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Posted: Mar 24th 2008 11:29AM (Unverified) said

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I agree that an IPO soon (i.e. before the next wave of SL's development via open source) would signal deteriorating confidence in LL by the early investors (and in fact I mentioned this awhile ago on the forums: http://forums.secondlife.com/showthread.php?p=1909396#post1909396).

Every investor needs an exit strategy. And I don't think there was ever any doubt that LL's early investors would most likely get out with an IPO. That's all fine. Nothing too telling with an IPO itself. But the timing of a potential IPO will be the critical signal. If they try to sell this current land model to the public with an IPO, I wouldn't buy it. We all know this business model's future is uncertain at best.

I think you are getting a little too ahead of yourself in this post Tateru, too much speculation, and a little too pessimistic, although I certainly share a lot of your views on this topic.

Thanks!

Posted: Mar 24th 2008 11:34AM (Unverified) said

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The important thing is to think for yourself. Agreeing with my take on things is entirely optional, and not always advisable :)

As long-view investors though, I wouldn't expect them to have any pre-existing exit strategy that was dated this side of 2010. Long-view investors are usually in for a minimum 10 years, in my experience.
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Posted: Mar 24th 2008 12:54PM (Unverified) said

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Tateru, I realize you don't have to answer this, but whenever I read an article like this, I have to ask: did you take economics in college? Did you ever work in a small or big company? Are you an expert on how companies work as a long-time business journalist in real life? Do you really have actual experience with observing or participating in long-term venture capital strategies?

Or are you self-taught, i.e. putting together various articles from the Internet to make what you think are astute judgements because you happened to come to SL and then acquire the second life of a journalist there? I ask this in all sincerity. It's fine to be self-taught. And it's grand to have a second life. But there's a kind of vacuum of lack of practicality and overly-theoretical nature to it. Actual practice and life experience can make these literalisms soften. Again, I'm not prying and urging you to describe your first life, which isn't our business, but asking you to pause for a second and realize how it sounds to say "in my experience, long-term investors do X or Y" if you...aren't a long-term investor or even an accredited RL reporter to long-term investors, but just watching on the Internet like the rest of us chickens here.

You seem to imagine that when a company "goes public" and has to answer to shareholders that it becomes a craven, greedy, capitalist caricature that stops caring about customers. But obviously any company that stopped having customer care and customer base growth as part of its portfolio would fail. How would it be possible to go on making money from subscriptions and a heavy customer contact operation like SL if you decided that only shareholders mattered?! You wouldn't *have* a product within a year! It's not like the investors can run it into the ground after sucking all its payout. They wouldn't have any kind of successful and good reputation as venture capitalists, either. It's not like a one-way street -- rich people fund start-up, run it into the ground after harvesting its cash. They simply couldn't function that way in a rational market where self-interest has to equal community interest to a certain extent because they would have to find others willing to take their venture capital. Not every company takes every VC offer, it's a more delicate dance than that, it seems to me.

There's a quite plausible scenario where some bigger company, like an IBM or Sony or EA.com, comes and buys out Linden Lab but keeps it as a kind of creative studio, a la Maxis being bought by EA.com Already, you can see that various larger entities have bought pieces of the initial start-ups in the metaversal services field, like ESC and MOU, and when they get that kind of influx of cash, they do have to then care about that company's shareholders and its grander plan and understanding of the market, and it might mean that rationally, they have to stop building expensive time-consuming but pretty builds in SL, as grand as that is, and go off to pet worlds and teen worlds where the real ROI is. They aren't philanthropies, after all (that's why I have often suggested making LL a non-profit or an Associated Press precisely because it might be more appropriate to make it like Firefox and Mozilla, who knows).

So you could say these start-ups that had to branch out their portfolios and change their offerings after getting big influxes of cash "abandoned their Second Life customers". But...they didn't. Because...those customers didn't *pay them*. They didn't have the SL community at large as their customer. Their customer is the outworld company that needs a PR job. PR jobs were better able to be performed in pet worlds. So they went pet. And that's the right thing to do for both their immediate customer, the large company, and even write large, the public at large if the public has shown by its preferences that it doesn't really value the complexities and costs of a tough virtual world.

If the public doesn't value an expensive 3-D interactive real-time sort of CAD or Massive Multiple-player Photoshop (as Eric Rice calls Sl), and only about 1.5 million people show up for it regularly, only 100,000 of whom are willing to pay $9.95 a month for it, you can't expect *a public company* that really is in a sense owned by the free public to go on funding this nonsense. That may sound harsh, but many artists and engineers just don't get funded by the public, either in government grants or philanthropic gifts or the support of public companies. And then you can't expect a private company, burning VC cash, to go on burning cash if it can't scale and find new customers to sustain it. Ultimately, all of this scenario really is about caring for people.

In the scenario where something big buys out SL, they can even possibly afford to lose money. They don't have to keep looking at their watch and their shareholders if the amount of the buy-out is a tiny fraction, a rounding error, of their budget. That in fact might even given LL the freedom to keep perfecting its product, and enable that big thing to be first and best in an emerging space. Im' not sure it *will* work that way (as I wonder if we are past that point now) but it could in theory.

I find your idea touching that Philip would take a buyout, an IPO that led to SL being folded or so morphed as to be unrecognizable, and then go sit in a new loft with a new start-up. The thing is...he did that already. It was called "leaving Real with a golden handshake and starting Second Life". I don't think a project this large, complex, and fascinating, really, is something you leave and then make *another* one of. But of course, who knows, I could be wrong, we don't have sufficient information to really judge all this precisely because it's a private company with private actors.

Posted: Mar 25th 2008 8:39AM (Unverified) said

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"They aren't philanthropies, after all (that's why I have often suggested making LL a non-profit or an Associated Press precisely because it might be more appropriate to make it like Firefox and Mozilla, who knows)."

Um, maybe I misunderstood, but I could have sworn you hated the very idea of open source software.
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Posted: Mar 24th 2008 2:19PM (Unverified) said

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Ah, excellent analysis, Tateru. Thanks for explaining the unruly crowd around here why "IPO" is not a magic word that can be applied to *all* companies in the world, ie. as if all companies had just one goal: "going public"... which is far from the truth.

There is an added issue here. None of the investors of Linden Lab are so keen to "let it go" out of their control, too :) They're not in for the "short-term" profit — they have more than enough from their past ventures — but the "long-term" aspect of virtual worlds, where they hope to be major players/decision makers/opinion leaders. Which, frankly, is much more exciting — if Linden Lab becomes the Microsoft of virtual worlds, they'll be in a position to push for *their* vision of the Metaverse — even a fragmented one, of course, with lots of incompatible technologies.

But I'm pretty sure that around Second Life as a "core technology" we'll see a SL-compatible Metaverse emerging. And, well, anyone at LL right now will have a huge stake in calling the shots, so I pretty much believe they wish to continue to be "in control" for another decade or so :)

I didn't understand why "The only place to go with that money would be acquisitions -- which would be a convincing sign of lost direction." The acquisition of the WindLight technology and a whole new team to develop the new renderer was not "losing direction" I guess. What about, say, acquiring the SpeedTree company? ;) That would certainly be very much in line with what LL *needs* — excellent programmers, untainted by the "Tao of Linden", and willing to deliver technology that *works* in a reasonable amount of time.

Posted: Mar 24th 2008 2:24PM (Unverified) said

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You have a good point there, actually - and I *did* think Windlight. It didn't take IPO levels of cash to bring that business onboard, however.

Yes, there's one or two interesting technologies that Linden Lab could bring in with the intent of releasing but an IPO would seem on the face of it to be a poor tradeoff to obtain those.
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Posted: Mar 24th 2008 4:53PM (Unverified) said

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Nice analysis Mis Tateru.

Prokofy has a point that, should a big investor buy out some of LL in order to get some eventual return on investment, they wouldn't necessarily be looking for a rapid turnaround - it might well be business as usual for LL for some time to come. That's not what an IPO is though.

An initial public offering is basically releasing a buncha stock to shareholders to get quick capital, and open your stock up for daily trade. The more of your company you put into the hands of the investing public, the more investors become your clients. Day traders are after short term return for the most part.

This does two things that LL probably doesn't want to do. It puts them directly into competition with other publicly traded companies - anyone can take their ipo cash on a reasonable VW technology and try to run it into a profit real quick (something they'll need to do faster than the competition). There can only be so many winners in that market however - put another way, a vast majority of IPO funded startups fail, as they need to both satisfy clients and investors over a short term, while competing with all their market peers.

The second thing opening to trading does is widen the group of non-client stakeholders. There are plenty of cases where the desires of in world stake holders and financial investor stakeholders are in direct competition. Should SL start to become a viable buisiness platform (not impossible) then competition in world would be put under financial pressures to generate return for a large body of out of world investors. If they are serious about the SL economy operating as a proper market at any time in the future, it would be foolish for them to place the burden of externalities on it. Effectively this would generate a highly taxed economy as LL would be forced to skim off successful in world ventures to service their public offerings.

This was pretty much the pattern during the first dotcom bust, where the companies we now see in the market predominantly grew during the IPO rush without drawing on that funding source. By the time the web market had been established, leaner companies without the burden of repaying their shareholders. Private companies easily knocked public companies out of the market by pricing their equivalent product closer to the actual cost of provision of the service - unburdened as they were by a debt to shareholders. When you actually own the market, a public offering makes more sense. Nobody owns the VW market yet.

Posted: Mar 24th 2008 8:36PM (Unverified) said

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Certainly Linden would probably get slaughtered in an IPO, especially in this market...it would take a brave contrarian of a fund manager to be investing into a virtual community with a slowing growth rate in the teeth of a credit crisis, a housing crash, and a recession.

It would also be far too easy for any short-seller or bearish analyst to run a bunch of lurid pictures of in-world activity and say, "THIS is a business model?"

Posted: Mar 25th 2008 8:46AM (Unverified) said

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I think you missed one important step in assessing what Second Life is in value, I mean what makes it actually worth anything besides the base cost of their hardware?

1. Servers (hardware)
2. Technology (software/code)
3. Employees (experience)
4. Hosted data (content)
5. Community/network (userbase)
6. Brand (public awareness)

This would help in assessing what corporations would benefit from these assets, and whether this 'divide and conquer' coldness of the 'big corporations' as you describe it is in any way justified, or whether we are more likely to see a buy-out, a cumulative strategy where the brand buying (any) of these assets would benefit themselves - like Google buying Feedburner for instance - by application. In the latter I find it hard to imagine this would not mean continued development of the Virtual World platform.

Posted: Mar 25th 2008 9:41AM (Unverified) said

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Um, maybe I misunderstood, but I could have sworn you hated the very idea of open source software.

I guess you don't really read what I write then. I'm opposed to open-source *extremism*, which is what we constantly see around Second Life (R), which goes like this: "Everything must be open-sourced. The entire Internet is built on open-source. There cannot be any wall gardens. You cannot have a business model based on copyright or walled gardens, give us your code, everyone can get rich with liberated code. It is possible to fund businesses on open source forever."

See, all of that is patently absurd. Everything doesn't have to be open-sourced, and isn't open-sourced, in the real world. The "entire Internet" is built on a mixture of open and closed and shared etc. There can be -- and are! -- all kinds of thriving walled gardens; if you are going to constantly rant about walled gardens in Web 1.0 and AOL, you have no framework within which to understand World of Warcraft of Facebook -- it's as if you say then that the 70 million people in those "walled gardens" and the companies that sustain them are "all wrong" and "must be liberated" (ever wonder why people calling for liberation want to go against your will, and use force, to "liberate" you?!).

Furthermore, there is a built-in argumentation with this OS movement around SL and web 2.0 that says it can fund businesses and generate wealth. Well, no. Firefox and Mozilla are non-profit OS efforts with *funding*. Go read about them. So...stop pretending that if you OS the platform and server code of SL, you endlessly have an automatic business plan for LL and every other thing around it. You don't. Call it the philanthropy that it will likely be, and treat it accordingly.

Posted: Mar 25th 2008 9:59AM (Unverified) said

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Of topic but I guess you need to start reading first Prok,

$66.000.000 -REVENUE- (85% from Google) is not a pure non-profit effort, unless you think Google is 'funding' Firefox for its search application.

http://www.nytimes.com/2007/11/12/technology/12link.html
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Posted: Mar 25th 2008 11:58AM (Unverified) said

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Open Source software can easily exist as profitable software on a limited basis with the right work and license done, and proper support.

There's a reason why some people run SeaMonkey instead of FireFox, even though they're code-for-code copies (excepting the appellations) - Firefox is a commercial trademark in actuality, and some open source distros loathe it, so the compromise happens however awkward it feels.

Trolltech's GTk+ GUI development framework costs either nothing or several thousand dollars a site (granted the free version is missing a few things including the ability to avoid opensourcing, but that's what the commercial code is for!)

For some of us, all open source means is that if the vendor starts refusing to play ball, we go look for other competent sources of upgrades and support. This is not the case with traditional proprietary software, that locks you right in and imposes significant switching costs.

Sometimes, all that people really care about is that they have a choice, and that it works. keep the demagougery off them, please.
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Posted: Mar 25th 2008 11:46AM (Unverified) said

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I believe that kanomi has brought up an important point.

Though Linden Labs has developed an interesting technology with Second Life, much of what goes on within the grid could easily be considered 'socially unacceptable'.

There is blatant copyright infringment of a multitude of real life businesses, an abundance of subcultures based on nearly every imaginable perversion, and a userbase that seems obsessed with protecting their anonymity.

Additionally, as time passes, an ever increasing number of similar platforms slowly siphon away users that have became dissatisified with the current state of affairs within Second Life.

So, investors buy into SL for what? Control of an aging 'gaming' engine that appears to have serious trouble scaling? Rights to 17,000 sims worth of amateurish builds, stolen textures, and copycat malls? Or ownership of a corporate culture based on the "Tao of Linden" that appears to have very little interest in maintaining good customer relations?

If an IPO is in the works, the sooner the better. The brand value of "Second Life" is quickly declining and becoming shorthand for the playground of basement dwelling perverts, scam artists, and IP thieves.

Posted: Mar 27th 2008 2:06AM (Unverified) said

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Google is funding Firefox for its search, yes. Why would that be somehow a controversial statement? Mozilla is formed as a non-profit. Firefox is opensource and people can make widgets for it.

Posted: Mar 27th 2008 2:05AM (Unverified) said

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Patchouli,

You belong to a school of thought, which is open-source extremism. So you will portray it in your lights.

This sort of statement is untested, unchallenged, and non-viable for many things in life, including, quite possibly, virtual worlds -- we can't know that yet as we have yet to see the viable business plan of this open-sourcing thing called Linden Lab:

"Open Source software can easily exist as profitable software on a limited basis with the right work and license done, and proper support."

Maybe it does in some cases; maybe it doesn't. Your argumentation isn't helped by the blanket way in which you apply this notion.

"Firefox is a commercial trademark in actuality, and some open source distros loathe it, so the compromise happens however awkward it feels."

So...let met get this straight. Some open-sourcers are such socialists in their belief system that the mere registration of a commercial trademark is onnoes111 evil capitalism for them? Is that how it works? By ideology? And culture?

>Trolltech's GTk+ GUI development framework costs either nothing or several thousand dollars a site (granted the free version is missing a few things including the ability to avoid opensourcing, but that's what the commercial code is for!)

This model that works for software which does certain specific things, and can still make money by doing certain customized thing is...a very narrowly applied and very specialized concept, and the ways in which the open sourcenik then makes money is in part by obfuscation -- that it is so complex to use their wares, that they can give them away for free because only other nerds will understand them, but the rest of the world, including nerd bosses, will pay to have them managed. This doesn't strike me as a very sound principle from which to run entire economies. And yet, that's what open-source extremists tell us -- that everything, from a dress or book or software (dresses or books merely because they now require software to make them in virtual worlds) and and should be "free" because...this narrowly-applied and still really untested concept that *might* apply to certain software types and companies is being replicated and promoted as "the way of the world" for the entire Metaverse. And that's just frankly not practical or realistic or even desirable.

Sometimes, all that people really care about is that they have a choice, and that it works. keep the demagougery off them, please.

Right back at your, Patchouli. We are never offered this choice in the SL debate about opensource. We are not participants in the decision about opensourcing not only server code but *all our stuff made with this code* -- hello?! You fail to grasp that consequences of this, apparently simply because it doesn't touch you.

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