It seems we’re entering the later stages of virtual worlds 1.0. Google Lively was shut down 3 months ago. John Zdanowski, long time CFO of Second Life recetnly stepped down; that’s after founder Philip Rosedale and CTO Cory Ondrejka left late last year. That isn’t to say Second Life is dieing, rather I believe it’ll be one of the few survivors of 1.0. Many of the start-ups begun in it’s limelight however will not fare as well. These companies won’t fade because Second Life or any other was victorious but because none of them captured the mainstream user. And to blame might be one of the defining features of virtual worlds 1.0 – a lack of context.

1.0 starts with a theory

Virtual worlds 1.0 was been driven by technology, most notably a graphics. Pre 1.0 virtual worlds didn’t have the graphical quality needed to attract larger audiences but with the birth of There and Second Life it seemed almost anything was possible. The theory was that if you could give users a truly rich 3D graphical environment they would come in mass. These new graphically rich worlds like Second Life managed to capture the attention of the press, then the general public, but the users never really materialized. There was more famous for flaming out than ushering in the future.

Make it easier, give them more, and self expression

Even before Second Life’s hype started to fade, upstarts began nipping at its heals. They promised ease of use, easy installation and access through web browsers, tie-ins with other web services such as Facebook, and an opportunity for self expression. In addition games were pumped into virtual worlds – anything and everything to keep the few users entertained. The virtual worlds seemed on the cusp of mainstream success, they certainly knew what users wanted. Sally Schmidt of Circle 1 Network laid it out at the recent Engage! Expo.

She then broke down the five key strategic points into the 5 Cs: Creativity (dressing up avatars, decorating homes, designing clothes), Collection (free goods, paid goods, points), Caring (feeding a virtual pet, charity), Community (chat, events, message boards), and last but not least Competition (levels, comparing points wit other players). Her conclusion was that each of the big sites encompass all five key points, but only strongly emphasize a few. For instance, on Stardoll the draw is obviously in the creativity of designing your own clothes and styling your avatar. On Neopets, your role as pet owner promotes caring.

In the end it’s still little more than 3D chat

Yet despite their attempts the mainstream users still didn’t come. However those in the industry try to paint it, Google Lively’s quick departure was a sign – the new, easier to use virtual worlds weren’t catching on either.

Ease of use and installation certainly broadened the market but the addition of games probably did little. How could these primitive games compete with other games already online? Tie-ins with social networks also added little and self expression seemed almost unwanted. Of course the latter point was already well known. When I worked at Yahoo! one of the mythical projects was to give users customizable avatars. Granted the first examples were 2D, but what shocked us was how little users seemed to care. Some liked customizing their outfits and such, but soon became bored. There was a market, but it was much smaller than any of us had predicted.

Virtual worlds 1.0 still didn’t offer a value proposition. They were nifty but didn’t offer any must have features. If I wanted a social network I’d just use Facebook as my friends were already there and 3D avatars offered little. In the end virtual worlds 1.0 is basically nothing more than 3D chat. And we all know what chat is famous for – sex. It was something Google Lively constantly had to deal with and defined other platforms.

The other popular service that was anything akin to what Lively had to offer was the immensely popular (and profitable) IMVU, which thrives off their always flirtatious, frequently risqué, and occasionally obscene userbase.

- That Was Quick: Google Shuts Lively Down

What did work

Virtual worlds 1.0 hasn’t been all failure – kids worlds proved popular. Was this because kids naturally just got it? Do we now have to wait for these kids to grow up; not unlike how manga grew up with their audience to where adults read comics on the way to work?

One thing that separates most kids worlds from adult or tween worlds are their strong sense of context. They don’t commonly pitch themselves as a virtual world, but as exciting play areas. Club Penguin isn’t about games, it’s about penguins first and foremost.

When you think about it, context is one thing the majority of 1.0 virtual worlds never had. They pitched themselves as a tie-ins to Facebook or AIM, places of virtual economies, where you can dress up an avatar. It simply didn’t click with users. I know cause whenever I ask friends what virtual worlds are they go blank or mention seeing Second Life on The Office. Ask a parent about Club Penguin and you’ll get a much different answer.

“Context determines meaning” and virtual worlds 1.0 as a whole had little or no context. What is a virtual economy? What is a tie-in with Facebook? What is even a virtual room? It’s like a movie with out a theme or genre – it’s nearly impossible to remember or find a categorical home for it in your head. Some would argue that Facebook itself is difficult to explain, but at first Facebook was simply a way to connect and stay in touch with friends. The mini-feed and everything else are more difficult to grasp at first, but Facebook itself has something the mainstream can get behind – connect with friends.

Virtual worlds 2.0

Of course out of the ashes of 1.0, virtual worlds 2.0 will rise. Granted it’s been a technology driven push to 1.0, but I’m certain that context will be a big part of 2.0. Some may argue that 2.0 is mobile, ubiquitous in-world connection, etc. but I strongly disagree. Much of this can be built faster in 2D and I might add, done better. As we’ve learned with virtual worlds 1.0; the value isn’t in the customizable avatar, self expression, or rudimentary games – it’s the context. When I want to enter a world I’ll visit a virtual world. If I want to play a game with friends I’ll visit a casual game site. Sure it would be nice to have the same avatar across services, but it isn’t necessary.

Of course having context is another way to pigeonhole yourself. Club Penguin simply doesn’t appeal to tweens. Start-ups in Silicon Valley are built to dominate markets, not simply become a hit in a hits driven business. The expertise of Southern California are better suited to such a business, however I have faith in Silicon Valley to evolve and tackle this new challenge. At least Silicon Valley can build the technology to power artists to create the context. And if Silicon Valley ultimately fails, well there’s always a market for enterprise and serious games.

Could we have found the 5 simple steps to a successful virtual world? We just might have. Sally Schmidt of Circle 1 Network laid it out.

She then broke down the five key strategic points into the 5 Cs: Creativity (dressing up avatars, decorating homes, designing clothes), Collection (free goods, paid goods, points), Caring (feeding a virtual pet, charity), Community (chat, events, message boards), and last but not least Competition (levels, comparing points wit other players). Her conclusion was that each of the big sites encompass all five key points, but only strongly emphasize a few. For instance, on Stardoll the draw is obviously in the creativity of designing your own clothes and styling your avatar. On Neopets, your role as pet owner promotes caring.

The 5 Cs seem pretty obvious and nearly all of us in the industry know them. However seeing them laid out may leave some of us wishing there was more. Second Life could have nailed these 5 points years ago, but they want more. What attracted many of us to the virtual world industry is most likely not contained in the 5 Cs. But the same could be said for us who joined Yahoo! in late 1999. We had our head in the clouds and business was booming. Nothing seemed out of reach. Then came the crash and reality set in. It was mail, community, news, etc. All great stuff but most likely not what we had glimpses of in 1999. What we envisioned was something like Google Earth, YouTube, Hulu, iPhone. But all of these came in the second wave, the second generation of Internet products.

That analogy begs the question – what will be the tenants of virtual worlds 2.0?

One trend I predict will play out over the next year is that virtual worlds will gravitate back to being about entertainment – entertainment platforms. Many virtual worlds have adopted social network features however I think this is quintessential virtual world 1.0. Another likely 1.0 tenant is being a games platform -where you enter a virtual world to run from one casual game to another. Unless these games evolve into more social game play I think this form of entertainment will be better met by purely game based services. One tenant I’m sure will be part of 2.0 is real time story. It’s just beginning to claw its way into existence but should evolve quickly once there’s an easy to use platform.

As for other possible tenants I’m not sure yet. Do you know of any? Any wild guesses?