Business 2.0

There Inc. invites you to sell your wares in the most realistic and commercially sophisticated virtual world ever created. Now for the hard part: Getting people to show up.

Most of the time, when Tom Melcher looks at the desktop wallpaper image on his Dell (DELL) Inspiron 8200 notebook computer, he sees just what's there: a screen-size photo of two dark-haired, smiling little girls, his 7- and 8-year-old daughters. Sometimes, though, he catches sight of another image. It's a glimpse of a not-so-far-off future, on a day when his girls, both away at college, are settling in for their weekly long-distance check-in with Dad. Unlike the "Sunday phone call from hell" that Melcher remembers from his own college years, however, this one takes place through a screen like the one he's looking at now, in a shared virtual space the whole family connects to from their computers. He sees his daughters onscreen, each represented as a walking, talking, gesturing 3-D caricature of herself (an "avatar"). They're sitting beside one another on a couch in what appears to be a well-appointed Swiss chalet. The girls in turn see their father's avatar on their screens, seated in a nearby armchair.

"And we sit there, around the fire, just talking," Melcher says. The talk floats up over their heads in chat balloons, or, bandwidth permitting, their voices ring out through computer speakers. Other sounds drift in from outside the chalet, where the skiing isn't quite what it is in the real world, but, thanks to the physics programmed into the system, it's convincing enough to challenge even the fastest-fingered videogamers. "So then we'll go out on the slopes together and do some runs," Melcher continues. "I'll try to do some tricks, and the girls will make fun of me.... And it's not that anything we say will in itself be particularly significant, but the experience will just be richer, more meaningful, than any we could have through existing telecommunications."

Melcher's vision doesn't end there. To picture the rest of it, multiply this heartwarming scene by the tens of millions of far-flung friends and families who will be meeting in the Alpine lodges, tropical resorts, and other attractive environments built into the networked virtual world of Melcher's imagining. Picture, as well, a vast commercial apparatus mobilized to tap this market of millions -- virtual shopping malls selling virtual Rossignol skis, virtual Nike (NKE) winterwear, and virtual whatever else an avatar might need to improve his or her virtual life, all priced and purchased in a virtual currency that is fully exchangeable for real, honest-to-God dollars. Then imagine more serious applications coexisting with the shopping and the fun: Architectural firms taking advantage of There's near-real physics to stress-test building designs by coaxing crowds of avatars to visit the virtual structures. Or Army divisions training en masse in virtual replicas of enemy territory.

And finally, picture a single company providing the technical infrastructure that makes this unreal world a reality. And note that, in Melcher's vision at least, the company in question is the same one he has been running since late 1999 -- an 80-employee Silicon Valley startup with $33 million in private backing and, against all odds, a genuine shot at taking online virtual worlds out of the computer-gaming ghetto occupied by EverQuest, Ultima Online, and The Sims Online and into the mainstream of global telecommunications.

The name of the company is There Inc. There, also, is the name of its sole product: an online, avatar-based virtual world that has been under development since early 1998. The product came out of stealth mode on Jan. 8, getting its first public viewing at the Consumer Electronics Show in Las Vegas and beginning its first public beta test one week later, a several-thousand-user affair scheduled to last through June.

But in a sense, what There announced in Las Vegas was hardly news. Internet startups have been heralding the arrival of the virtual-world business for almost as long as there's been an Internet. With the exception of a handful that were developed for hard-core gamers, those startups haven't amounted to much. Their names -- daVinci Time and Space, Habitat, the Palace (see "As the Virtual Worlds Turn") -- clutter online history like the shipwrecks they are, and their failures don't bode well for There's future. The business of building a virtual world from scratch, the record suggests, is almost inherently an overambitious one -- always just a little too much for the available technology or the assembled talent or the targeted market to handle.

Yet the drive to create a viable virtual world persists, driven by the conviction that one day we'll all socialize, play, and conduct business there. And the thing about There is that no virtual world before it has ever come to market so broadly prepared for the job. The tech looks right, the team looks sharp, and after half a decade hanging out in chat rooms and sending instant messages, the real world looks ready for a new way to interact online. If all that checks out, then there's only one job left for Melcher & Co.: Convince a world still painfully hung over from the sweeping technological visions of the Internet boom that yet another sweeping technological vision -- There's -- is precisely what it's ready for.

Piece of cake.

For a typical first-time visitor to There, the experience is something like this. You log in and are presented with 10,000 Therebucks at no charge (if you want more later, you'll have to charge them to your credit card at an exchange rate of 1,787 Therebucks to the dollar). Even before the visuals appear, you hear the sound of monkeys and tropical birds in the near distance. Next you see the palm trees, and the tiki huts, and the soaring green mountains of a Polynesian island (rendered straight from a U.S. government satellite database of South Pacific landforms). You stop in at a hut and accessorize your standard-issue white T-shirt and khakis, maybe spend 3,199 Therebucks on a pair of surfer shorts. And then you decide to blow 5,499 on a hoverboard; you hop on this sporty little cross between a surfboard and a hovercraft, and something curious happens. You feel an ineluctable urge to point your board at the horizon and fly till you tumble head over heels down the first steep precipice you hit.

Don't worry. Nobody dies in There, and it's not unusual for a first-timer to feel impelled to take that tumble. There's something a little dizzying about the open-endedness and sleek realism of the world, and for the average visitor there's no easy way to describe it. The most articulate response most have, it seems, is to fly off a cliff.

Ask the average geek what There represents, though, and he or she can tell you in an instant: It's a metaverse. The word comes from Neal Stephenson's Snow Crash, a 1992 science-fiction novel that describes a hyperrealistic digital world (the Metaverse) where people spend the bulk of their leisure time and disposable income. But it's come to serve as shorthand for a long-standing dream among tech insiders -- the vision of a parallel virtual universe in which the world's communication networks come to life. It's a scheme whose kewlness needs no explanation for the average computer hacker or sci-fi fan, and it's largely because earlier metaverse builders took the merit of their projects for granted that so many of their attempts failed.

Melcher is hardly immune to this hazard, being part geek himself. "I've wanted to do something like this since seventh grade," he admits, remembering hours spent in the company of fellow dweeblets at the keyboard of a clunky old PDP-11 mainframe, navigating the virtual dungeons of the text-based game Adventure and coming to feel, he says, that "we were better friends on that computer than in real life."

When Melcher was offered the CEO job at There, consequently, part of him was ready to pounce on it. The company had been founded more than a year before by Will Harvey, an illustrious name in the software business since the age of 15 (when he wrote a best-selling program called Music Construction Set) and by then a 32-year-old computer science Ph.D. If it's true, as Jupiter analyst Joe Laszlo insists, that "from a technological standpoint, There is head and shoulders above the competition," Harvey is the man responsible. By the time Melcher got his first look at the product, Harvey and his engineering team had already laid out the basic dimensions of their world (the size of planet Earth) and hammered in the patented physics algorithms that make that world feel so realistic.

But Melcher was no longer a seventh-grader. He was by now a graduate of Harvard Business School, a veteran of the venerable McKinsey management consultancy, and a refugee from daVinci Time and Space -- an early virtual-world business that torched $4.6 million on its way to tanking in 1996, shortly after Melcher left as director of business development. So when he took the job at There, he did it fully aware that he had his work cut out for him. The geek in him was already in love with the tech, but the tech, he knew, would ultimately go nowhere without some genuine revenues to carry it forward.

So while Harvey and the growing design team continued to build There as a world, Melcher proceeded to build it as a business. He hired managers and marketers. He ran beta tests and focus groups. He wheeled and dealed and generally eyeballed There from every profit-minded angle he could think of. Three years later the result is an Internet business model plainly shaped by the lessons of the Internet bust -- a potentially robust set of interlocking revenue streams, all resting on a fundamental disbelief in the once-fashionable notion of a free lunch.

Tellingly, There's first bankable revenues are likely to come from a source that went almost completely forgotten during the boom years but was once tech's most reliable wellspring of funding: the Department of Defense. The U.S. military has a long history of expertise in the creation of simulated environments, but since 9/11 the Pentagon has looked for ways to fill those environments with the bustling crowds that terrorist and other "asymmetric" threats tend to emerge from. Designed precisely with crowds in mind, There turns out to be far ahead of any multiuser world the Defense Department has cooked up internally. "Even though the military has awesome simulation capabilities, as you might imagine, the idea of these large-scale persistent worlds -- that is not an approach they had taken," says Robert Gehorsam, There's VP for strategic initiatives, who expects to sign a contract imminently to build a "virtual Afghanistan" for the Defense Department.

In the long run, though, There's most lucrative partnerships will no doubt be with consumer-goods companies. Currently both Levi's and Nike are selling virtual versions of their newest clothing lines to There's beta testers, with the Levi's Type 1 denim jeans, for instance, selling for 5,999 Therebucks (roughly $3.35). At this early stage, no money -- virtual or real -- is changing hands between Levi's or Nike and There. For the partners, There is a virtual focus group, a chance to see how people react to their new products (for those who want an actual denim pair of Type 1s, There provides a link to the Levi's website), and also a risk-free opportunity to test the market for virtual clothing. "If the way I dress is part of how I define myself in the real world, and I make style choices and brand choices based on that, it's a logical transition to do those same things in this virtual world," says Patrice Varni, Levi's director of digital business.

There and its partners are "still trying to figure out what works for each party," Melcher says. "The relationship is purely experimental." Whether There turns out to be a media company selling product placements or a retailer selling shelf space, revenue will flow in There's direction. Melcher and his marketing VP, Andy Donkin, are currently in talks with more than a dozen consumer-goods companies for virtual marketing deals.

But ultimately -- and in stark contrast to the classic Internet boom enterprise -- it's the users who will keep There in the black. They're the ones who will pay dollars for Therebucks to buy digitized Nikes. Why in the world would any sane person do this? The boom business in virtual cobalt armor and scepter destruction weapons -- for which devotees of the popular online role-playing game EverQuest pay very real sums as high as $1,500 -- suggests that there are indeed plenty of people who will shell out the bucks to outfit their avatars.

In addition, Melcher envisions a basic $10 monthly subscription fee to start, with higher service grades available for higher fees. More intriguing are the revenue possibilities lurking in There's role as central banker of Therebucks. The more stuff there is to buy in There, after all -- whether it's branded goods or user-produced items -- the more Therebucks will be bought to buy stuff with. And as long as those Therebucks are being bought from There, that's more U.S. currency on the bottom line.

Melcher, in short, has erected an impressive architecture of profit, grounded solidly in the foundation of consumer revenues. There's just one small structural weakness to the plan: What if those consumers never show up?

At a little after noon on Jan. 8, Tom Melcher is standing on a press conference stage at the Consumer Electronics Show, making There's first public announcement after almost six years under wraps. Melcher is wearing a flowery Hawaiian shirt and lei inspired by There's imaginary South Pacific setting. Not much else about his presentation, however, suggests he's doing anything like cutting loose.

"There is the first online 'getaway' that gives you the freedom to play and talk naturally while having fun and making friends," Melcher says, pronouncing the words as carefully as if he were reading scripture, which he more or less is. Projected onto the screen next to him, that sentence is There's official "positioning statement," hammered out during hours of in-house debate. Resting on a mountain of data gleaned through six years of focus groups and one year of beta tests, the statement has strategic marketing implications encoded in almost every word.

Thus, for instance, Melcher informs all within hearing distance that There is a "getaway" and not a "game." To be sure, he and his team draw some confidence from the long-running success of massive multiplayer online fantasy games like EverQuest and Ultima Online, each with monthly subscriber bases running into the hundreds of thousands. But in the end, There is after a much larger audience: the roughly 53 million adults who say they've socialized online in the last 30 days, most of whom wouldn't be caught dead in virtual tights and chain mail. And more to the point -- having determined, like many a fern-bar owner before them, that where women go, men will follow -- they are after the 22- to 49-year-old females within that demographic, most of whom haven't gone near a computer game since Ms. Pac-Man left the arcade.

This is as precision-targeted an appeal as Melcher can make. There's some risk to it -- selling There as an online Club Med, after all, invites unfavorable comparison with the real thing and sets up expectations of user-friendliness that may aggravate the limitations (no Mac version; special graphics cards required). But the risk is calculated, as is everything else about this pitch. Which is precisely where the pitch's greatest frailty lies. Because when all is said and done, when all the demographics are parsed and sorted, Melcher's intended target is still people -- and as his Hawaiian-shirted lieutenant Stewart Bonn, "vice president for fun," was heard to opine just moments before the announcement began, "people do weird shit."

Bonn's point was a hopeful one, a fairly sure bet that whatever initially draws people into There, the ultimate attraction will be the people themselves and the endlessly amusing weirdness they commit. But the point poses a challenge too, because weird behavior tends to be unpredictable. Which means that no matter how good There's technology is, no matter how smart its handlers are, and no matter how well-honed its marketing message is, Melcher's dream of building a metaverse may ultimately run aground on the same nutty human indeterminacy that its success depends on. The problem he faces, in short, has less to do with the neat lessons of a business-school case study than with a Zen koan's mind-tweaking imponderability: How do you convince the world it needs your product when you yourself can't be sure what the world will ultimately turn your product into?

Of course, There is not the first broadly innovative new communication technology to face that problem. Twenty years ago, for instance, the newly inaugurated Internet was still just a nerdy backwater of the military-industrial complex, a network built primarily to facilitate advanced research by defense contractors. Could anyone then have predicted Napster, instant messaging, or the full modern meaning of the phrase "You've got mail!"? Perhaps. But if There fails to find an audience in the end, it may be some comfort to Melcher to realize that even the smartest attempt to mass-market the Internet in 1983 would have been an exercise in guesswork.

And if that fails to console, he can always look to another communications technology with an uncertain beginning: the telephone. Some early marketers of the phone, after all, thought they were selling a system for piping music into the home. But eventually, of course, people figured out what the phone was for. And they'll still know what to do with it when it's time for Melcher's daughters to check in from college, even if there's no There there.