Linden Labs' 'Second Life' Layoff: An Ominous Sign for Video Games

A pioneer of virtual worlds got a harsh dose of reality on Wednesday, when Linden Lab, maker of the smash hit virtual world Second Life, announced it was laying off 30% of its workforce. The move is yet another sign that even relatively newer segments of the video-game market are under siege and possibly may never recover from the onslaught of social gaming built around Facebook. These social games, such as Zynga's Farmville, are much cheaper to construct, don't require exotic physics engines to make stunning graphics and can be bankrolled for less than $1 million.

Contrast that with old-style massively multiplayer online games like Second Life, which has an engrossing 3-D framework and cost tens of millions to build. The economics are stark. Linden Lab's layoff may be heralding the death throes of the stunningly visual graphic powerhouses that have dominated the video-game industry to date.

In Asia, Paying to Play Is Anathema

DailyFinance has already written about the woes of video-game makers such as Electronic Arts (ERTS) and the troubles at retailer GameStop (GME). Linden Lab is trapped in the same sad systemic changes. Strapped consumers are far less likely to fork over $50 or $60 for a new version of their favorite video game that plays on a console like a Nintendo Wii, a Sony (SNE) PlayStation or a Microsoft (MSFT) XBox. And they're becoming less eager to embrace virtual world games like Second Life that charge subscriptions.

Zynga and other social games rely instead on sales of virtual goods for profits. This model now dominates the Asian market, where paying for online games has become anathema.

All of that said, the cutbacks at Linden Labs are terribly sad. Second Life has become a fixture of online society, complete with a virtual economy (and real entrepreneurs making real money). Lots of businesses have used Second Life as a social laboratory, and many colleges even have campuses in its virtual world.

Regrouping to Refocus

Another difficult reality that could be playing out here is one that may concern Zynga, too: That the giant tractor beam of Facebook, which has to date sustained most of the social gaming platforms, could be sucking the life out of any online interactions that exist outside of Zuckerbergville.

This would be a testament to Facebook's success and also a likely outcome of the simple truth that people don't like to go to too many places online and will choose convenience when it's offered.

True, Linden Lab is hardly dead. The company is regrouping to refocus its development efforts. But it's hard not to see easy comparisons here to what the Web did to newspapers, with cheap content decimating more expensive and more detailed information-gathering and -delivery systems.

And that raises another troubling queston: What will become of the now-aging virtual worlds?