SWOT Away Those OpenSpace Problems

Thursday, November 20, 2008 Thursday, November 20, 2008

I haven’t yet reacted to the OpenSpace controversy, but today I will.

I believe it has been a bad thing for some, but of little consequence to many others. It just depends what you are doing in the virtual world.

I watched with interest when OpenSpaces were announced, because, like you, I secretly lusted for my own island. A place where I could control things, with limitless prims and a décor to match my tastes. I saw OpenSpaces as a possible way to achieve that goal, as they were quite a bit less expensive than a full island. But there was a problem. According to the Land Store, you have to own a full island before you were allowed to buy even a single OpenSpace.

Today I own an 8192sm mainland parcel, more than suitable for my business, with a tier of only USD$40 per month. It’s a great situation, as my business provides more than $40 per month in revenue, so all costs are easily covered, with plenty of profit leftover. Buying a full island would increase my tier to $295 per month in addition to the horrific task of moving an active business. I could not justify spending an extra $255 per month just to get more space and control. You do not run a successful business by spending without expecting a return on your investment.

In other words, I would have to do something profitable with the extra space to recover the $255 increase in monthly tier. But I could not think of anything, other than hair-brained schemes that probably would not work. So I discarded the idea, for the time being.

But then land prices decreased (although tier did not). Tempting. But how to recover the extra $255 every month? One approach, used by many others, is to rent out the excess space to others who cannot afford a whole island. But wait, I want the WHOLE island to myself! What to do? The answer, it seemed, was OpenSpaces. Here’s the formula:
  • Buy a whole island and commit to paying $295 per month.
  • Buy several OpenSpaces at an additional $75 per month each.
  • Rent the OpenSpaces at a rate higher than $75 per month each.
  • Cover your costs through the profit on OpenSpace rentals.
Hey, this could work! If I charge $XXX per month to YYY renters, I cover ALL my costs, including the $295 for my home island! Easy money!

There’s more. If I can cover my costs, why don’t I do more? Yeah, if I have twice the number of renters, I can pull in a significant profit. Wait, why not 4X ? Or 10X? I’m rich!

I went through this logic, as appears did many, many others. But I did not proceed. Why? Because I did an analysis that any business owner should perform. It’s called “SWOT”, which stands for: Strengths, Weaknesses, Opportunities, and Threats.

It’s pretty straightforward. You simply carefully consider each of these aspects with respect to your business idea. Let’s take an abbreviated tour through the OpenSpace rental scenario:

Strengths: There are some great strengths to this proposal, including the potentially large profit, covering expenses for a whole island, and even getting to meet many new people through the rental operation.

Weaknesses: Hm, as the business expands, the amount of administrative and management work will probably increase, so the benefits are not obtained for free. There's lots of work to do.

Opportunities: The excess space on the home island could be used to develop a new business or other operations. Additional OpenSpaces can be added ad infinitum. Groups of OpenSpaces could be joined together for events or other joint activities.

Threats.

This is the dimension that stopped me cold. Threat analysis says, “What could happen that is out of my control?” and “If that happens, how can I prepare to meet that challenge?” If you cannot handle the possibilities, then it is perhaps not a good idea to proceed. Here are the threats I saw:

  • Linden Lab could change their OpenSpace ownership policy. For example, what would happen if they dropped the requirement that you must own a full island before purchasing an OpenSpace? Well, the customers would simply rent their own instead of yours, and you are instantaneously completely out of business. There is no way around this scenario, you’re dead – unless you intend on picking up the entire island bill yourself. (Note: this was actually mentioned as a possibility by the Lindens at a recent office hour!)
  • Other rental operations could set their prices artificially low and drag away your customers, even though their pricing may be lower than they can sustain over the long term. This could prevent you from having ANY renters. The only way to mitigate this risk is to be prepared to drop your prices, perhaps significantly. Perhaps lower than you need them to be to break even. Oops, this suddenly isn’t so good.
  • Linden Lab could change their pricing structure for either OpenSpaces or full islands. They have done this in the past, and there is no way to predict the future. The only way to mitigate this one is to simply be prepared to raise your rental rates and hope your customers can handle the extra cost. Obviously, some may not and your carefully constructed cover-the-costs model is broken.
At the time I felt these threats were more than sufficient to scare me away from the idea of becoming a landlord. So I declined to proceed with buying islands and OpenSpaces, in spite of others suggesting that it could be a good idea. “Look at all the landlords with so many islands! Look at the money they are making!” Yes, but those threats were always there.

And, as it turned out, one of them came true. At least it wasn’t the worst one.

Today I’m still in my $40 parcel, profitable and relatively happy. But there are many landlords who are very unhappy because their business model is broken and they are caught holding investments that are not paying back. Even worse off, I fear, are those who use OpenSpaces as a community facility. They are different from the business operations I’ve described above in that they generally rely on donations. Their fundraising may not be able to make up the difference, and they may shut down operations.

The moral of the story? Always SWOT before you leap.

6 comments:

ClassTax Xue said...

Ah, well stated, ArminasX!!

I always take a little longer to take decisions similar to this because of my OCD ;) but I have far fewer regrets and much more overall satisfaction with the things in my life. I may not have it all, but I have it really great because I took the time to plan it out.

If someone thinks a decision like this is urgent, sleep on it an other day...or, in other words, use a model like yours here to put a little thought into it. There's a good chance we'll all be a little happier with our choices...

"If you don't have time to do it right the first time, when will you have time to do it again?"

Valiant Westland said...

Right On Using SWAT!

I wish more people in the Metaverse (and 1st Life) made decisions this way. Hell, if the US Congress made decisions this way we wouldn't be in the financial mess we are now!

Peter Stindberg said...

Like you I toyed with the idea of getting an OpenSpace as home for my businesses and the ones I am involved in. This thought is very far now.

However those people close to my heart, those people dear to me, who suffer greatly from the recent move do not fit into this scenario. They got an OpenSpace is their personal home, basically a huge parcel for two avis and the occasional friends coming for a visit.

My SL sister and her RL partner live some 600km apart. They can not afford to move together for years to come, so they live their live as a couple in SL instead. From the technical specifications an OpenSpace is perfectly suited for a private home, and it is just cynical of LL to do as if that had never occured to them.

Feline said...

Interesting, and very well thought out. That's a great distillation of a mental process I often do but had never formalized that way.

One thing I wanted to comment on regarding what you pondered: "Linden Lab could change their pricing structure for either OpenSpaces or full islands." Indeed than can, and did. But they could also change their pricing structure for mainland (and will, I think, before too much longer). I think that is part of the equation that doesn't show up in your musings here, but it certainly is part of the bigger picture many considered when doing that risk/benefit analysis.

Seikatsu Koba said...

I must congratulate you on your analysis; I am certain that many people went through a similar process, but did not consider the weaknesses and threats as well as you have. I think that most often we stop analyzing at the breakeven point, and do not take a deeper look at the possible problems.

I would like to add to the list of weaknesses (which according to LL is the major issues): the performance of the SIMs decreased as content and traffic increased “because they were never intended for that level of load.” I categorize it as a weakness because it is a intrinsic technicality that many land owners over looked when they purchased OpenSpace.

On a personal note, I have considered purchasing my own island, and, like you, I cannot yet justify the cost mostly due to the volatile and fast changing nature of SL.

Jordyn Carnell said...

Perfect example of what SWOT is all about: taking the time to fit the world to the business. If something doesn't fit, rethink it.

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