Sunday, October 24, 2010

The Creative Destruction of Second Life

remixed cc image courtesy
Having failed to cross the chasm into mainstream adoption, Linden Lab is embarking upon a creative destruction of Second Life to save itself from ultimate decay. What's wrong with a little destruction?

Crossing the chasm
On March 15th I wrote a blog post entitled "Linden Lab Leaping the Chasm?" outlining my thoughts on the divergence of the Linden Lab vision for Second Life from "connect everyone to an online world that advances the human condition" to something more akin to "3D chat with super easy shopping".

The crux of that post was based on Geoffrey Moore's model for what he called "crossing the chasm". Crossing the chasm is the process of moving a product from an early adopter market to the early majority and eventually into the mainstream. From the Lab's point of view, despite a thriving economy and steady growth, Second Life was stuck in the sweet spot of early adopter goo and the only way out was to find new markets - the kind of markets that make money and not just headlines.

With limited resources, targeting a new market would mean sharpening the focus of the Lab. My analysis in March suggested that the Lab was poised to do several things:
  1. abandon Second Life Enterprise for business. (check)
  2. likewise, surrender the already saturated Education market and attendant educators. (check)
  3. merge the Teen Grid with the Main. (check)
So far, each of these changes has transpired, but Moore's formula includes finding a beach head from which you can pursue the riches of your new market. So where is the new beach head? My guess at the time was:
 ... if Viewer 2.0 is not for finding things to do and it's not for content creators or land owners, then what's left?  Maybe I'm using the Moore model too rigidly, but is there a niche adult market out there that would serve as a suitable beachhead and give the Lab a leg up for the next wave?
My best guess is what a friend of mine likes to call "playing house with paper dolls".
Now that we know where to land we need a reliable vehicle for getting there.

Hit the beach!
The innovative vehicle the Lab chose for the chasm crossing was none other than Viewer 2.

Heralded like a new messiah - the golden gateway from which the early majority could storm the Second Life beaches and find their own virtual land of milk and honey - Viewer 2 sadly hit the virtual shores with a thud.

Regardless of your personal opinion of Viewer 2 one thing remains clear - it's not exactly the landing craft that the Lab had hoped it would be. Growth has not escalated, nor has the Viewer stimulated new adoption. The adoption of third party viewers (TPV), however, is still healthy despite a predictable yet unsettling breach of contract and trust with what was then the most widely used viewer.

Unless the Lab improves Viewer 2 dramatically and/or cuts off the open source developers from emerging capabilities, third party viewers will continue to deliver innovative experiences and charter a significant percentage of the resident logins leaving the Lab without a chariot.

So now what?

Meet Larry the Liquidator
Have you ever seen the movie "Other People's Money"?  The film stars Danny Devito as "Larry the Liquidator", a corporate raider on the lookout for a take over.

Larry finds a perfect candiate in New England Wire & Cable - an obsolete but debt-free company - and embarks upon a mission to take it over. In the process he ends up falling in love with the daughter-in-law lawyer of the company President Jorgenson (Gregory Peck) but that's just to sell box office tickets.

The real story crescendos with the ultimate war of ideologies at the annual shareholders meeting between Larry and Jorgenson. Jorgenson pleads a case of community, family and people:
...God save us if we vote to take his paltry few dollars and run. God save this country if that is truly the wave of the future. We will then have become a nation that makes nothing but hamburgers, creates nothing but lawyers, and sells nothing but tax shelters. And if we are at that point in this country, where we kill something because at the moment it's worth more dead than alive -- well, take a look around. Look at your neighbor. Look at your neighbor. You won't kill him, will you? No. It's called murder and it's illegal.
Well, this too is murder -- on a mass scale. Only on Wall Street, they call it "maximizing share-holder value" and they call it "legal." And they substitute dollar bills where a conscience should be. Dammit! A business is worth more than the price of its stock. It's the place where we earn our living, where we meet our friends, dream our dreams. It is, in every sense, the very fabric that binds our society together.
So let us now, at this meeting, say to every Garfield in the land, "Here, we build things. We don't destroy them. Here, we care about more than the price of our stock! Here, we care about people. ..
Larry successfully counters with the money punch:
...You know, at one time there must've been dozens of companies makin' buggy whips. And I'll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. Let's have the intelligence, let's have the decency to sign the death certificate, collect the insurance, and invest in something with a future.
"Ah, but we can't," goes the prayer. "We can't because we have responsibility, a responsibility to our employees, to our community. What will happen to them?" I got two words for that: Who cares? Care about them? Why? They didn't care about you. They sucked you dry. You have no responsibility to them. For the last ten years this company bled your money. Did this community ever say, "We know times are tough. We'll lower taxes, reduce water and sewer." Check it out: You're paying twice what you did ten years ago. And our devoted employees, who have taken no increases for the past three years, are still making twice what they made ten years ago; and our stock -- one-sixth what it was ten years ago.
Who cares? I'll tell ya: Me. I'm not your best friend. I'm your only friend. I don't make anything? I'm makin' you money. And lest we forget, that's the only reason any of you became stockholders in the first place. You wanna make money! You don't care if they manufacture wire and cable, fried chicken, or grow tangerines! You wanna make money! I'm the only friend you've got. I'm makin' you money. ..
Second Life might be the best damn social virtual world there is, but it may be rapidly becoming obsolete and I still think the Calculus of Mesh will play out to be nothing short of a distraction on the course to creative destruction.

Welcome the Creative Destruction
The film may sound like a chick flick dressed in a business suit, but Other People's Money is a classic treatise on capitalism framed in creative destruction, a concept popularized by Joseph Schumpeter in "Capitalism, Socialism and Democracy" (1942).

Creative destruction is a mash-up of evolution and economics theory, recognizing the endless cycles of disruptive technological and societal change and the business need to continually adapt or die. Business resources are scarce, and in order to make progress it's often necessary to cast off whole parts so that you can reallocate resources to new innovations and efficiently navigate to new territories. In effect, you do have to commit murder (as Jorgenson phrased it) in order to live a new life.

Having failed to cross the chasm ala Moore, Second Life has to find a new life. The Lab started with a focus on the markets that presented the highest revenue opportunities, but it has to continue to destroy vestiges of the "old" business to create the new. Perhaps this is why Linden Lab initiated a restructuring and 30% staff reduction in June and is continuing to shed people throughout the year as their tenure is complete.

Exit the King
With his unending passion and charisma combined with those frequent reminders that "Second Life is not all about making money", Philip is destined to be Jorgenson. As he said in his opening remarks at the last town hall meeting with CTO/COO now last adult in charge, Bob Komin.
The fundamental belief that I have is that Second Life and virtual worlds are going to profoundly affect the human experience, profoundly, and in a positive way. That is the mission of the company to make that happen and it's my personal inspiration and dream to see that happen. 
And I think the very fact that although we face many challenges as a company, as a community, and we're here today to talk about a lot of them, I'd just like to start by saying that nothing that I've seen in these last few years has done anything but strengthen the certainty that I have that that fundamental vision is correct. 
That virtual worlds are going to have a huge impact on humanity. And, if I can be part of that in any way I want to.
I am speculating that this is why Philip had to retreat from his position as interim CEO as quickly as possible.

He may have left of his own accord or he may have been asked to leave by the Board - the point is moot. Second Life - the business - is all about making money. But Philip appears driven by a vision about Second Life - the world - that is not grounded in financials.

Enter Bob
Bob Komin joined Linden Lab in January 2010. Prior to joining the Lab, Komin was the CFO for early stage solar energy start-up firm Solexel.

Before Solexel, he was the CFO for privately-held Tellme Networks. While there, Komin helped to build TellMe Networks from pre-revenue stage to over $100 million in revenue and grow its employees from 160 to 300. He was also a leader of the acquisition and integration of Tellme by Microsoft in a transaction valued at approximately $800 million. That ties in nicely with the rumors earlier this month that the Lab and Microsoft were in discussions.

Before TellMe, and after 5 years in senior financial roles at Cincinnati Bell, Komin was the VP, Finance & Treasurer of the founding executive team of Convergys, a NYSE traded company that was formed by a spin-off and executed its $225 million IPO in 1998. Komin was responsible for raising over $2 billion in equity and debt offerings while VP, Finance & Treasurer at both of these public companies. (source)

In a few words, Bob groks business. That's a good sign for the future of Second Life.

Creatively Deconstructing Interactions and Transactions
Maybe Bob doesn't grok Second Life like an oldbie, but that doesn't matter. Whatever you thought Second Life was - it won't be what Second Life is about to become - whether it comes from the mind of Bob Komin or some lurking Larry the Liquidator.

In my personal experience - from writing this blog and being a Resident for nearly five years - there are broadly two ways to see Second Life.

One is through a lens (as Philip describes) of changing the human experience through human interactions  - encouraged by financial transaction.

And the other (hinted at by Bob Komin) is through a lens of changing the virtual world experience through financial transactions - encouraged by human interaction.

These are slightly different lenses but profoundly different business models. The latter is the engine of things like Farmville and Groupon, the former is still largely unknown yet observable in emergent non-profits like Kiva.  (Guess which investors favor?)

The good news for Second Life Residents is that these are not mutually exclusive, and it helps to understand where the priorities of the Lab reside and think about whether it's time to creatively self-destruct, how and to where.

For me, I'm holding fast to my Virtua Spiritus Mundi, as long as the second Second Life allows and I will continue to creatively destruct my own experiences.

After all, what's wrong with a little destruction?

“In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed” - Charles Darwin
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