I’ve been saying for months (http://cleanslate.cityofnewbabbage.com) that some or many of Linden Labs’ investors are looking for an exit, at a valuation that makes their balance sheets happy. I find it easy to imagine that the fact that these positions are for sale crossed the desk of someone at Microsoft who controls some deep pockets, who cooked up some plausible logic (laced liberally with ego and deal-narcissism), and the wheels started to turn.
Microsoft has a lot of cash sitting around that it needs to put to work, and acquiring companies with tenuous strategic value seems to pay off for them 40% of the time, so why the hell not?

Here’s my prediction: this rumor is true, and we’ll hear an announcement that Microsoft will take a stake in Linden Labs (not a complete acquisition) within the next 30 days.

I wonder if I were a hacker and griefer I’d be able to have more success with my own announcement that Linden Lab had been bought by Google… I had far more persuasive arguments back then!

The correct way to spread those rumours is to mix them up with some “real facts”. Everybody knew, months ago, that LL would close their UK offices; it was reported officially and confirmed by the UK staff that were fired.

For the past 5 years, everybody has been announcing that Linden Lab was in “financial trouble”. Hardly! They have been profitable and growing slowly every year; as recently as 2008, they had more revenues than Facebook, but with a profit. Facebook, of course, after successfully selling more and more slices of their privately held shares, plus the vast amount of Microsoft-based advertising, makes a fortune — but is still not profitable.

In 2009, Linden Lab had 4% of the world-wide business of digital online content sales. That might not seem much… until one looks at the numbers to see they had eclipsed Apple’s iTunes and App Store, as well as any other of the millions of websites selling digital content online — only Google ads were way above LL in sales.

That same year, LL also had 4% market share of the world-wide VoIP market in terms of minutes — coming second to Skype. Not a close second, either, but nevertheless way above plenty of other VoIP providers, including several large carriers.

So why the downsizing? I believe they very correctly estimated that the economic downturn would affect the virtual economy. It did — even though far less than expected; the virtual economy of SL is worth US$ 0.6 billion annually and growing way above the real economy. It just doesn’t grow as fast as in 2006/7 — still, it’s about ten times bigger than back then, when everybody reported about the “success” of Second Life. These days, even though SL has been almost forgotten by the media, it grows and grows and grows… with 10,000 new daily registrations. Every day.

There are probably a lot of reasons for the downsizing, but the major one is focusing. They had spread themselves very thin in the past 2 years, trying to do everything at the same time — and failing in all approaches, except the residential market, and leaving dozens of incomplete projects laying around. Now they’re just focusing on improving the experience for residential users. The laid-off employees suddenly became redundant… and LL has plenty of cash to spare with their “leaner” strategy, good for several years, even if all of a sudden everybody dropped out of Second Life, which is not going to happen.

Nevertheless, I can very well believe that they are open to accept bids from other companies. They are, after all, one of the very few Internet companies around that actually turns a profit — while the others just burn venture capital cash and hope against hope to be bought by someone else. Maybe some potential investors are suddenly thinking that it’s better to invest in a profitable company instead of “nice ideas” with lot of media splash and huge amounts of free accounts, and no real business model. If that’s the case, it would be a good change of mentality for investors…