What do Second Life and Detroit have in Common: Decline, Neglect… and Hope?

Excerpted from ‘The Virtual Real Estate Market‘ by Pam Broviak, for Public Works Group Blog.

Many people might be surprised to find out there is a virtual real estate market and have a hard time understanding how someone could pay money for something that you can’t physically touch like virtual land. Before visiting virtual worlds myself, I would not have believed people would pay money for something like that. It was only after spending time in places like Second Life that I began to see the value people found in having a virtual space and virtual objects. Over the years I’ve watched as this value increased to create a billion dollar virtual goods industry – reported by TechCrunch to have reached $2.3 billion by the end of 2011.

But while the virtual goods market has increased, the virtual land market, at least in places like Second Life, has seemed to follow a trend similar to that of the physical real estate market in the U.S. In both places, land values have dropped and the amount of vacant and abandoned land has increased resulting in a surplus of properties. Because of the similarities I’ve seen in the offline and online markets and their affects on communities, I thought it would be interesting to look at a comparison of the physical and virtual markets and explore movements towards recovery.

To get an idea of the amount of land available for sale in Second Life, I took a screenshot showing the large number of parcels for sale in an area of Second Life. Each dollar sign indicates a parcel on the market. (The green dots represent people who are visiting a space.)

In most offline communities the number of vacant and abandoned parcels would not appear to be as large as what is seen in the virtual land market in Second Life. But there is one place where it does seem close – Detroit. Below is a screen shot of a website called Why Don’t We Own This by Loveland Technologies showing the number of foreclosed or tax-distressed parcels in an area of Detroit.

Linden Lab offers users a choice between two different types of land for display of their items: Mainland and Private Islands. Before the fall of the land market, mainland islands sold by Linden Lab through auction could cost about $1,000.

Back then, the lowest resale cost was a few dollars per square meter. Today the cheapest resale cost is $0.17 per square meter. This difference is simply a reflection of what happens when supply exceeds demand. It almost sounds exactly like what happened to many developers in the physical real estate market who had invested in subdividing land and were left with vacant lots and no buyers after the market fell. Many of those developers went bankrupt and lost the land to the bank. In Second Life, when owners abandon their parcels, they return to the ownership of Linden Lab.

In the virtual space, people have pointed out that some of the operation costs for hosting a virtual world have been reduced because of lower costs for the infrastructure so tier should be lowered to reflect this. But others have argued that fees cannot be lowered or profits will be lost. In the end, Linden Lab has not indicated in any way that tier will ever be reduced. So people who are upset with paying the level of “taxes” or tier have to make a decision between accepting the costs or moving to another virtual world.

So what happens to a community when costs of land do not decrease, services decline, and the population becomes alienated from its caretakers. Again we will look at Detroit — in the last decade, this city has lost 25% of its population (see Wall Street Journal article). Some of the reasons cited for this loss are affordability (taxes and jobs) and a reduction in services. It almost becomes a viscious cycle because as people move out values fall, properties are abandoned, and taxes must be raised to offset losses. So many properties in Detroit were abandoned that some sections were even closed off. But as shocking as Detroit’s current situation appears to be, it seems it has been steadily declining for decades. There’s an interesting discussion about the causes here: The Reasons Behind Detroit’s Decline by Pete Saunders.

Those who follow the virtual land market in Second Life might see some similarities in that declining graph. And while the elements within the virtual and physical communities might be different and the downward trend not as long, people believe Second Life’s land decline is caused by management issues that sound a lot like Detroit’s: a refusal to discuss or address the decline and the cost of maintaining land, a focus on meeting the needs of one or two primary groups, and a lack of investment in the community to the point where people sense a feeling of neglect. And when I say this, I don’t mean the company managing Second Life is actually neglecting the world. As a person working in government I am well aware of the essential work and effort that goes into operating a community –- work that no one knows about or wants to know about. And I believe Linden Lab is taking care of all those operational duties much like a public works department works in the background to make sure a city keeps functioning. The neglect comes about because in addition to keeping the gears turning, a community needs nurturing to be successful.

Even if you think you are meeting the needs of the people, if the population thinks you are not, then you are not. For those of you who used to play Sim City it is kind of like the newsflash you would get telling you what the people in your city thought about the job you were doing. When they were unhappy, you would try to figure out what you could do next to change their opinion to one that was more positive. Well, unless you were the type who liked to inflict disasters and mayhem on your city just to see how bad it could get.

After 60 years, Detroit is now working hard to stop their decline. They are engaging the public and offering incentives to encourage people and business to move to their community knowing it can ultimately lead to lower costs for everyone as revenue increases. And they are no longer listening to only one industry – now everyone in the community has the potential to voice their ideas and opinions through online sites and public meetings and workshops. The people who love and care about Detroit do not want it to slip into oblivion.

Those of us who love Second Life also do not want it to slip away, but we do not seem to have reached the point yet where the owners of the world have expressed any concern about the loss of land and investment. And we face a challenge somewhat different from people in places like Detroit. Those running our community do so to make a profit and they alone have ownership. In places like Detroit, the people own the community – in the end, they have the power to keep the lights on or turn them off and walk away. In Second Life, this decision is ultimately up to the company owning that world.

Perhaps the owners of Second Life are content to make as much money off the world as possible while allowing the decline to occur until expenditures exceed revenue. Then at that point, they just shut it all down and go on to their next thing. Or they might expect the decline to eventually stabilize and as long as they are still making an acceptable profit, they will be content to leave the world at that size. After all, not every community wants to become a metropolis. And some communities only want a demographic that can afford to “live” there.

Finally the other option is what Detroit has chosen – address the decline and determine a path to turn it around. And just as Detroit is investing significant effort now to accomplish growth, this option would also be the most work for Linden Lab. There are some who have suggested Linden Lab is pursuing this option by launching other potential revenue streams. And some have suggested imposing new fees unrelated to land. If these steps were taken, the company could choose to use new revenues to help meet costs of operating Second Life and still ensure profit while allowing for a reduction in tier. This is somewhat similar to a city adding new taxes or service fees or a city that works to attract a heavy sales tax or industrial base and uses the additional revenues to offset a reduction in taxes for residents. But if the company chooses to build a new revenue base, the key will be to diversify, because history shows relying on one group or industry or revenue stream eventually leads to a collapse. The video below is a trailer for a documentary about communities and the aftermath of this type of collapse.

http://vimeo.com/detroitlives/atftrailer

As the young man points out in this video the “The soul of the city . . .are the people.” So if Linden Lab chooses to follow Detroit’s path, they need to also follow their example of engaging and informing the community and embracing the people because the people really are Second Life. Without them, there is only water, ground, and sky. And people cannot be expected to invest time and money in a community without knowing its plan for the future or feeling like they have a say in that future. As decades of emigration and our example of Detroit have shown, when people have no clear path to the future and lose faith in leadership on top of facing high costs, they will eventually seek out a new world and opportunities.

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Read the full article at Public Works Group Blog, February 3, 2o13.
SL images by Pam Broviak.