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'Second Life' land prices get hefty hikes

Virtual private islands are being subjected to substantial up-front and ongoing maintenance fees as game's publisher seeks profitability.

In a bid to get into the black, "Second Life" publisher Linden Lab has unveiled a new pricing structure for private islands in the virtual world.

The move has angered some community members, since Linden Lab gave early warning of the price change to some developers.

Until now, anyone who wanted to buy a small private island of about 16 acres could do so by paying $1,250 and a monthly maintenance fee of $195. But as of Wednesday, the company plans to .

"I'm not sure we know yet how it will affect resident behavior and growth patterns."
--John Zdanowski CFO

Linden Lab said the fee hikes would not affect existing islands or land on the "Second Life" "mainland."

"It's basically recognition that there's a whole lot more value for private island regions," said John Zdanowski, Linden Lab's new chief financial officer. "That's why our demand for them has been so much higher" than similar size real estate on the mainland.

"Second Life" is an open-ended 3D virtual world in which residents create nearly all the content, including fantastical buildings, vehicles, outfits, avatars and much more. "Second Life" is free to play, but anyone who owns land has to pay maintenance fees. In large part, Linden Lab's business model is about selling such digital real estate--each island is stored on a single server--and charging those ongoing fees.

In effect, the company's business model is to sell server space. Along the way, it has sold more than 2,000 islands to customers like Sony BMG, IBM and General Motors.

Zdanowski said Linden Lab has not been profitable to date, and that with the existing island price structure, the company has been "subsidizing" the growth of the virtual world. It now has more than 1.2 million registered accounts and has recently seen a rush of famous companies jostling for position in-world.

Zdanowski said Linden Lab's cost for servers, bandwidth and engineering talent have risen significantly in recent months and that those factors were involved in the company's decision to raise island prices.

He also said that one of his first orders of business upon arriving at Linden Lab was to address profitability.

"The way (islands are priced) now, we would always be on the verge of profitable. The new CFO comes to town and does some analysis and recognizes that fact," Zdanowski said.

Linden Lab said it would take a final inventory of 150 islands available at previous prices. After those are gone, all sales will be at the new prices.

Zdanowski said corporate customers will not feel any squeeze from the rate hikes.

"It's a non-event" for them, he said. "They're spending hundreds of thousands of dollars to set up an in-world presence, and they're paying almost nothing for the land."

Not the only pricing move
But Linden Lab isn't sure what the effect on the rest of the "Second Life" community will be.

"I'm not sure we know yet how it will affect resident behavior and growth patterns," Zdanowski said, "and I think anybody who thinks they can doesn't understand how complex the system that the in-world economy is."

The island price change isn't Linden Lab's only pricing move. Earlier this month, the company also began charging $9.95 for users' second accounts. And in a , Robin Harper, Linden Lab vice president of community development and support, floated the idea of charging residents for technical support, something that has so far been free.

Prior to publicly announcing the island pricing policy change, Linden Lab let a small number of developers know about the impending change. And some users are upset about that, charging that such a heads-up gave those developers an unfair advantage in the rush to try to buy islands at the old, lower prices.

Among those who got the early word was Electric Sheep, the biggest third-party "Second Life" developer. Its clients include Major League Baseball, Nissan and Starwood Hotels.

For Electric Sheep and other developers, the advanced warning allowed them to give their own clients the most up-to-date information.

"Let's face it, they're a business, and they have to operate as a business."
--Alice McKeon, "Second Life" resident

"I think the primary reason they did it is that they know we're out proposing and negotiating large projects with 'Second Life,'" said Giff Constable, Electric Sheep's vice president of business development. "We had just had a situation where Linden Lab , and so we had to go to prospects and reset expectations. I would bet that was the primary reason why they notified us."

For its part, Linden Lab said it was chastened by community anger at the early warning to some developers.

"I was taken by surprise when the information leaked to some people who might have tried to take advantage of (it)," said Zdanowski. "Clearly, there is a delicate balance between soliciting feedback from our customers while also not giving them an information advantage--and we will be much more careful in how we approach this in the future."

Meanwhile, opinions appear mixed about how the price change will affect "Second Life" and its existing residents.

On the one hand, most "Second Life" users don't own islands and never will. So those users will not be directly affected. On the other hand, small business owners, or those who rent space on islands--there are many such businesses--may well experience a downside.

At least one "Second Life" landlord has seen enough to say goodbye to his business.

"I'm sure you can appreciate that (the price changes) will have a huge effect on the rental market," wrote Hiro Queso, an owner and landlord of a number of "Second Life" islands. "With great sadness, I hereby give you notice that I will no longer be offering rentals and all (islands) will be cleared" within a month.

Queso--a "Second Life" account name--went on to apologize to his clients for effectively evicting them.

Of course, there are other rental businesses in "Second Life." An owner of one of the busiest said she isn't sure how the price changes will affect her outfit.

Alice McKeon, who runs in "Second Life" and rents 39 islands along with partner Tony Beckett, said she was not surprised Linden Lab raised the price of islands, but thought the fee increase was unexpected.

"Naturally, we will have to (raise prices) to recoup our investment" on new islands, McKeon said. "We'll have to see what supply and demand is (for islands). We will not grow as fast as we have in the past."

She did say she bears Linden Lab no ill will for raising the prices.

"Let's face it, they're a business," McKeon said, "and they have to operate as a business. I'm in their ballpark and either I believe in them and I stay, or I don't believe in them and I leave. And I plan to stay."