The current economy and Virtual Worlds

These are indeed interesting times for businesses, most particularly startups.  I always seem to be in a virtual world presentation or at a virtual world conference as the macro-economic situation worsens and worsens.  In stepping back, this downturn should have some surprising impacts on this stage of development of the virtual worlds industry.

By way of context, in my humble opinion, the virtual world industry is still relatively nascent. There have been companies doing virtual world platforms for fun and profit for decades, however as a technology sector overall, they are just now coming into mainstream adoption numbers.  There is the standard first/second/third technology generation tensions between early entrants (many of which are making money) and new market entrants (who are not) looking to disrupt and capitalize.

The virtual world companies that are in the middle of (or about to seek) fund raising will find their valuations pushed down as a best-case-scenario, with 'no capital availability' as a worst-case scenario.  Typical sources of capital like friends/family/angel investors are all feeling the pain of watching their personal portfolios shrinking on a daily basis, and are therefore less likely to invest in a speculative venture in an increasingly-crowded sector.  The venture community is suffering from a combination of gripping fear, lack of self confidence, and overall paralysis.....but only at a certain altitude.  Large VCs are most impacted, as they have so much more capital to put in to play that they need certain (absurdly large) valuations of the startups they are injecting capital into.  Smaller funds, which invest in smaller denominations/valuations, are going to clean up during this time. 

Bad news for VW startups wanting large valuations about now, good news for smaller VCs with capital on hand and VW startups looking for early smaller rounds.

What about the impact of the economy on the broader value proposition of the industry?  Lets break it down a step at a time....

Gaming- The worlds that are focused on gaming (casual or immersive) will be relatively unscathed if you use history as an example.  People seek to distract themselves during hard times, so movies, games, alcohol sales, and any other way for people to forget that their portfolio is tanking are historically safe bets.  The high-end of the market (big screen television sales, gaming PCs unit sales, third-quartile-pricerange wine sales) will soften as it always does during a downturn, which will hamper adoption of graphically intense MMOGs and VWs. 

    End result = Good for VWs that are gaming/entertainment focused, unless it was predicated on advertising revenues and not currency or virtual good sales, in which case, find a buyer soon.

Social Networking- During downturns, people reach out to their personal and professional network for job opportunities and just-plain-solace. Sitting around a virtual campfire commiserating about the economy will be a safe bet for a while, and social networking sites in general (whether avatar-mediated or otherwise) should see a large uptick in traffic as people seek synthetic camaraderie and community.

    End result = Good for VWs that are social networking focused

Collaboration-  Here's a counter-intuitive case.  Enterprises, even more than individuals, will institute new measures of austerity in order to weather the downturn.  Even the invulnerable Google showed us their mortality with today's soft-peddled negative guidance. 

You would think that this means that corporate travel is going to be cut back and therefore this is a great opportunity for virtual collaboration to take the reins and make rapid inroads into the Enterprise.  Well, not exactly.

When downturns like this happen, enterprises often over-react and lock down all hiring, purchasing and new projects.  It's belt-tightening at the extreme.  If the virtual world project isn't already in-progress at said enterprise, it's highly unlikely that the purchasing department is going to grant you a Papal dispensation for your technology trial when the person in the cubicle next to them just got laid off five minutes ago, and they are next to meet with the 'consultants'.

    End Result= Bad for the budding corporate collaboration virtual world vendors.  Write it off to bad timing.

Event Substitution- From the Virtual Energy Forum to virtual tradeshows, there are ample reasons to nail the coffin tight on traditional trade shows.  They are absurdly inefficient with time, money, and the environment.  Unfortunately, with fuel costs plummeting due to a global slowdown in demand, the costs of attending these conferences are no longer as objectionable as they recently were, which dries up an excellent rationale for virtual events over meatspace ones.  There is still the environmental argument, to be certain, however people are a little preoccupied with food/clothing/shelter right now, and less focused on carbon emissions of trade shows, sadly.

    End result = Bad for VWs that are exclusively event/conference focused, for now.  In the long term, this is still a smart buy.  It'd be nice if the market proved me wrong on this one, and realized the cost savings inherent in this model.

The parachute in many virtual world platforms' business plans is to be acquired by a large technology company.  During these hard times, I suspect you'll see limited (read 'fire sale prices') acquisition activity by the major tech firms, as they need to keep their powder dry in the event that this situation is a 10-15 year drought and not a 24 month one.  All of the portents and omens certainly point that way, and these large companies are already run by their finance groups anyway (don't tell!).

Where does that leave us?  The predicted consolidation in this currently-overpopulated technology sector will be accelerated as underfunded startups will join with like-minded underfunded startups in efforts to stay afloat through these rough times.  Larger companies that are already making profits in this space are best positioned, provided they are reasonably cash-flow-positive and don't need capital infusions in this tricky VC climate.....they just need to continue to close business and pay payroll until the clouds part.

The sad casualty will be the increasing genetic diversity happening around the fringes of the industry as the consolidation will defocus everyone from expanding as they concern themselves more with fortifying their current market position.

If you have the capital on hand, Mr. Startup, this will be a great opportunity for you to take a market at wholesale prices.  Wait about 12 more weeks, then hang out a sign that says 'we buy distressed VW startups with more than a million users' right on top of the one offering to purchase the technology assets of startups that could have disrupted your business model for the worse.  Buy them and shelve them in that Indiana Jones warehouse next to the Ark of the Covenant.  You'll be happy you did so soon enough.

Comments

[past]

All old hat,

Computer Associates did all this in 1999. Bought up and buried VRML.
No open standards/corporate 3d for anyone...

Not that it ever made sense anyhow. But you needed something to "consult" and "conference" about...