November 1, 2006 4:00 AM PST

'Second Life' land prices get hefty hikes

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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 bump those fees to $1,675 and $295, respectively, for all new sales.

"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 blog posting that was blasted by some community members, 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.

CONTINUED: Chastened by community anger…
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