Coffee & Power, which was started by the founder of Second Life, is launching an online marketplace that allows people to buy and sell small tasks with one another — or even to meet up in person at a company-owned cafe in San Francisco.

The site is a little like Craigslist, but focuses on giving people a venue to sell things such as tutoring lessons, software development services, commissioned art or something as random as Hula Hoop lessons.

The concept draws from the latest trend in making small amounts of money from things you may already possess, through a designated community.

Others examples include Airbnb, which assists with renting out a room in your house; RelayRides, which lets you make money by leasing your car; and Zaarly, another online marketplace for people to sell used items or hire someone for their skills.

Coffee & Power was started by Philip Rosedale, the founder and former CEO of Second Life, a virtual world that flourished into a small economy, where players buy and sell items made within the game.

Rosedale explained to me how Second Life overlaps with what he’s doing at Coffee & Power:

“Second Life became more inspiring for me than anything else — not because it was an unbelievable Lego set, but because of what people did economically with the Legos. People were able to use it to create new jobs and inspire themselves to do new things with their skills they weren’t doing previously.”

For instance, Rosedale said, a person might be a software engineer in real life, but on Second Life, they might design women’s shoes and make $2,000 a month selling them to other players.

“We saw that in Second Life, and if we are right about Coffee & Power, we can affect even more people,” he said.

The site first went live in April, but is relaunching today. In that time, Rosedale said that 2,000 people have used it, completing 700 so-called “missions” — which are transactions — for a total of $10,000. The average value has been $15.

Some of the missions include offering to shop at Trader Joe’s for $25, or asking if someone could turn a suit into a zombie costume. Rosedale’s son will bake you brownies or teach you card tricks.

With all of these sites, there’s potential for fraud or deceptive practices. Airbnb had the most public example, when an apartment was ransacked by a renter and the owner’s identity was stolen.

Coffee & Power is employing some of the usual tools to help verify a person’s identity, such as allowing users to link their Facebook or LinkedIn profiles. But the most original part of the company’s concept is funding a coffee shop in downtown San Francisco, where members can meet up to exchange items and drink coffee for free. The cafe at 1825 Market Street is the first site, and Coffee & Power plans to open up additional spaces in other locations as it expands.

Another twist is that Coffee & Power does not let people transact in U.S. dollars. As with Second Life, all missions are conducted in a virtual currency.

Coffee & Power will charge people 15 percent to cash out whatever they earn, which in turn will encourage people to keep the money on the network and spend it on other items in the community.

The company raised $1 million in funding early this year from angel investors, including LinkedIn’s Reid Hoffman and Amazon’s Jeff Bezos, who also invested in Second Life. It has three founders and one full-time employee, and has gotten most of the development work accomplished through hiring software developers online.

But a legal dispute may imperil their pastoral bliss: It threatens to close the only store where Ms. DeLouise can buy food for Star and Holly. Without their special diet, the horses would waste away and turn green.

Star and Holly aren’t real horses. They exist only within Linden Research Inc.’s “Second Life,” an online virtual world where people can fashion a new existence. But while the buying, breeding and riding of horses happens in the virtual world, litigation over them happens in real-life federal court.

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When it goes public, the Facebook game developer will be the first major U.S. company supported primarily by the sale of virtual goods to do so.

To get an idea of what such an animal might look like, I talked to a handful of accountants, lawyers and game companies to get a sense of what we might find under the hood.

What’s immediately clear is that there are no obvious answers.

The Securities and Exchange Commission and other governing bodies have not yet come up with a legally prescribed method for taking into account the sale of virtual goods.

That leaves companies to come up with their own best guesses.

“There are no rules about this stuff,” said Bob Komin, the CFO and COO at Linden Lab, which operates Second Life, the four-year-old online virtual world. “I haven’t heard anything about a standard, but it’s probably the number one thing we talk about before we get audited every year.”

Revenue recognition on the sale of virtual goods is not exactly a sexy topic (unless we’re talking about an avatar’s undergarments!). But as more companies shift to a free-to-play model, where games are monetized through microtransactions and virtual goods, the subject will become more commonplace.

Zynga may be the first out of the gate, but many others are waiting in the wings — Facebook being the most prominent. Zynga declined to comment for this story.

Here’s what is known about Zynga

Four of its titles dominate the most popular applications on Facebook: CityVille (No. 1); FarmVille (No. 2); its newest title, Empires & Allies (No. 3); and Zynga Poker (No. 4).

All of those games are free and monetized through the sale of virtual goods, such as purple cows, energy boosts, clothing or premium buildings.

In-game items like these are either purchased directly on Facebook or through gift cards purchased in the store. Zynga also makes money from advertising and mobile games, but revenues from those are presumed to be far less.

In total, Zynga reportedly generated about $400 million in profit last year on about $850 million in revenue, although subsequent sources told AllThingsD’s Kara Swisher that the filing will reveal much more robust numbers.

But it’s not the sheer magnitude of Zynga’s business that has created problems for bean-counters. It’s the details on how to account for every last penny.

In a white paper, accounting firm Ernst & Young writes that there are three typical models being used today.

Here’s how they break it down:

• Game-based model: The company recognizes revenue over the life of the game.
• User-based model: Revenue is recognized over the estimated life a user plays the game.
• Item-based: Revenue is recognized based on the implied or explicit life span of the item — in other words, how long it would last in the real world. Examples of more durable goods are virtual vehicles, furniture or weapons. Revenue from these would be recognized for as long as the player stays active in the game. Revenues from a more consumable item, like a virtual cup of coffee or a jolt of energy, would be recognized almost immediately.

And there are still other factors to take into consideration, such as whether the goods were paid for with virtual currency or real cash, and how much information a company has for establishing the averages.

Lack of rules won’t stop companies from filing to go public

It can get really confusing really fast.

Kirk Soderquist and J. Dax Hansen, attorneys at Perkins Coie in Seattle, are looking at the legal ramifications of virtual goods.

“You have a bunch of alternative financial services companies that have sprung up on the Internet around social networks and gaming because there’s a need to deal with money in an innovative way. But the laws aren’t clear on how they apply to the Internet and the gaming space,” Hansen said.

Despite the lack of clear regulations, they said, they don’t believe that’s keeping any companies from filing for a public offering.

The one major aspect for a company to consider is unclaimed property laws. If a user purchases credits or coins but doesn’t use them, a company can’t necessarily set an expiration date and count them as revenue. In many states, it is considered “unclaimed property” — like an unused gift card — and the government can collect the revenue.

“Investors and acquirers will be interested in how you deal with that,” Hansen said. “If they are dependent on breakage for their business model, then they have another think coming.”

Linden Lab recognizes revenue over three years

Linden Lab’s approach for Second Life most closely resembles user-based accounting, which recognizes revenue over the average lifespan of a player, which is three years.

That time frame was picked, Komin said, because players tend to stick around for two to four years. “So, three years is not a bad estimate,” he said.

Komin prefers the long timeline because it evens out the revenues, making the company look like it has a very predictable and recurring business model. “If you have recurring and repeatable revenues over three years, it means that even if you are growing really fast, your reported numbers would be growing less quickly, but it would be more predictable. The other far extreme would be to report everything in the current period, and you’d see the growth as it was happening — but it would be more volatile.”

In other words, if Zynga does the same thing and reports FarmVille revenues over more than the two-year period it has been popular and revenues from Poker over three-plus years, revenues will be very consistent and not reveal much in terms of how well its games are currently performing.

Likewise, sales won’t spike when they release a new title, like Empires & Allies — which has jumped from the seventh most popular game to the No. 3 spot in the past week, according to AppData.com.

The iPhone is an example of the two accounting models

A good example for this is how Apple originally accounted for its iPhone.

When the first iPhone came out, Apple used subscription-based rules to account for the revenue. That meant that sales from the iPhone were spread out over many months, rather than right after a customer bought the phone. Wall Street analysts found the practice annoying because the company’s revenues barely budged despite selling two million devices in one quarter.

Apple was forced to report it this way because it technically wasn’t selling a finished product. Over the life of the product, Apple planned to push down free updates to the device. (This is also why Apple once charged for iOS updates for the iPod touch, so it could recognize all revenue immediately.)

The laws have since changed.

“Apple is a great analogy,” Komin said. And just as Apple figured it out over time, “I think there will be some adjustment as people figure [virtual goods] out.”

To be sure, Komin has his preferences for how he wants to do it, as the company considers an IPO.

“Generally speaking, investors don’t reward you for volatility,” he said. “Recognizing revenue that matches [a user's] life cycle feels better than recording it immediately. But whichever way we go, and whichever we choose to do, we have to make sure investors understand the business.”

Whatever Zynga decides, investors (and journalists!) will thank it for being transparent.

The Silicon Valley startup is one of many companies exploiting the Internet to improve collaboration. It builds on several existing concepts, such as Web conferencing, Internet telephony and instant messaging. Sococo also leans on the notion of virtual spaces, pioneered by companies such as Linden Lab with Second Life.

David Van Wie, a veteran Valley entrepreneur who is Sococo’s CEO, says part of its inspiration came from a time when he and a group of professionals around the country were trying to put together a deal. “We were all sitting around with high-speed computers and networks,” he recalls, with access to advanced conferencing and collaboration tools.

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Merchants that sell digital goods lost 1.9 percent of all revenue to fraud in 2009, compared with a 1.1 percent fraud rate for companies that sell physical goods online, according to CyberSource Corp., which processes credit cards for online merchants.

Such percentages seem small, but can translate into sizeable sums of money as social networks like Facebook Inc. expand the market for virtual goods, which have long been associated with games like Second Life and World of Warcraft, where players buy items like virtual gold and clothes for avatars.

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The company said Thursday that Kingdon has stepped down and founder Philip Rosedale–who was succeeded by Kingdon as CEO about two years ago but remained chairman–has returned as interim chief executive. It added that chief financial officer Bob Komin was promoted to chief operating officer.

“This is a big, tough change but one the board of directors and management team deeply believes in,” Rosedale said in a blog post.

Rosedale praised Kingdon for improving the stability of Second Life and building a strong team of new leaders at the company. But he added:

“Our thinking as a team is that my returning to the CEO job now can bring a product and technology focus that will help rapidly improve Second Life. We need to simplify and focus our product priorities–concentrating all our capabilities on making Second Life easier to use and better for the core experiences that it is delivering today. I think that I can be a great help and a strong leader in that process.”

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Ms. Schultze, who teaches management and information technology, leads both an online and physical classroom–students have the option of attending either or both. But for her, Second Life goes beyond being a teaching tool. Ms. Schultze explored the avatar-self relationship with a paper she presented at the 30th International Conference on Information Systems in Phoenix back in December. With her research, funded by the National Science Foundation, she will write a series of papers that look into the different aspects of these avatar-self relationships.

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But the search giant hasn’t confined its ambitions to mere hardware and software design. It also wants to reinvent the way the mobile business works.

Heady stuff, but then, Google (GOOG) has already reinvented some industries (ask the old search engines) and is helping reorder others (ask any newspaper publisher). 

The flip side: While Google does launch lots of stuff, many of its products are now on the shelf with other dusty tech curios.

Below are a few of the choicest nuggets in our newest slideshow. Some are first-place finishers, while others had to be killed off and turned into mulch for Google’s organic garden.

But the San Francisco company is far from backing away. The latest bet: that users will pay real money for things that only exist “in world,” as Second Life fans call it.

Linden Tuesday night announced that it has purchased two small companies–Xstreet SL and OnRez–that act a bit like Amazon.com (AMZN) in providing one-stop shopping for virtual goods from other merchants. One component of their strategy has been to make it easier to buy goods through the Web, not requiring users to enter Second Life to acquire the items they may use there. Financial terms are not being disclosed.

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“Businesses have learned some hard lessons,” said Gartner analyst Steve Prentice. “They need to realize that virtual worlds mark the transition from Web pages to Web places and a successful virtual presence starts with people, not physics. Realistic graphics and physical behavior count for little unless the presence is valued by and engaging to a large audience.”

A bit of a truism, that. A collaborative virtual world isn’t much of a world at all without, you know, collaborators. That said, Gartner is quite bullish on the potential of virtual worlds in the years ahead. By 2012, it estimates that 70% of organizations will have established their own private virtual worlds. “Companies need to start thinking what their virtual-world strategy is, incorporate it into their Internet strategy, and merge their two-dimensional Web pages to support a 3-D Web place,” Prentice said. “Virtual world presence is not to replace the 2-D world but to supplement it.”

Make the right impression. Your avatar’s appearance should be reasonable and fitting for the activities in which you engage (especially if conducting IBM business). If you are engaged in a virtual world primarily for IBM business purposes, we strongly encourage you to identify your avatar as affiliated with IBM. If you are engaged primarily for personal uses, consider using a different avatar.

- IBM Virtual World Guidelines

A pioneer, that IBM (IBM). A trend-setter. It was the first company to publish a code of conduct for workers enamoured of virtual environments. And soon it will be the first to create a virtual world of its own in Second Life. This morning, Big Blue announced a partnership with Second Life producer Linden Lab to create a secure, enterprise-class version of the popular Internet-based virtual world. By running a Second Life installation on servers inside IBM’s firewall, the two will homestead a sort of corporate gated community for security-conscious companies–one in which companies can conduct business without being set upon by a horde of animated flying phalli. A savvy way to drive adoption of virtual worlds in enterprise. And if all goes as planned, a host of other companies will be running Second Life inside their own firewalls by year’s end. “There has been so much hype and puffery around virtual worlds,” Ginsu Yoon, Linden’s vice president of business affairs told The Wall Street Journal. “It’s really important to Linden Lab to be able to demonstrate that it is able and willing to meet the requirements of companies like IBM.”

At one point, I kid him, noting, “You can’t dance on the Internet.”

So, of course, it took about two seconds to get an email on the subject decrying my ignorance, including a link to Second Life Ballet’s first production from about a year ago.

Called “Olmannen,” it uses original animations, music and choreography, put together by a choreographer and director whose Second Life name is Inarra Saarinen. And, apparently, the virtual-reality dancers are real ones manipulating the avatars.

While I am not a big fan of Second Life, this is oddly riveting and works well in the avatar medium.

The SLB’s newest production is, no surprise in this holiday season, “The Nutcracker,” which just premiered in Second Life and runs through January.

Here’s “Olmannen,” in two parts:

Part 1

Part 2

Of course, I redubbed it: “Has the Internet Jumped the Shark?” For the love of All Things Fonzie, you bet it has.

The discussion centered around what I think most agree is an inflated market for start-ups, worrisome especially given a looming recession.

Here is my video and one from the panel, in this case a snippet of Benchmark Capital’s Bill Gurley talking about Second Life, in which he is an investor:

Interestingly, none of the panelists–Gurley, Glam CEO Samir Arora, Lise Buyer of Class V Group and Aggregate Knowledge CEO Paul Martino–seemed bothered by that for a variety of reasons (lots of bigger companies interested in acquiring little ones, for example).

I am a little less okay with the rampant frothiness, insane valuations and who-cares mentality, which has seeped into the market and can only result in lack of discipline and too many me-too companies.

While–thankfully–the weak IPO market is protecting the investing public from the insanity this time around (no Pets.com!), it’s still not a good thing for the industry to see too many companies without solid paths to profitability being formed with the hope of some pie-in-the-sky idea that endlesss advertising revenues will support the whole rickety enterprise.

But that’s just me.

Once you put in several hours flailing around learning how to function in Second Life, there isn’t much to do. That may explain why more than 85% of the avatars created have been abandoned. Linden’s in-world traffic tally, which factors in both the number of visitors and time spent, shows that the big draws for those who do return are free money and kinky sex. On a random day in June, the most popular location was Money Island (where Linden dollars, the official currency, are given away gratis), with a score of 136,000. Sexy Beach, one of several regions that offer virtual sex shops, dancing and no-strings hookups, came in at 133,000. The Sears store on IBM’s Innovation Island had a traffic score of 281; Coke’s Virtual Thirst pavilion, a mere 27. And even when corporate destinations actually draw people, the PR can be less than ideal. Last winter, CNET’s in-world correspondent was conducting a live interview with Anshe Chung, an avatar said to have earned more than $1 million on virtual real-estate deals, when Chung was assaulted by flying penises in a griefer attack.

–Frank Rose, Wired 07.24.07

You think that maybe corporate America is taking virtual worlds like Second Life a bit too seriously? Advertising in the “metaverse” is one thing; building a virtual complex in which to host employee meetings another. But issuing corporate guidelines governing the appearance and behavior of employee avatars (the metaverse term for “losers”)? Well, that seems a bit much, doesn’t it?

Yet, that’s what IBM has done. On Friday, IBM issued its Virtual Worlds Guidelines, a code of conduct by which it expects its workers to abide as they muck about in Second Life and other virtual environments. Here’s a quick selection:

• Protect your–and IBM’s–good name. At this point in time, assume that activities in virtual worlds and/or the 3D Internet are public–much as is participation in public chat rooms or blogs. Be mindful that your actions may be visible for a long time. If you conduct business for IBM in a virtual world or if you are or may appear to be speaking for or on behalf of IBM, make sure you are explicitly authorized to do so by your management.
• Protect others’ privacy. It is inappropriate to disclose or use IBM’s or our clients’ confidential or proprietary information–or any personal information of any other person or company (including their real name)–within a virtual world.
• Make the right impression. Your avatar’s appearance should be reasonable and fitting for the activities in which you engage (especially if conducting IBM business). If you are engaged in a virtual world primarily for IBM business purposes, we strongly encourage you to identify your avatar as affiliated with IBM. If you are engaged primarily for personal uses, consider using a different avatar.

Sounds like mostly common sense, right? Observe nondisclosure agreements, don’t behave like an idiot and don’t dress your avatar up like one either. Unlike Vegas, whatever happens in Second Life probably doesn’t necessarily stay there.

Still, why bother codifying such conduct? “I’m just not sure it’s necessary,” said Reuben Steiger, founder of Millions of Us, a consulting firm based in Sausalito, Calif. “Companies that don’t bother with guidelines aren’t flying blind–the regular rules automatically extend to virtual worlds.”

Once you put in several hours flailing around learning how to function in Second Life, there isn’t much to do. That may explain why more than 85% of the avatars created have been abandoned. Linden’s in-world traffic tally, which factors in both the number of visitors and time spent, shows that the big draws for those who do return are free money and kinky sex. On a random day in June, the most popular location was Money Island (where Linden dollars, the official currency, are given away gratis), with a score of 136,000. Sexy Beach, one of several regions that offer virtual sex shops, dancing and no-strings hookups, came in at 133,000. The Sears store on IBM’s Innovation Island had a traffic score of 281; Coke’s Virtual Thirst pavilion, a mere 27. And even when corporate destinations actually draw people, the PR can be less than ideal. Last winter, CNET’s in-world correspondent was conducting a live interview with Anshe Chung, an avatar said to have earned more than $1 million on virtual real-estate deals, when Chung was assaulted by flying penises in a griefer attack.

–Frank Rose, Wired 07.24.07

You think that maybe corporate America is taking virtual worlds like Second Life a bit too seriously? Advertising in the “metaverse” is one thing; building a virtual complex in which to host employee meetings another. But issuing corporate guidelines governing the appearance and behavior of employee avatars (the metaverse term for “losers”)? Well, that seems a bit much, doesn’t it?

Yet, that’s what IBM has done. On Friday, IBM issued its Virtual Worlds Guidelines, a code of conduct by which it expects its workers to abide as they muck about in Second Life and other virtual environments. Here’s a quick selection:

• Protect your–and IBM’s–good name. At this point in time, assume that activities in virtual worlds and/or the 3D Internet are public–much as is participation in public chat rooms or blogs. Be mindful that your actions may be visible for a long time. If you conduct business for IBM in a virtual world or if you are or may appear to be speaking for or on behalf of IBM, make sure you are explicitly authorized to do so by your management.
• Protect others’ privacy. It is inappropriate to disclose or use IBM’s or our clients’ confidential or proprietary information–or any personal information of any other person or company (including their real name)–within a virtual world.
• Make the right impression. Your avatar’s appearance should be reasonable and fitting for the activities in which you engage (especially if conducting IBM business). If you are engaged in a virtual world primarily for IBM business purposes, we strongly encourage you to identify your avatar as affiliated with IBM. If you are engaged primarily for personal uses, consider using a different avatar.

Sounds like mostly common sense, right? Observe nondisclosure agreements, don’t behave like an idiot and don’t dress your avatar up like one either. Unlike Vegas, whatever happens in Second Life probably doesn’t necessarily stay there.

Still, why bother codifying such conduct? “I’m just not sure it’s necessary,” said Reuben Steiger, founder of Millions of Us, a consulting firm based in Sausalito, Calif. “Companies that don’t bother with guidelines aren’t flying blind–the regular rules automatically extend to virtual worlds.”

Congress’ Joint Economic Committee is expected to issue a report on the potential taxation of virtual goods by the end of July. No word yet on what it might say, although a JEC director has suggested that “as long as virtual activity stays within the virtual economy, it shouldn’t be taxable.” So is that to say that there are tax consequences for activity that extends beyond it? Sounds like it. “Any time someone wins a tangible prize or award, the value is reportable as taxable income,” an Internal Revenue Service rep told CNN earlier this year. “An accumulation of ‘points’ would not result in tax consequences, but redeeming or selling them for money, goods, or services would.”

ABC, which reportedly spent a fair sum of money on the island’s creation, plans to spend a bit more recreating it–and securing against future attacks. “When we opened ABC Island we knew that many challenges would present themselves and that by being the first Australian media organization to venture into the world, we were entering uncharted territory,” said Abigail Thomas, head of strategic development at ABC Innovation. “We will now be looking closely at security measures, investigating how the hackers breached the existing security and, of course, making changes to protect the island’s future development.”

Linden Lab’s Second Life, the metaverse’s premier destination for folks missing a first, is getting a new tenant: Playboy. The world’s largest-selling men’s magazine will open shop in the Internet-based virtual world sometime in June. What sort of form it will take remains to be seen. A metaverse mansion and grotto? A retail outlet peddling Playboy Bunny avatar skins? Or perhaps a simple casting call for the girls of the next “cultural zeitgeist”?

So-called age play isn’t exactly a new phenomenon in Second Life. Linden Lab, the virtual world’s creator, has been dealing with it for some time now. “There are people in (Second Life) who are role-playing (as) children engaged in sexual activities,” Robin Harper, Linden Lab vice president of community development wrote in a recent post to the official Second Life forum. “While not a terms-of-service violation–no illegal activity–it could be argued that this behavior is broadly offensive and therefore violates the community standards.”

It sure could–especially when it sparks a real-world police investigation.