worlds]. Then I took a look at this seemingly hopeless little thingy. I logged in and it looked like an empty and dead place, incredible laggy [slow], clumsy, and ugly. And beside that, it seemed really pointless.

But I really liked the degrees of freedom to really change and edit this world and also the lack of strict and insanely limiting rules that the big companies usually impose in their worlds. I did not come here for business, but found it an interesting challenge to see if I could "play" here for free. I also made it [an] iron rule to not invest RL [real-life] earnings.

To what do you attribute your success?
One reason for my success here, I strongly believe, is that I am not only here for business. I am very deeply rooted in this world, like a real native person. Most people who just come here for money fail miserably. They are foreigners, act like foreigners, and lack deep understanding of this virtual country. Many of them are also lazybones who think you just need money to make more money. The truly successful people I know here all are deeply involved in life and society here too.

What was attractive about the land business in particular? I gather you started with other activities first?
In the land business at that time, there was nobody who did [a] large volume and professional service with low margins. This was not exactly planned. I think last autumn it become obvious that if I would start selling L$ [Linden dollars, the in-world currency] in huge quantities, it could become serious income. Something became very real when I was able send money to one poor boy in the Philippines and it was enough he could live on. Now it is exciting to see it creating jobs in China.

Do you see expanding the business beyond land sales? What other opportunities might there be?
We have moved from land trading to land development to community development. Entire communities. This continent here, called Dreamland, is unique in that it contains several themed and zoned communities. Examples of communities here are German or Japanese communities in Second Life that we are hosting, or lifestyle communities such as furries, gay/lesbian, gothic people.

Our new studio will hopefully soon allow us provide new types of content and services together with land that will take landowner experience in SL to a completely new level.

Did you expect to build such a large business inside Second Life?
Please do not think any of this was planned even one year ago. It more or less just overwhelmed me.

Does it all seem very strange sometimes?
Yes, at times it becomes really kinda surreal. I feel like I am reading a cyberpunk novel. This kind of interview, of course, is difficult because it blurs the online role and real person.

Yes, a little odd for me too.
Also, what now happens with branching out into RL. I don't know if there is any other company in the world that has actually started in a role-playing game. You can say this virtual role-playing economy is so strong that it now has to import skills and services from the real-world economy.

Do you admire any other activities or creators in SL?
In general, I am a big fan of some cultural projects here and also admire the people who help others connect who might have difficulty in RL, such as people who are immobile. I think these kind of places have great potential to help people have new experiences and realize their dreams.


COVER STORY

My Virtual Life

A journey into a place in cyberspace where thousands of people have imaginary lives. Some even make a good living. Big advertisers are taking notice

podcast
COVER STORY PODCAST

As I step onto the polished wood floor of the peaceful Chinese country house, a fountain gurgles softly and a light breeze stirs the scarlet curtain in a doorway. Clad in a stylish blue-and-purple dress, Anshe Chung waves me to a low seat at a table set with bowls of white rice and cups of green tea. I'm here to ask her about her booming land development business, which she has built from nothing two years ago to an operation of 17 people around the world today. As we chat, her story sounds like a classic tale of entrepreneurship.


Slide Show >>
Except I've left out one small detail: Chung's land, her beautifully appointed home, the steam rising from the teacups -- they don't exist. Or rather, they exist only as pixels dancing on the computer screens of people who inhabit the online virtual world called Second Life. Anshe Chung is an avatar, or onscreen graphic character, created by a Chinese-born language teacher living near Frankfurt, Germany. And the sitting room in which Chung and my avatar exchange text messages is just one scene in a vast online diorama operated by Second Life's creator, Linden Lab of San Francisco. Participants launch Second Life's software on their personal computers, log in, and then use their mice and keyboards to roam endless landscapes and cityscapes, chat with friends, create virtual homes on plots of imaginary land, and conduct real business.

REAL BUCKS
The avatar named Anshe Chung may be a computerized chimera, but the company she represents is far from imaginary. Second Life participants pay "Linden dollars," the game's currency, to rent or buy virtual homesteads from Chung so they have a place to build and show off their creations. But players can convert that play money into U.S. dollars, at about 300 to the real dollar, by using their credit card at online currency exchanges. Chung's firm now has virtual land and currency holdings worth about $250,000 in real U.S. greenbacks. To handle rampant growth, she just opened a 10-person studio and office in Wuhan, China. Says Chung's owner, who prefers to keep her real name private to deter real-life intrusions: "This virtual role-playing economy is so strong that it now has to import skill and services from the real-world economy."

Slide Show >>
Oh yes, this is seriously weird. Even Chung sometimes thinks she tumbled down the rabbit hole. But by the time I visited her simulated abode in late February, I already knew that something a lot stranger than fiction was unfolding, some unholy offspring of the movie The Matrix, the social networking site MySpace.com (NWS ), and the online marketplace eBay (EBAY ). And it was growing like crazy, from 20,000 people a year ago to 170,000 today. I knew I had to dive in myself to understand what was going on here.

As it turns out, Second Life is one of the many so-called massively multiplayer online games that are booming in popularity these days. Because thousands of people can play at once, they're fundamentally different from traditional computer games in which one or two people play on one PC. In these games, typified by the current No. 1 seller, World of Warcraft, from Vivendi Universal's (V ) Blizzard Entertainment unit, players are actors such as warriors, miners, or hunters in an endless medieval-style quest for virtual gold and power.

All told, at least 10 million people pay $15 and up a month to play these games, and maybe 20 million more log in once in a while. Some players call World of Warcraft "the new golf," as young colleagues and business partners gather online to slay orcs instead of gathering on the green to hack away at little white balls. Says eBay Inc. founder and Chairman Pierre M. Omidyar, whose investing group, Omidyar Network, is a Linden Lab backer: "This generation that grew up on video games is blurring the lines between games and real life."

Second Life hurls all this to the extreme end of the playing field. In fact, it's a stretch to call it a game because the residents, as players prefer to be called, create everything. Unlike in other virtual worlds, Second Life's technology lets people create objects like clothes or storefronts from scratch, LEGO-style, rather than simply pluck avatar outfits or ready-made buildings from a menu. That means residents can build anything they can imagine, from notary services to candles that burn down to pools of wax.

PROPERTY RIGHTS
You might wonder, as I did at first, what's the point? Well, for one, it's no less real a form of entertainment or personal fulfillment than, say, playing a video game, collecting matchbook covers, or building a life list of birds you've seen. The growing appeal also reflects a new model for media entertainment that the Web first kicked off: Don't just watch -- do something. "They all feel like they're creating a new world, which they are," says Linden Lab Chief Executive Philip Rosedale.

Besides, in one important way, this virtual stuff isn't imaginary at all. In November, 2003, Linden Lab made a policy change unprecedented in online games: It allowed Second Life residents to retain full ownership of their virtual creations. The inception of property rights in the virtual world made for a thriving market economy. Programmer Nathan Keir in Australia, for example, created a game played by avatars inside Second Life that's so popular he licensed it to a publisher, who'll soon release it on video game players and cell phones. All that has caught real-world investors' attention, too. On Mar. 28, Linden Lab raised a second, $11 million round of private financing, including new investor Jeff Bezos, CEO of Amazon.com Inc (AMZN ).

Virtual worlds may end up playing an even more sweeping role -- as far more intuitive portals into the vast resources of the entire Internet than today's World Wide Web. Some tech thinkers suggest Second Life could even challenge Microsoft Corp.'s (MSFT ) Windows operating system as a way to more easily create entertainment and business software and services. "This is why I think Microsoft needs to pay deep attention to it," Robert Scoble, Microsoft's best-known blogger, recently wrote.

WEAK SPOT
A lot of other real-world businesses are paying attention. That's because virtual worlds could transform the way they operate by providing a new template for getting work done, from training and collaboration to product design and marketing. The British branding firm Rivers Run Red is working with real-world fashion firms and media companies inside Second Life, where they're creating designs that can be viewed in all their 3D glory by colleagues anywhere in the world. A consortium of corporate training folks from Wal-Mart Stores (WMT ), American Express (AXP ), Intel (INTC ), and more than 200 other companies, organized by learning and technology think tank The MASIE Center in Saratoga Springs, N.Y., is experimenting inside Second Life with ways for companies to foster more collaborative learning methods. Says Intel Corp. learning consultant Brent T. Schlenker: "We're trying to get in on the front end of this new workforce that will be coming."

The more I kept hearing about all this, the more I knew this was wa-a-a-ay more than fun and games. So early this year I signed up at www.secondlife.com, downloaded the software, logged on, and created my persona. As reporter "Rob Cranes," I embarked on my journey.

And promptly got lost in the vast, uncharted terrain.

Click: I land at the Angry Ant, a nightclub holding a "Naked Hour" where avatars are in various stages of undress, dancing lasciviously. Is it getting warm in here?

Click: I stumble upon someone teaching a class on how to buy and sell virtual land to a motley crew of avatars sitting attentively on chairs watching PowerPoint slides. Do we get a toaster when we're done?

Click: Suddenly, I'm underwater at Cave Rua, watching a school of fish swim by. Cool, but what do I do here?

Click: Here's a virtual doctor's office, where a researcher runs a simulation of what it's like to be a hallucinatory schizophrenic. A menacing British voice from a TV urges: "Shoot yourself. Shoot them all. Get the gun out of the holster and shoot yourself, you !@#&!" Yikes, where's that teleport button?

My disorientation points up one of the big challenges of these virtual worlds, especially one so open-ended as Second Life: With nothing to shoot and no quest to fulfill, it's hard for newbies to know what to do. Virtual worlds require personal computers with fairly advanced graphics and broadband connections and users with some skill at software. "The tools are the weak spot," says Will Wright, legendary creator of The Sims video game, who nonetheless admires Second Life. For now, he says, "That limits its appeal to a fairly hard-core group."

Still, there's no denying the explosion of media, products, and services produced by users of these virtual worlds. IGE Ltd., an independent online gaming services firm, estimates that players spent about $1 billion in real money last year on virtual goods and services at all these games combined, and predicts that could rise to $1.5 billion this year. One brave (or crazy) player in the online game Project Entropia last fall paid $100,000 in real money for a virtual space station, from which he hopes to earn money charging other players rent and taxes. In January inside Second Life alone, people spent nearly $5 million in some 4.2 million transactions buying or selling clothes, buildings, and the like.

That can add up to serious change. Some 3,100 residents each earn a net profit on an average of $20,000 in annual revenues, and that's in real U.S. dollars. Consider the story of Chris Mead, aka "Craig Altman," on Second Life. We exchange text messages via our keyboards at his shop inside Second Life, where he hawks ready-made animation programs for avatars. It's a bit awkward, all the more so because as we chat, his avatar exchanges tender caresses with another avatar named "The Redoubtable Yoshimi Muromachi." Turns out she's merely an alter ego he uses to test his creations. Still, I can't help but make Rob Cranes look away.

SHOPPING SPREE
Mead is a 35-year-old former factory worker in Norwich, England, who chose to stay home when he and his working wife had their third child. He got on Second Life for fun and soon began creating animations for couples: When two avatars click on a little ball in which he embeds the automated animation program, they dance or cuddle together. They take up to a month to create. But they're so popular, especially with women, that every day he sells more than 300 copies of them at $1 or less apiece. He hopes the $1,900 a week that he clears will help pay off his mortgage. "It's a dream come true, really," he says. "I still find it so hard to believe."

His story makes me want to venture further into this economy. Besides, my photo editor is nagging me to get a shot of my avatar, which needs an extreme makeover. Time to go shopping! First I pick out a Hawaiian shirt from a shop, clicking on the image to buy it for about 300 Lindens, or about a dollar. Nice design but too tight for my taste, so I prowl another men's shop for a jacket. I find something I like, along with a dark gray blazer and pants. As a fitting finishing touch for a reporter, I add a snazzy black fedora, though I'm bummed that it can't be modified to add a press card.

I'm also feeling neglectful leaving my avatar homeless every time I log out. It's time to buy some land, which will give me a place to put my purchases, like a cool spinning globe that one merchant offered cheap. And maybe I'll build a house there to show off to friends. I briefly consider buying a whole island, but I have a feeling our T&E folks would frown on a $1,250 bill for imaginary land. Instead, I purchase a 512-square-meter plot with ocean view, a steal for less than two bucks. Plopping my globe onto my plot, I take a seat on it and slowly circle, surveying my domain. My Second Life is good.

I soon discover that Second Life's economy has also begun to attract second-order businesses like financial types. One enterprising character, whose avatar is "Shaun Altman," has set up the Metaverse Stock Exchange inside Second Life. He (at least I think it's a he) hopes it will serve as a place where residents can invest in developers of big projects like virtual golf courses. In a text chat session in his slick Second Life office, Altman concedes that the market is "a bit ahead of its time. I'm sure it will take quite some time to build up a solid reputation as an institution." No doubt, I'm thinking, especially when the CEO is a furry avatar whose creator refuses to reveal his real name.

Premature or not, such efforts are raising tough questions. Virtual worlds may be games at their core, but what happens when they get linked with real money? (For one, people such as Chung's owner start to take changes to their world very seriously. She recently threatened to create her own currency inside Second Life after the Linden dollar's value fell.) Ultimately, who regulates their financial activities? And doesn't this all look like a great way for crooks or terrorists to launder money?

Beyond business, virtual worlds raise sticky social issues. Linden Lab has rules against offensive behavior in public, such as racial slurs or overtly sexual antics. But for better or worse, consenting adults in private areas can engage in sexual role-playing that, if performed in real life, would land them in jail. Will that draw fire from law enforcement or, at least, publicity-seeking politicians? Ultimately, what are the societal implications of spending so many hours playing, or even working, inside imaginary worlds? Nobody really has good answers yet.

My head hurts. I just want to have some fun now. It's time to try Second Life's most popular game. Tringo is a combination of bingo and the puzzle-like PC game Tetris, where you quickly try to fit various shapes that appear on a screen into squares, leaving as few empty squares as you can. I settle in on a floating seat, joining a dozen other competing avatars at an event called Tringo Money Madness @Icedragon's Playpen -- and proceed to lose every game. Badly. I start to get the hang of it and briefly consider waiting for the next Tringo event until I see the bonus feature: a movie screen showing the band Black Sabbath's 1998 reunion tour.

Instead, I seek out Tringo's creator, Nathan Keir, a 31-year-old programmer in Australia whose avatar is a green-and-purple gecko, "Kermitt Quirk." It turns out Keir's game is so popular, with 226 selling so far at 15,000 Lindens a pop, or about $50, that a real-world company called Donnerwood Media ponied up a licensing fee in the low five figures, plus royalties. Tringo soon will grace Nintendo Co.'s (NTDOY ) Game Boy Advance and cell phones. "I never expected it at all," Keir tells me, his awe evident even in a text chat clear across the world. He's working on new games now, wondering if he can carve out a living. That would be even cooler than the main benefit so far: making his mum proud.

TALENT BANK
After all my travels around Second Life, it's becoming apparent that virtual worlds, most of all this one, tap into something very powerful: the talent and hard work of everyone inside. Residents spend a quarter of the time they're logged in, a total of nearly 23,000 hours a day, creating things that become part of the world, available to everyone else. It would take a paid 4,100-person software team to do all that, says Linden Lab. Assuming those programmers make about $100,000 a year, that would be $410 million worth of free work over a year. Think of it: The company charges customers anywhere from $6 to thousands of dollars a month for the privilege of doing most of the work. And make no mistake, this would be real work were it not so fun. In Star Wars Galaxies, some players take on the role of running a pharmaceutical business in which they manage factory schedules, devise ad campaigns, and hire other players to find raw materials -- all imaginary, of course.

All this has some companies mulling a wild idea: Why not use gaming's psychology, incentive systems, and social appeal to get real jobs done better and faster? "People are willing to do tedious, complex tasks within games," notes Nick Yee, a Stanford University graduate student in communications who has extensively studied online games. "What if we could tap into that brainpower?"

In other words, your next cubicle could well be inside a virtual world. That's the mission of a secretive Palo Alto (Calif.) startup, Seriosity, backed by venture firm Alloy Ventures Inc. Seriosity is exploring whether routine real-world responsibilities might be assigned to a custom online game. Workers having fun, after all, likely will be more productive. "We want to use the power of these games to transform information work," says Seriosity CEO Byron B. Reeves, a Stanford professor of communications.

BUILDING BOOM
Whether or not their more fantastic possibilities pan out, it seems abundantly clear that virtual worlds offer a way of testing new ideas like this more freely than ever. "We can and should view synthetic worlds as essentially unregulated playgrounds for economic organization," notes Edward Castronova, an associate professor in telecommunications at Indiana University at Bloomington and author of the 2005 book Synthetic Worlds: The Business and Culture of Online Games.

I get a taste of the lack of regulation just as we're about to go to press. Logging in to Second Life after a few days off, I see that someone has erected a bunch of buildings on my avatar Rob Cranes's land, which is located in a region called Saeneul. The area was nearly empty when I arrived, but now I'm surrounded by Greek temples under construction. So much for my ocean view. Online notes left by one "Amy Stork" explain that the "Saeneul Residents Association" is building an amphitheater complex, and "your plot is smack bang in the middle." She's "confident that we can find a *much* better plot for you than this one....Love, Amy xx."

Oh, really? For some reason, this causes Rob Cranes to blow a gasket. He resists my editor's advice to "head to the virtual gun store," but he fires off angry e-mail complaints to Ms. Stork and Linden Lab and deletes the trespassing buildings, planting some trees in their place. Then he reconsiders: Maybe a ramshackle cabin with a stained sofa and a sun-bleached Chevy up on blocks would be a great addition to his plot.

At first, I wonder why I (or my avatar) has such a visceral reaction to this perceived intrusion. Then a flush of parental pride washes over me: My avatar, which so far has acted much like me, hanging back from crowds and minding his punctuation in text chats, suddenly is taking on a life of his own. Who will my alter ego turn out to be? I don't know yet. And maybe that's the best thing about virtual worlds. Unlike in the corporeal world, we can make of our second lives whatever we choose.


Two Famous Characters in Second Life


The Land Baroness

Avatar Anshe Chung was created by a Chinese-born language teacher living near Frankfurt, Germany. She keeps her real identity private, but that hasn't stopped her and her imaginary self from creating what may be Second Life's biggest business. Chung has amassed virtual real estate and cash assets inside Second Life worth about $250,000. She buys land wholesale from Second Life operator Linden Lab, and then develops it, resells it, or rents it out. She's known as the Rockefeller of Second Life.

The Artist

Chris Mead decided to become a stay-at-home dad when his wife gave birth to their third child. Mead, who lives in Norwich, England, turned his longtime interest in computers to online games. Stumbling into Second Life, he started creating "couples animations" -- programs that make two avatars dance or cuddle. His animations are so popular that Mead, whose avatar is named Craig Altman, earns up to $90,000 a year selling them to other avatars.