Virtual magnate shares secrets of success

Since its public launch in 2003, the virtual world Second Life has become a haven for entrepreneurs. And while the number of people making a considerable profit is still relatively small, it is growing rapidly.

The poster child for profitable Second Life businesses is Ailin Graef--better known by her avatar's name, Anshe Chung--and Anshe Chung Studios, the business she runs with her husband, Guntram Graef.

Originally, the two ran the company from Germany, but at the beginning of this year, they set up shop in Wuhan, a large city in China, and are now employing more than 30 people full-time at, she says, better than local average wages.

Last month, Ailin Graef issued a press release announcing that the company's total holdings, comprised mainly of virtual land in Second Life, were worth more than a million real-life dollars. For those who aren't familiar with the complex economies of virtual worlds, such a claim may seem incomprehensible.

But for anyone who has spent significant time in Second Life, the number seems all too possible, given Chung's dominance of the land market there.

On Monday, Graef visited CNET's Second Life bureau for a discussion about her business, how best to set up businesses in Second Life and the nature of competition there.

Unfortunately, as the interview was commencing, the event was attacked by a "griefer," someone intent on disrupting the proceedings. The griefer managed to assault the CNET theater for 15 minutes with--well, there's no way to say this delicately--animated flying penises.

It's not clear why the griefer attacked, but Anshe Chung is controversial to some Second Life residents for reasons such as inflexibility on land pricing, the signs she has placed in many areas of the virtual world that are visible to anyone flying overhead, and her ability to get many residents to sell their land to her.

Chung refused to continue the interview in the CNET theater but agreed to go on in her own space.

Once restarted, the interview was attacked again, and the protester even managed to crash the entire server on which Chung's theater is held.

But after restarting and bringing back the audience, Chung talked with CNET News.com for nearly three hours. This is the first of two parts of that interview.

Q: How did you first get started with Second Life?
Ailin Graef: I used to be in another virtual world called Shadowbane. Then I decided try out this weird new thing that was only for adults and supposed to be "user created." This was in March 2004, I think shortly after Second Life first allowed registration from outside the United States and the U.K.

Did you have a business right away?
Graef: No. I was mostly exploring the social and emotional side of virtual worlds, not the money side. I was in virtual worlds a long time before having the goal to start a business.

So what made you decide to start your business, and what was it like at first?
Graef: I've been role-playing in virtual worlds for a long time, and my time always ended up being valuable. In Asheron's Call, I used to be quite popular, creating magic weapons for people, and I always ended up helping people the whole day and still couldn't help everybody. That's what originally led me to charge (game) money for doing things, long before the idea of actually turning it into real money.

How do you describe your business today?
Graef: We are, by revenue and customers, the largest virtual-world (land) developer and service provider--if you do not count platform creators like (Second Life publisher) Linden Lab, of course. We develop various kinds of content, such as land and landscapes, buildings, objects and whole communities.

We also operate on IMVU (by IVMU.com), There (by There.com) and Entropia Universe (by Mindark). We also provide services like community management, currency exchange and realtor service.

We don't rely on outside investment capital, and business with residents exceeds the amount of our business for corporations. We are also proud that we train new talent for Second Life and don't just harvest on existing talent in the community.

What were some challenges you had to overcome to get your business started?
Graef: The biggest challenge was the established elite that existed in Second Life before I joined. Many people were around more than a year before me. But from when I signed up in March 2004 to when I showed up at the top of the leaderboard was only four months.

This, not surprisingly, created some funny reactions from the existing power elite. Others in similar situations--such as one well-known casino operator--who were also latecomers and successful, ended up being griefed so badly that they gave up and left Second Life. Luckily, I was prepared when it happened.

What were some other challenges, and how did you overcome them?
Graef: The Second Life economy changed rapidly. In September 2004, about two and a half months after I had entered the land market, most of our business was still purely trading--buying and selling land, and providing some services associated with this, but not yet really developing land. We and others had invested in the Second Life land market at relatively high prices.

Suddenly, Linden Lab more than doubled the release rate of land. Overnight, the land prices dropped drastically, to less than half that of before. Most of my competitors made the big mistake of not wanting to sell land at a loss. So they sat on land they owned and did not sell it.

At the same time, they had no money to buy new, cheaper land. I swallowed the bitter pill and followed (my husband's) advice to start selling land at a loss, but at the same time, I aggressively bought cheap land as it flooded into the market. This was a very big challenge because it entailed a very real risk of bankruptcy if it didn't work.

What challenges do you think someone would face in trying to start a business in Second Life today?
Graef: I think one challenge I faced when starting--and that people face now when starting--is to discover one niche that offers a good opportunity. When I started, most of the content market was already well-covered, so I only started becoming successful at targeting the new feature of (avatar) animations. After this, I developed the new service model for the land market.

Now, of course, Second Life is much bigger. I think the recent surge in population offers many opportunities in niche markets and products that were not viable when the number of potential customers was smaller. Ask yourself, "How can I make people happy?" Once you make people happy, it is not so hard to actually also profit from it.

What other advice would you give someone starting out a business now in Second Life, beyond finding a niche?
Graef: I would suggest careful optimism and avoiding the blindness of the hype about Second Life. It has very strong and solid growth, but I still think that people who invest $200,000 of their real-life savings now are risking too much. The first step to succeeding in a virtual world is not to invest huge sums of money but instead to become a resident of the world, learn how to live here, play in it, use it and do what everybody else does and more. You don't go to Indonesia and say, "Here, I have a million dollars," and blindly invest.

Once you got going with your business, what set you apart from your competitors? How did you manage to grow so much faster?
Graef: I generally did not set my pricing model at "How much can I make people pay?" I kept it at cost plus (a small) margin. And I always tried to scale up, to increase the volume of business with lower margins.

Why was it important to announce that you had a million dollars in assets?
Graef: My announcement was a pre-emptive strike. You need understand that I, in fact, surpassed that milestone much earlier this year. It might not have been quite as easy to prove, but I could have made the announcement in early summer or even spring.

But now there was all this hype from businesses who have not really been around Second Life very long or who have not really done much, so I decided to set the record straight and remind people of the substance of business in these platforms.

There were at least three groups whom I knew were going to make some "millionaire" announcement soon. None of them is even close to it, but with creative mathematics and hype, things can be sexed up.

There are plenty of skeptics about Second Life who simply can't accept that someone could have a million dollars' worth of virtual assets. So how do you come to that figure?
Graef: First, you need distinguish between three different things: real money in Ailin Graef's bank account. There's no million dollars in any bank account now. Second, the value of Anshe Chung Studios. That number was independently assessed in August by (some) investment firms and was already clearly more than $1 million.

The third thing is the value of what actually is owned by the avatar, which is 550 simulators--some unsold, some with profitable business tenants earning money every month--and the far more difficult, to assess value of content, content rights and stakes in other Second Life businesses.

To liquidate everything without leading to the price of Second Life land or the value of Linden dollars (the currency of Second Life) dropping by more than 10 percent would require up to eight weeks. I am very confident in saying this because in February and March, we cashed out $150,000 because of our investment in setting up shop in China, at the same time that IGE sold off about $100,000 Linden dollars.

At that time, the LindeX volume and the size of Second Life economy was much smaller. Yet even such large liquidations of Linden dollars did not lead to any serious issues. The Second Life economy is so large that I would not be surprised if, in two years, somebody has a net worth of $10 million.

Part two of this interview will run soon. Please stay tuned.