Second Life Lessons

Real-world businesses face the costs and learn the benefits of setting up shop in the online universe

Launching a digital version of a car within an online universe where most residents fly or teleport from place to place can be a challenge, even for an innovative company such as Toyota (TM). The Japanese carmaker initially planned to give away virtual versions of its hip, boxy Scions within the 3D universe of Second Life, the growing Web-based world with more than 1 million "residents," who collectively spend $7 million a month on virtual land, products, and services (see, 5/1/06, "My Virtual Life").

But Toyota's marketing execs soon realized their tactic of freebie autos could easily alienate indigenous Second Life car vendors and consumers. Toyota didn't want to seem out of place among more flamboyant automobiles that have wings or other engineering details that, well, just wouldn't fly in the real world.

So to respect the Second Life economy and cast the company as hip, Toyota will sell digital, customizable doppelgängers of its entry-level Scions for $2, the going rate for entry-level cars designed and sold by Second Life residents, starting in early November. For a relatively small investment—the Scion campaign was designed by San Francisco-based firm Millions of Us, which typically charges in the low six figures for Second Life projects—Toyota will be able to position itself online as a pop culture-savvy brand.

There's My Audience

It's a move that its competitors are soon to match: General Motors (GM) and Nissan (NSANY) will also hawk pixellated customizable cars. All three hope to create an aftermarket for the modified vehicles and use virtual customer feedback for real product development.

Opening a virtual office, selling and market-testing digital replicas of products, and asking employees to create 3D online personas or "avatars" are quickly becoming action items at companies seeking to brand themselves as hip, or simply wanting to reach Second Life users, nearly half of whom are female and whose median age is 32.

This has made the online world a hot advertising outlet for brands ranging from Warner Bros. (TWX) to Adidas (ADDYY) to Microsoft (MSFT). While advertising's traditional media seem to be losing eyeballs, the population of Second Life is growing at 35% per month and its economy at 15% per month. Or in terms of annual growth rates, the population is growing at 978% and the economy at 270% to date for 2006.

Big Virtual Business

And revenues at the companies helping advertisers set up shop in Second Life are growing proportionally. The most popular four—Washington-based Electric Sheep Co., New York's Aimee Weber Studio, Sausalito (Calif.)-based Millions of Us, and London's Rivers Run Red—are quickly establishing the standard costs and services. They're also illustrating the market potential for companies that specialize in 3D graphics and programmers of scripted, interactive gadgets.

All four companies have grown exponentially over the past year. The largest and oldest, Rivers Run Red, has been designing for Second Life since the world launched in 2003 and has worked with clients such as Adidas, Reebok, and Audi. Today, the company has 17 real-world clients with products or a presence within Second Life, and charges between $5,000 and $1 million per campaign.

"The campaigns are part of an ongoing media mix and most clients are looking at their Second Life projects as taking up occupation in a new territory," says Justin Bovington, the company's chief executive. "They think of Second Life as a new region and an emerging market channel. It's an ongoing commitment." Bovington adds that Rivers Run Red has various retainer contracts, but won't discuss the financial details.

Serious Inquiries Only

While Second Life campaigns are only a portion of Rivers Run Red's overall business (the company also works on other new media branding and advertising projects), Bovington says that last year, Second Life-related contracts made up 20% of revenues. Today, it's more like 80%, and the company has expanded to 32 employees, up from eight one year ago.

Seeing a similar boom in business, the Electric Sheep Co. has grown more than twelvefold, to 25 employees, up from only two the same time last year. They now won't take on clients with design budgets of less than $10,000, says Giff Constable, Electric Sheep's director of business development. Currently, they have 30 real-world clients, the most of any major Second Life developer.

An average Second Life presence will run a real-world business between $10,000 and $200,000 via Electric Sheep, whose clients include Starwood Hotels & Resorts Worldwide (HOT) and Reuters (RTRSY) (see, 10/17/06, "Big Media Gets a Second Life"). For a mere $10,000, "we can design an event, create custom architecture that isn't too complicated, and even throw in a virtual, interactive version of a real-life gadget that works in Second Life," says Constable. "But it won't buy a fancy island."

As Individual as Snowflakes

Constable won't say what higher incremental fees will buy for corporations seeking a Second Life store or brand campaign. He says that most companies ask for a one- to three-month launch campaign, although some companies such as Starwood have said that there is no real end date to the project.

"Each Second Life campaign we've done so far is so customized. That's the beauty of it," Constable says. "But it's then difficult to generalize what type of design or development 'package' can be offered."

On the other end of the spectrum is Aimee Weber Studio, which exists only in Second Life and has 15 real-world clients, about half that of Electric Sheep. Last year, the studio didn't exist but today Aimee Weber has five employees.

Weber usually designs a two-month campaign, and her clients have included American Apparel and the U.N. (see, 6/27/06, "American Apparel's Virtual Clothes"). Her fees fluctuate from $5,000 for "small builds with little or no scripted interactivity," she wrote recently via e-mail, to her biggest job so far with a budget of $150,000.

Long-Term Relationships

Like Aimee Weber, Millions of Us has 15 real-world clients and launched less than one year ago. With 27 employees (only five are full-time), its fees are slightly higher than Weber's and Electric Sheep's. Millions of Us charges between $20,000 and $400,000.

"We spend about four to eight weeks developing a campaign," says Reuben Steiger, founder of Millions of Us, whose clients include Toyota and Intel. "Then we usually produce a high-profile launch event and help with 12 weeks of managed campaigns with regular events."

While companies are certainly spending real money to get into Second Life, none has yet been in the world long enough to evaluate how successful their efforts really are. And a Second Life campaign isn't without its dangers. One problem that all four firms—and their clients—must face is hackers who shut Second Life down periodically. Linden Lab, the company that owns Second Life, recently met with federal authorities to address this cybercrime.

The Avatar's New Clothes

Also, many long-time residents view the arrival of big brands with suspicion or worse. Big Brands are often seen as corporate threats to the native mom-and-pop shops and most have been slow to create interesting in-world experiences. Some Second Life vigilantes have gone so far as to set off bombs, via malicious computer code, that destroy virtual buildings or cause the application on your computer to freeze. American Apparel has also had to deal with virtual protestors, scandalized by the scantily clad models in the company's real-world ads.

In addition, there are also unofficial quotas on the number of digital people that can fit in a given space (usually between 60 and 90), mainly due to the server's limited capacity, so far, to render graphics quickly enough to accommodate large crowds of avatars. When an area is swamped with visitors, a bug in the system can make avatars' clothes disappear—bad news for retailers hoping to set up shop in Second Life.

But Philip Rosedale, CEO of Linden Lab, is not worried because the supporting technology is continually progressing to accommodate its growing number of residents. "Second Life is improving in resolution and functionality at the rate of Moore's Law. The real world isn't getting better by the day."

And Is Real

Nor does Rosedale view Second Life as a multiplayer online role-playing game such as World of Warcraft, or even in the same category as Will Wright's forthcoming Spore, which allows players to design their own species. Instead, Rosedale sees Second Life as a platform, in the same sense as MySpace. In the future, Rosedale sees Second Life as a possible 3D Web browser.

The ambitious idea, as Rosedale explains it, is that eventually instead of using your mouse to move an arrow or cursor, you could walk your avatar up to an (AMZN) shop, browse the shelves, buy books, and chat with any of the thousands of other people visiting the site at any given time about your favorite author over a virtual cuppa joe.

"If you're on now, you can't ask [other Amazon users] whether they liked a book or to meet up again for a reading group. Second Life is more real-time, social, and experiential," said Rosedale. Amazon CEO Jeff Bezos has invested in Linden Lab, and engineers have been investigating a partnership although there is nothing official yet.

No New Tricks

The current flood of corporate press releases announcing a Second Life for presence has echoes of the late '90s, when every CEO wanted an e-commerce site. Then, as now, it was cool and timely, but not easy to make any real money. (American Apparel, for example, has sold about 5,000 articles of digital clothing since July at $1 a piece, or only $5,000 in three months.) Also, while the population of Second Life is growing quickly, only a fraction are online at any given time.

On a recent Sunday afternoon, 13,000 people or 1% of the total residents were actually "in-world." Those in-world can also be choosy about where they spend their money, if they spend any at all (many newbies sightsee for some time before ever shelling out). Finally, since it is not a traditional game with a defined quest, it is difficult to know what to do and where to go, meaning that many a new "resident" might end up a one-time tourist.

Cynics and skeptics point out that big-brand product placement in real-life simulation computer games is nothing new, and launching digital versions of real goods in Second Life could just be a fad. In 2002, video game behemoth Electronic Arts (ERTS) garnered the first seven-figure fees from McDonald's (MCD) and Intel (INTC) to feature virtual products within The Sims Online.

Doing Your Homework

What sets Second Life apart is that the products offered by true-life brands can be customized by the people using them—a growing trend in the real-world marketplace. And Second Life is an interactive, social-networking zone where companies hope not only to find customers but to connect remote employees to one another and recruit new hires.

Advertising giant Leo Burnett Worldwide (PUB), for instance, is building an "ideas hub," an online meeting space where its 1,600 "creatives" around the world can attend conferences and industry social events, and where the company can attract new talents who are already Second Life experts.

For a company considering jumping into Second Life now, serious homework is needed. Competition among big brands is heating up. It's no longer enough to be the first in an industry to launch a presence in Second Life. Just as Toyota, and now Nissan and General Motors, conducted market research in the digital world before unveiling its plan to sell virtual cars next month, savvy corporations and their Second Life developers must carefully analyze the competition and differentiate their products.

Questions such as "Who are the other big brands with instant name recognition in this new market?" And "Where are the new research and development opportunities in this new space?" And "How exactly do we measure the results of this campaign?" are just as real in Second Life as they are in ours. We've collected a list of to-do's for real-world companies interested in getting a Second Life. Click here for the tip sheet.

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