Monday, July 28, 2008
Do with it what you will... Comments are welcome.
I say the following somewhat sheepishly - I was one of the business owners that was listed on the WSE for a year until March of this year, and while I was listed there, I was a supporter of the exchange and what it was trying to accomplish. My own experience there was overall a good one - I was able to use the exchange the way it had been intended - to raise money to expand my business, and was always able to provide an excellent return to investors. But I have to say, that I now regret ever having my name associated with the WSE, and in particular the owner, Luke Connell. I delisted in March and have been dealing with the investors privately, and it has all worked out well - the transition was a good one, and the people who invested in my company are being treated well and seem satisfied.
I saw some of the shenanigans going on around me with other companies and with the owner of the WSE, but (I am somewhat ashamed to say) was willing to turn a blind eye to them because they did not affect my company directly, and because as I say, there WERE some good honest people there.
I think we have to be careful to separate the owner of the WSE from the businesses that were, and still are, listed there - some of which are operated by some wonderful, establishes, respectable people.
In February of this year, in response to the decision by the WSE to do away with Lindens and implement their own currency, and in light of the terrible lack of communication that was forthcoming from Luke about his plans and the fate of the WSE, another biz-owner and I organized a meeting of a number of listed company "CEO's", to discuss the issues and present a united front to Luke about our concerns. We had one meeting during which we aired our concerns to each other, and a number of CEO's (myself among them) stated their intention to have some kind of answer from Luke about his plans, or to take further action to protect themselves and their companies.
Within a matter of hours, the transcript of this meeting was sent to Luke, (must have been by one of the participants...) and within a few days, a number of companies were involuntarily delisted, and their assets (cash and shares in other companies) were confiscated by the WSE. Their accounts were locked (as was mine for a time), and they were not even provided with a list of shareholders from which to work. Millions of Lindens worth of assets changed hands from the company CEO's to Luke.
My company was left alone - and I am just cynical enough to believe that it was because it had only modest assets that could be seized - all of my land was of course owned by my account, not the WSE. It may have just been because I was less mercurial than some and chose my words more carefully. I had a long discussion with Luke about the WSE and his plans, and in the end, I decided that I simply could not continue to participate in an organization that took these kinds of dictatorial and arbitrary actions.
I have always been careful about what I have said publicly about the WSE, both because there ARE still people I count as friends running companies there, and because I personally had over a million Lindens tied up in the WSE when it closed in January - a large chunk of cash i was planning to use for dividends, and a number of shares in companies there. Luke has a long history of simply canceling accounts and taking the assets in it if people speak out against the WSE - so I have had to be careful what I say.
But, I simply can't stand by and watch people get set to throw their money back into the WSE. It is likely that if I speak out, I will lose whatever I have in there - but at this point, I am not sure that it is ever going to be possible to get it out anyway, and frankly, I am willing to take the loss if it prevents other people from investing any serious money there. There is simply no way that Luke could open the WSE and afford to honor a cash-out of all the existing balances there. So I am assuming that there will be a period of moratorium on withdrawals (perhaps a couple of months), during which people can deposit money into their account, and trade with existing balances, but not take any out. I cannot believe that the WSE has any real money left after this long time, so that current balances are going to have to be covered by new deposits - which sounds a lot like a ponzi to me...
To echo the advice that has been given already by others - if you are planning to invest in the WSE, do it only as a game and not as an investment. There are no rules, no regulations, and to my mind, there is no honor at the WSE. Luke has a proven history of seizing other people's cash and other assets when he doesn't like what they have to say. I suspect that as a result of this post, and some others I intend to make, that I will suffer a similar fate soon.
If you want to put a few dollars into the WSE because the drama is funny, or you want to see how a mock market works, go for it. But if you are thinking that the WSE offers a realistic mechanism for making money on an investment, there is a long line of investors that have lost theirs shirts, waiting to disagree with you. There were a few people that have made money on the WSE, but I am convinced that it was mostly done with insider information, the use of alts to manipulate the market, and back-room deals.
So, yeah... I was one of WSE's biggest supporters for a long time, but it's time now, with the WSE set to reopen, to tell you all the hard (and somewhat humiliating) lessons that I learned on the inside.
The WSE is not to be trusted. If you are looking for a fast Linden, take your Lindens and put them in a Sploder - your chances of a return are much better.
Sunday, July 20, 2008
For the last couple of months, I have been thinking a lot about the land business in Second Life, and have posted about it on several forums, as well as done a couple of posts here with some preliminary thoughts. Over that time, the number of empty plots on some of my sims has continued to increase. After a couple of messages yesterday from long term tenants that had decided to leave their land, I was disappointed to see several of my sims sitting more than half empty.
Normally, this would not be a huge reason for concern – it has happened before a couple of times that the normal turnover of land has resulted in more empty land than usual – but the difference this time is that the IM's coming in requesting land seem to have turned from a healthy stream to a sickly trickle, and I am at the point where I am considering some radical action. Every empty sim essentially makes two others unprofitable, since the profit from them has to go toward paying tier for the empty one. And more than this, when i visit friends and explore SL, there seems to be more and more empty land everywhere on private estates. To date, I have had some success in converting a couple of sims to Openspaces, which have been doing better, but I fear that the initial excitement about Openspaces has dampened, and the market has become flooded with other land owners trying to capitalize on this new market as well.
I have a few choices – I can try to sell off the empty sims, or in the worst case simply abandon them to LL if there are no prospective buyers. I can try a couple of different rental models over the next month to see if occupancy picks up. Or I can continue to pay tier on empty islands...
Linden Labs has already lowered the price of islands significantly, and has signaled their intent to lower them again in the future. I also think it is highly likely that they will open up the Openspace sims so that they can be purchased by anyone (at this point, you have to own at least one regular estate to be able to purchase an Openspace). Both of these will make it ever more difficult to keep land rented out. And significantly for land businesses that have investors and shareholders, the change in LL policy also means a change in the way I think about land – I can no longer afford to think of land as an asset since it now has very little real value on the market – I would be unlikely to be able to get more than $700 for an island on the market, and perhaps much less, since I suspect that there are more and more people who are being forced into a position to sell their islands because they cannot cover their tier.
I think the days of running a profitable land business the way I have done so for the last two years are coming to an end – it is only a matter of time before Linden Labs policies, the massive growth in the land mass without a corresponding increase in the population, and the poor US economy, are going to drive it into the ground. What I want to avoid is being one of the land owners who refuses to recognize this, and tries to hold onto what they have far too long, and thereby loses everything. There are some land owners who have catered to a specific theme and may be okay, but I have never done that – I have provided more flexibility on my land than most, but have not done a lot of themes and have rented land more as a commodity than anything else. What I don't know is how long it is going to take – whether it will be three months or a year, but my guess is that it will not be longer than that.
At this point it looks as though DDE is going to have to start downsizing, and unfortunately I don't expect a huge return from selling off islands – the prices are simply too low right now. The problem for my shareholders (and me) is that downsizing, while it reduces costs, also reduces potential revenues, and so the absolute amount of profit will decline, while the number of shares remains constant. If things go the way they have been going the last two months, I will have less and less profit left over for dividends and buybacks.
Which brings me to my conundrum. Because DDE is now a quasi-public company in which the share price has been established (by me), and because I do not have the expertise or time to be able to broker share sales from one investor to another, both investors and I are stuck in the current model. There is no way to let the market decide share value and provide an opportunity for shareholders to take these trends and act upon them. If I am right about the land business, then the engine that drives DDE will slowly become less and less able to provide returns and buybacks, and shareholders have no way out.
On the other hand, in light of the state of the land business, I would expect that the only outcome of relisting on another exchange, after perhaps an initial bubble of interest during which share prices might rise as new investors come on board, would be a gradual decrease in share price over time to reflect the changes in the land business and the scaling back of DDE operations.
Under the current model, I have assumed a disproportionate amount of the market risk. By guaranteeing share prices, I have no protection against a worsening of the market. On the other hand, I may have less and less cash available to honor those commitments, and the buyout of shares may take far longer than anticipated, or possibly even become impossible if things get very dire and DDE is unable to turn a profit at all.
As I hope you all know by now, I have always held the shareholders' interests above all, even above my own interests and my ability to make any money personally from SL. To date, in two years, i have never taken any money out of SL for myself, except early on to repay a modest amount that I invested into SL out of my pocket. In spite of the success of DDE, I have never profited personally from any of it. Any Lindens I have garnered from dividends or a salary have been put back into the company, either as a straight gift, or to buy shares from other shareholders to increase my ownership.
There was a time when I thought that eventually, I would have a nest egg that i owned completely, and that there might be a payday coming down the road. At this point, I am resigned to the belief that this will not occur – that the “assets” I thought we owned are actually not assets at all, and by the time I have managed to purchase the lion's share of DDE, it will be worth very little.
I don't have a big problem with that – doing business in Second Life was never about the money for me – it was about the challenge and the opportunity to learn and meet people – both of which I have done in abundance. So, in that spirit, the challenge now is to guide DDE through a difficult transition, and do so without putting my RL financial situation (which is precarious) in danger.
Rest assured, that I am not simply going to roll over and play dead. I still have a few tricks up my sleeve and will do all that I can to keep DDE profitable – I will enter new lines of business, i will adapt the land business to cater to different markets, and I will continue to work hard to make a go of it. But it is only fair that you all understand the road that we are on – it will not be an easy one.
Given the uncertainty of the land market right now, and the uncertain future of DDE, I think it would be unwise to pursue relisting on another exchange and the current time. However, the feedback I have received to date has been overwhelmingly in favour of relisting (with a couple of notable exceptions from major shareholders). Based on the feedback I have received in comments and IM's, well over ½ of the DDE shares (excluding mine) have spoken out in favour of relisting.
Which is why I have made this post. I am not going to do anything precipitously or quickly, and I wanted you all to know my thoughts about the future before we make any major decisions. What I propose is that we wait until at least the end of the summer, and see where we are in September, before making a decision on relisting. I hope that this meets with the approval of shareholders. I am not ruling the idea out, but I see no reason to fast-track it, especially considering that the liquidity on the exchanges right now seems to be at an all-time low.
Ok – time for a group hug! I will continue to rely on you all for advice and support as we move forward, and i will do a better job of posting my thoughts and progress as we move forward. As always, your comments are welcome, and I would even go so far as to say necessary – so please take the time to make your thoughts known to me and the other shareholders. By working together, we may yet beat the odds and pull DDE out of the fire!
Monday, July 14, 2008
However, the adage for any good business has to be "adapt or die". This is particularly true right now, in my opinion, for the land business in Second Life. The future is not as certain as it was, and it seems clear that Linden Labs' intention is to continue to reduce the price of purchasing land going forward. Whether or not this will spell the end of the "land baron" as we understand it remains to be seen.
So, I wanted to lay out the pros and cons of relisting, as I understand them. Then, I will hold a shareholder meeting, and elicit comments from shareholders here, in the company group, and through personal IM's to the major shareholders. In the end, I am willing to be swayed by the will of the majority. In effect, i will be taking a "vote", although no formal mechanism exists for me to do so - there are few enough shareholders that it can be done relatively painlessly. If more than 50% of outstanding shares (not including my own - I will abstain from the vote) want DDE to relist, then I will seriously consider it and do some serious research about which exchange to approach. So you know, my initial "gut feeling" is to go with the International Stock Exchange (ISE). Although it is small, it has a good track record, and seems to be run honorably.
First, it makes sense to provide a brief company valuation. Before the change in Linden Labs pricing, the Net Asset Value per Share for DDE was between 3L and 4L per share, depending on land prices. Under the current LL pricing model, the NAVPS is more on the order of 1.5L - 2L per share, with a liquidation value considerable lower. And there is an ongoing debate as to whether or not land can even be considered an asset. If not, then DDE in fact has very few assets at all.
However, the profit model is strong. Revenues are in the 3,000,000L per month range, with costs about $2,400,000, yielding profits of about $600k per month, or about 0.13L per share per month. Dividends have typically been (and will continue to be after September) at least 0.1L per share per month - so the annual yield on shares from dividends alone is about 30%-40% on a share price of 3L per share.
I think Vitall beck has outlined the main potential benefits of relisting:
1. The market determines share price: philosophically - I think this is best. The current plan is set, and while it provides a good return for investors, it does not take into account the effect of any factors which change the value of DDE, for better or for worse. A free market would allow the investors to determine the price of DDE shares, based on the best available information, without the heavy hand of Big Brother (or Big Sister in my case) steering the ship so directly. Now, it has to be recognized that this is a double-edged sword - it may mean higher prices for the stock (which is good for existing shareholders), but it may also mean lower prices, especially if the land business becomes more difficult.
2. Liquidity: if DDE relists, shareholders can buy and sell stocks as they wish. This would both allow new investors to buy in, and allow current shareholders to sell their shares when they wish at market prices. Under the current system, I don't really have the ability to allow shareholders to sell off - i simply don't have the time or infrastructure to become a trading platform.
3. No mandatory buybacks. At this point, I have put in place what i consider a fair plan for buybacks over the next year or so at established prices - which is not optional. If DDE relisted, these would obviously cease - shareholders would not be required to sell me any shares, and buybacks could be done at market value with whatever cash was available (starting in September). This would serve to help keep the share price reasonable. If investors know that I will be buying back shares every month, the share price would be more stable.
1. Higher risk. Under the current plan, investors know pretty much exactly what they are going to get. over the next year or more, their shares will be bought back at preset, increasing prices which will offer a decent profit for most shareholders. If DDE relists, there is no way to know whether the price will rise or drop.
2. Lack of liquidity and consistency in the exchanges. The stock exchanges in SL are all suffering from a lack of liquidity, which makes it difficult for investors to get good value for large investments. Although DDE has been successful in the past at attracting investors, there is no certainty that this will continue. And more fundamentally, the share price of companies on the exchanges seems at times almost random - many companies are either radically undervalued or overvalued based on their published financials, and at times there seem no rhyme or reason to it. Prices are subject to "gaming" by a relatively small number of investors under some circumstances.
3. Guilt by association. this is a bit more nebulous, but as you all know by now, I am not happy with the lack of regulation on the exchanges, and have been appalled at the actions of many of the exchange operators and CEO's running companies on them. By listing DDE on any of them, I am essentially buying into at least one exchange's behaviour and am aligning myself at least to some degree with the exchange and the companies on it. I have a fierce sense of loyalty when i get involved in something, and would feel honor bound to support the exchange as much as my own ethics would permit. It was in the end a conflict between my loyalty and my ethics that led me to delist from the WSE in the first place.
So - there you have it. I would be interested in your thoughts on the matter, and will actively pursue them. Comments on the blog would be helpful, so that everyone can see your thoughts, but I will also post to the group, and will contact the top 20 or so investors personally to solicit feedback. In addition, i will hold a shareholder meeting in the near future (thinking next Saturday at 3pm SL time at this point).
Please note - I am making no promises one way or the other, but I need to know what the will of my investors is so that I can make my decisions in their best interests - so please provide me with some feedback. And if you do comment on the blog, please identify yourself - an anonymous comment is the same as no comment at all...
Friday, July 11, 2008
I have been relaxing on vacation for the last week, and it has given me some time to reflect on my SL business and put some thought into what the future holds for DDE. Since the delisting from WSE in March, things have been moving forward well. I wouldn't say that business is booming - it has been a difficult couple of months for the land biz in general - but things are consistent. Occupancy of the sims has dropped somewhat as I have mentioned before, but is still high enough to return a consistent profit. The Openspace sims are doing well.
As you all know, when I delisted from the WSE, it was with the intention of winding down DDE and eventually getting out of the land biz. A month later, though, Linden Labs announced new land prices, effectively reducing my assets by 40%, which made selling DDE a lot less desirable. however, the time pressures that made me want to wind down in the first place, are still there, and I am finding it more and more difficult to devote the time necessary to run DDE effectively. Nevertheless, since March, DDE has actually expanded to take advantage of the new Opensapce market, buying new sims for clients as they are needed, and when cash was available.
I have always only kep a modest cash reserve, enough to cover about half of my monthly tier at any one time - because it always made sense to me to put the money to work instead of holding it as a cash balance. Right now, DDE has enough cash on hand to pay about half of its monthly tier (which is approaching $8,000 USD per month). As you all know, DDE has been able to continue to provide dividends to shareholders and I have been able to buy back shares with my own money as we have gone along. The ultimate aim of this was to be the sole owner of DDE (eventually), and then consider my options.
Recently, I have begun to have some concerns about the land business in SL - I am hearing from many land owners that renters are harder to find, and I am not sure of the direction Linden Labs is planning to take into the future. I am worried that keeping such a low cash reserve is dangerous - if I were to lose a significant number of renters one month, I would be in danger of defaulting on tier payments, without enough time to sell off assets if it became necessary. In addition, I have lost out on a couple of opportunities to buy inexpensive sims (from some of these same land owners who are selling off to cover tier).
I know that DDE has been consistent in providing dividends every month since it first went public about 15 months ago - for a long time we provided weekly dividends, and have probably provided more 1.5L per share in dividends over that time. I have always wanted, and continue to want, to share the bounty of whatever success I have with investors. However, I think it would be prudent at this point, given my concerns, to retain a larger cash reserve for a "rainy day", or to position DDE to take advantage of opportunities that become available in the next six months.
So, I am proposing a three month "dividend holiday" for June, July, and August, during which no dividends would be distributed. I may still do limited buybacks of shares with my salary, if profits warrant a salary. This would give DDE a chance to increase cash reserves and maintain a more conservative financial position, and to address my own level of anxiety.
It's difficult for me to even propose this - I have always taken pride in our unbroken track record. However, after much thought, I am convinced that it is the prudent approach given the current state of affairs.
Since I don't really have a mechanism for "voting", I am going to assume that my shareholders will trust me to do what I think is best, unless I receive an outpouring of concern from them. If that happens, I will rethink my position and continue to communicate.
As always, please feel free to IM me, or leave a comment here with your questions, comments, or concerns.
Tuesday, July 8, 2008
I am just taking a few days vacation - wooot! However, I have the final June numbers ready, and will be completing the dividend and buybacks in the next few days.
During the month of June, I did buy a few new Openspace sims - they are doing very well, so I have expanded when a client has wanted a sim but I have had none available. So, as of the end of June, DDE now has 19 regular islands, and 25 Openspace sims. Occupancy levels on the regular sims are not yet what they were in the spring - but the Openspaces are all full but one.
June was overall a good month, but I did use some funds for the expansion.
I am expecting to provide dividends of between 0.075L and 0.1L per share this month. I have taken the monthly salary this month (250k) - and will be using my salary and dividends to buy shares for myself.
What I am proposing for this month is to buy back as many of the shares of one large investor that is trying to sell out - and not buy back shares from anyone else. So, for most of you, your share totals will remain unchanged this month.
Please contact me if you want to get some additional shares from the individual that is selling off.
If you were counting on the buybacks for a little extra cash - please let me know as soon as possible - but remember, as of July, share buy back prices increase from 2.50L to 2.75L per share - so waiting will get you a little extra in future buybacks.
And remember - if you have any land needs - please contact me - it's good for both of us ;-).
As always, please contact me with questions, comments, or concerns, or leave a comment here on the blog.