This is the first article of what will be a small series on the economics of the virtual land industry in Second Life by Turbine Mountain, known in Second Life as MouzurX Wise, an experienced Second Life business executive.
Land Sales
The land industry heavily relies on real-life payments, in combination with real-life currency being converted into virtual currency. When the real-world economic situation is bearish, the land industry will inevitably need to cope with lower demand and lower land prices, as was the case during the real-life global credit crunch during 2007/2008, when land prices dropped from a peak of L$ 12 per square meter in the second quarter of 2007 to around L$ 4.40 per square meter as of May 2008. The land industry is an industry that is currently experiencing consolidation; there are more medium-sized land businesses created then ever before. This is not true for the larger land businesses, that number doesn't increase greatly, with the amount of time required to run a large land business by management being cited as one of the primary reasons for not growing a medium-sized land business into a large one.
Market Overview
In 2007, the price of land was extremely volatile, with prices between L$ 6 and L$ 12. Between 5-10% of all land was on sale on average. More virtual companies in Second Life are in the land industry than any other industry: there's very much competition, including competition from real-world companies. However, because of the drop in land prices and higher operating costs with profit margins dropping from 30-40% to 10-20%, the land business isn't as attractive to start in for new avatars as it once was. Profit margins are suffering from oversupply, volatile economic conditions and the implementation of a new rule by Linden Lab, Second Life's creator, resulting in European residents having to pay VAT when conducting business with Linden Lab.
As European VAT can be as high as 15-20%, virtual land businesses whose owner is based in Europe now have much lower profit margins than the owners of land businesses based elsewhere. When this tax policy was first implemented, the value of land declined rapidly due to European land owners going out of business who put their land on sale. Smaller land businesses disappear, merge with other land businesses or are bought by (larger) players, who are able to survive better in the long run due to their pricing power and resources.
Business Models
There are several business models in this sector of the land industry: Clean areas, with no objects provided by the sim owner. This is the oldest model in virtual worlds, and, while still popular, proves to be too old for new areas (sims) more and more. The profit margin for avatars can be high, but selling clean areas is much more difficult than selling land via other business models if there is oversupply. Instead of clean sims without objects provided by the sim owner, sims with objects provided by the sim owner, such as roads, subways, trams, buses and ATMs are providing very popular at the moment. This model is especially very attractive for businesses and people with an above-average virtual income who'd like a more realistic neighbourhood or a premium location for their home or business. Another, newer, business model in land sales are private islands.
This business model consists of a sim essentially being a water sim with small islands. These small islands prove to be popular with more affluent avatars wanting a bit more privacy. This seems to be a large market with a lot of opportunities, but without the competition of real-world companies, since most cannot afford to custom-design a small island for a customer at the moment. Smaller and medium-sized virtual companies can do this, and it seems to be a good and sustaining business model, with profit possibilities of 25-30%, mostly dependent on the size of the islands and the look of the island and the environment near the island. It also depends on the objects provided by the land lord - if any objects are provided at all.
More Info
The land business. You can begin small and eventually buy a sim from Linden Lab for thousands of real-world US dollars, but be aware of the competition before starting in this industry. Also, watch the average land price very, very carefully. Sometimes, renting out land is a better option. Lots of people lost a lot of money in the virtual land business lately, but if you use a unique, innovative or one of the newer business models and are willing to invest money and time into a land business, it certainly is still possible to take advantage of the current growth of virtual worlds.
