BC Business
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In a world that exists only on computer screens, virtual consumers (controlled by real people seated at computer desks) teleport to malls and window-shop along virtual high streets for goods ranging from ball gowns to hovercraft. With a simple wiggle and click of a mouse, visitors enter these shops, browse around and, often, purchase the wares on display.
Some of these stores have familiar names like The Gap, American Apparel and Telus; others are new and funky businesses resembling what you might find on Vancouver’s Main Street – except that they’re run by entrepreneurs from their home computers. Welcome to the virtual economy of Second Life, a wildly popular online realm where nothing’s “real” except the cash – and some plucky Lower Mainland entrepreneurs are raking it in. “I thought I could earn beer money through Second Life, but I now earn enough to live on,” says Vancouverite Steve Cavers, who worked as a technical writer until ¬ becoming one of Second Life’s hottest vehicle makers, designing everything from elaborate World War I-style biplanes to ¬futuristic hover-bikes for his Second Life clients. (Just to be clear, these vehicles don’t actually exist. He’s selling virtual vehicles to fellow “avatars,” the digitally animated characters inhabiting this virtual world, who buy them with ¬virtual dollars that can then be exchanged for real cash.) Surrey fashion designer Nyla (who has dropped her surname, Kazakoff, in real life and online) is also cashing in on the exploding popularity of the online virtual-reality platform. Her Second Life avatar is Nyla Cheeky, whom she controls from the computer in her home office. Before Nyla Cheeky sets foot in her online fashion boutique, House of Nyla, she not only changes outfits, but also alters the shape of her body and switches the colour of her skin, from black to white. Once ready for work, she levitates into the air and enters the building from the third floor. Today it’s empty, except for one virtual patron who’s wearing a Nyla outfit the avatar’s real-world analogue paid for with real money. Since March 2006, the online world of Second Life – a so-called “metaverse,” where avatars created by people from more than 80 countries attend virtual concerts, go dancing, meet for coffee, play slots and, of course, shop – has seen its population skyrocket from 160,000 users, or “residents,” to more than 2.5 million at the beginning of 2007. (For a glossary of Second Life terms, see “Linden lingo,” below) Unlike online role-playing games played simultaneously by thousands, if not millions, of people worldwide (such as EverQuest or World of Warcraft, where people band together and go on quests), Second Life has no objective other than to be a venue for people (well, their avatars) to meet and socialize in a world they help to create. “People are walking up to you and introducing themselves. You just don’t get that in the real world,” says Nyla, 30, as she chats with a customer via instant message. The commercial potential of this new world has not gone unnoticed. Stores like Nyla’s might not exist in the real world, but she and other residents, who legally own their “in-world” creations as intellectual property, are starting to make real-life incomes from their virtual businesses. According to Second Life’s Economic Statistics webpage, 140 in-world business owners grossed between US$2,000 and US$5,000 in December 2006; 90 others earned more than US$5,000 that month. And it’s not just computer-savvy entrepreneurs. Looking to brand themselves as cutting-edge, companies and institutions including Starwood Hotels and Resorts Worldwide Inc., Toyota Motor Corp., Reebok Ltd., Telus Corp. and Harvard Law School have quickly established footholds in the metaverse. (Big name perfume-makers have also embraced the marketing potential of the virtual realm – Calvin Klein’s new scent, ckin2u, was recently released in Second Life.) Even Vancouver’s soon-to-be-inaugurated Great Northern Way Campus has built a Second Life campus (see sidebar, “Going Digital,” below). For those too caught up in their real lives to tap into Second Life, here’s how it works: The entire online world of Second Life – every home, store, hotel, casino and nightclub – is created by users with design software provided by the realm’s creators, a privately held San Francisco-based company called Linden Research Inc. (Linden Lab has an impeccable pedigree and impressive backers. Its founder, Philip Rosedale, was previously the chief technology officer of RealNetworks Inc. Investors include eBay chairman Pierre Omidyar and Amazon CEO Jeff Bezos.) Anybody with a computer and a broadband Internet connection can enter Second Life for free. (They must first download the client software at secondlife.com.) From some basic options, a new user can choose a generic body type and some nondescript clothing (white T-shirt and khaki knee-pants) without spending a virtual dime. But to have a first-class time on Second Life and enjoy some of its niftiest toys, such as a spaceship that seats 11 or customized skin with freckles that will allow you to fit in with virtual cool kids, users need to spend cash. Transactions are made with an in-world currency, Linden dollars, which can be converted back to U.S. currency on LindeX, Second Life’s official currency exchange. Those who pay for premium Second Life memberships receive a weekly allowance of 300 Linden dollars. They’re also allowed to own land in the metaverse. Others may buy Linden dollars using a real-life credit card at a fluctuating rate of approximately 270 Lindens to one U.S. greenback. Not business as usual As their businesses take off, Second Life entrepreneurs are scrambling to sort out how to apply real-world business practices to the commerce of virtual goods and services. Nyla, who studied fashion at the Helen Lefeaux School of Fashion Design in Vancouver, wasn’t looking to start a new business when she stumbled onto Second Life. She was hoping to promote her real-world one. “I actually wanted to have a 3-D boutique attached to my website,” she says, “a place where people could spin my clothes around and see what they look like from all angles.” An Internet-savvy friend introduced her to Second Life. What started out as a marketing idea is now a healthy side business. Although she declines to reveal her monthly earnings from Second Life, Nyla estimates that 30 per cent of her income is earned in the virtual realm. [pagebreak] Once in the metaverse, Nyla spent four months learning scripting and design codes and exploring Second Life’s unique, fad-driven culture before opening her own virtual store on Valentine’s Day 2006. She’d noticed a significant portion of residents involved in adult situations (the game is restricted to adults; a separate teen version is also available). As an experiment, Nyla designed some virtual lingerie, which she doesn’t make in real life. (In “first life,” Nyla’s flamboyant, brightly coloured couture gowns and corsets have been featured on the reality TV show Canada’s Next Top Model.) “I needed something to play with,” she says. The lingerie became a hot seller, and soon Nyla was confident enough in her abilities as a digital seamstress to make Second Life versions of her real-world creations. Using the computer program Photoshop, Nyla creates digital images of her clothing and adjusts them to fit perfectly on an avatar before uploading them to Second Life. A single Second Life dress can take up to 12 hours to make. In the physical world, Nyla’s designs range from $500 for a simple summer dress to $3,000 for a hand-stitched, elaborately beaded gown. In contrast, one of Nyla Cheeky’s Second Life dresses costs 1,500 Lindens, or approximately US$5. Unlike her real-world dresses, however, Nyla can sell her digital garments again and again. “It adds up fast,” she insists. “You’d be surprised.” One particular mask, priced at about US$2, sells 10 or 15 times a day, she adds. As with many Second Life entre¬pre¬neurs, Nyla’s overhead is low. For her largest boutique, she pays US$40 a month in rent to Second Life land baroness Anshe Chung. Her other five boutiques cost her about US$25 a month in total. One store gets approximately 1,500 visitors a day, all of whom can complete instant transactions. In the virtual world, however, business owners don’t have the kind of rights and protections that a typical lease holder would retain. In fact, Nyla was evicted from her first store with only 24 hours’ notice. “The owner told me, ‘Sorry, I am selling the land,’ ” she recalls. “And I’d just set up my store. Things happen fast there.” Thirty-year-old Steve Cavers (a.k.a. Cubey Terra) didn’t hesitate to chuck his day job for online cash flow, turning an all-consuming hobby into his sole source of income. His familiarity with the virtual world has been a key factor in his success, along with some smart pricing and his timely response to customer feedback. A Second Life early adopter, Cavers first joined in 2003. His initial foray into virtual business included bad poetry nights where “cash” prizes were given out at a theatre he’d built himself. That year, Cavers, who’d co-authored a book on Lego Mindstorms, a robot-building kit, also began designing Second Life vehicles. In those early days, Linden dollars couldn’t be transferred into hard currency. “Back then, it was just the challenge of amassing as much play money as possible,” Cavers explains. “It was strictly competitive.” When the rules changed, Cavers exchanged his Second Life earnings for real cash and quickly realized he could profit from what, till then, had been a pastime. Cavers estimates that he generated between US$1,500 and US$2,000 in revenue during the 2006 Christmas season. Given the effort he puts into his work, Cavers bristles when news reports about Second Life marvel that the economy revolves around goods and services that don’t physically exist. “People buy things that aren’t ‘real’ all the time: they pay for MP3s, they buy movies, software or games,” he’s quick to point out. “To most, Second Life is about escapist entertainment. Some prefer to rent DVDs; others find their entertainment entirely in Second Life.” To design a single vehicle, Cavers manipulates and assembles dozens of “prims,” the adjustable, pixelated building blocks in Second Life that come in basic shapes such as cubes, spheres and cylinders. He then writes scripts, or programs, that enable the vehicles to “fly.” Cavers’ most popular product, a parachute, is also one of his least expensive, at 100 Lindens. (Skydiving is a popular group activity in Second Life.) His priciest items, such as an Airco DH2 biplane and a replica of the Nieuport 17 flown by World War I flying ace Billy Bishop, sell for 1,200 Linden dollars each. Cavers sells his vehicles at Abbotts Aerodrome, a Second Life airport, and on websites such as SL Exchange and SL Boutique, online marketplaces devoted to Second Life creations that charge merchants a commission based on sales volume. He has also started to license Cubey Terra shops, offering franchisees everything necessary – kiosks, shops, hangars, signs – to start a business in exchange for a royalty on every vehicle sold. As Second Life develops and tastes grow more sophisticated, Cavers’s job gets harder. “It takes several weeks of careful design and script development to produce an aircraft that catches the consumer’s attention,” he admits. And he predicts he’ll need an entire development team to produce quality virtual vehicles in the future. “The one-man aircraft company will be obsolete.” Big biz jumps in It isn’t just the solo entrepreneurs who are getting in on the virtual-world action. White Plains, New York-based Starwood Hotels opened an in-world version of Aloft, its new line of loft-style hotels, in September 2006, a year before the real ones are slated to open. IBM Corp. holds meetings within Second Life. The news agency Reuters Group PLC has assigned a reporter to cover in-world happenings. Educational institutions, including New York University and Harvard Law School, have offered courses dealing with new media in Second Life. With real-life companies desperate to gain a foothold in the virtual world, some Second Lifers are making money by helping them understand – and gain a foothold – in this unique online society. Housed in a basement of a Surrey residence, Crystal Studio dubs itself a one-stop shop for companies looking to explore virtual worlds. The firm is headed by three 20-something computer wizards – Kyle Polulak, Ron McDowell and Sam Coleman – and 51-year-old Michael Ryan. “We literally tell businesses what they can or can’t do in the world,” explains 23-year-old CEO Polulak (known in Second Life as Fox Diller). [pagebreak] Ryan, a certified general accountant, helps the company’s clients avoid trouble with the tax authorities in their quest to make a buck in Second Life. He carefully tracks clients’ revenues in Lindens, U.S. and Canadian dollars, and Euros. While all Second Life income is taxable, working in the world does create some strange situations. Crystal Studio, for instance, occasionally deals with some in-world contractors who conceal their real-life identities and work locations. These contractors, Ryan explains, are never strictly anonymous because they leave an audit trail when they convert their money using PayPal, an Internet payment system that requires users to list a name and mailing address. This trail, Ryan says, “could also be reproduced by Linden Labs if required by the Internal Revenue Service or the Canada Revenue Agency.” Ultimately, it’s up to the designers to declare their income or charge GST. To date, Crystal Studio has amassed an enviable list of clients. It recently worked with Dutch television producer Endemol NV, creator of the reality show Big Brother, which needed help with a Second Life version of its global hit. Crystal Studio provided Endemol with software allowing it to track its virtual contestants on its private island, Kingdom of Media. Crystal has also worked with Sprott-Shaw Community College, which has 22 real-world campuses in B.C. and Alberta, to develop an online campus where students can obtain real degrees. For many companies, it’s not yet so much about adding a new revenue stream as the PR push that comes with having a presence in Second Life. Catherine Winters, a Vancouver-based computer programmer and co-author of Second Life: The Official Guide, says many of these stores are nothing more than advertising platforms. “Take, for example, the [Second Life] American Apparel store. They’re definitely selling [virtual clothes], but it’s probably not enough to recoup their costs of development, even hosting. But the advantage they have is that it’s been all over the media.” Second Life creates an opportunity for one-of-a-kind promotions, says Winters, known in Second Life as Catherine Omega. Last December, she used her in-world expertise to help Save the Children, a British charity, put together a clever in-world promotion involving a “Yak Shack” that allowed residents to buy pixelated yaks. The profits from these virtual creatures went to Tibetan families who used the money to buy real-life yaks. No guarantee on IP Piracy is becoming an increasingly serious concern. Local fashion designer Megan Seely, who also sells virtual duds in Second Life, has seen other avatars selling clothing that she had given away free. “Often new players don’t realize this is happening,” she says, “and spend all their Lindens on something they could have gotten for free.” Last year, Second Life designers were alarmed by the advent of CopyBot, a controversial application designed by a rogue developer that allows some items to be duplicated without the permission of the creator. Steve Cavers, the vehicle maker, isn’t fazed by this threat to his intellectual property. “CopyBot has proven itself incapable of circumventing Second Life’s copy-protections to any degree that would affect anyone’s business,” he says. But like other user-generated websites, Linden Lab encourages self-policing within the community of users. Ron McDowell, Crystal Studio’s CTO, has a project on the go that steps lightly around the issue of intellectual property: he has built an unauthorized Second Life recreation of the Sunnyvale Trailer Park from the popular Canadian sitcom Trailer Park Boys. “I have landmarks from the show, like the King of Donair,” brags McDowell, 21. He is already making money by renting trailers. Other fans of the show have offered to build additional trailers, and one built a liquor store exactly like the one in the show. According to Alexandra Samuel, the CEO of Social Signal, a Vancouver company that builds online communities for non-profit organizations, fighting unauthorized copying is a retrograde way of dealing with user-generated content. “A company could go after all those people as copyright infringers, but they could also think that, ‘Hey, these people are doing our advertising for us. They’ve created their own interpretation of a brand, and that’s adding to our glory.’ That’s the shift that companies need to make.” Samuel says the future will see more companies moving into virtual worlds as Second Life is better integrated with Internet browsers such as Internet Explorer and Mozilla. But it won’t be a breeze. “There are two related challenges for businesses on Second Life,” advises Samuel. “The first part is understanding that it’s a new market and learning about it. The second challenge is that the bar is rising steadily, and it’ll become more important for companies not to be just there, but to do something that showcases their product in an interactive way.”