Editor’s note: This story kicks off our three-part series on virtual real estate worlds. Find out why these worlds are not just games, and what entices people to pay real money for land in cyberspace. (See Part 2: Real estate investors gain ground in virtual worlds and Part 3: The real estate worlds of cyberspace.)

Tiered mansions perch atop steep, lushly vegetated cliffs. Piers, like giant outstretched fingers, extend into gentle bay waters, and a modern pyramid towers above the surreal landscape.

And here, at the corner of Sansome and Green streets in this San Francisco neighborhood, a nondescript metal plaque set in a stout concrete base denotes the site of a lab where Philo Taylor Farnsworth, the “Genius of Green Street,” conceived and constructed a device that would forever change the world.

“On Sept. 7, 1927, the 21-year-old inventor and several dedicated assistants successfully transmitted the first all-electronic television image, the major breakthrough that brought the practical form of this invention to mankind,” proclaims the plaque. Discoveries at that lab formed the foundation for modern television.

Craning your neck from the historic marker is to trace the lineage of modern communications in this seaside city. Farnsworth’s lab site is at the base of Telegraph Hill. In 1853, this hilltop was home to the first telegraph station in California, then a revolutionary communications tool. Prior to that, a tall pole with movable arms rose above the hill–it was used to signal local residents about sailing vessels passing through the area.

Linden Lab, across the street from Farnsworth’s Green Street lab site, is the new innovator on the block–the company has created a world within a world called “Second Life.” And unlike television, this new world is not just something to watch. It is an Internet-based three-dimensional interactive space, enabling a new form of existence and a new place to exist.

This creation and others like it are pushing a new paradigm in communication and social interaction. As these digitized worlds grow, so blur the lines between reality and virtual reality–realty and virtual realty. Already, participants in these artificial domains are spending real-world money to buy digital property. And unlike the real world, if there is a scarcity of available land the creators can just make more.

Colonists are populating three-dimensional cyber-spaces at a rapid pace. Property ownership can be socially and financially empowering in this new frontier, much as it is in the real world, and this has spawned a booming market for real estate purchases and a profitable niche for virtual world real estate specialists.

The currency in “Second Life,” called Linden dollars, can be exchanged for real money–and vice versa. Lately, the exchange rate has hovered around 265 Linden dollars for $1. Landowners pay a subscription fee to Linden Lab that is based on the size of the land area that they own and manage. For-sale land and developed real estate is advertised both in the “Second Life” world and on separate Web sites. There are custom-built, single-family homes as well as planned residential communities.

Landowners and nomads, real estate brokers and developers, architects and designers, inventors and investors, programmers and engineers, artists and musicians, business owners and customers, socialites and socializers, hobbyists and gamers populate Linden Lab’s Internet-enabled world. These residents are represented within this three-dimensional space by customizable, animated “avatars” that range in appearance from humanoid to bipedal beast, and everything in between.

While the fast-evolving digital world of “Second Life” cannot be touched, it indisputably exists. There are tens of thousands of residents here who communicate and build, buy and sell, explore and create. Transportation is easy here: if you don’t want to walk, you can fly; if you don’t want to fly, you can teleport to your destination.

“Quite often we get labeled as a game. We’re not. Games typically have a beginning, a middle and an end. We don’t,” said David D. Fleck, vice president of marketing and business development at Linden Lab. Philip Rosedale, a computer whiz who formerly served as a technology executive at digital media company RealNetworks, founded Linden Lab in 1999.Rosedale was inspired, in part, by Neal Stephenson’s “Snow Crash,” a futuristic book that features a “Metaverse,” or virtual world.

In 2003, Linden Lab released the first 240 acres of land to residents. The population has grown from a few hundred that first year to a current total of about 100,000, and the site is adding about 15,000 to 20,000 new residents and 1,600 acres of land per month, Fleck said.

“We’re scaling so fast now that the ability for us to actually manage all of our own land is starting to slip away from us. We estimated recently that it would take about 2,500 full-time engineers at our company to keep up with the daily creation demands of our current residents,” he added. I’m not sure we could do as good a job as they’re doing. There is some major creative talent out there that has built another world.”

It appears that “Second Life” has taken on a life of its own.

“Second Life” is sometimes grouped within the genre of massively multiplayer online games, or MMOGs. The real-world market for virtual-world assets in this genre is valued at about $900 million, according to IGE, a company that operates a network of buying and selling sites for the virtual currency and items acquired through virtual worlds. And IGE reports that this market for virtual assets could reach $7 billion by 2009. There are reports of Third-World sweatshops that companies have set up to amass virtual-world gold and goods and exploit the trade in fantasy-world commodities.

Virtual world real estate and currency sales have cropped up on eBay and other auction sites, and at least one Web site has even created an “MLS” numbering system for its inventory of for-sale virtual-world properties.

“Second Life” developers put an entire virtual island up for bid on eBay Dec. 9, with bids topping $4,000 by Dec. 20. The island, which spans 16 acres, has a face value of about $1,250 and also includes over 100 hours of free design and building development assistance, one year of paid land maintenance fees, and 40 “Second Life” memberships.

Linden Lab also auctions off property through listings posted within “Second Life,” and residents can also choose to buy property directly from other residents.

The company has also dabbled in the design and construction of planned residential communities modeled after 1950s-era subdivisions, with row after row of tract homes. “We just tried to test out a community called Blumfield,” Fleck said. “It has a very … ‘Hometown, U.S.A.’ type of feel to it. We’re looking at testing beyond that now and figuring out if we want to do more zoned communities.” Residents can choose from six different home designs in Blumfield.

There are few rules about building design and zoning in “Second Life,” though some virtual landowners have adopted basic rules to maintain residential areas versus business areas, for example. And the complexity of the architecture is limited to prevent long load times by residents who view and interact with the buildings. Software tools allow virtual barn-raising within “Second Life,” and it’s not uncommon to see entire buildings go up within a matter of hours.

“Housing can be anything from apartment-style, condo-style, townhouse-style, two-bedroom-bungalow-style all the way up to themed castles with gothic looks and feels to them,” Fleck said. And just as in non-virtual real estate, location matters in “Second Life.”

“Not surprisingly, if you have water on your property–whether it be a lake or stream or ocean view, it will increase the value of the property,” Fleck said. “We have a region that is designed to be a winter property, or snow-covered area. Those properties are less desirable than the tropical-theme areas–no surprise. So those kinds of variables do play into pricing.”

Wagner James Au, who reports on the world of “Second Life” as an embedded journalist named Hamlet Linden, said it’s typical for landowners to adopt themes for land areas that they control, so you might find “a desert oasis, a tropical resort, or a Bavarian mountain town” in the world, he said. Group land ownership has become quite popular.

“Many of these are owned in common by a group who abide by a covenant to preserve its appearance–or sub-leased by a landowner to people willing to pay him or her rent for the pleasure of living in an experientially consistent area,” he said.

Ailin Graef of Frankfurt, Germany, is perhaps better known as “Anshe Chung,” a major landowner and developer in “Second Life.” Chung’s real estate deals in “Second Life” have reportedly brought in over $100,000 a year in real money for Graef. Chung has built themed areas in “Second Life” for French or German speakers, for example, Au said.

While imagination is the limit for building homes in “Second Life,” Au said many residents pick pre-fabricated “house-in-a-box” designs that they can quickly install on their land. “In that sense, most homes are very similar to homes in the United States. They even look like them and follow their styles, for the most part,” he said. “(There are) lots of beach houses, Spanish-themed and Victorian-style homes, for example.”

He added, “What’s amazing, above all, is how so many residents live in traditional homes totally rooted in the real world. For the most part, people seem to want the kind of home they’d probably live in if they were rich–a mansion with a big yard–even though they could have a home on a space ship, or in the stomach of a blue whale, or in a temple from Egypt in 3000 B.C., or in a fever dream with walls that melt. So why do so many of them just want a place that looks like any house in the ritzier part of town? It’s a fascinating question that I’m still trying to answer.”

Houses in “Second Life” are frequently unoccupied as homeowners are typically hanging out in more public, social spaces, said Au, who maintains a blog packed with “Second Life” stories. A “Second Life” home, he explained, is sort of like a three-dimensional Web site or blog. And perhaps they are just an attempt to impress the neighbors. “For the most part, I think they treat (homes) as dollhouses, places to fill out with furniture and art … or for builders, places to create their own idea of a perfect home.”

One Second Life-related Web site, SLBoutique.com, contains about 200 ready-made designs for “non-commercial buildings,” with the “Onion Dome Floating Sky Retreat,” the “Alpine Castle” and a “Low Prim (simple) log cabin” among the available pre-fabs. The log cabin design cost $100 Linden dollars, for example, while the Alpine Castle cost $3,200 Linden dollars.

Among the more unique virtual homes and neighborhoods that Au has viewed: Houses suspended in air or submerged in water, a space station, a vampire castle, a village inspired by Dr. Seuss’ Whoville from “The Grinch Who Stole Christmas,” and a Japanese village with role-playing samurai.

What is it that drives people to spend real-world money for digitized real estate?

William T. Quick, an author who maintains a San Francisco real estate blog, said some people “buy ‘virtual reality’ property for the same reason that people staked million-dollar claims to domain names like ‘Wine.com’ back in the dot-com boom days. They think they are buying something valuable that will either appreciate for their own account, or that they’ll be able to flip profitably somewhere down the road,” Quick said.

People may think of virtual property as something that is imaginary, “but it isn’t–anytime an entity exists in an agreement between a buyer and a seller, it’s as real as anything ever gets,” he said.

Edward Castronova, an associate professor of telecommunications at Indiana University and author of “Synthetic Worlds,” which details the cultural and economic impacts of online virtual worlds, agrees that areas of cyberspace can have the same value and function as real-world places, from an economic perspective.

“It’s persistent space through which people can carry out economical activities,” he said. “It is valuable to be in a spot where a lot of people are moving characters around. It is the same thing that drives rental rates on Rodeo Drive.”

Wealth-building, too, is a motivator for some people in online worlds, just as it is in real life. “It is a natural process where income accumulates with certain people and not with others. If you’re playing a game of keeping up with the Joneses–as tough as it is out here, it’s as tough in there. It’s a human universal.”

Fleck said that “Second Life” developers attempt to maintain a healthy real estate market and economy. “We don’t … flood the market with available land. We do bring it on in a very rational manner. The goal here is not to devalue property prices. If we did flood the market with raw land it could have an adverse effect.”

While Linden Lab’s Fleck acknowledged that “Second Life” creators do have “God Powers” within the virtual world, they tend not to use them unless it is to prevent damage to peoples’ in-world property.

“We demand that people respect other peoples’ properties and their creations and we have a very low tolerance of any abuses of that,” he said.

For those residents who abuse the rules within “Second Life,” they are not sent to prison, but rather to a virtual cornfield to rehabilitate, said Fleck. And at the center of thevast field is a simulated television set that broadcasts 1950s-era public-service announcements on a repeating loop. Philo Taylor Farnsworth, the father of television, might have been proud to see that.

“I think we’re very lucky to be sharing the same neighborhood as something so momentous as Farnsworth did with television,” Fleck said. “I would hope that a few years (from now) this location will be marked as one of those spaces in San Francisco that started something very cool that the world has embraced wholeheartedly–this concept of a virtual world.”

Jerry Paffendorf, a member of the executive committee for the San Pedro, Calif.-based Acceleration Studies Foundation, said there is something very basic and fundamental that drives the real estate market in “Second Life” and other virtual worlds.

It’s human nature, he said, to divvy up available resources in a given area. Virtual worlds “are a great host for the age-old human condition,” he said. The foundation is a nonprofit organization devoted to the study of emerging technologies.

Paffendorf also works for The Electric Sheep Co., which is building search tools for “Second Life” and is also working on other ways to expand virtual-world commerce.

As real-world mapping tools such as Google Earth are constantly improving, Paffendorf said he believes there may be some crossover opportunities for virtual worlds into real-world places. In future years, computer users may navigate actual cities and shops via three-dimensional simulations. In the real estate industry, agents might use such tools to display for-sale properties in a parallel digital world, for example.

Virtual worlds, despite their growing popularity, are still “Wild-Westy” today, Paffendorf said. But once upon a time, so was the World Wide Web. And it is these formative years, he said, that are “the great times to get in on stuff.”

***

Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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