Linden Labs and the Failure to Understand Basic Business Principles

Most successful businesses operate according to a business model of some kind. The model reveals such fundamental components of the business such as where the revenues come from and the nature of the expenses required to produce those revenues. In the early days of the web, one of the much debated questions was - what business models are appropriate for web based businesses. At the risk of being overly simplistic, we can sort most websites in one of three business models or, perhaps, some combination of those models. First, is the website used to produce sales. The revenue generated from a sales website is a percentage of the sales. Second, is the website that draws traffic somehow and exposes that traffic to advertising. The revenue generated by that traffic draw supports the website. Third, is a website used as public relations vehicle to provide information about a company or agency. The revenue for this website comes internally from that company. The point here is not to catalog websites, however. The point is to say that in order to be successful a website must operate according to a business model and the designers of the website must understand that model.

Unfortunately, the business model for Second Life is entirely unclear. And they attempt to attract businesses into Second Life who are equally as unclear regarding their business models which creates confusion on two levels. According to published accounts, Linden Labs has wrestled with the idea of business models. They have made several decisions that reflect this. They decided to allow content creators to maintain the copyright to the things they produce in world. They decided to obtain revenue from the sale of land rather than charging for accounts or taxing sales. These are all business model decisions. Unfortunately (again) these decisions were made in the absence of a cohesive and workable business model and, consequently, appear as random, often confused, decisions.

A business model would help address some burning questions with regard to Second Life. Should users pay for their accounts? Should sales be taxed? Is open sourcing good or bad for Second Life? Should users remain anonymous? If development funds are invested, should they go into better development tools, improving ease of use, specialized infrastructure for education or commerce, and so on. But, since Linden Labs does not seem to understand the basics of business they do not appear to have a workable business model. And since they do not have a workable business model the above questions as well as many others simply cannot be answered.