Second Life's Real-World Problems

By Kristina Dell

Reality is catching up with Second Life, the much hyped 3-D website that lets users create alter egos called avatars who can walk, chat, fly, have sex and buy and sell virtual stuff for real money. The ballyhoo surrounding this online community has led multinational brands from Reebok to Toyota to establish beachheads on Second Life to interact with consumers and be a part of the next wave in social networking. In April market-research firm Gartner predicted that by the end of 2011, 80% of active Internet users will have some sort of presence in a virtual world, with Second Life currently one of the most populous. Business Week last fall put on the cover a real estate agent whose virtual land deals made her the first person to earn $1 million through the site, and TIME included Second Life creator Philip Rosedale in this year's list of the world's 100 most influential people. Even NBA commissioner David Stern now has a Second Life avatar, although he told TIME, "I don't think it captures the essence of my personality or good looks." He was kidding, but the site's failure to live up to expectations is serious business.

The overall traffic has been disappointing: the site has nearly 8.7 million registered members, but the number of active users is closer to 600,000. One reason for this gap may be that the technology isn't intuitive. (I spent my first hour on Second Life wearing both sneakers and high heels because I couldn't figure out how to discard one pair. And yes, I passed Computer Science 101.)

Every business has its growing pains. But as companies explore why their expensive virtual outposts remain largely empty, Second Life has other, potentially more serious, issues. Governments are scrutinizing the four-year-old site as a possible haven for tax-free commerce, child-porn distribution and other unsavory activity. The dilemma for Linden Lab, the company running Second Life, is how to rein in its creation without alienating hard-core users. Fans love the site as a way to meet people and experiment in self-expression. And companies are drawn to these techno-savvy trendsetters who spent 22 million hours on the site last month. But some devotees are so upset by increasing commercialization that a group called the Second Life Liberation Army last year gunned down virtual shoppers at American Apparel. So-called griefing, or on-site harassment, is on the rise. Says Gartner research chief Steve Prentice: "Second Life is moving into a phase of disillusionment."

It's also running into trouble with governmental authorities. In July FBI investigators prompted Linden to shut down Second Life's casinos because online gambling is illegal in the U.S. German police are looking into allegations that members traded pornographic photos of real children on the site, and several European governments are upset that adult avatars are having sex with childlike ones. Linden responded this summer by banning lewd acts with minors as well as "other broadly offensive content," a move that annoyed longtime users. Soon, grumbled one participant on the site's blog, "the only things left to do on Second Life will be getting griefed in sandboxes and going to church."

Linden is also dealing with other disgruntled users. After it booted Marc Bragg over questionable virtual real-estate deals, the Pennsylvania resident sued the company last year for confiscating property worth thousands of dollars. While Linden won't discuss the merits of pending litigation, it's clear that Second Life's virtual assets have actual value. Linden lets users retain the rights to digital imagery they create on-site, and the result is a thriving economy that's as real as it gets. Attorney Stevan Lieberman made $20,000 last year helping Second Lifers file patents, trademarks and copyrights. And $6.8 million changed hands in June on the site's Lindex, where the exchange rate is about 270 Linden dollars to one U.S. dollar. Congress is looking into whether this commerce should be taxed.

Amid low traffic and raunchy behavior, American Apparel and Starwood Hotels are a couple of the big brands that have pulled out of Second Life recently. Linden wants to keep others from jumping ship, since it makes money selling plots of land for as much as $1,675 apiece and charging owners $295 monthly usage fees. Some corporate outposts have figured out how to engage users and get valuable feedback. One of Second Life's big selling points, says Cory Ondreijka, Linden's chief technology officer, is "this porousness with information flowing in both directions." The site's financial success will depend in part on Linden's improving its search engine as well as the ability to have more than 70 avatars in one place at a time. Companies are keeping their fingers crossed. It could open up a whole new world.