Second Life’s John Zdanowski

The CFO of Second Life explains what the online virtual world is all about, and how his real-world company measures and rewards employee performance with the Love Machine.

How quickly has the company grown?

The company started in 1999. When I got here in September 2006, we had about 80 people; we have about 200 now. We’ve grown from about $1 million a month in billings to nearly $6 million, in a cash-positive and profitable way. We have pretty complex revenue recognition; that’s why I use billings instead of revenue at this point.

What part of the business generates most of the revenue or billings?

Linden Lab operates the virtual world Second Life, which consists of roughly 4,000 or 5,000 servers that host the virtual world application. Server space in Second Life is called “land,” using a three-dimensional analogy for land. Each CPU can host, or simulate, 16 acres of land. We sell each region as an island for $1,675 as an upfront setup fee, and then we charge $195 a month for the monthly maintenance fee, which is a recurring charge. Residents buy that land, which they can parcel out and resell to people who want to own smaller portions of land. They can [also] develop it and use it either internally or to interact with their customers. Land sales and maintenance make up about 60 percent of our billings.

Most of the rest comes from operating the virtual economy. In Second Life, everyone can use the virtual currency, which we call Linden dollars. The local currency can be exchanged in Second Life at a rate of 270 Linden dollars for one U.S. dollar. We implemented the Linden dollar to facilitate a marketplace of digital goods. I’m working with experts on how to recognize the sale of Linden dollars. I don’t quote revenue, because it’s not entirely clear yet how to recognize the sale of Linden dollars.

So you have to manage the finances of both Linden Lab and the Second Life economy?

We’re breaking a lot of ground in terms of trying to manage an open virtual economy. For the most part, it sounds a lot more complex than it actually is. We basically manage the Linden-dollar economy by managing the Linden-dollar supply. We can reduce the Linden-dollar supply by accepting fees in Linden dollars. So if you upload an image, you have to pay Linden Lab 10 Linden dollars. If you form a group, you have to pay 100 Linden dollars. If you get married or divorced in Second Life, you have to pay a Linden-dollar fee. If you buy a classified ad, you pay a Linden-dollar fee over a period of time.

Do you expect Second Life to go public anytime soon?

I don’t think we’ll be going public anytime soon. But I do believe that this is a very interesting company that can, in the long run, be a stand-alone public company. I think being primarily angel-backed, with Mitch Kapor owning a large portion of the company and the founder owning a large portion of the company, we probably won’t rush to be a public company. Being a small public company, from my experience, is very difficult. At this point, we are self-funded and we generate the cash that we need to continue to grow. Unless there are large acquisitions that we want to do, we should be able to get financed pretty easily. We should be able to finance our own growth.

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