Sunday, July 20, 2008

Reflections on the land business and relisting DDE: July 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!



Anonymous said...

Although I would love to see DDE trading again, in view of the facts explained by Del, I agree to postpone a possible listing on a later time. Listing make sense for us only if market conditions are positive.

As far as the present situation, unless the company does not hold a strong cash reserve fund, it is normally better to cut unprofitable investments and be more conservative. Eventually, consider alternative investments to diversify risks.

Yes, it would temporally diminish profits but, it is less risky vs. a collapse.

eliale morigi

Anonymous said...

I see potential exchange listing more as a mechanism to share the risks (that Del is currently mostly assuming herself) and define equilibrium share price on on-going basis. In this light, I have to respectfully disagree with Eliale, financial market conditions should not be a main factor in our decision regarding relisting.

I have no problems with postponing the decision till September though.

Vitall Beck

Anonymous said...

In a normal situation the condition of the financial market is of importance when you consider to enter the stockmarket.
But in this case however, since you don't need to attract cash,one
shouldn't hesitate to relist.
My position concerning relisting
remains therefore positive.
Let the market decide the price of the share, while giving the shareholders the opportunity to decide to hold, buy or sell.
And at the same time open the possibility for potential new buyers to enter the market.

Richy Brynner

sevenseals said...

Why waiting with the delisting? Let the shareholders or the market decide what DDE is worth. Even if its only 1L$ or less. Assuming that DDE has a asset value there will be a value of the share at a stock exchange. And if you are of the opinion that the share is too cheap, maybe cheaper than the liquidation value, you can buy back more shares for less money.

Regards, Eric