Premium accounts and the Second Life business model
by Tateru Nino 
Nov 14th 2008 at 10:00AM
Filed under: Business models, Economy, Opinion, Second Life, Virtual worlds
Much has been made of a statement recently by Linden Lab's new CEO, Mark Kingdon, that 'Premium subscriptions are immaterial in our overall business.' You see, in a sense that's pretty much spot-on. Unless a premium account owns more than 512 square metres of the Linden Estate (colloquially known as the Second Life Mainland), that account is either only very small revenue for the Lab, or actually represents an ongoing cost to them.
Linden Lab's CFO, John Zdanowski said, 'The revenue we generate from premium subscriptions is largely offset by the stipends we pay out to these account holders, so this decline doesn't have a material impact on our business.'
Either you're on an older premium account with a 500 Linden Dollar per week stipend grandfathered in, or you're on a newer premium account with 300/week. There's also a choice of plans, ranging from monthly to annual. Let's take a look at the relative values.
The chart below shows the monthly gain or loss based on the type of premium account (old or new, by stipend) and the billing plan. The US Dollar figures show how much Linden Lab gains or loses each month based on a conservative Linden Dollar exchange rate of L$265:US$1 (lately the Linden Dollar has been trading rather better than that, in the vicinity of 262:1). Losses, we've highlighted in bold.
| Stipend | Monthly plan | Quarterly plan | Annual plan |
| L$300 | +US$5.42 | +US$2.98 | +US$1.48 |
| L$500 | +US$2.40 | -US$0.04 | -US$1.54 |
So, for a premium account that holds 512sqm of Mainland or less, the best Linden Lab can pull in is US$65 per year (plus change) after stipends. At worst, a loss of US$18.48 per year. Are low-or-non-landholding premium accounts common? Zdanowski seems to confirm this: 'We have many premium subscribers who are not land owners. As such, a decline in premium subscriptions does not mean we have a reduction in the number of land owners'
There are, of course, additional costs. Storage, bandwidth, electricity and customer support (the latter is only available to premium accounts).
The Lab's main business drivers are islands and Mainland tier.
Mainland simulators attract at least US$195 per month in fees (it can be higher if the whole simulator is held by more than one person), whereas non-void islands draw a flat US$295 per month. The major difference in costs to Linden Lab is Concierge Support. Concierge support is automatic for owners of an regular non-Mainland simulator, or for users who hold more than half of a simulator's worth of land area on the Mainland.
We cannot begin speculate as to the actual cost of Concierge Support. There is insufficient data to do so. Nevertheless, for a user that holds one Mainland simulator in land, versus a user who holds one non-Mainland simulator, Linden Lab receives an extra US$100/month from the latter at no additional cost to them.
There's also a new Enterprise Level Support with expedited response and additional benefits, but we have no information on the costs associated with obtaining it, nor of the profit margins -- but we doubt that the scheme would have been initiated if it represented an actual loss to the Lab.
Moving forward, the smart business strategy for Linden Lab would be to cut or eliminate premium account stipends, including grandfathered types, and instead offer alternative benefits to premium accounts that cost the Lab less than the stipend amounts (or, ideally, cost nothing at all).
Indeed Zdanowski hints that something of that nature is in the works: 'We are currently in the process of evaluating ways to make premium subscriptions more valuable to Residents and less dependent on Linden dollar stipends.'
That's quite a telling way of phrasing it. After all, if you were planning to add benefits to make premium accounts more attractive in addition to the existing stipends, you'd say that -- it would sound a lot more appealing.
Our rede is that the Lab is planning to take the smart business option and prune stipends, replacing them with one or more other, cheaper benefits for premium accounts. Quite what however is more difficult to say. The Lab has always been adamantly opposed to reducing functionality for basic accounts (well, unless you count access to Customer Support).
What inexpensive benefits could Linden Lab be planning?
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Reader Comments (Page 1 of 1)
Crap Mariner said on 10:13AM 11-14-2008
I think they should go the route of unlocks and level-ups.
Since there's no such thing as a Level 3 Furry or Level 6 Land Baron, then the things to unlock would be the stuff people keep asking for that already exist as features, but have some kind of limit on them:
- Additional Group Slots
- Permanent email-to-avatar gateways
- Discounts on Classified postings
- Ability to post more events per day than 3
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Kara Spengler said on 10:19AM 11-14-2008
I hope they add rather than subtract premium benefits. Since I have a grandfathered account and a new account I would have an automatic reaction to them eliminating the stipend. Quite simply, I would dump my land, have both become free accounts, and probably cost LL more when it comes to resources used and such.
My grandfathered stipend is the main reason why I keep my older paid account a premium one. My newer account is a premium because it was the cheepest way to get 512 more of tier.
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tony said on 2:09PM 11-14-2008
I'm not sure how creating another premium account is the cheapest way to get another 512 more of tier. According to land pricing, it costs an extra $5/month to add 512 to your existing account.
According to the membership page new accounts cost "as low as" $6/ month so that's $12/year more expensive.
Unless you were thinking of creating 3 accounts to create a group and get an extra 10% of land for a group, I can't see how it could be any better at all.
Adz Childs said on 11:38AM 11-14-2008
Good article.
I have a few additional notes.
For a short period of time, in between the 500L and 300L stipend there was a 400L stipend. I believe this period lasted 1 month. But, it was grandfathered like the 500L one. I'm sure a few people have it.
Also, there is a bug that prevents referrals from registering on LL's side premium upgrade bonuses from being paid out to referrers. This may be reducing the number of premium signups, and affecting the economic incentive for upgrading to premium, namely, the incentive of having you friend get 2000L bonus from LL after 2 of your payment cycles. There is a SL JIRA issue for it: https://jira.secondlife.com/browse/WEB-841
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Tateru Nino said on 12:39PM 11-14-2008
I suspect I blinked and missed the L$400/w stipends.
Tinker LaFollette said on 12:06PM 11-14-2008
The money paid out in premium stipends: does LL actually purchase that currency on Lindex, or simply "mint" new L$? The latter would create some inflationary pressure, true, but it would mean no US$ cost for LL. And how big of an inflationary effect would it be, compared to the overall size of the economy?
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Tateru Nino said on 12:44PM 11-14-2008
It is minted currency, but currency minted for stipends cannot be sold on the Lindex, and so represents a diminishment of future earnings.
A stable economy requires the currency pool to grow or shrink in direct proportion to the availability of goods/services within the economy. RL economies attempt to create that balance, but it is difficult to achieve, and leads to all sorts of problems. GDP and GNP are optimistic approximations.
The Lab manages to do it with elegant simplicity since all currency trading is - essentially - a foreign exchange activity. Stipends + the sales by Supply Linden neatly encapsulate the growth of goods/services availability within SL.
rightasrain said on 1:41PM 11-14-2008
maybe if you're a premium then LL will let you post on comment on their blog?
Premium is really a joke--it only allows you to buy more stuff? LL must be one of the few online sites that forces you to pay in order to buy from them. If you have a good product, why wouldn't you want everyone buying it rather than force people through a paywall? And why not just rent from landbarons who seem to take anyone at anytime?
er...are people really that dumb? /me remembers I had a premium account until earlier this week. Stop the insanity! LDS intervention pls!
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Tali said on 2:48PM 11-14-2008
This evaluation hinges on the notion that every L$ given out is a lost Supply Linden sale, which is a somewhat contested interpretation.
It is possible that those with Premium currently simply wouldn't be spending as much money to buy L$ on the Lindex if they were not premium, forcing LL to adjust the sinks (or inject L$ in other, non-paid-for ways) to hold the value steady.
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Eeyo said on 3:14PM 11-14-2008
There was also a time when you had to pay $10 to make a non-premium account, however you got a L$50 stipend. I've got one of those grandfathered in, so LL is practically bleeding money into my account while I pay nothing.
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Kara Harkins said on 3:26PM 11-14-2008
Tony: subtract the 300/wk stipend then compare than to 60/yr for the 512
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steve2470 said on 3:55PM 11-15-2008
The Enterprise Level Support is $25,000 USD per year. I checked into it. Only Anshe and the biggest of the big can possibly afford that.
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Cinco Pizzicato said on 5:33PM 11-21-2008
Tier should be more granular without having to set up an alt and forming a group in order to limit tier cost. For instance, if I'm at $75 and I want 1k more land I have to start paying $125 for a bunch of tier I don't really need. I could bring an alt to premium, plus the 1k tier level, which means LL has to service me twice with stipends.
So the problem here is not really premium, but the tier system. If it were more granular, I'd be more enticed to make a small leap over $75/month, which is obviously what LL wants, remain below concierge level, which is also what LL wants, and get only one stipend payment, which is also also what LL wants.
So let's reform the tier system for the better.
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AnnMarie Otoole said on 12:56PM 11-22-2008
Cinco has an excellent suggestion. I'm right at the 1/2 sim level and if incremental tier charges were available I would now be up to about 3/4 sim but making that first 16 sqm purchase that bumps you into the next tier is a barrier that is too expensive to cross.
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Linda said on 8:04AM 11-27-2008
There are several ways to add more value for Premiums.
Expansion of Group limit.
A more detailed, more informative and interactive Big Map both inworld and outworld.
Expanded outworld management of inworld matters, like;
Group management
Event planning > 3
Smart embedded e-mail support (inworld and outworld)
Smart embedded IM support
etc etc etc
Full website application into inworld objects.
Uploads for L$0 of L$5
Additional quality software applications to support easier creation of content
outworld to be easily embedded inworld, for example: clothes, textures, primitive
building, song list streaming, 3D modelling, sculpting, etc etc etc.
etc etc etc
Not saying that all needs to be done, but there are many option to add value for
Premiums i suppose.
Linda
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Redd1 said on 11:18AM 12-11-2008
Perhaps Linden could go through their records and start to eliminate inactive accounts... say those that have not logged on for more then 6 months to 1 year. Some of the older accounts have land that was free and they could get that back for auction sales.
OOO how about a spell checker for Premium =)
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Tateru Nino said on 11:28AM 12-11-2008
There was a plan last year to eliminate most of a million accounts that had never logged in even once. There's no sign that it ever happened, however.
We're still curious as to what happened.