No diamonds for Second LifeBig Spenders ?

by Douglas MacMillan found at businessweek.com 

Alyssa LaRoche is rolling in Linden dollars, the hard currency of virtual world Second Life. Sure, the money is digital, but it can be exchanged for real U.S. greenbacks, or any other currency for that matter.

Under the alias Aimee Weber, LaRoche designs clothes, plans events, and helps companies set up shop in the virtual world for big consulting fees. But when she recently opened up her checkbook to pay for her avatar's virtual wedding (yes, it's a common occurrence), she made a discovery that brought her back to reality: In Second Life, there's no such thing as a diamond wedding ring.

The problem, you see, is that rare and precious stones as we know them can't exist in Second Life. That's because once purchased these items can be easily duplicated, undercutting the basis of their market value. Some virtual jewelers make cubic zirconium rings and earrings that shine convincingly, but you won't find diamond baubles dangling from the necks and ears of avatars.

Virtual second life world residents shell out real dollars for nonexistent clothes, cars, and real estate. Will real-world luxury brands and diamonds capitalize? 

Linden Loot

Since there is little economic value assigned to rare items in this online world, sprawling estates and lavish sports cars abound as signs of wealth, or at least for those who are status conscious, as a means of keeping score. (Not too different from the real world.)

"Everyone [in Second Life] is a luxury consumer," says Reuben Steiger, CEO of virtual world marketing consultant MillionsOfUs. "Very few people go into a virtual world and decide they're a hobo." Even virtual hobos wouldn't have it so bad, since in Second Life having bread on your plate and a shelter over your head are hardly essential.

Bumming around in a virtual world is fun for some, but the vast majority of Second Life residents buy and sell user-generated goods and services, and keep their pockets stuffed with Linden dollars. Virtual currency is bought and sold on Lindex—a currency exchange Web site where users buying in are automatically hooked up with users cashing out.

Last February more than $5 million (that's Uncle Sam currency) changed hands on Lindex alone. Like real-world currency, conversion rates fluctuate with the economy—as of this writing, $1 is worth 267 Linden dollars.

And just like in real life, if you're a connoisseur of luxury goods you need to have a fair amount of dinero. In Second Life, there's evidence of some big spenders.

Last March more than 800 users spent over 1 million Linden dollars, or about $4,000. Ailin Graef, the virtual real estate mogul who last November claimed to be the first Second Life-made millionaire, says there is a market for high-priced, high-quality design in homes and other virtual commodities. "There is no real upper limit when it comes to people spending money on art, self-expression, and uniqueness," she says.

The highest-priced home in Dreamland, her popular residential community in Second Life, goes for about $420. However, she says some "well-off individuals" have paid more than $10,000 for virtual properties.

Status Symbols

Merely living in a big house or wearing a fur coat isn't enough to stand out from the crowd, so the top spenders look for items with meticulously programmed designs, textures, and animations. Philip Rosedale, CEO of San Francisco-based Second Life creator Linden Lab, has the power, money, and influence to get his hands on just about anything he wants in the virtual world. When asked what personal possession his avatar, Philip Linden, holds most dear, he says he's most amazed by clever little objects, like virtual wind chimes.

"Think about that for a moment," he writes in an e-mail, "virtual wind chimes." Second Life merchants sell wind chimes with lifelike movement and sound, but at about 50 cents, they're hardly an indulgence in luxury.

A few entrepreneurs have honed in on this demand for uniqueness and quality better than others. A mysterious resident named Starax Stotasky earned notoriety in Second Life from sales of his Starax Wand, a magical object that conjured eagles, demons, and dozens of other fanciful creations.

It sold in limited production for between $60 and $120, and because of its complexity was impossible to duplicate. Yet many residents abused the powers the wand granted—like summoning buildings on somebody else's land—and new laws were created that rendered it obsolete.

Even though Second Life residents can fly from place to place rather than drive, cars are a popular and cheap commodity—you can buy Scions and Pontiacs for about $1. But an avatar that went by the name of Francis Chung brought to market the Dominus Shadow, a retro two-seater created with painstaking detail both inside and out. At about $40, it's the most expensive car to be sold in Second Life and an envied status symbol among residents.

Real World Infiltration

The past year has seen a deluge of entertainment, media, apparel, and automotive brands from the real world establishing a promotional presence in Second Life. But seeing little potential in the young, technology-oriented demographic, makers of luxury goods have largely stayed on the sidelines.

That may change if two upscale fashion brands, Lacoste and Calvin Klein, succeed in stirring up profits in their current Second Life campaigns. The French alligator-logo shirt maker recently announced an avatar modeling contest in which the six finalists will share a prize of 1 million Linden dollars.

And to help promote its new CK IN2U fragrance, Calvin Klein has begun distributing "virtual scents," which make fragrance bubbles dance around happy-in-love Second Life residents. Next up: diamond rings?

Douglas MacMillan  in New York.