Is the Second Life economy faltering?

Wednesday, April 14, 2010

Merchants have been complaining about slow sales in Second Life ever since... well, ever since there have been sales. But I think for the first time we are seeing visible effects in the economic statistics.

Check out Tyche Shepherd's graph of Linden$ sales on the Lindex. This shows that Supply Linden has had a harder time selling L$ to people in Second Life who want to buy things.

The overall economy of Second Life is one of the money pumps Linden Lab uses to make money. In general, it works like this:

Merchants sell items → L$ accumulate in merchant accounts → Merchants and Supply Linden sell L$ on Lindex (with Linden Lab taking 3.5%) → Customers buy L$ on Lindex → Customers use L$ to buy items from merchants → Merchants sell items

As the L$ cycle through this loop, Linden Lab skims 3.5% off the top each time. Not that there's anything wrong with that; it's a perfectly legitimate way to make money off a virtual world.

Also note that's it's not a perfectly closed loop. Linden$ can leak out, when people spend them on things like classified ads and group fees, and also when people stop playing Second Life and leave with money still in their account. These sinks are balanced by Supply Linden, who manufactures Linden$ out of thin air and sells them on the Lindex, just like merchants do (except Supply Linden doesn't have to pay the 3.5% fee).

If any one part of this economic cycle breaks down, the whole loop falls apart. And then we get a situation like this.

This is from the Lindex Statistics on the Procyon Games site. It shows the amount of Linden$ that people are trying to sell. In a normally functioning market, the numbers of buyers and sellers are roughly equal. But recently, the sellers have swamped the buyers. Here we have over 200 million Linden$ asking to be sold at 250 L$/US$ or above. That's huge. It's normally between 50-70 million. It's never been this high, and it's been like this for days.

Supply Linden can only sell Linden$ if there are people willing to buy them. Without a steady stream of customers, that magical profit stream of Linden Lab just dries up.

It's possible there could be some other explanation for this glut of Linden$, and Supply Linden's withdrawal from the market. A couple years ago some big land baron left Second Life, and sold all their Linden$ on the market at once, creating a temporary glut. Supply Linden's sales dipped then, but they quickly recovered. This looks to be a sustained drop, so if there's another explanation I'd be happy to hear it. I hope T Linden's upcoming economic report sheds some light on this issue.



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