My Blog: Land Price Bubble: Will You be Hurt?

[temporarily disabled until it can be revised based on excellent feedback]

Here is the article. It seems funny now that the crash is happening.

http://infomyth.com/sl/Guides/land_bubble.htm

If the land bubble bursts, the land barons who have been jacking up prices will have the most to lose. Personally, I think it couldn't have happened to a nicer bunch of folks.

Agreed I have all my properties but 1 sold, so down with those land barons!

1. Would like to know where you get $700 for a server? I suspect the cost may be just a bit higher than that. New Class 5 servers are all dual-core dual-processor machines, each capable of supporting 4 sims, one per core.

2. Use market orders for L$-US$ conversion. With Supply Linden on the market, you have no way of knowing what a "reasonable Lindex limit order" might be.

3. Your costs for a Linden Labs server cannot in any way be equated to regular web-hosting services. You are getting so much more than a server, you are getting all the supporting architecture that makes SL work; Log-in servers, database servers, the asset cluster, all the interconnections that allow you to move from one sim to another, etc. Not to mention some VERY fat datapipes that allow you and 20k+ other people to all connect at the same time.

All that aside, you make the same points that have been made in these and other forums, over and over again. The land bubble will collapse when wannabe land barons can't make their tier, or LL starts cranking up the land-making machine again. They've been swamped with private island requests, once that glut has passed, I would expect to see more mainland sims coming up.

As for First Land, good luck to all in trying to find it.

As for land in general, buy it for fun, don't invest any more than you can afford to lose.

Max

I just wanted to briefly say that I found the commentary in this blog to be massively ill-informed.

I really enjoyed that article - I needed a good laugh.

Interesting Article, but I think you're getting the server hardware prices wrong. I'd assume a Class 5 box that hosts 4 Sims would cost some 3k-5k in Hardware (it's server hw, not consumer hw!), or some 1000 USD per Sim.

You can't run a 700 USD piece of (consumer) hardware 24/7 on high loads and expect it to survive for long. Even if it's beefy enough to run the four sims, which I'd strongly doubt.

However, the bubble will deflate eventually. I agree with you on that one.

In retrospect Elanthius, do you still feel that way now that the crash has actually occurred?

My next prediction: someone will launch a class-action lawsuit lol. (For the sake of sanity I hope not and do not advocate it, people need to take responsibility for their actions).

Yeah sure, we had a crash. Or a correction or whatever you want to call it. However it wasn't because "OMGz land isn't worth what everyone is paying for it!!!" it was because LL made a blog entry designed to cause maximum panic and then backed it up with a surprise dump of 40 sims on the auction block.

A lot of people have been floating around opinions that land isn't worth what it is actually being traded for. This argument is fundamentally wrongheaded. If I pay X for land then that means it is worth at least X to me regardless of your opinion.

Now, I'm talking in retrospect and hindsight is always 20/20 so take this as you will. The reason a crash was inevitable is because LL can (and will) at any time push the market in whatever direction they like. Now, some might say this absurd market volatility is a bad thing but it may be inevitable. Hard to know. Frankly I assume that LL did this whole thing deliberately in order to cause a crash but it's not clear to me how that is to their benefit. I didn't see any discussion at all about this inherent instability in the market in your blog.

err server holds one sim unless its a void sim then it holds 4.. that is the really ill informed part I think?

as for the crash yes I like many didn't buy mainland land but bought from a land baron who didn't over inflate prices so my land is still worth what I paid for it (not much) however there are many around me who are trying to get 400% what they paid for their land and I want another slice so here is my chance Mainland or no

One point I see many times people repeat saying again and again is Linden Labs can make as many land as they want and it is unlimited.
But I think this point is FALSE. Each sim is an autual server, you need air condition room to ensure they run in a certain temperature. And it takes manpower, hardware and bandwidth to maintain these servers running. The logic of umlimited land is that Linden Lab has the ability to build unlimited amount of servers, add unlimited amount of supporting staffs for these servers and have unlimted amount of air condition room for these servers.

By the way. I would argue the server is land because the machine sitting is some room in a lab ACUTALLY DOES OCCUPIED PHYSICAL SPACE IN RL. Even a virtual machine need to be run on a real machine that take up space. I have never encounter any computer in this world that doesn't take up actual space yet.. if you find one let me know!

(Ducks for cover) - to reduce the level of complaints they were getting about your bots?

Seriously, though - from a business standpoint, if Linden Labs has a bunch of new servers that they've invested real time and money and space in that are rarin' to go, wouldn't they want to get those things online? Even if they might not get as much in auction as they would if they timed the release, I'm guessing they've figured it out financially to still be worth it. AND it makes the thousands and thousands of people who complain about land prices all day and night happy, and if they aren't complaining as much, it increases business and frees up Linden time for more productive activities.

Actually I thought my blog quite clearly explained the inherent market instability -- hence the term "bubble". Classic bubble. Greed fuels prices resulting in "investors" holding large surpluses with inflated prices. The point about inherent value of servers is merely that LL makes land, not nature or God (or whatever you believe).

This is how Linden Lab benefits:

1) They prevent the bubble from growing even larger and being even more catastrophic when it blows. Think about the worst zit you had in high-school...

2) They release more supply to end users, increasing the value and participation of Second Life to more people. Watch: first land will now free up, paying populations will grow.

I'm sure Linden Labs realizes the negative consequences of people losing large amounts of money (and it was inevitable) on real estate in Second Life -- not just speculators, but ordinary people wanting a house or store. My heart goes out to those who bought mainland in the past two months (the reason I wrote the blog, my friend who was considering dropping U.S.$500 on a land speculation group is a real person, not fictitious).

Maybe Linden Labs planned this as a pre-emptive strike on the bubble (hints in the blog suggest this is so), maybe not, but that the correction has occurred earlier rather than later means less casualties.

The SL Capitalist's Phrasebook

"it's the free market", "if you don't like it you don't understand how the world works", "you're just jealous"
- Linden Lab decision that makes me money

"instability", "appalling interference with the free market"
- Linden Lab decision that loses me money

No, no. Don't get me wrong. I might grumble under my breath slightly at the loss of capital but ultimately it's clear to me that more land is better for everyone.

Also to address some other points. The blog refers to instability caused by greed and profiteering and evil capitalist dealings by land swoopers and does not in any way whatsoever refer to instability caused by LL's business model (which I mentioned earlier is probably unavoidable and possibly not detrimental at all). This "greed" argument is part of what I referred to earlier as massively ill-informed.

Actually I never used the word evil, don't put words in my mouth; I firmly believe in capitalism and don't view "greed" as evil, but it definitely fuels speculative behavior. I apologize in advance for the cross-post, but found this wikipedia article that describes the situation:

http://en.wikipedia.org/wiki/Economic_bubble

The wikipedia article could be relabeled "Land Prices in Second Life in the Past Three Months".

Real-life is replete with examples of economic bubbles, and when you recognize the pattern it became a "no-brainer" to see it in SL.

This is true, and I apologise for paraphrasing poorly. Meanwhile we will never know if we were in a bubble or not because the market corrected based on a huge change that would have crushed any normal market. Imagine if OPEC suddenly released ten times as much oil as they had done the previous month. Or if someone found a way to make cars ten times more cheaply than before, or whatever. It would have the exact same effect. In fact, the fact that prices only dropped by 30-40% shows quite a reserved reaction to the rate of land supply increasing ten fold.

It WAS in fact a bubble that was corrected as you stated.

I liken LL's mass release to when the US increases interest rates to cool down a hot market.

Also. anyone in their right mind knew this would eventually happen. LL stated time and time again that they were dealing with private islands before releasing additional mainland. My business partner and I run a club/casino and a mall. She constantly wanted to buy land at the inflated prices, as they were rising. I repeatedly advised her not to based on LL's blog on taking care of the private islands, back in december.

LL did SL a good service by springing this release on the public. If a specific date would've been announced, the land barons would've been able to sell at a slightly lower amount in order to have reserves to buy up a good portion of the 40 released regions.

All we knew beforehand was that they were ramping up new sim developments. Some of us accepted that fact and tried to play the 'land game' anyway. Some of us won, some of us lost -- some more than others. There's always an inherent risk when you're dealing with something that is NOT a free market. The land market is exactly what a free market isn't. In a free market, people are encouraged to sell for whatever price they choose -- price fixing is a serious criminal offence in many countries. Here, price fixing runs rampant with many people encouraging others to taking part in their schemes to attempt to increase or decrease prices, etc. In a *real* free market, the government does not step in and crash prices if it's not happy where prices are going. Sure, they can increase or decrease interest rates, but this takes time, nevermind the fact that it isn't the big investors that usually lose most when such happens -- it's the little guys that don't realize what a change in interest rates will do to their ROIs.

That's not to say what LL did was a bad thing, just that because of their *absolute control* over what happens in SL, nobody really has any power ultimately when it comes to land prices on mainland. If LL wanted mainland to fall to 0L/sqm, they could do that. They could take away the minimum 1000usd bid, heck they could make sims with buy it nows of 10usd if they wanted -- they make all their initial investment back on tier fees anyway. That's not to say LL would do that, merely that they could AND that is the difference between a free market and a dictatorship.

That being said, I believe that in the grand scheme of things, this decision was rendered in a perfectly sound economic fashion weighing the benefits and costs associated with such a move. By crashing the price as fast as possible LL could reduce the number of people who lost money while unfortunately increasing the amount of money that those in the 'land game' lost. That seems like a fair tradeoff. I'm aware of a handful of barons who lost $500+, but all things considered, 500usd is really trivial compared to what many of us made in the last few months... Most of us have just accepted this as the risk of dealing in mainland. Are we angry? Of course. But will we quit SL over something like this? Most definitely not. Matter of fact, most of us are preparing for the 'next crash' which should unfold soon (within a week or so). Now, imagine for example if they were to have slowly crashed the market by instead of releasing 4 sims a day like they were beforehand, that they ramped up production to say, 8 sims per day. This would of course crash prices -- prices were already crashing at 4 per day... But, how many regular users would notice this subtle crash? Probably not all that many. Many of us land barons would inevitably be forced to dump this land on these users who aren't aware that the market is crashing. Take me for example. When the 40 auctioned sims hit the auction block, I sold as fast as possible. I had roughly 200 512s or larger plots at the time. Is it better that I lose a bit, or that 200 people buying these plots over the next few days lose a lot? I know many people who enjoy SL on budgets of as low as 20usd per month -- and are premium members. These are likely the users who would be the angriest should they lose 30-40usd on that plot of land they bought because someone like myself dumped it and they thought my price was good, which considering I knew the market was crashing, knew my price really wasn't. The Second Life Manual has a nice forward from Mr. Rosedale where he clearly elucidates what he envisions for SL in the future. His future is not one of land barons making millions, despite the fact that the press is all over that. His vision is a 3D world where creativity flourishes. How can creativity flourish if the prices are so high that only the wealthy or people attempting to make a business out of SL can afford to get into the market?

Sadly, these large price fluctuations that are occuring yesterday and today are making ample grounds for the capitalists to come out and play the 'land game' once again. I've decided to stop 'playing it' for a couple days -- it's just not rational to be attempting to predict the future when there are so many unknow variables for the time being -- Where is this new continent? How large will this new continent be? How fast will sims be released after these ones are sold? Will LL abolish the 1000usd minimum bid if people stop placing 1000usd bids on the auctions? Is LL planning on increasing tier fees to ensure that those interested in owning a sim don't start buying mainland sims granted the lower tier fees and potentially lower upfront costs (not to mention not waiting half a month for 'delivery')?

What becomes clear at the moment is that there are more questions waiting to be answered than answers ready to be provided to these questions. Until answers begin being provided it seems only rational that we will observe increased market instability...