Crystal Ball: Google Buys LL

It's a hypothetical, for sure...but conceivably there's some universe in which Google comes along, sees LL/SL for what it's worth, and swoops it all up.

While not necessarily that probable at the moment due to the nacent nature of this technology, here's why this isn't some wacked out pipe-dream:

1. VR is going to happen, someday. While it's fair to say that VR isn't a mass-market yet, it will be eventually. What sets SL apart is the fact that its customers own the intellectual property that they create - this fundamental idea is integral to a successful 'metaverse', and LL is the only one to really do this part right to-date. It's further arguable that if this is the 'missing ingredient', then SL is the only real VR property of interest out there right now, and therefore if Google decides to do VR (as they have search, email, etc.), they're going to go after SL or at least knock it off. LL is small enough (read: cheap) and bright enough, that Google would probably find it easier to just buy the place/people/technology and also get the small installed user-base as a bonus.

2. Google is quite arguably the world's foremost authority when it comes to clustered computing. Back-end database problems? Pshaw. Google has gobs of technology in this area, and could probably put significant resources toward the Big Computing Problems that plague SL right now. They've also got the cash to throw into the sort of data centers that would make LL Ops weep in adulation. They've also got the ambition, and would probably be anxious to see what they could do if they were in the driver's seat this time around, instead of having to spend up-front resources fighting with entrenched competitors like Microsoft, Altavista, etc. as they did with the Web.

3. As with the Web, VR will eventually become synonymous with "marketplace", and as such will need search technologies. Who knows search better than Google? It's not hard to conceive of an in-world Gap store, where you walk in to buy a Striped Tee for L$3000 that goes into your avitar's inventory...and oh yes shows up on your RL doorstep two days later. When/if this eventually happens, you can bet that Google hopes you found that store by making a search request through their system, one registered teleport duly paid for by The Gap. Oh, and it doesn't hurt to have your own currency either - even Microsoft doesn't have that at the moment.

4. It's important to note that Google's long-term goal here would probably NOT be 'ownership' of the metaverse. That sort of territory is difficult to defend (ask Microsoft), and wouldn't be very practical. The more strategic thought would be to eventually open the protocols once they're stabilized, and define THAT as the metaverse rather than the platform. Then, sit atop of the whole thing leech-like (as they have with the Web)...BUT with the advantage of having much more control over the formative processes this time around that they could play into their favor. Again, the strategy wouldn't be to own the metaverse but rather utilize this opportunity to make their existing market of the Web and other Internet apps that much bigger, accessible, and popular. Bottom line, they hammer out a one-two punch of: having more competitive advantage this time around, and growing a market which is probably beginning to stagnate by their ambitious standards.

I've more on this, but RL duties call... I'm not claming to be a Far Seer of any sort here, but it is an interesting topic to discuss amongst ourselves, isn't it?

I can see this if LL goes cash flow positive (never mind profitable..)

Until they solve that puzzle though, it's all up in the air.

that would be a good thing, great post!!

What makes you think they haven't?

Negative cash flow occasionally MAKES a deal because it devalues the subject property...that is, when the market acceptance is low but the technology has a high chance of success. In this case, they would want the people/technology - the existing business is somewhat irrelevant. Anything that makes the purchase of these true commodities cheaper is a good thing.

That being said, there is a right time and a wrong time to invest in any new technology. The best practice is to wait until the market *begins* to prove itself, then snap up the players before they have a chance to mature. That may have been what you were attempting to get at blaze, but in this case cash flow is not necessarily the leading indicator of when is the best time to make a play. It all boils down to how daring the acquiring company is - you can buy before the market proves itself with more risk and get a better deal, or wait until it is established and make a safer deal. All about risk management, really...

***edited***

Philip admitted they weren't profitable in an article in Red herring. I am pretty sure he meant they were not cash flow positive, otherwise he would have said something.

Anyways, it's not hard to do the math. There is no way they are cash flow positive and it's hard to see they will be for sometime.



Very true. However, I think a part of why SL is working is because LL is paying for people to play. That business model will attract people everytime, but it will not attrack ROI everytime.



Maybe. Google is pretty elitist. Unless they have lots of PhDs on staff, I'm not sure Google would be very excited..



I agree with this mostly. However this infinite bandwidth model is a little odd. I feel like LL is paying more than they're getting for people to play in hopes of cheaper BW prices in the future.

Unless the government regulation changes, I'm not sure BW prices are going to drop quickly like they have in other countries. however, who knows?

I could see Microsoft buying up SL, though. The whole XBox 360 seems to play into this perfectly.

Don't. Ever. Say. That. Again.

I predicted this a few months ago, in a post where I said amazon.com and other sites like that would buy this technology and adapt it for a 3D sales environment. I'll hunt for the post out of my 2000 and post the link.

if sl (or it's market) has the chance of becoming $1 billion dollars.. microsoft might try to by sl.

Not to go to off-topic, but Xbox 360 looked like crap on that MTV demo. The graphics looked like something Playstation 1 could have handled.

However, If they made a keyboard and mouse attachment, then SL would be open to a lot more users, and X-Box live could simply pay SL its charges with the addition $10 a month or whatever for Xbox live.

The problem would be that it would make it even easier and perhaps encourage minors to get onto the adult grid, but I guess that if they really wanted to, they could do this anyway.

Hmm, blaze, your post intrigued me. Why is there "no way they are cash flow positive"?

Consider...

They co-locate around 800 servers (for easy, nice, round numbers; we don't know how many servers beyond the current grid they have online, for their own purposes). Since they charge $195/month for a private sim, I'd imagine they won't be paying more than that for leasing + co-location fees + bandwidth. $150/month for a co-located server is not an uncommon price, perfectly negotiable if you have a thousand machines in the same facility. So, for the sake of argument, let's assume they have $120,000/month of co-location costs.

LL has now around 50 employees, but the largest part of it are part-time employees. Let's assume, for the sake of argument, that they earn an average of $1000/month (rumours have been spread that even the board of directors do not earn that much - but a few are just working 2 hours per day, so it's hard to figure out an "average" salary value). So, around $50k for salaries. Now you need a place to put all those full-time people to work, and let's assume they'll be paying $2500/month for it - since I never visited LL's HQ, I can only wildly guess about the price of their rent. You have to take in account all monthly recurring fees from leased equipment, power, Internet connection, office supplies, some advertising, outsourcing the Mac and Linux clients, etc. - let's take a value like $80k for salaries and all the extra bits (like taxes...). Adding the infrastructure's cost, this is about $200k/month.

Now let's take a look at the revenues. We have around 3000 new residents per month, so that adds up to just $30k. 84% of all 30,000 residents are basic accounts; only 16% are Premium. If we take the lowest possible Premium account payments (yearly account), we're talking about US$6/month for around 5000 residents, so, again, not more than $30k/month.

But finally we have land tier to consider. Let's assume this scenario: 80% of land is actually resident-owned. If we see the worse-case scenario (people paying $195/month for a full sim, which is the lowest tier-per-square-meter you can pay), this would mean that from the 800 servers, you'd get around $125k/month income. Adding that to the income from new residents and premium accounts, this is roughly $195,000/month. But we would be assuming there are 800 residents owning the whole land, sim-wise, which is clearly not true.

But still the figures are not very bad! In truth, only a very few people own complete sims, so the land usage fees are in reality higher. Some data presented by Philip and apparently confirmed by Robin has shown that 3700 residents own substantially more than just 512 sq. m. What is the average? We cannot really know. Land tier fees go from US $5 to US $195, so, just picking an average is too simplistic - if we say that those 3700 people pay, as an average, US$75.00/month for a 1/4 sim, this would mean that they would collectively "own" 925 sims, which is clearly not the case. So, we can assume that, at most, they are one tier level below that, on average, for just US$40/month, and "owning" some 400 or so sims, again, as an average - which we also know it's below the current usage. Still, that's almost an income of $150k/month, which brings us nicely into the green ($220k/month) and even give some breathing space for LL to hire more people, raise salaries, or do a bit of advertising every month.

Of course, all this is merely speculative (since we can only hint at the data, not get hard figures), and overly simplified, but the point is, you can tweak a bit with this business model, and see that LL is not losing much money every month, and, more likely, is making a few extra dollars. Achieving ROI, however, is a completely different issue. But the point is, LL has a working business model, which is very conservative (since growth is linear and not presumed to be exponential; and we have taken into account that over 80% of all users will never pay for Premium accounts), and can scale well without adding extra costs that are proportional to the user base (and, as they get more and more computers on the grid, infrastructure costs will go down and down, but there is a theoretical limit...). Also, while human resources in customer support (and community management) will grow with a larger user base, the "core team" - developers on the server-side or the client-side - will not need to grow much (the current team can develop for a platform with 30,000 users as well as for one which has 1 million users...). And since in SL you don't need company-designed content as LL grows, the income base will grow over the cost base significantly, although, as said, until all costs are recovered, LL may well have to work 3-5 years. It's a long-term project.

So, I wonder what is wrong with my calculations?

Costs in any tech biz are usually always people. I would have put it around 10K per person (which is what I'm used to in tech), but LL is notoriously cheap and like you said, lots of part time people working for peanuts.

So, considering benefits / expenses / etc .. probably more like 5K per person.

That works out to be about 250K on people.

However, I thought some of your other numbers were a bit high.. so, yeah, if total expenses were running around 300-350K they are probably not that far from cash flow positive.

At 7 servers a week, I could see them hitting it late summer (san francisco, where it's still summer in october . Especially because there is often a flood of new people during the summer.

Realistically, though, I can imagine we won't hear the words cash flow positive until the sometime in the new year after the christmas rush of new users.


In the end though, I don't see cash flow positive as a big deal.

What looks like a big deal is scalability and key technical hurdles. If they can't overcome certain challenges, then they're just going to be another low growth activeworlds type biz.

For me those key challenges are:

- scalability
- EQ2 / WoW type FPS (assuming sims which are 'locked' down)
- WoW type graphics engine

Sometime later this decade it'll be less about games and more about education, collaboration over the internet, etc, however clearly that stuff will take awhile to ramp up.

5k per person per month? I wish I were "relatively cheap" labor.

I didn't take the time to closely examine the other figures in this longer-than-my-hand post, but these numbers are LAUGHABLY low.

First of all, the salaries are likely higher than you're estimating. In addition, it costs a LOT of money for benefits, worker's comp, etc. etc. etc.

Secondly, office space for 50 people in San Francisco for $2500/mo?

LOL.

You couldn't even do for *5* people with that, and you'd likely still be keeping an Easton baseball bat by the door to take care of the rat infestation.

I would imagine the rent is probably more along the lines of $25,000 a month. You'd have trouble finding a decent apartment in SF for 2500 a month.

Thanks for all your corrections Yes, you're right on the office rental costs - I did my calculations based on a table that listed prices in square feet but mentally I thought it was square meters. So, the actual values should be around ten times what I've listed - $25,000/month at the least, and not $2,500. Sorry!! I should have been more careful.

Mind you, only half of the Lindens work physically at LL. And even some (like the Liaisons) work in shifts (when not directly from home), so, although there won't be just 5 people at the offices (I agree with that!), I'd say the average will be 15-25.

As to salaries, that was also wild speculation based on the number of people that work full-time at LL. Again, the bulk of LL are currently Liaisons and community-related staff, which, for the most part, do not work full-time. The developer and operations teams will certainly work near to full-time and those certainly will be the greatest cost.

So, I have to agree that the total running costs (infrastructure + salaries + office) will be in the US $250-350K region (like blaze suggested), and the current income probably below US $250K. I'm dismissing the income from setting up new islands and from selling land parcels in US$ from the land auctions as negligible.

I must conclude that the business is very dangerously low-margin As said, the only real advantage of this model is that the major expenses - developer & ops teams, office space - are "fixed" in time and do not need to grow much beyond a certain threshold. Infrastructure has usually diminishing costs over time (although I don't think there will be a significant improvement there, we'll be talking about discussing single-digit percentages at this point in time), but only the infrastructure, Liaisons and community-related staff need to grow according to the growth of the user base - and with telecommuting as an option, office space does not need to grow much more.

So, yes, it works Although I expect that buying shares from LL right now won't make you filthy rich, and I don't see how LL can make the "leap" towards a company operating with large margins using the current model, unless they raise prices dramatically. I'd have to put these on an Excel spreadsheet and see where the critical points are (and it has been a while since I've fiddled with numbers that way), but I'd probably point out the prices - lower them, and LL is likely doomed.

Are we all missing the point here? Half of LL works from home and is not a wealthy techie.
Liaisons do not make $5000 a month, sorry. More like $500.
So they dont need office space for 50 people either.

Right, Eggy, that was my point. Their salaries' budget is nothing near US $250K/month. And LL is not a "techie-only" company - rather the contrary. Of course, the "core team" is working full-time there with Cory, and they have certainly grown in size lately. But most LL employees are part-time telecommuters, and will earn about what you've posted.

Yeah, 5K per person isn't all about salary (salary probably averages about 3K per person).

Salary is only a part of the equation. It's also about:

Salary & Benefits (medical is not free in the US)
Office Leasing
Conferences & Travel
Office Equipment, Computer Equipment & Software Licenses

The reason you roll up those other expenses and not just use salary as they are usually proportional to your headcount.

And then don't forget about Marketing & Advertising

All the other misc. administration expenses that tend to add up after awhile..