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The Almighty Buck Entertainment Games

Financial Analyst Calls Second Life a Pyramid Scheme 334

Posted by CmdrTaco
from the get-in-on-the-ground-floor dept.
Petey_Alchemist writes "Silicon Valley gossip rag Valleywag is carrying a story about Second Life being a new spin on the old pyramid scheme. The article, which consists mostly of selections from the report of financial consultant Randolph Harrison, suggests that not only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it. It says 'Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.'"
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Financial Analyst Calls Second Life a Pyramid Scheme

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  • by ArsenneLupin (766289) on Wednesday January 24, 2007 @10:00AM (#17736932)
    ... or any other thing that may give money to the lucky?
    • by FleshMuppet (544521) on Wednesday January 24, 2007 @10:08AM (#17737006)
      ... or any other thing that may give money to the lucky?

      No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends. This is commonly referred to as liquidity- the ability to transform whatever type of investment one has made into actual cash. The article asserts that transferring money from Second Life 'assets' to real-world cash is much more difficult than people are being made to believe, and that the only way to make money is to pass off those 'assets' to some other sucker.

      • Re: (Score:2, Insightful)

        by ArsenneLupin (766289)

        No, because the value of a company's stock is based on real assets, liabilities, and

        That would be the so-called "book value". However, many healthy companies are worth much more that their assets...

        income:

        This is a more realistic source of value. Value is based on income versus risk. However, even here, many companies are/were tremendously overvalued (no way the company's income (even future income) could justify the share price), especially during the period before the bubble burst...

        ...the only way to make money is to pass off those 'assets' to some other sucker.

        ... as is the case with most shares as well (yes, some companies do have share buyback programs, but these ar

        • by FleshMuppet (544521) on Wednesday January 24, 2007 @10:58AM (#17737538)

          Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles, and that I might be feeding a troll here, but I am simply explaining the argument the analyst takes in the article, which you seem to not have read or are ignoring altogether. It does not matter what you think of the stock market, etcetera. The analyst has stated clear, identifiable criteria that differentiate the stock market and what they regard as a market in Second Life. You can dismiss the value of trading ownership in a company, but that doesn't change the fact that it is different than what the analyst claims is happening in Second Life.

          Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors. Once they have some investors coming in, they begin to pay back the earliest investors in order to create hype and garner more investors. People make money in ponzi schemes, but only by being at the top of the pyramid. What separates a Ponzi scheme from an actual market is that in an actual market, the items being traded have value outside of the system itself, and that access to liquidity is therefore available at levels other than the top. The article claims that because cash exchanges and the corresponding exchange rates are controlled by the people at the 'top', they are the only people with the ability to achieve substantial liquidity, and therefore, to make any money. This is why they say it resembles a Ponzi scheme more than an actual market.

          That would be the so-called "book value". However, many healthy companies are worth much more that their assets...
          This is a more realistic source of value. Value is based on income versus risk. However, even here, many companies are/were tremendously overvalued (no way the company's income (even future income) could justify the share price), especially during the period before the bubble burst...

          Differences in valuation and perception are what make the stock market work, and why people make and loose money speculating in the market (and in other markets and industries as well). You can pay too much for anything, be it a stock, a pig, a bushel of corn, or necklace with fake diamonds you find on ebay. That doesn't make the market a pyramid, because those things have value outside of the market itself, and can be transfered independently of the market place. On the other hand, in a pyramind scheme, the items traded generally have all of their value because of the scheme itself, not because of their value to the outside world, and access to liquidity is not independent of the people who sold you the item.

          ... as is the case with most shares as well (yes, some companies do have share buyback programs, but these are the exception, rather than the rule...).

          This is simply false. Shareholders not only control the company, determine who gets serves on the board, and other items of fiscal policy, but they have very well-defined avenues of legal recourse. Not only that, but the company itself has no control over the valuation of its stock other than how it presents its performance to the outside world. Which once again, is strictly regulated. Once again, you may have issue with the way that the stock market works, but it is clearly different than the way that a pyramid scheme operates. TFA claims that all access to valuation is controlled (and manipulated) by the people at the top to their financial gain, and the detriment of others, and you can make snide comments about how the stock market operates, but it does clearly operate in a manner different than that of a Ponzi scheme.

          • Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles,

            Well put. Actually, I was just trying to make a first post. Of course, once the people took that FP seriously, it was very hard to resist the temptation and run with it... ;-)

            ... in the article, which you seem to not have read or are ignoring altogether.

            Well, if I had read the article, I would have been unable to get FP.

            That being said...:

            Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors.

            Well, that also happens in the stock market, see the recent article about spam-based pump & dump schemes.

            This is simply false. Shareholders not only control the company, determine who gets serves on the board, ...

            Correction: majority shareholders control the company. Small-time investors are out of luck most of the time. And yes, the larger inve

      • Re: (Score:2, Insightful)

        by Mr. Slippery (47854)
        No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends.

        Not for a long time. Most do not pay dividends, and their value has little relation to any actual assets a company might have.

        Stocks are like baseball cards: pieces of paper with collector's value.

        • by Hassman (320786)

          Stocks are like baseball cards: pieces of paper with collector's value.

          ...said the man who doesn't understand the stock market or how it drives the economy, and how the economy drives the market.
        • Re: (Score:2, Interesting)

          by MicktheMech (697533)
          This is absolutely false. The stock markets (at least in developed countries) are efficient, so the share price is a good estimate of the company's value. There are many ways to value a company, it's more an art than a science. However, it's generally agreed that the value is the sum of discounted future cash flows. So, while income and book value do contribute to the estimation of those cash flows they aren't the only drivers behind share price. The price a stock is trading at is then basically an average
      • by h2g2bob (948006)
        Tell that to SCO

      • by Svartalf (2997)

        No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends.

        Heh. That's RICH.

        Stock valuation might be based on that if you're talking IBM or GE, but unless it's one of the stocks on QQQ or one of the NYSE blue chips, you're not investing against that- and the valuation is based on a lot of things utterly unrelated to the things you mention. Working the stock market (or any securitie

    • by PrvtBurrito (557287) on Wednesday January 24, 2007 @10:10AM (#17737032)
      No. First the stock market is guided by US and International law. Second, much like copyrights and IP, they too are also protected by law. Second life property and currency has no more value than selling property on the moon. Finally, the stock market does not only give money to the lucky, the past 80 years have shown that, over time, it gives money to everyone.
      • by JeffSh (71237) <jeffslashdotNO@SPAMm0m0.org> on Wednesday January 24, 2007 @10:43AM (#17737364)
        The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

        Currency gets its value thanks to simple acceptance.
        • by UbuntuDupe (970646) * on Wednesday January 24, 2007 @11:17AM (#17737712) Journal
          This is an important issue that's kept my attention. How do I know my dollar will keep any value? Why do people value dollars? I've spent a lot of time researching this question, and quite frankly, monetary theory will drive anyone insane because of the intricacies involved in thinking about money. There's no limit to the number of crank theories about money (social credit, Freigeld, bimetallism, gold bugs) that it's hard to even know if the Federal Reserve is not itself based on a shoddy theory.

          You are correct in at least one respect: if you ask anyone why they accept dollars as payment, they answer is always: "because other people will take it as payment". But isn't this fundamentally a house of cards? ("I thought you were watching the kids." "But I thought you were watching the kids!") With no *separate* reason to value them, we're forever exposed to the risk of the value quickly evaporating (cf. hyperinflation).

          However, based on what I've learned about the Fed, large financial institutions expect it to sell its assets for dollars if the dollar drops too low, in effect, propping it up that way. It's like this: let's say I get investors to give me 100 silver ounces and I issue them 100 notes redeemable for a silver ounce (ozAg). But then, let's assume I suspend convertibility on demand. Can the notes still have value? Yes, if people expect me to buy them back. Let's say on the market, merchants start demanding more than one note for an ozAg. Well, then I can dump my ozAg's on the market at the prevailing price. If the price of an ozAg on the market stubbornly refuses to return to exactly one note, then I can buy back all the notes, and keep the extra silver as a profit. And merchants won't let that happen.

          So yes, it's possible for dollars to have value, even if they're "unbacked" like in the above, as long as people expect the central bank to do what's necessary to keep its value up. Once that stops ... well, then we're screwed.
          • by vrmlguy (120854)
            So yes, it's possible for dollars to have value, [...] as long as people expect the central bank to do what's necessary to keep its value up.

            Actually, it's quite possible for dollars to have value, even in the complete absence of a central bank. See this article: http://www.mises.org/fullstory.aspx?control=1595 [mises.org]

        • While it's not backed by gold or silver, it IS backed by a commodity's valuation...

          Stop and think about what one thing that everyone in the "first world" countries want that is a natural resource...
          That one thing can only be bought with ONE currency. You can't buy it in Euros, Francs, etc.- only in US Dollars.

          Once you realize this, many of the things that the US does and have done over the years snap into clarity.
          • Re: (Score:3, Informative)

            by DarenN (411219)
            That used to be true, but not any more! Now it can be bought in Dollars AND Euro
        • Re: (Score:3, Insightful)

          The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

          What are you talking about? Neither the article nor the post you replied to said anything about the value of the US dollar. The point is that if there were really a market for exchanging SSL and USD, as claimed, then there would be some price that represents the relative value of these two commodities that is "simply accepted", in your parlance. It doesn't matter what these v

        • The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

          True enough -- but it is trust in something that has a certain reliability. Anyone who accepts US dollars in exchange for real goods is trusting that the US government will behave a certain way. That's a reasonable article of trust -- it is not the act of faith that some imply it is.

          Trusting the government of Weimar Germany to behave similarly would be an unjustified act of faith.

          Same for US treasury bonds. The buyer of such bonds is trusting that the US government will not default on the necessary collection of taxes and repayment of mature bonds, and that the US economy will not crash bad enough to be unable to make such payments. That too is a justifiable act of trust.

          Of course we all disagree over just how justifiable that trust is. The world's collective estimation of our trustworthiness is expressed in the interest rate that bonds fetch on the open market. Trustworthy countries get to pay lower interest rates on their bonds; risky countries pay higher interest rates... just like any consumer loan.

    • by CreatureComfort (741652) * on Wednesday January 24, 2007 @10:20AM (#17737106)

      Except that if you rely on luck for your stock picking, you really need to get out of the market. No, really. Day traders and the ignorant make the jobs of real investors much more difficult. Not impossible, and really not even less profitable, just more difficult.

      On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.

      • by mumblestheclown (569987) on Wednesday January 24, 2007 @11:00AM (#17737556)
        Day traders and the ignorant make the jobs of real investors much more difficult.

        Arguably the dumbest 'smart' statement I've seen on slashdot in a while. The reality is that without day traders and the ignorant, things like heuristic trading schemes set up by large investment banks would be far less profitable. Real investors LOVE day traders and the ignorant, as they are the ones who are giving them money.

      • by vertinox (846076)
        Except that if you rely on luck for your stock picking, you really need to get out of the market. No, really. Day traders and the ignorant make the jobs of real investors much more difficult. Not impossible, and really not even less profitable, just more difficult.

        Except that is how the market works now. Apple's stock just dropped like a rock right after they announced their quarterly earnings and they have the highest earning yet. What gives!

        Of course... Apple tends to follow a general pattern in which it
        • Ah yes pump and dump, hate those that do not allow the "real investor to make money". Come on give me a break. The stock market is about speculation.

          Also remember that the stock market is not about past earnings, but future earnings. It is about expectations.

          Now regarding Apple here are the details:

          * The Apple stock has been riding high and some took profit.
          * Apple is making record earnings, but only in iPods.
          * Computer sales slacked and underperformed meaning that Apple is largely a one trick pony show.
      • by UbuntuDupe (970646) * on Wednesday January 24, 2007 @11:03AM (#17737586) Journal
        On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.

        Actually, that's about as wasteful as day trading. Don't bother figuring out which company is good or bad. Other people are already doing that in an attempt to appropriate value the stocks. It's not enough to know which businesses are good; you have to know which ones are good relative to the price their stock is selling for, which is a much, much, much more difficult problem.

        The alternative? Buy an index fund. They simply track the relevant broad market (large cap, small cap, foreign, bond, whatever). They don't have to pay for research and they don't rely on a manager's hunches.

        No, this isn't sarcasm. Anyone not trying to sell you on a manager's stock picking ability will tell you the exact same thing. Slate has a great series going on now detailing this: see here [slate.com].
    • by Marillion (33728)

      Second life is too unregulated. Also the stock market has a goal of developing wealth for the investor. The same isn't true of second life. Second life has a very high overhead for infrastructure (sims) and they have other economic forces that make ridiculous things like camping chairs profitable for their owners.

    • by nelsonal (549144)
      The wealth of the stock market comes in part (for most companies) from dividends which changes a zero sum game to a postitive sum game, less directly but equally positive, share repurchases also infuse new money into the markets.
  • by jesuscyborg (903402) on Wednesday January 24, 2007 @10:01AM (#17736938)
    Sounds a lot like the promises of becoming rich in real life that few actually obtain due to those pesky land barons^W^Wcorporations.
    • Yeah, it's a lot like First Life. Most people are simply trying to exchange their time/labor (virtual or real) for stuff they perceive they want, while a few have figured out how to game the system and win big. So yeah, it's a lot like First Life.
  • WoW! (Score:2, Interesting)

    by Kirin Fenrir (1001780)
    I've known World of Warcraft was a money-sink from day one. So this guy is saying MMO's cost money? I know Second Life has no monthly fee, but come on...a pyramid scheme?

    It's not easy to make money in your First Life either, therefore, real-life must be a pyramid scheme. Damn you, God, you sly bastard!
    • by Bert64 (520050)
      Real life is exactly a pyramid scheme too, all the money gradually filters upwards to the top 5% of people who are filthy rich. Those who are filthy rich will remain so, while those who are not never will be.
      • Re: (Score:3, Insightful)

        by ciggieposeur (715798)
        Though I know where you're coming from (having read The Screwing of the Average Man many years ago), you might get further traction if you pick your numbers more carefully.

        The bottom edge of the top 5% sorted by income isn't obscene -- I think that is somewhere around $300-$500K USD per year. It's hard to dismiss the value of a $500K CEO whose wheeling and dealing keeps two hundred other people employed at $40K+ each -- that's $500K propping up $8 million in salaries.

        Now, the bottom edge of the top 1% is g
  • by KDan (90353) on Wednesday January 24, 2007 @10:04AM (#17736966) Homepage
    BDSM [theregister.co.uk] and Virtual Sex [theregister.co.uk]...

    Daniel
    • by Skevin (16048) * on Wednesday January 24, 2007 @11:27AM (#17737854) Journal
      Real Estate must be a pyramid scheme because every time land changes hands, it's usually because the previous owner is selling it for more than he bought it for, never mind when each owner has developed the property some more.

      My stock shares of Coca Cola must be a pyramid scheme because (accounting for inflation) I paid more for them than the person before me, and he paid more for them than the person before him.

      The Dow Jones Industrial Average (12560.56 at last glance) must be a pyramid scheme because it represents people selling stocks for more than they bought it for. It's going to crash, I tell you.

      Scientific research might be a pyramid scheme because many successive discoveries rely on knowledge gleaned from past discoveries.

      Why is it that insufficiently educated journalists can point to value-added commodities with accusations of the P-word for the sake of sensationalism? Has it ever occurred to them that "Pyramid Schemes" are neither illegal nor unethical as long as something of value changes hands, and especially if that particular something can be developed or improved? It becomes morally wrong when that something in question changes hands with an artificially inflated price that does not properly demonstrate its commensurate worth. Whitewater could be thought of as an illegal pyramid scheme. Ponzi's operation was an illegal pyramid. "Make Money Fast!" was an unethical pyramid, albeit not illegal.

      There are many legitimate operations that can be thought of as a pyramid scheme, but if one starts thinking of them that way, please refrain from thinking the P-word is a bad thing.

      Solomon Chang
      • Re: (Score:3, Informative)

        by alienmole (15522)
        "A pyramid scheme [wikipedia.org] is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered." So no, none of the things you mention are pyramid schemes.

        The article's point is not that the economy within SL is a pyramid scheme itself, but rather that "withdrawing money from the Benchmark-backed virtual world is about as hard as cashing out of a pyramid scheme". In particular, he's referring to the all
  • by Zeek40 (1017978) on Wednesday January 24, 2007 @10:05AM (#17736978)
    I'm sorry, buy if you consider investing in virtual property in a Video Game a good idea, you have absolutely no business managing your own funds. You'd probably be better off investing in a pyramid scheme ( aside from the fact that they're illegal ). At least most pyramid schemes have some sort of actual product that moves around, rather than just a collection of bits on some hard drive somewhere.
    • by GuyFawkes (729054)
      The united states dollar, along with the united kingdom pound, and most other currencies, is no more than virtual money, with as much true innate value as linden dollars or any other virtual money.

      we live in a fiat economy, the chinese discarded it a thousand years ago, the problems they had then are rearing their ugly heads yet again, with the same end result, more than likely.

      http://en.wikipedia.org/wiki/Fiat_currency [wikipedia.org]
  • by BVis (267028) on Wednesday January 24, 2007 @10:07AM (#17736998)
    there are people who will seek to take advantage of others for financial gain. It's generally referred to as "capitalism." Those same people who are deceived by con artists in Second Life are the people who watch the infomercials on late-night TV that have the guy with seventeen mansions and a 25 foot speedboat and hot and cold running girls, etc. and believe what they're saying.

    The same adage works in both worlds: "If it sounds too good to be true, it usually is."

    I've spent considerable time in SL, and have spent a grand total of $20 in my time there. I've made small amounts of in-world cash through various jobs. I tune out the scammers in SL just like i do in RL.

    Anyone that gets scammed like this (in either world) deserves to be parted from their money. Anything we can do to make stupidity painful (or at least expensive) is OK in my book.
    • by kalirion (728907) on Wednesday January 24, 2007 @10:39AM (#17737310)
      Anyone that gets scammed like this (in either world) deserves to be parted from their money. Anything we can do to make stupidity painful (or at least expensive) is OK in my book.

      You must just love it when grandmas who have only just discovered the internet lose their life savings to PRESIDENT UBUNTA OF NIGERIA.
      • by BVis (267028)
        Did anyone warn Grandma about anything before she started using the Internet?

        If not, well, there's your problem. The stupid is not located within Grandma, it's located within anyone that allowed Grandma within 15 feet of a computer with Internet connectivity before educating her (or at least attempting to.)

        Again, conventional wisdom applies.. "If it sounds too good to be true, it usually is." I would hope that someone with grandchildren would at least be familiar with the concept.
        • by jidar (83795) on Wednesday January 24, 2007 @11:28AM (#17737860)
          Ah. Blaming the victim.
          Blaming the victim is trait that has become more common in the average American. Most educated people would agree that this common sentiment is not a good trait to have, and many say it's a sign of our increasing callous attitudes and selfishness, but what is the cause?

          It has been proposed that one cause of victim-blaming is the "Just World Hypothesis". People who believe that the world has to be fair, may find it hard or impossible to accept a situation in which a person is unfairly and badly hurt for no cause or reason. This leads to a sense that, somehow, the victim must have surely done 'something' to deserve their fate. Another theory entails the need to protect one's own sense of invulnerability. This inspires people to believe that bad things to those who deserve or provoke it (Schneider et. al., 1994). This is a way of feeling safer. If the potential victim avoids the behaviours of the past victims then they themselves will remain safe and feel less vulnerable.

          Supporters of this view (once referred to as "Job's comforters") must perforce accept that to do otherwise would require them to give up their belief in a just world, and require them to believe in a world where bad things -- such as poverty, rape, starvation, and murder -- can happen to good people for no good reason. The cognitive dissonance in doing this becomes too great, and results in victim-blaming.

          So BVis, what do you think is wrong with you that makes you think this way?
          • Re: (Score:3, Insightful)

            by BVis (267028)
            This isn't blaming the victim. It's asking people to be responsible for themselves and their loved ones.

            The world isn't fair. Once you accept that and take steps to be responsible for your own safety and your own actions, you'll do a lot better.
          • by Imsdal (930595)
            Blaming the victim is trait that has become more common in the average American.

            This isn't even remotely true, as a staggering amount of bizzare, yet successful, law suits will tell you. I'd argue very strongly that the opposite is true.

            Pouring hot coffee on your lap while driving? Not your fault. Being raped by some creep you met on MySpace? Clearly MySpace is the one to blame. Some punk shoots some other punk? Clearly violent video games are to blame.

          • Re: (Score:3, Insightful)

            by PhiRatE (39645)
            Man. What complete crap.

            You're not wrong, in the sense that there are plenty of people who suffer from that "Just World" problem. But using it as a method to attack anyone who judges another at fault for failing to apply even the most basic thought to a a significant action does not require that you subscribe to the Just World hypothesis.

            People who subscribe to that will blame another for what essentially constitute random accidents - a car hits yours when you had right of way - why didn't you do a defensiv
      • by kobaz (107760) on Wednesday January 24, 2007 @11:04AM (#17737604)
        You must just love it when grandmas who have only just discovered the internet lose their life savings to PRESIDENT UBUNTA OF NIGERIA.

        [rhetorical]Why does the internet have anything to do with this?[/rhetorical]

        If grandma received a letter in the mail from the PRESIDENT UBUNTA OF NIGERIA what are the odds of the scam working? I would say it's less likely to work with snail mail based on purely nothing other than I think that since the internet is much more convenient and "magical". It's almost effortless to for people to just click reply and think, well, it can't hurt.

        A previous landlord of mine, who I figured was quite intelligent (he did have a phd in geology and was a professor) received a friendly note from our friends in Nigeria. He mentioned it to me and I explained to him how the scams work in detail. He said he was going to try seeing what he can get out of it, since some guy from "Canada" (since it's not Nigeria it's okay right?) had contacted him. Four checks came in with the sum of about 100k, he cashed them. I told him to not do anything at all, don't send these guys money, ever. Few weeks later he stopped by my place and said: "I'm sorry, but, you were right, I'm in the hole 300k. I've made arrangements with the bank to start repaying the money". The bank actually managed to recover all of it eventually (he had wired some people money and then the Nigerians withdrew even more). I can't believe he was actually thinking about just paying the bank back over 40 years.

        I really don't know if it's just pure stupidity or not.
        • If they managed to make off with the money, why shouldn't he be on the hook for it?
          • by kobaz (107760)
            My point wasn't that he shouldn't be held responsible. My point was he was not thinking of even trying to fight to get this fixed.
      • by drsquare (530038)
        If she's been alive for eighty years yet lacks the basic common sense to not send her life savings to a person she's never met in Nigeria, then she must have lived a very sheltered life.
    • there are people who will seek to take advantage of others for financial gain. It's generally referred to as "capitalism."

      It would appear on the surface that Capitalism will inevitably lead to a highly oppressive society where rich people rule over large masses of poor people. But it is not true. Proven scientifically.

      Robert Axelrod of Univ of Mich, showed, based on simulations of Prisoner's Dilemma problems, how cooperation emerges due to purely selfish reasons. He showed that nice, forgiving, non-en

      • It would appear on the surface that Capitalism will inevitably lead to a highly oppressive society where rich people rule over large masses of poor people. But it is not true. Proven scientifically.
        That may be. The problem is that it's not proven in practice -- or can you point to a pure unregulated economy that actually works?
        • Re: (Score:3, Insightful)

          by mfrank (649656)
          Read "The Jungle" by Upton Sinclair. Very early 1900's were pretty friggin' unregulated capitalism. It takes place in the meat packing district (of Chicago, I think) and the publication of this novel pretty much led to the establishment of the Food and Drug Administration. The last chapter has the main character attending a Communist Party meeting and "seeing the light" (Sinclair was a major league commie).

          Purely unregulated economies dont' work. But there's more to a society than the economy.
  • by antifoidulus (807088) on Wednesday January 24, 2007 @10:10AM (#17737022) Homepage Journal
    Some will go in desperately believing that it will make them a lot of money then wind up losing a ton, some will be smart and/or lucky and go in and make a lot of money, and most will go in with the expecation that they will enjoy themselves, if they make some money great, if they lose it it sucks but they know that going in and set aside a small amount for that purpose. And of course, the house, aka Linden Labs, always winds up a winner.
  • Second Life? (Score:5, Interesting)

    by EveryNickIsTaken (1054794) on Wednesday January 24, 2007 @10:10AM (#17737034)
    I'm beginning to think that some media conglomerates must hold a stake in Second Life, and that's why we keep reading/hearing "news" on it.

    Compared to other online communities or games, Second Life is miniscule.

    "...only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it."

    Yeah. Right. The reason people start playing Second Life is because their First Life is boring or sucks. Not because they "heard how much money they can make off it."

    • Re: (Score:3, Interesting)

      by cybermage (112274)
      Not because they "heard how much money they can make off it."

      I think that you are right about the majority of people using Second Life, but I personally know people who do Second Life for a living.

      There are people who hear stories about making money from Second Life and pick it up for that reason, but I think the point that the article fails to get is that it is not the creators of the game saying it.
    • I'm beginning to think that some media conglomerates must hold a stake in Second Life, and that's why we keep reading/hearing "news" on it.

      It's more due to the fact that Linden Lab (the company behind Second Life) hired a really good PR agency [lewispr.com] that packaged the story up with a bow for reporters [valleywag.com].

    • Re: (Score:3, Insightful)

      by HorsePunchKid (306850)

      I'm beginning to think that some media conglomerates must hold a stake in Second Life, and that's why we keep reading/hearing "news" on it.
      You may be on to something [reuters.com]...
    • by gclef (96311)
      Nah, I suspect they heard about it from the flying penises [youtube.com]. Anything that has those must be a real internet mover and shaker.
    • Valleywag seems to be mounting a 1-man crusade against Second Life right now. They either generate or publicise pretty much any negative news about it they can. As to the rest of the news industry, well, journos like to talk about it because it's basically unique and the idea is a bit sci-fi.

  • Deceived by whom? (Score:5, Insightful)

    by Rob T Firefly (844560) on Wednesday January 24, 2007 @10:12AM (#17737042) Homepage Journal
    I've only recently started playing this game, and me getting into it had nothing to do with any hype about perceived money-making opportunities. I had seen some friends playing, and seen some screenshots and things, and was mildly interested. When the client went OSS I respected that move enough to dissolve my last bit of resistance and try it out myself, and it turns out I enjoy it so far.

    Never in the game's help files or the blogs I read did it talk about using this thing as some huge income-generator. It's a game, and I find it pretty good at being a game. If on the other hand I wanted to work and make money I'd get another job.

    This "OMG MONEYS!" hype seems to be confined the more sensationalist news outlets which I don't really take as gospel, and some third-party stuff. From my own short experience playing the game the actual financial rewards appear, just as in real life, to come to the people with the skill, time, and wherwithal to put into making stuff other people want to buy.

    So who is doing any deceiving here?
    • by cowscows (103644) on Wednesday January 24, 2007 @10:31AM (#17737230) Journal
      Exactly. There are some people who've had the mixture of talent, time, and luck with SL, and have managed to make some money through the game. For many of those people, as their SL bank account grew, so did their ego. And so they make a big deal about themselves, it gets picked up by some of the media because it's kind of a strange story, and some lazy people with free time think they can maybe get in on that action.

      These people are only fooling themselves, making money in SL requires time and effort just like in real life. If you want it to provide income, you're going to have to treat it like a job. A job in a bizarre and very unpredictable economy, but still a job.

      The really sucky part about this whole phenomena is that as these people gain publicity, their clout with the SL developers grows, and so the whole setup starts shifting in the favor of those who treat it as a job, at the expense of the majority, who treat it as some sort of a game. Linden Labs needs to be very careful with how they balance those two sides, because if all the "gamers" leave, then the bottom of the economy falls out, and all those virtual moguls won't be able to save SL.
      • by jandrese (485)
        Frankly, in SL I think you're doing pretty good if you make enough money to pay your tier (basically rent on your land), and that's an absolutely pathetic amount of money you need to make if you put your stipend towards your tier.

        I think the article misses the point that people put actual value into virtual items. Heck, the entire online porn industry is built on this (all you get are some bits that happen to represent naughty images with no resale value). The thing is that they're only focusing on land
  • Second life is full of peoepl trying to stela my monies!!!!

    Quick, someone make a Thrid Life!
  • Ads (Score:5, Funny)

    by Cutie Pi (588366) on Wednesday January 24, 2007 @10:25AM (#17737166)
    I love the ads that go along with this article:

    Get a (Second) Life
    Live out your virtual dreams with this official guide to Second Life!
    www.amazon.com

    Want a Easy $9000 a Week?
    Not MLM and No Selling Fully Automated and Get Paid Daily
    www.MillionaireSuccessCourse.com
  • Load of junk (Score:5, Insightful)

    by Anonymous Coward on Wednesday January 24, 2007 @10:30AM (#17737214)
    I make $1500 US a month from Second Life, whilst the ease of making money is definately overstated it has nothing in common with a pyramid scheme and it is very easy to withdraw your money (Not so much if you are trying to withdraw less than $50 due to the fees involved). This article talks about "banks", which no real business should be touching as the are run by residents and are unofficial and unapproved. This is the equivalent of giving your gold to another player in World Of Warcraft who tries to make you interest off it through loaning it to other players.

    He also seems to have no grasp of how the currency exchange system works, either you sell automatically at the lowest asking price or price it yourself. Trying to buy and sell currency is worthless due to the fees involved and the relative stability of the market.

    Any actual SL business will sell content to people, then cash this out on the official currency market every so often. It's really not hard to make a few dollars with no overheads. He does have a point on the circular nature of the market though, there are very few money sinks and the market is only healthy due to the fact new users are constantly joining.
    • This article talks about "banks", which no real business should be touching as the are run by residents and are unofficial and unapproved.

      Back in '03 when I played SL, I started an in-game "bank". I held people's money over the end of their week so that it looked like they were poor and the system would give them more in-game currency. (It always refills you up to a certain level.) I didn't pay interest, but at one point I considered doing it to build trust.
    • Re:Load of junk (Score:5, Insightful)

      by roman_mir (125474) on Wednesday January 24, 2007 @12:05PM (#17738414) Homepage Journal
      The 'goods' that are sold within SL have no value in real life, which makes the SL a closed system, which sustains itself only due to the new users who are constantly joining as you yourself stated. It is a pyramid scheme.
  • The pyramid scheme statement, in my opinion, would only be accurate if the game producers were using it as an enticement to get people to join the game, but they're not.

    The press does seem to have some kind of fascination about people making money off it, as they should, but for the wrong reason.

    What I think the industry should be more focused on is not the dashed dreams of people hoping to make money in these virtual universes and failing but those who succeed in making money.

    If you can turn around and sel
  • Hey I am still having problems running First Life. I mean the resolution and refresh rate I am getting is AWESOME, but maintenence on my avatar is disturbingly difficult. It takes weeks to modify the look of my avatar (many users have reported a similar problem), and all my support queries to the Developer seem to be piped to /dev/null.

    And not ONE cheat code has surfaced yet. I ask you!
    • by kalirion (728907)
      You're doing it all wrong. Why worry about the appearance of your avatar? The real appeal of First Life is the minigames (like Second Life).
    • My main gripe is the freaking gold farmers. Also, I'm still waiting for a bot I can use for the dull grinding bits.
  • Well.. (Score:5, Interesting)

    by argStyopa (232550) on Wednesday January 24, 2007 @10:37AM (#17737290) Journal
    ...I'm NOT a fan of Second Life - I think it's feeble, clumsy, laggy, antiquated in every technological way, and pointless - but even I draw the line at calling it a pyramid scheme.

    That's just silly. If anything, it's closer to a pure meritocracy than anything - there are some stunningly creative people in there (apparently with LOTS more time than me). There are a lot of things I'd be interested in exploring DESPITE the horrendous lag and 1992 graphics. Hopefully these creative people can sell their work for Linden$ and turn that into cash based on market forces.

    At some point, people have to be responsible for their own actions. It's 'caveat emptor' for the computer world, which itself is capitalist Darwinism that is essentially no different than any OTHER non-computer capitalist mechanism.

    If I enter 2nd Life with no knowledge of what I'm doing, and expect to "make ton$$$ of money!", I'm probably going to waste my time (and if I'm stupid enough to spend real money, I'll lose that too). How is this ANY different than if I buy a franchise restaurant without knowing anything about the business, or start day-trading stocks knowing NOTHING about the market? In every case, my ignorance will cause me to make mistakes (at best) or even be exploited by more savvy actors (at worst) but either way, the ending will not be happy for me.

    In that sense, 2nd life is no different than the real world.
    • by Aladrin (926209)
      The article writer only used the term 'pyramid scheme' for the effect he knew it'd have. Those are 'evil' and he's trying to make SL out to be evil by association.

      It's not like a pyramid scheme in any way shape or form.

      I have my own reasons for hating Linden Labs (customer service, especially) but call it like it is.
  • by bitkari (195639) on Wednesday January 24, 2007 @10:41AM (#17737334) Homepage

    I think a lot of people have failed to realise some things about the economy of Second Life. Unlike our real-world economy, the world of SL doesn't have the same economic limits and drives that we're used to. If we do look at what's really going on there, we can see how things might change in our "real" economy in the future - and I don't just mean trying to do the same old "real" stuff virtually:

    • Apart from land (the price of which is set by Linden Labs), there is no real scarcity. If I want something (anything!), I can make it myself.
    • In the world you have no needs. You don't need any food to eat, you don't even need a place to live.
    • While it is described as a "game", there is no real game in SL. As such there is no struggle to gain resources to achieve game success.

    Now, the only real reason for any money in this game is for people to be able to buy items from other people that have created. However, if this system were to be abandoned in favour of, say, a FOSS-like model, people would simply make things that they enjoy creating, freely distribute them and likewise obtain items that they like from others without need for any financial exchange whatsoever. There certainly are many people already in SL who just give their creations freely without seeking any real payment other than a simple "thanks".

    There is no reason that this shouldn't happen other than we're quite used to dealing with a capitalist system based on scarcity. If we ever hope to grow beyond our current real-world economics, it's certainly worth trying to experiment with alternative systems virtually.



    • by vadim_t (324782) on Wednesday January 24, 2007 @11:25AM (#17737822) Homepage
      SL has scarcity of a kind. Boxes in SL are everywhere. Custom made things are scarce.

      People in SL won't abandon the economy for a "FOSS approach", and I say that as an OSS advocate myself.

      The thing is that no real cash would actually make SL a less impressive place. Let's suppose you want for whatever reason to look like your RL self. Right now you can hire an artist who will tell you what sort of photos they want of you, and will then create textures and clothes in the right shape. They get cash, and you get to look like yourself.

      On the other hand, who will bother with that in a pure "FOSS" environment? It's tedious work. The same way, OSS does badly in areas like accounting packages. Working on the kernel is interesting. Writing code for dealing with some obscure tax regulation is boring. Making some random guy's nose look just right is boring.

      Yes, people can and do release all sorts of things for free. Say, avatars. But who wants to be cybergoth #12342? All of them would look exactly the same. If you want to look unique there are only two things you can do: make it yourself (which is hard unless you're skilled), or get somebody else to make it. And so far we haven't come up with a better way to motivate people to make custom stuff than paying them for it.

  • Bullshit (Score:5, Informative)

    by vadim_t (324782) on Wednesday January 24, 2007 @10:44AM (#17737370) Homepage
    It's very possible to make money in SL. But of course taking it as a stock market is stupid. What sells in SL is services.

    SL is simply an environment capable of connecting buyer to seller. You provide a service: drawing a custom picture, making a custom script, building something, the buyer provides the cash. This way of doing things simply CAN'T be a pyramid scheme.

    Banking in SL is stupid - that I can agree with. People in SL simply aren't patient enough to handle a sane interest rate. Most people work with amounts like $5 USD, which they consider significant. Only maybe 1% of all people in SL works with amounts of money where a 5% interest would amount to something. So SL banks offer really insane interests, possibly operating as a Ponzi scheme. I haven't used any SL banks, but my feeling is that they're very unreliable.

    Calling all of the SL economy a pyramid scheme is bullshit though. If you act as a scripter/artist/builder for hire you can make some money without problems. Build something pretty, put it on sale, and if people buy it, you get cash.

    Now, indeed, you won't get rich in SL very easily. Earning say, $10 or $20 in SL is easy. Earning something approaching a real income is very, very hard. It'll take dedication, an impressive quality (there's tons of competition), selling things much below what they'd cost in the real world (meaning, what you get per hour of scripting is probably noticeably below what you can get per hour of coding in your country). Through all of it, you'll have to be your own programmer, marketing department and businessman, because involving any more people makes it even less profitable. Through all of that you have to contend with that everything in SL is intangible. With no materials other than perhaps hosting costs for things that require external servers, anything you offer for cash, somebody else could offer for free.

    Now, despite all this, I'll say that selling things in SL can be a very nice experience, despite the low income you get from it. At least for me personally having something I made byself get used by several hundred people and personally hearing feedback gives a much nicer feeling than being a faceless drone in a corporation, even though the corporation pays a lot better.


  • Ha! Tell me about it!

    I am a victim of Kingdom of Loathing addiction. It's a web-based MMORPG in which you pick a class like Turtle Tamer or Seal Clubber and fight a variety of foes to gain items and skills. Sound familiar, huh? Well KoL takes it to a whole new level of abject, life-destroying addiction:

    -- Real-world buying and selling. KoL gear routinely reaches 15 or, for the rarest items, even 30 dollars on ebay! Just trying to keep up with high-level characters can result in a second mortgage or ev
  • It's a game! (Score:4, Interesting)

    by Thumper_SVX (239525) on Wednesday January 24, 2007 @10:56AM (#17737504) Homepage
    It's not a game in the classical sense that there's a goal to be accomplished, scores and so forth... but it is nonetheless a game.

    I got into SL a few months back mostly out of curiosity. I didn't buy into the hype being generated by the media and checked it out because I was intrigued (as I have always been) at the concept of virtual realities. I was always a big fan of Gibson and the Cyberpunk novels in general and so I already had a "primer" in the thoughts behind virtual worlds.

    Now, SL is not perfect. Not by a long shot. It's sometimes laggy, crash prone and buggy... but it IS enjoyable. I have friends I made through SL whom I probably would never have met in RL. I used to get on IRC a lot about a decade ago, and this provides similar interaction in my opinion. I enjoyed IRC because at the time I lived in East London, and getting on IRC provided me a way of meeting and communicating with people all over the world. Although now I've not logged into IRC in 7 or 8 years some of those same people are still my friends, and they were instrumental in helping me when I decided to move to the US 10 years ago. I don't predict I'm going to make another similar move, but SL provides me with the same sense of community I got back then.

    Now, as far as the pyramid scheme thing goes... please! Take a look through secondlife.com (the official site). Although the idea of selling your creations or renting property is discussed, it's not plastered on the main page "Make Massive $$$$$$ Now" or something like that. Linden Labs for all their faults are selling SL as what it is; a virtual world, a community and a creativity tool. If you are creative enough and good enough with the built-in building tools, then you can sell your wares to others and make a little cash. I know some people who do this and make enough in-world L$ to "shop" occasionally. Sometimes they even make enough that they can "own" a small plot of land and have their monthly fees covered by their sales. I have never known anyone personally who makes a massive profit. In that regard, it's more like real-life... if you have a marketable skill (avatar building or building models of ships, houses, furniture etc.) and know how to market it properly you can make some in-world money. If not, you won't. It's that simple. There are no more huge opportunities to make "phat cash" in SL than there are in real life. The only advantage of SL is that it's still a relatively untapped market if you're creative enough.

    Hell, I make some L$ in-world by creating real art. I draw, sometimes ink and paint... then I upload a texture and map it onto a simple prim with a nice frame... voila... one saleable item that people will buy to hang in their property. I don't make much, but I cover expenses... and I get to keep the original :) Plus I get kudos from friends who check out my store when I create a new piece... or comments (positive or negative) depending. I like that... it's communal. I don't expect to get rich from it... in fact I doubt I'll ever have to worry about withdrawing L$ from SL so I can't speak to how easy it is to withdraw.

    The media has created the pyramid scheme, not SL... and certainly not the majority of the denizens of that virtual world. They're the ones selling the idea that you can get rich quick in SL... Linden I don't think has ever claimed that. Oh, and the SL "millionaires"? Have you seen the exchange rate of L$ to USD? An SL "millionaire" probably has as much in their "bank account" (read that as SL account) in real world $ as I do in my bank account. I am not rich... in fact there are months I juggle bills like everyone else. Plus, I have to note that there were probably more scams being thrown at me in IRC 10 years ago than I have seen in SL. It's just the media ignored IRC because it wasn't "cool" to be geeky back then. The same things have happened... they just have an extra coat of polish and eye-candy.
  • Does anyone know anyone who has had a *bad* experience (as in, lost money) with Second Life?

    All I hear about in the popular press is Anshe Chung, Anshe Chung, Anshe Chung. These give you the distinct impression there's millions to be made, easily. If anyone has experience to the contrary, lets hear it...
  • Having just read both of TFAs I really have to question the sanity of the author - it's a goddamned game! You could replace "Second Life" in that article with ANY role playing game all the way back to the original Red Book (Blue Book? whatever) paper editions of D&D.
  • by DLG (14172) on Wednesday January 24, 2007 @10:59AM (#17737544)
    I have had a second life account for over a year. I have some typical number of Lindon dollars. I have never bought more. I have never spent any. I have no real understanding of the economy, except that if I want to import a graphic image into the system it costs money, so I don't.

    I am sure I am missing out, but lots of people have GIVEN me things that I assume cost someone money at some point. That of course dilutes the value of the investment. The pay back probably involves social status, similar to potlatch societies where whomever gives away more is the 'wealthiest'.

    Clearly the actual issue is how to convert ANY of that into real value, in a way that economists can equate either directly or analogously to real world value, such as income or return on investment.

    What this article does most effectively is highlight the lack of support for predictable commerce. The same is true in countries with unregulated financial systems, and the factors of anonymous commerce, no legal system, and essentially no reliable contract, means that the only commerce that is effective for most people involves commerce in which there is a low stake, which means that actual use and accumulation of wealth is both hindered, and less valuable.

    This is a vending machine economy. Its based on a million players putting in a quarter in a slot machine, or buy a new outfit, face, body etc... Things that are specifically part of the online environment (playing with toys or enhancing your visual representation)...

    -----

    Second Life really is more interesting because it is the equivalent of a Graphical MUSH where all the users have the ability to create items. I can create any number of items, and give them away or clone them. A good item may be worth something but since any good item can be reverse engineered and distributed at no cost, there is little value to developing quality code except for social praise. Real designers and coders actually can earn good livings in the 'FIRST WORLD' so most of what you see is toys made by people for fun, which makes alot of sense.

    -----

    Last but not least, its a crappy environment for real development. It is harder to output text in any meaningful format. Thats an intentional crippling to force people who want to create content to have to pay to input graphics, rather than write code to actually draw graphics. Pretty regressive considering the direction of the web, which enables REAL commerce and has created a good amount of wealth.

    ------

    When SecondLife stops being a scam, and supports real internet technology and openness, perhaps it will also draw the kind of mindshare that will create real value and an honest marketplace, but that is a different economic model. For now, its mostly a place to play john and whore and part of that means paying, and if that happens to let your one dollar turn into 250, then the game seems more exciting. If a grown woman and parent of two actually believes that earning 185 dollars a month for being a whore and a mule for money laundering is good money, then I guess thats what she deems herself worth. Hard to argue with that sort of capitalism.

  • How is this different from real life? Computers, stock options, stocks, homes, cars, home appliances, etc. are all sold with the promise that they save/make people lots of money, and they rarely deliver. Lots of people in real life have dreams of being their own boss and becoming independent, and they keep buying stuff supposedly allowing them to do it, but few ever make it. Financially prudent living involves purchasing very little, in real life or Second Life.

    Proper pyramid schemes also require more th
  • ... but isn't the economy supposed to be a secondary part of it? I thought it was basically a graphical MUSH -- i.e., you create your avatar, wander around and build stuff. Isn't the "virtual economy that translates into the real world" just a secondary feature that seems to be taking on a life of its own?

    If that's the case, I can't really consider it a pyramid scheme because that wouldn't be the primary selling point of the game. If it *is* the primary selling point of the game then the author's argument i
  • Yes and no (Score:3, Insightful)

    by bytesex (112972) on Wednesday January 24, 2007 @11:09AM (#17737646) Homepage
    But there seems to be a very vague understanding of what is a pyramid scheme among the /. crowd. A pyramid scheme is not just plain old deception, nor is any pyramid scheme illegal. A pyramid scheme is a market that can only go up because the amount of participants increases. Given a growing population, the housing market is an example of a pyramid scheme (that is, if you assume that nobody ever fixes up their house, or that houses don't automatically degenerate, but if you do that, and you get in early, then you're bound to win). The stock market in the nineties was a bit pyramid-like (it went up largely because the amount of players increased dramatically, and they all needed stock - any stock). I suppose 2nd life does generate value of its own (people are meeting other people, for example), so it's not entirely a pyramid scheme, at least.
  • The first sentence of the Wikipedia article on "Fiat Currency" (http://en.wikipedia.org/wiki/Fiat_currency) reads:

    "In economics, fiat currency or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government."

    It should read: Fiat currency is money that is backed by the trust in the promise that goods will be delivered in exchange.
    Neither the Euro nor the "modern" Federal Reserve Dollar are backed up by anything but promises, they are fiat cur
  • The author makes some interesting [and I believe, valid] points. However, the implication is that [by calling it "pyramid" and "Ponzi" scheme], there is something either illegal or at the least, unethical going on.

    Call me libertarian, but I'm having a hard time seeing how this is any different in concept from banking in the real world, albeit much higher risk -- you get a small rate of return, the banks take a cut by using the combined saved money of their customers as assets to invest and reap higher rates
  • The problem is that they are "investing money" into lindens and hoping the exchange rate changes. Linden Labs as specifically "pegged" the linden to the dollar. I track it and it usually has been consist to about 1000L for abojut $4/US. Lindens are strictly controlled, it is not easy to just make large amounts of linens, ( I know I have tried :) ). Most of this is planned, they hired an economist to help control the economy. Linden labs makes $.30 US on each buy and about 3.5% on each sale. Sales of linde

  • It turns out that inside the game, counterparty risk is tremendous. In fact, entire banks will suddenly disappear. Or banks will simply renege on obligations without recourse.

    This is not a sign of a pyramid scheme, it's a sign of underdeveloped institutions. It happens in most societies which are first developing banks and stock markets. (Shouldn't a finance writer remember John Law and the Banque Générale?)

    Banking institutions develop in roughly three stages.

    First there's the banks-disapp

If A = B and B = C, then A = C, except where void or prohibited by law. -- Roy Santoro

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