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McKinsey: ignore Second Life at your peril! (english only)

From Times Online, April 23, 2008
By Jonathan Richards

Virtual worlds such as Second Life will become an indispensible business tool and vital to the strategy of any company intent on reaching out to the video-game generation, one of the world's leading consultancies has said.

McKinsey & Company, the management consulting firm whose observations about corporate behaviour are closely watched, said that virtual worlds were on the cusp of a major expansion - particularly as a way to reach younger customers - and that companies were "ignoring them at their peril."

A senior consultant at the company, which generally shies away from making public statements because its clients include major high street brands, said that any consumer-facing business "absolutely" had to be "experimenting in virtual worlds" if it wanted to get the attention of under 30s.

"Our clients are telling us that they're not able to reach out to the video-game generation the way they have to newspaper audiences, say, and that they want to distinguish themselves in the digital space," the consultant, who did not want to be named, said.

The company has produced a 150-page report on the way businesses can get a return for the investment they make in virtual worlds.
Some of the world's best-known brands, including IBM, Sony, BMW, and Coca-Cola, have a presence in Second Life, a sprawling online universe which costs $9.95 to join. 'Residents' of the virtual world fashion digital versions of themselves called avatars and wander about building virtual houses on virtual property and trading virtual goods.

The world, which was set up in 2003, claims to have 13 million residents, and says it facilitates daily trade worth $1 million in a currency known as the Linden dollar, which has a variable exchange rate with its real-world US counterpart. McKinsey's comments came as Linden Labs, the company which runs Second Life, announced that it had appointed a new chief executive to oversee the next phase of its global expansion.

Philip Rosedale, the founder and chief technologist of Second Life, is stepping down to be replaced by Mark Kingdon, until recently the chief executive of Organic, the San Fransisco-based digital marketing agency and prior to that a partner at Pricewaterhouse Coopers.

Companies setting up 'shop fronts' in Second Life over the past couple of years have done so in the hope that customers will be able to have a more immersive experience, trying out products in the online world before they buy them by linking to the store's website. But the world has been criticised for being difficult to use, and for failing to deliver any tangible benefit to companies doing business in it - which to date has mostly been marketing.

The next phase of Second Life's development, analysts said, would involve businesses developing very specific 3D applications, which for instance would enable them to conduct virtual meetings, saving on transport costs, and to undertake advanced staff training.

Trucking companies, for instance, are teaching drivers how to parallel park their vehicles using simulations built in Second Life; Hilton, the hotel chain, is collaborating on a tool to train receptionists in virtual lobbies, and energy giants are developing applications that can help them to train staff on how to deal with a hostage situation on an oil rig.

"What's happening with Second Life right now is exactly what happened with the web in the early days," Mr Rosedale said at an event in London this week. "People would say 'the internet is a horrible place for brands, there's all this stealing of property, and pornography', and now what you find is that the web is used relentlessly for information-sharing purposes. We're seeing exactly the same thing in Second Life."

About $1.5 billion has been invested in companies developing technologies for virtual worlds in the past year and a half, according to a report published this week by Forrester, the analyst firm. Driven by the near complete penetration of broadband, an increasingly technology-friendly workforce, and cheap computing tools, the 3D web would be "the next major wave of the internet's evolution," the report said.

Significant challenges remain, though. "There's a lot of interest in these technologies, but many companies find that it's simply too hard to become familiar with these worlds," said Ivan Croxford, head of BT Tradespace, a BT-run website through which small businesses connect with one another.

There was also the problem that agencies advising companies on digital strategy - for instance about how to run their websites - had traditionally been skilled in areas like graphic design, which did not necessarily translate well to virtual worlds.

"Whereas the needs of the 2D web were well-served by graphic designers, what the 3D web demands is cinematographers," a McKinsey consultant said. "You need story-tellers - actors and directors who can get customers involved in plots and incentive-based structures that are familiar from movies and video games."

Mr Rosedale said that Second Life was addressing issues such as the length of time it took users to become accustomed to the world, as well as the possibility of companies being able to use special ‘sectioned-off’ areas, easing concerns about privacy and confidential information.