Electric Sheep, A Leading Virtual-Worlds Content Company, Shears 25% Of Employees

The Electric Sheep Company, a leading content-creation company working in Second Life and other virtual worlds, this week laid off 20 people, or 25% of its staff. Coming on the heels of the departure of AOL from Second Life, and CTO Cory Ondrejka’s departure from Linden Lab, the events invite the question: What’s going on in Second Life? Is something wrong?

T. Sibley Verbeck, Electric Sheep founder and CEO, said the layoffs reflect a shift in the virtual worlds marketplace. Second Life growth has been flattening out, while other virtual worlds are emerging. The people laid off were Second Life and events specialists. As part of the layoffs, Electric Sheep shut down an ad network that it was building in Second Life.

Electric Sheep plans to continue work in other projects, including developing tools for using artificial intelligence to animate avatars, building the OnRez marketplace for Second Life goods, and the massive game tie-in with the TV show CSI:NY. The company is also developing projects in other virtual worlds, including Metaplace, which is still in alpha testing, from Areae, Inc.;; the Icarus Platform from Icarus Studios; and the platform developed by Makena Technologies for its virtual world There.com and MTV’s virtual world.

But Electric Sheep has been primarily focused to date on Second Life, the biggest general-purpose virtual worlds platform for adults, and the layoffs are the latest in a series of blows for Second Life in recent weeks. Pontiac, one of the most well-respected and popular real-life companies in Second Life, announced Dec. 8 that it’s pulling out. Ondrejka, the fourth employee hired at Linden Lab, either quit or was fired Dec. 11. According to reports, Ondrejka and CEO and co-founder Philip Rosedale had differing visions for the future of Linden Lab (whatever that means — little information is available about the circumstances of Ondrejka’s departure).

Pontiac and AOL were both Electric Sheep clients, however their departure from SL had nothing to do with the layoffs, Verbeck said, adding: "For the last six months, those have been two very small customers for us -- together definitely less than 5% of our revenue this year."

Verbeck said his company, and Second Life, are still strong. “A year ago, we made some staffing plans based on how we hoped the industry would unfold, and in some ways, based on entertainment companies and other companies coming in to Second Life, we were completely right, and in other ways we were not,” Verbeck said. Second Life was growing at a rate of 25% per month for its first three years, but that rate slowed this year, growing just 3% month-over-month in the last month for which historical data is available, September. But the service is still growing, adding more than 10,000 new sign-ups every day, with 11.5 million accounts created since it opened four years ago, and 433,500 logins in the past seven days. The ad network is an example of an Electric Sheep project undertaken during Second Life’s earlier, rapid growth period that doesn’t make sense in the current climate.

Update, 2 am Eastern Wednesday: Hours after I initially published this post, Linden Lab posted updated usage stats for Second Life, with more bad news. Hours logged in November were actually down month-over-month.

Electric Sheep is seeing greater interest in big-ticket, million-dollar-plus virtual worlds projects from big companies than it has ever seen before, and less interest in smaller projects, Verbeck said. “We’re getting more leads than every before, by an order of magnitude, on million-dollar projects, and fewer hundred-thousand-dollar projects than ever before,” he said. It’s harder to get return-on-investment from smaller projects, he said; virtual worlds engagements today require a big up-front investment in building an environment, including landscape, buildings, props, machines, and clothing, and then staffing it and marketing and advertising to lure in users.

He said neither AOL’s nor Ondrejka’s departure from Second Life will be crippling to the platform. AOL’s departure was the result of a need by AOL, which is struggling, to focus on core competencies, and Ondrejka had mostly been a public face of Second Life for a long time, not closely tied to technology and platform development.

I asked Verbeck whether he thought Second Life is imploding, and he responded in e-mail: “I think it’s worth noting that Linden Lab’s business has never focussed around the corporate use of Second Life. They’re far more focussed on serving the community of end users who are dedicated to that world.” Growth in corporate investment in Second Life might be slower in the next six months than it has been in the last six months, he said. But he added: “SL is about its relatively large user base of very active users, with its internal economy, and that will continue to thrive. Meanwhile the platform will continue to develop technologically, and more and more specific uses of it will become profitable, sensible, and worthwhile.”

Is Second Life in trouble? Look at the graphs and see for yourself. Not only are growth in new signups flattening, but the amount of real-world money spent in Second Life has actually declined precipitously in the third quarter.

On the other hand, the amount of land in Second Life is growing steadily; in other words, people continue to lease server space from Linden Lab.

I do think Second Life is in trouble, but its fundamentals are sound. I think the decline of spending in the third quarter can be explained by the gambling ban that went into effect in July. The service received a dumptruck-load of hype in 2006 and early this year. The second half of this year marked the period of unreasonable backlash. Now, I think expectations are more realistic, and Second Life stands to grow at a healthy rate, if it can overcome its problems. Chief among the problems: usability and stability, although those are improving steadily. Also, it’s hard to explain to newbies what they should do once they log in to the service; the Second Life community needs to do a better job welcoming newcomers and guiding them to interesting things in-world. And Linden Lab sometimes falls down on business fundamentals such as processing credit-card transactions without a hassle, communicating strategy to major customers, and scheduling downtimes for least possible disruption.

And virtual worlds are looking to get interesting in 2008. Several companies are launching potential competition to Second Life (the most interesting that I’m aware of: Metapace. I’ll be writing about them soon.) Some of these companies approach the idea of virtual worlds in ways that are very different from Second Life. It’s going to be fun to be part of the virtual worlds community next year.

Likewise, while the layoffs at Electric Sheep are cause for concern — major layoffs are always cause for concern — there’s no reason for Electric Sheep’s business partners to panic. As TechCrunch put it: “It would be easy to suggest that Electric Sheep Company's failure here may be indicative of a broader downturn in Second Life; however, the more likely scenario is simply that this is a company that added too many staff in the expectation of ongoing and future work that didn't happen, and they would be far from the first startup to be caught in this situation.”

Still, it stinks to get laid off. I’ve been there myself. My condolences to the Electric Sheep employees facing unemployment, and I hope they all find great jobs soon.

Update, 8 pm Eastern: I said usability and stability are improving steadily for Second Life but perhaps I spoke too soon on that.. Apparently, Linden Lab’s own statistics show that client-side performance is down. On the other hand, server-side performance and stability are both up. Also, Rosedale said in November that Linden Lab launched with the philosophy of getting the service and features out the door fast, a strategy it adopted for economic reasons. But now, he says, stability is job one for Linden Lab.

Updated, 2 am Eastern Wednesday: I updated this post again, adding information on Pontiac pulling out of Second Life, and updated usage stats.