Part I: WHAT IS THE METAVERSE?
A BRIEF HISTORY OF THE FUTURE
The term “Metaverse” was coined by author Neal Stephenson in his 1992 novel Snow Crash. For all its influence, Stephenson’s book provided no specific definition of the Metaverse, but what he described was a persistent virtual world that reached, interacted with, and affected nearly every part of human existence. It was a place for labor and leisure, for self-actualization as well as physical exhaustion, for art alongside commerce.
Baudrillard described hyperreality as a state in which reality and simulations were so seamlessly integrated that they were indistinguishable. Though many find this idea frightening, Baudrillard argued that what mattered was where individuals would derive more meaning and value—and speculated it would be in the simulated world. The idea of the Metaverse is also inseparable from the ideas of the Memex, but where [Vannevar] Bush imagined an infinite series of documents linked together via words, Stephenson and others conceived infinitely interconnected worlds.
The growing popularity of MUDs inspired the creation of Multi-User Shared Hallucinations (or MUSHs) or Multi-User Experiences (MUXs). Unlike MUDs, which asked players to carry out specific roles in the context of a specific and usually fantastical narrative, MUSHs and MUXs enabled participants to collaboratively define the world and its objective.
A “corporate internet” is the current expectation for the Metaverse. The internet’s nonprofit nature and early history stem from the fact that government research labs and universities were effectively the only institutions with the computational talent, resources, and ambitions to build a “network of networks,” and few in the for-profit sector understood its commercial potential. None of this is true when it comes to the Metaverse. Instead, it is being pioneered and built by private businesses, for the explicit purpose of commerce, data collection, advertising, and the sale of virtual products.
It is here that fears of a Metaverse dystopia seem fair, rather than alarmist. The very idea of the Metaverse means an ever-growing share of our lives, labor, leisure, time, wealth, happiness, and relationships will be spent inside virtual worlds, rather than just extended or aided through digital devices and software. It will be a parallel plane of existence for millions, if not billions, of people, that sits atop our digital and physical economies, and unites both. As a result, the companies that control these virtual worlds and their virtual atoms will likely be more dominant than those who lead in today’s digital economy.
CONFUSION AND UNCERTAINTY
All new and particularly disruptive technologies deserve scrutiny and skepticism. But current debates about the Metaverse remain muddled because—at least thus far—the Metaverse is only a theory. It is an intangible idea, not a touchable product. As a result, it’s difficult to falsify any specific claim, and inevitable that the Metaverse is understood within the context of a given company’s own capabilities and preferences. However, the sheer number of companies that see potential value in the Metaverse speaks to the size and diversity of the opportunity. What’s more, debate over what the Metaverse is, how significant it might be, when it will arrive, how it will work, and the technological advances that will be required is exactly what produces the opportunity for widespread disruption. Far from disproving it, uncertainty and confusion are features of disruption.
This confusion leads to a few common error types. Sometimes, emerging tech is seen as a trivial toy. In other cases, its potential is understood, but not its nature. Most often people misunderstand which specific technologies will thrive and why. On occasion, we get everything right except for the timing.
What makes technological transformation difficult to predict is the reality that it is caused not by any one invention, innovation, or individual, but instead requires many changes to come together. After a new technology is created, society and individual inventors respond to it, which leads to new behaviors and new products, which in turn lead to new use cases for the underlying technology, thereby inspiring additional behaviors and creations. And so on.
A DEFINITION (FINALLY)
Here, then, is what I mean when I write and speak about the Metaverse: “A massively scaled and interoperable network of real-time rendered 3D virtual worlds that can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications, and payments.”
Although virtual worlds come in many dimensions, “3D” is a critical specification for the Metaverse. Without 3D, we might as well be describing the current internet. 3D is necessary not just because it signals something new. Metaverse theorists argue that 3D environments are required in order to make possible the transition of human culture and labor from the physical world to the digital one. For example, Mark Zuckerberg has claimed that 3D is an inherently more intuitive interaction model for humans than 2D websites, apps, and video calls—especially in social use cases. Certainly, humans did not evolve for thousands of years to use a flat touchscreen.
History provides a few lessons. First, humans seek out digital models that most closely represent the world as they experience it—richly detailed, mixing audio and video, and with a sense of being “live” rather than static or outdated. Second, as our online experiences become more “real,” we place more of our real lives online, live more of our lives online, and human culture overall becomes more affected by the online world. Third, the leading indicator for this change is typically new social apps, which, more often than not, are first embraced by younger generations. Collectively, these lessons seem to support the notion that the next great step for the internet is 3D.
Central to most visions of the Metaverse is the user’s ability to take her virtual “content,” such as an avatar or a backpack, from one virtual world to another, where it might also be changed, sold, or remixed with other goods. In addition, the Metaverse should make it so that wherever a user goes or whatever they choose to do, their achievements, history, and even finances are recognized across multitudes of virtual worlds, as well as the real one. The closest analogues are the international passport system, local market credit scores, and the national identification systems (such as social security numbers). To realize this vision, virtual worlds must first be “interoperable,” a term that refers to the ability for computer systems or software to exchange and make use of information sent from one another.
It isn’t necessary for all parties to embrace common standards, so long as economic gravity is allowed to do its work. Those who do will grow and those who don’t will face constraints. It’s for this reason why it’s so important to understand how the interoperability standards of the Metaverse will be established. The leaders here will have extraordinary soft power as this next-generation internet exists. In many ways, they will decide the rules of physics, and when, how, and why they will be updated.
For “the internet” to be “the internet”, we generally accept that it has to have a seemingly infinite number of websites and pages. It can’t, for example, just be a handful of portals owned by a few developers. The Metaverse is similar. It must have a massively scaled number of virtual worlds if it is to be “the Metaverse.” Otherwise, it is more like a digital theme park—a destination with a handful of carefully curated attractions and experiences that can never be as diverse as, or contend with, the outside (real) world.
The Metaverse will only become “the Metaverse” if it can support a large number of users experiencing the same event, at the same time, and in the same place, without making substantial concessions in user functionality, world interactivity, persistence, rendering quality, and so on. Just imagine how different—and limited—society would be today if only 50 to 150 people could attend any given sporting match, concert, political rally, museum, school, or mall. However, we are far from being able to replicate the density and flexibility of the “real world.” And it is likely to remain impossible for some time.
The Next Internet
We should expect the establishment of the Metaverse to be broadly similar to that of the internet. Many will try to build or co-opt the Metaverse. One of these groups might even succeed, as Sweeney fears. However, it’s more likely that the Metaverse will be produced through the partial integration of many competing virtual world platforms and technologies. This process will take time. It will also be imperfect, inexhaustible, and face significant technical limitations as a result. But it is the future we should hope for and work towards.
Daniel Ek, the co-founder and CEO of Spotify, has argued that the dominant business model of the internet era has been breaking down anything made of atoms into bits—what was once a physical alarm clock on a nightstand is now an application inside the smartphone on a nightstand, or just data stored on a smart speaker nearby. In a simplified sense, the Metaverse era can be thought of as involving the use of bits to produce 3D alarm clocks made of virtual atoms. Those with the most experience in virtual atoms—decades of it—are game developers. They know how to make not just a clock, but a room, a building, and a village populated by happy players. If humanity is ever to move to a “massively scaled interoperable network of real-time rendered 3D virtual worlds,” that skill is going to take us there. When discussing what he got right and wrong about the future in Snow Crash, Stephenson told Forbes that “instead of people going to bars on the Street in Snow Crash, what we have now is Warcraft guilds” which go on in-game raids.
Part II: BUILDING THE METAVERSE
COMPUTING
Shifting as much processing and rendering to industrial-grade data centers seems both more efficient and essential to building the Metaverse. There are already companies and services pointing in this direction. Google Stadia and Amazon Luna, for example, process all video gameplay in remote data centers, then push the entire rendered experience to a user’s device as a video stream. The only thing a client device needs to do is play this video and send inputs (move left, press X, and so on)—similar to watching Netflix. Proponents of this approach often highlight the logic of powering our homes via power grids and industrial power plants, not private generators. The cloud-based model allows consumers to stop buying consumer-grade, infrequently upgraded, and retailer-marked-up computers and instead rent access to enterprise-grade equipment that is more cost-efficient per unit of processing power and more easily updated.
For all the ostensible logic of this approach, and the success of server-side content services such as Netflix and Spotify, remote rendering is not the consensus solution among game publishers today. Tim Sweeney has argued that “initiatives to place real-time processing on the wrong side of the latency wall have always been doomed to failure because, even though bandwidth and latency are improving, local computing performance is improving faster.” Put differently, the debate is not whether remote data centers can offer better experiences than consumer-owned ones. They obviously can. Rather, it’s that networks get in the way and will likely continue to do so.
For the foreseeable future, what I call “Sweeney’s Law”—improvements in local compute will continue to outpace improvements in network bandwidth, latency, and reliability—seems likely to hold. Although many believe that Moore’s Law, which was coined in 1965 and states that the number of transistors in a dense integrated circuit doubles about every two years, is now slowing down, CPU and GPU processing power continues to grow at a rapid pace. In addition, consumers today frequently replace their primary computing device, resulting in enormous improvements for end-user compute every two to three years.
The insatiable need for more processing power—ideally, located as close as possible to the user but, at the very least, in nearby industrial server farms—invariably leads to a third option: decentralized computing. With so many powerful and often inactive devices in the homes and hands of consumers, near other homes and hands, it feels inevitable that we’d develop systems to share in their mostly idle processing power.
VIRTUAL WORLD ENGINES
The concept, history, and future of the Metaverse are all intimately tied to gaming, and this fact is perhaps most obvious when we look at the basic code of virtual worlds. This code is typically contained in a “game engine,” a loosely defined term that refers to the bundle of technologies and frameworks that help to build a game, render it, process its logic, and manage its memory. In a simplified sense, think of the game engine as the thing that establishes the virtual laws of the universe—the ruleset that defines all interaction and possibilities. Historically, all game-makers built and maintained their own game engines. But the past fifteen years have witnessed the rise of an alternative: licensing an engine from Epic Games, which makes the Unreal Engine, or one from Unity Technologies, which makes an eponymous engine. Using these engines has a cost.
In a sense, we can think of independent game engines as a shared R&D pool for the industry. Yes, Epic and Unity are for-profit companies, but instead of every developer sinking part of their budget into proprietary systems to manage core game logic, a few cross-platform technology providers can concentrate a portion of their budgets into a more capable engine that supports, and benefits, the entire ecosystem.
Companies like Unity, Unreal, PlayFab, and GameSparks are in an enviable position. Most obviously, they become a sort of standard feature, or lingua franca, for the virtual world—think of them as the “English” or “metric” of the Metaverse. Just as it is likely that you use some English and some knowledge of the metric system when traveling internationally, odds are that if you’re building something online today, irrespective of what it is you’re building, you are using—and paying—one or more of these companies. But more importantly, who better to establish common data structures and coding conventions across virtual worlds than the companies that govern their logic? Who better to facilitate exchanges of information, virtual goods, and currencies between these virtual worlds than the companies that power the same inside them? And who better to create an interconnected network of these virtual worlds, as ICANN does for web domains and IP addresses?
As both independent game engines and live services suites developed over the past two decades, other companies combined these approaches into a new one: integrated virtual world platforms (IVWPs) such as Roblox, Minecraft, and Fortnite Creative. IVWPs are based around their own general-purpose and cross-platform game engines, similar to Unity and Unreal (Fortnite Creative, or FNC, which is owned by Epic Games, is built using Epic’s Unreal Engine). However, they are designed so that no actual “coding” is required. Instead, games, experiences, and virtual worlds are built using graphical interfaces, symbols, and objectives. Think of it as the difference between using the text-based MS-DOS and visual iOS, or designing a website in HTML versus creating one in Squarespace. The IVWP interface enables users to create more easily and with fewer people, less investment, and less expertise and skill.
Roblox is unlikely to meet my definition in one key way: most virtual works will exist outside of it. This makes it a Metagalaxy, rather than the Metaverse. But could Roblox become the Metaverse? What if Epic’s IVWP Fortnite Creative, game engine Unreal, and live services suite Epic Online Services, along with its other special projects, were combined—would the result be the Metaverse? If you squint, you might be able to imagine these companies, or one like it, subsuming all virtual experiences, thereby becoming a Metaverse-sized Metagalaxy. And it is notable that some form of this process is what happens in Snow Crash and Ready Player One. The current state of technological progress, however, suggests another outcome. Why? Because as fast as these virtual giants are growing, the number of virtual experiences, innovators, technologies, opportunities, and developers are all growing faster.
Though the top integrated virtual world platforms are mighty and fast-growing, they also represent a far smaller portion of the gaming industry than Facebook does in the social web. In 2021, the combined revenues of Roblox, Minecraft, and FNC represented less than 2.5% of gaming revenues in 2021, and reached fewer than 500 million of an estimated 2.5 billion–3 billion players. Moreover, they’re dwarfed by the major cross-platform engines. Roughly half of all games today run on Unity, while Unreal Engine’s share of high-fidelity 3D immersive worlds is estimated at between 15% and 25%. Roblox’s R&D expenditures may exceed that of both Unreal and Unity, but this ignores the billions in additional investment made by licensors of these engines. The two most popular games in the world, excluding low-fidelity casual titles such as Candy Crush, are PUBG Mobile and Free Fire, both built on Unity. Most important may be the reach of Unreal and Unity’s developers. While millions of users have made a Minecraft mod or a Roblox game, the number of professional developers using these IVWPs is estimated in the tens of thousands. Epic and Unity count millions of active and skilled developers.
Given the pace of change, level of technical difficulty, and the diversity of potential applications, it’s likely that we will end up with dozens of popular virtual worlds and virtual world platforms, with many more underlying technology providers. This is a good thing, to my mind. We should not want a single virtual world platform or engine operating the entire Metaverse.
INTEROPERABILITY
AR and VR experiences, 2D and 3D games, realistic and cartoon-styled worlds, high concurrent users and low concurrent user simulations, high-budget and low-budget titles, and 3D printers—all use different formats and store data differently. Full standardization would likely mean underserving one application, falling massively short on another, and so on—often in unpredictable ways.
So we will need technical standards, conventions, and systems for an interoperable Metaverse. But that’s not enough. Think about what happens when you send a send a photo from your iCloud storage to your grandmother’s Gmail account—suddenly, your iCloud and her Gmail both have a copy of that image. Your email service does too. And if she downloads it from her email, there are now four copies. Yet this doesn’t work for virtual goods if they’re to hold value and be traded. Otherwise infinite copies will exist every time they’re shared between one world and another, or one user and another. This means that systems are needed to track, validate, and modify ownership rights to these virtual goods, while also safely sharing this data from partner to partner.
The 3D standards to use (or not use), the systems to build and data to structure, the partnerships that need to be struck, the valuable data that must be protected but also shared—these and other issues have real-world financial implications. The largest of these considerations, however, might be how to manage an economy of interoperable virtual objects.
To achieve even a measure of interoperability, the gaming industry will need to align on a handful of so-called interchange solutions—various common standards, working conventions, “systems of systems,” and “frameworks of frameworks” that can safely pass, interpret, and contextualize information from or to third parties, and consent to unprecedented (but secure and legal) data-sharing models that allow competitors to both “read” and “write” against their databases and even withdraw valuable items and virtual currency.
Interoperability in the Metaverse is not binary. It is not about whether virtual worlds will or won’t share. It’s about how many share, how much is shared, when, where, and at what costs. So why am I optimistic that, given all these complications, there will be a Metaverse? Economics.
It’s likely that consumer spending today is constrained by the very knowledge that no game lasts forever. Think of anything you might buy on holiday but don’t plan to bring home in your suitcase—a boogie board, a stainless steel water bottle, a costume for Día de los Muertos. Expected obsolescence always constrains our spending. The utility of these goods is further limited by ownership restrictions. Most games and gaming platforms prohibit users from giving outfits or items to other users, or even selling them for in-game currency. The publishers that do allow reselling and trading typically place firm limits on this activity.
Ownership rights are foundational to investment and the price of any good, while the opportunity for profit is a well-established motivator. Speculation has always financed the growth of new industries, even when it results in bubbles (a lot of America’s now cheap-to-use fiber optic cabling was laid in the run-up to the dotcom crash). If we want the greatest possible investment of time, energy, and money into the Metaverse—if we want to achieve the Metaverse—we need to establish firm ownership rights. Every stakeholder in virtual worlds faces incentives and risks that point in this direction. It’s dangerous for any developer to build a business whose wares or services are limited by the popularity of a given platform or its economy (or economic policies). And anything that results in less investment and thus fewer and worse products overall doesn’t benefit the developer, the user, or the game and its platform.
The standardization of game engines and communications suites is fairly complex compared to how 3D-objects conventions will emerge. Witness the current universe of 3D assets. Billions of dollars have been spent on non-standardized virtual objects and environments across film and video games, civil and industrial engineering, healthcare, education, and more. There are no signs that this level of spending will do anything but increase in the near future. Constantly remaking these objects for a new file format or engine is financially impractical and often wasteful; the greatest attribute of a digital “thing” is that it can be endlessly re-used without additional cost. Interchange solutions are already emerging to tap into the “virtual gold mine” of previously created and fragmented asset libraries.
In addition to driving asset interoperability, Epic is also driving the “interoperation” of competing intellectual properties, which is a philosophical, not technical, problem (cross-platform gaming reminds us this is the harder of the two challenges). As virtual platforms like Fortnite, Minecraft, and Roblox grew into culture-driving social spaces, they’ve become an increasingly necessary part of consumer marketing, brand building, and multimedia franchise experiences. In the past three years, Fortnite has produced experiences with the NFL and FIFA, Disney’s Marvel Comics, Star Wars and Alien, Warner Bros.’ DC Comics, Lionsgate’s John Wick, Microsoft’s Halo, Sony’s God of War and Horizon Zero Dawn, Capcom’s Street Fighter, Hasbro’s G.I. Joe, Nike and Michael Jordan, Travis Scott, and more. But to participate in these experiences, brand owners must embrace something they almost never allow: unlimited-term licenses (in-game outfits are kept by players forever), overlapping marketing windows (some brand events are mere days apart or overlap entirely), and little to no editorial control. In sum, this means it’s now possible to dress as Neymar while wearing a Baby Yoda or Air Jordan backpack, holding Aquaman’s trident, and exploring a virtual Stark Industries. And the owners of these franchises want this to happen.
If interoperability truly has value, then financial incentives and competitive pressure will eventually solve for it. Developers will eventually figure out how to technically and commercially support Metaverse business models. And they’ll use the Metaverse’s larger economy to surpass “legacy” game makers. This is one lesson of the rise of free-to-play game monetization. In this business model, players are charged nothing to download and install a game—or even to play it—but are presented with optional in-game purchases such as an extra level or a cosmetic item. When it was first introduced in the 2000s, and even a decade later, many believed free-to-play would, at best, lead to lower revenues for a given game and at worst cannibalize the industry. Instead, it proved to be the best way to monetize a game and a core driver behind video gaming’s cultural ascendance. Yes, it led to many non-paying players, but it substantially increased the total number of players and even gave paying players a reason to spend more. After all, the more people you can show a customized avatar off to, the more you’ll pay to do so.
HARDWARE
Every time there is a large-scale transformation in computing and networking, new devices emerge to better suit their capabilities. The companies that first crack these devices, in turn, have the opportunity to alter the balance of power in technology, not just produce a new business line. Thus companies such as Microsoft, Facebook, Snap, and Niantic see the ongoing struggles with AR and VR as proof that they may be able to displace Apple and Google, which operate the most dominant platforms of the mobile era, while Apple and Google understand that they must invest to avoid disruption.
We might assume that tech companies will inevitably find ways to improve displays, reduce weight, increase battery life, while adding new functionality. After all, TV resolutions seem to increase every year, while supported refresh rates go up, prices go down, and the profile of the device itself narrows. Yet Mark Zuckerberg has said that “the hardest technology challenge of our time may be fitting a supercomputer into the frame of normal-looking glasses.” As we saw when examining compute, gaming devices don’t just “display” previously created frames, as a TV does—they must render these frames themselves. And as with the challenge of latency, there may be real limitations imposed by the laws of the universe when it comes to what’s possible with AR and VR headsets.
The immense technical challenge of “supercomputer glasses” helps explain how tens of billions of dollars are being spent annually on the problem. But despite this investment, there will be no sudden breakthrough. Instead, there will be a constant process of improvements that reduce the price and size of AR and VR devices, while increasing their computing power and functionality. And even when a key barrier is broken by a given hardware platform or component provider, the rest of the market typically follows within two to three years. What will ultimately differentiate a given platform is the experiences it offers.
There are no “best practices” within the brand-new device category. In fact, many of the choices we consider obvious today were once controversial—not just the iPhone’s touchscreen. For example, some early Android builds and apps used Apple’s “pinch-to-zoom” concept, but believed it was backward—if you’re bringing your fingers closer together, shouldn’t whatever you’re looking at come closer, not move farther out? It’s almost impossible to imagine this logic today, but that’s partly because we’ve been trained for fifteen years into thinking the opposite is natural. Apple’s “slide-to-unlock” feature was considered so novel the company was awarded a patent for it, and ultimately won over $120 million after a US Court of Appeals found that Samsung had violated this patent, among others owned by Apple. Even the app store model was controversial. Smartphone leader BlackBerry didn’t launch its app store until 2010, two years after Apple and a year after its famous “There’s an app for that” campaign. What’s more, BlackBerry’s focus on business users (and therefore security) led to policies so strict, such as the need for notarized documents just to gain access to BlackBerry’s application development kit, that many developers never even bothered with the platform.
Wearables will shrink in size and increase in performance, and as the technology improves they will be integrated into our clothes. These developments will help users enhance their interactions with the Metaverse, and enable them to interact with it in more places. Carrying a controller everywhere you go is not practical, and if the primary goal of AR is to make technology disappear into an everyday pair of glasses, then pulling out a thumbstick or a smartphone to use it truly defeats the purpose.
AR and VR may come to replace most of the devices we use today. That time is unlikely to be soon. Even if the combined number of VR and AR headsets (two very different device types) in use by 2030 tops one billion, four times the aforementioned forecast, they would still reach fewer than one in six smartphone users. And that’s okay. There are, in 2022, hundreds of millions of people spending hours each day inside real-time rendered virtual worlds through smartphones and tablets—and these devices are rapidly improving.
The many devices required and expected to support the Metaverse can be grouped into three categories. First, the “primary computing devices,” which for most consumers are smartphones, but may be AR or immersive VR at some point in the future. Second, the “secondary” or “supporting computing devices,” such as a PC or PlayStation, and likely AR and VR headsets. These devices may or may not rely on a primary device, or be complemented by them, but they will be used less frequently than a main device and for more specific purposes. Finally, we have the tertiary devices, such as a smartwatch or tracking camera, which enrich or extend a Metaverse experience, but will rarely operate it directly.
PAYMENT RAILS
With a few important exceptions, the Metaverse economy will follow the patterns of real-world ones. Most experts agree on many of the attributes that produce a thriving real-world economy: rigorous competition, a large number of profitable businesses, trust in its “rules” and “fairness,” consistent consumer rights, consistent consumer spending, and a constant cycle of disruption and displacement, among others.
The payment rails of today’s virtual economy are more expensive, cumbersome, slow to change, and less competitive than those in the real world. Why? Because what we consider to be a virtual payment rail, such as PlayStation’s wallet, Apple’s Apple Pay, or in-app payment services, are really a stack of different “real world” rails and forced bundle of many other services.
The payment rails of console gaming are not discrete, as they are in the real world. Players and developers alike are prohibited from directly using credit cards, ACH, wires, or digital payment networks, and the billing solution offered by a platform is bundled with many other things—entitlements, save data, multiplayer, APIs, and more. It doesn’t matter what the market rate is, or what a developer or user needs. There is no discount if a publisher’s game is offline only, or if they don’t need the online multiplayer services of a given platform. It also doesn’t matter if a publisher’s game was bought at GameStop, rather than digitally at PlayStation’s Store—even though the publisher had to give GameStop a cut of the transaction, too. The fee is the fee.
Steam is seen as one of the most important innovations in PC gaming history, and a critical reason the segment remains as large as console gaming, even with its greater complexity of use and higher cost of entry (a decent gaming PC still costs more than $1,000, while meeting the specifications of newer consoles requires $2,000 or more). But nearly 20 years later, its technical innovations in game distribution, rights management, and online services have largely been commoditized. In some cases, users and publishers skip them altogether. Many PC gamers, for example, now use Discord for audio chat, rather than Steam’s voice chat. The rise of cross-platform gaming also means that most in-game trophies and play records are awarded and managed by a game-maker, rather than by Steam. Yet no one has managed to compete with or disrupt Valve’s platform, even though PCs, unlike consoles, are open ecosystems. A player can download as many software stores as they like and even buy a game directly from the publisher. The publisher can also withhold that title from Steam and still reach its customers. But Steam’s power and centrality endure.
Steam’s ongoing success is partly due to its outstanding service and rich feature set. It is also protected by its forcible bundling of distribution, payments, online services, entitlements, and other policies—just like consoles.
The gaming industry isn’t just informing the creative design principles and building the underlying technologies of the “next-generation internet.” It also serves as the Metaverse’s economic precedent. In 2001, Steve Jobs introduced digital distribution to most of the world through the iTunes music store. For his business model, he chose to emulate the 30% commission commanded by Nintendo and the rest of the gaming industry (though unlike consoles, the iPod itself had gross margins above 50%, not below 0%). Seven years later, this 30% was transposed to the iPhone’s app store, with Google quickly following suit for its Android operating system. Jobs also decided, at this point, to adopt the closed software model used by the console platforms, but that had not been previously used by its Mac laptops and computers, or its iPod.† On iOS, all software and content would need to be downloaded from Apple’s App Store, and as with PlayStation, Xbox, Nintendo, and Steam, only Apple had a say over what software could be distributed and how users would be billed.
By 2020, the App Store had become one of the best businesses on earth. With revenues of $73 billion and an estimated 70% margin, it would’ve been large enough to be a member of the Fortune 15 if it was spun off from its parent company (which is the largest company in the world by market capitalization, as well as the most profitable in dollar terms). And this is despite the fact that the App Store billed less than 10% of transactions flowing through its system, which themselves made up less than 1% of the global economy. Were iOS an “open platform,” these profits would likely have been competed away, at least in part. Visa and Square would offer smaller in-app fees, while competing app stores would emerge that offered services comparable to Apple’s but at lower prices. But this isn’t possible because Apple controls all of the software on its device, and like gaming consoles, keeps it closed and bundled. And its only major competitor, Google, is just as happy with the state of play. These issues aren’t exclusive to the Metaverse, of course, but their consequences for it will be profound, for the same reason Judge Gonzalez Rogers narrowed in on Apple’s gaming policies: the entire world is becoming game-like. That means it’s being forced into the 30% models of the major platforms.
But why, exactly, does Apple’s 30% “outlaw” the Metaverse, to return to Sweeney’s pre-lawsuit remark? There are three core reasons. First, it stifles investment in the Metaverse and adversely affects its business models. Second, it cramps the very companies that are pioneering the Metaverse today, namely integrated virtual world platforms. Third, Apple’s desire to protect these revenues effectively prohibits many of the most Metaverse-focused technologies from further development.
In the “real world,” payment processing costs as little as 0% (cash), typically maxes out at 2.5% (standard credit card purchases), and sometimes reaches 5% (in the case of low-dollar-value transactions with high minimum fees). These figures are low because of robust competition between payment rails (wire versus ACH, for example) and within them (Visa versus MasterCard and American Express). But in the “Metaverse,” everything costs 30%. True, Apple and Android do provide more than just payment processing—they also operate their app stores, hardware, operating systems, suite of live services, and so on. But all of these capabilities are forcibly bundled and consequently not exposed to direct competition. Many payment rails are also bundles. For example, American Express provides consumers with access to credit, as well as its payment networks, perks, and insurance, while merchants gain access to lucrative clientele, fraud service, and more. Yet they are also available unbundled and compete based on the specifics of these bundles. In smartphones and tablets, there is no such competition. Everything is bundled together, in only two flavors: Android and iOS. And neither system has an incentive to cut fees.
The problems of 30% payment rails are particularly acute in virtual world platforms. Roblox is full of happy users and talented creators. However, few of these creators are making money. Although Roblox Corporation had nearly $2 billion in revenues in 2021, only 81 developers (i.e., companies) netted over $1 million that year, and only seven crossed $10 million. This is bad for everyone, really, given that more developer revenue would mean more developer investment and better products for users, which in turn drives more user spending.
Roblox has enriched the digital world and turned hundreds of thousands of people into new digital creators. But for every $100 of value it realizes on a mobile devices, it loses $30, developers collect $25 in net revenue (that is, before all of their development costs), and Apple collects roughly $30 in pure profit even though the company puts nothing at risk. The only way for Roblox to increase developer revenues today is to deepen its losses or halt its R&D, which would in turn harm both Roblox and its developers over the long term.
To Apple, Roblox’s margin constraints (and the consequences of those constraints on Roblox developer revenues) are a feature, not a bug, of the App Store system. Apple does not want a Metaverse comprised of integrated virtual world platforms, but of many disparate virtual worlds that are interconnected through Apple’s App Store and the use of Apple’s standards and services. By depriving these IVWPs of cash flow, while offering developers much more of it, Apple can nudge the Metaverse to this outcome.
For all of the constraints that Apple places on interactive experiences, its most stringent controls focus on emergent payment rails. For example, neither Apple nor any of the major console platforms allow applications that are used for crypto mining or decentralized data processing. Apple has based this prohibition on the stated belief that such apps “rapidly drain battery, generate excessive heat, or put unnecessary strain on device resources.” Users might fairly argue that they—not Apple or Sony—have the right to decide whether their battery is being too quickly drained, to manage the health of their device, and to determine the appropriate use of their device’s resources. Regardless, the net effect is that none of these devices can participate in the blockchain economy, nor make their idle computing power available to those who need it (via decentralized computing). In addition, these platforms (with the exception of the Epic Games Store) do not allow games that accept cryptocurrencies as a form of payment, or that use cryptocurrency-based virtual goods (that is, non-fungible tokens, or NFTs). Though this is sometimes portrayed as a protest against the energy used to power blockchains, such claims don’t hold up to scrutiny. Sony’s music label has invested in NFT start-ups, and created its own NFTs, while Microsoft’s Azure offers blockchain certifications and its corporate venture arm has made numerous start-up investments. Apple CEO Tim Cook has admitted that he owns cryptocurrencies and considers NFTs “interesting.” It’s more likely that these platforms refuse blockchain games because they simply do not work with their revenue models. Allowing Call of Duty: Mobile to connect to a cryptocurrency wallet would be akin to a user connecting the game directly to their bank account, rather than paying through the App Store. Accepting NFTs, meanwhile, would be like a movie theater permitting customers to bring their grocery bags to a film—some people might still buy a box of M&Ms, but most wouldn’t. What’s more, it’s impossible to imagine how a platform might justify taking a 30% commission from the purchase or selling a multi-thousand- or million-dollar NFT—and if such commissions did apply, the entirety of the NFT’s value would be devoured if it traded hands enough times.
At the core of the virtual payment rails problem is a conflict. The very idea of the Metaverse supposes that the “next platform” is not based on hardware, nor even an operating system. Instead, it is a persistent network of virtual simulations that exist irrespective of, and in fact, are agnostic regarding, a given device or system. The difference is that between a New York Times app that runs on a single user’s iPhone and an iPhone used to access a living New York Times universe. There is evidence of this transition today. The most popular virtual worlds, such as those of Fortnite, Roblox, and Minecraft, are designed to run on as many devices and operating systems as possible, and are only lightly optimized for any specific one.
BLOCKCHAINS
Why is a decentralized database or server architecture seen as the future? It helps to put aside the idea of NFTs, cryptocurrencies, fears of record theft, and the like. What matters is that blockchains are programmable payment rails. That is why many position them as the first digitally native payment rails, while contending that PayPal, Venmo, WeChat, and others are little more than facsimiles of legacy ones.
As an application becomes more successful, it tends to become more controlling. Google’s Android and Apple’s iOS followed this path. Many technologists view the phenomenon as the natural arc of a for-profit technology business—as it accumulates users, developers, data, revenue, and so on, it uses its growing might to actively lock in developers and users. This is why it’s difficult to export your account from Instagram and re-create it elsewhere. It’s also why many applications close their APIs as they scale or face competition.
Most blockchains are structurally designed to prevent this arc. How? They effectively maintain what’s valuable to a dapp developer—their tokens—while the user has custody of their data, identity, wallet, and assets (for example, their images), via records that are, again, on the blockchain. In a simplified sense, a fully blockchain-based Instagram would never store a user’s photos, operate their account, or manage their likes or friend connections.‡ The service cannot dictate, let alone control, how this data is used. In fact, a competing service can launch and then immediately tap into this same data, thereby placing pressure on a market leader. This blockchain model does not mean applications are commodified—the real Instagram outmaneuvered its competitors in part because of its superior performance and technical construction—but we generally recognize that ownership of a user’s account, social graph, and data to be the primary store of value.§ By keeping most of this outside the hands of an application (or in this case, a dapp), blockchain enthusiasts believe they can disrupt the traditional developer arc.
Consider the adage “possession is nine-tenths of the law.” Under centralized server models, a user can never truly take ownership of a virtual good. Instead, they are simply provided access to a good that’s held, via digital record, on someone else’s property (that is, a server). And even if the user took that data off that server and onto their own hard drive, that’s not enough either. Why? Because the rest of the world needs to acknowledge that data and agree on its use. Blockchains can do this by design.
The sense of possession is augmented by another key property right: the unrestricted right to resale. When a user buys an NFT from a given game, the trustless and permissionless nature of a blockchain means that the game’s maker cannot block the sale of that NFT at any point. They’re not even actively informed of it (though the transaction is recorded on a public ledger). For related reasons, it is impossible for a developer to “lock” blockchain-based assets into their virtual world. If Game A sells an NFT, Games B, C, D, and so on can incorporate it if the owner so chooses—the blockchain ownership data is permissionless and the owner is in control of the token. Finally, token structures mean that even if a duplicate version of this virtual good is minted, the original remains distinct and “original”—like a signed and dated painting listed as one of one.
The fact that “decentralized” assets have “centralized” dependencies leads to two major conclusions. First, NFTs are useless—propped up by fraud, speculation, and misunderstanding. This was often the case in 2021 and is likely to remain largely true for years to come. Second, the untapped potential of this technology is extraordinary and will be realized as the utility of, and access to, blockchain-based games and products expands.
This second conclusion points to the importance of blockchain for the Metaverse. For example, blockchains don’t just establish a common and independent registry for virtual goods; they also provide a potential technical solution for the biggest obstacle to virtual goods’ interoperability: revenue leakage. Many players would love to bring their assets and entitlements from game to game. However, a number of game developers generate the bulk of their revenue by selling players goods that are exclusively used inside their games. The ability for a player to “buy elsewhere, use here” endangers a game developer’s business model. Players might accumulate so many virtual goods that they no longer see the need to buy any more. Alternatively, players might start buying all of their skins from Game A, but then exclusively play them in Game B, which would result in distortions of where the majority of costs and revenues occur. In fact, it’s likely that virtual goods sellers would emerge that could deeply underprice the goods sold inside the game because they don’t need to recoup on a game’s initial development nor operating costs.
A good example of dapp-to-user blockchain dynamic is demonstrated through the competition between Uniswap and Sushiswap. Uniswap was one of the first Ethereum dapps to gain mass adoption, having pioneered the automated market maker model, which allowed users to swap one token for another through a centralized exchange. Uniswap’s predominantly open code was copied and forked by a competitor, Sushiswap. To gain adoption, Sushiswap issued tokens to its users. Users had the exact same functionality as they had from Uniswap, but received what was effectively an equity stake in Sushiswap for doing so. This forced Uniswap to counter by offering its own token, while retroactively rewarding all prior users. A user-beneficial “arms race” like this is typical. Dapps have few barriers that prevent the emergence of better versions of their functionality, specifically because blockchains, not dapps, maintain much of the data we typically value in the digital era—a customer’s identity, data, and digital possessions, etc.
The most disruptive aspect of digitally native “programmable” payment rails, however, is how they enable greater independent collaboration and easier funding of new projects.
Smart contracts can be written in minutes and serve almost any purpose; they can be small and temporary, or massive and persistent. A number of independent authors and journalists use smart contracts to fundraise for their research, investigations, and writing—serving as a sort of advance against future earnings, but one that comes from the community rather than a corporation. Upon completion, their works are minted to the blockchain and sold, or perhaps put behind a crypto-based paywall, with the proceeds shared back to their patrons. In other cases, a collective of authors have issued tokens to fundraise for a new, ongoing magazine that is then exclusively available to token-holders. Some writers use smart contracts to automatically share tips with those who helped or inspired them. None of this requires credit card numbers, entering ACH details, invoices, or even, really, much time—just a cryptowallet with cryptocurrency.
Part III: How the Metaverse Will Revolutionize Everything
WHEN WILL THE METAVERSE ARRIVE?
There’s never a moment when a switch flips. We can identify when a specific technology was created, tested, or deployed, but not when an era precisely began, or ended. Transformation is an iterative process in which many different changes converge.
Cross-platform was essential in three ways. First, the very notion of a virtual persistent simulation that exists in the cloud is at odds with device-specific limitations. If the operating system you’re using alters what you can see or do in “the Metaverse” and perhaps blocks you from visiting it altogether, there can be no “Metaverse” nor parallel plane of existence—instead, only software running on your device that lets you peer into one of several virtual realities. Second, the ability to use any device and interact with any other user led to a surge in engagement—just imagine how much less you might use Facebook if you had a different account with different friends and different photos on your PC versus on your iPhone, and if you could only message those who were using the same device as you. If the digital era has been defined by network effects and Metcalfe’s Law, then the enablement of cross-platform play instantly made these virtual worlds more valuable by joining together their forked networks. Third, this increased engagement had a disproportionate impact on those building virtual worlds. Almost all of the costs to build a game, avatar, or item on Roblox, for example, are up-front and fixed. As a result, any increase in player spending dramatically increased an independent developer’s profits, and thus their ability to reinvest in better or more games, avatars, and items.
What are the next “critical pieces” that might lead “Metaverse revenues” or “Metaverse adoption” to surge? Time will eventually reveal the truth, but for the foreseeable future, we can bet on three major drivers. First, each of the underlying technologies required for the Metaverse is improving on an annual basis. The second driver is the ongoing march of generational change. The third driver is a result of how the first and second come together. Ultimately, the Metaverse will be ushered in through experiences. Smartphones, GPUs, and 4G didn’t magically produce dynamic, real-time rendered virtual worlds—they needed developers and their imaginations. Note, too, that as the generation of “iPad-natives” ages, more people within it will shift from being consumers of or amateur hobbyists in virtual worlds to professional developers and business leaders in their own right.
META-BUSINESSES
The best example of impending transformation might be education. The sector is of critical importance to both society and the economy, and educational resources are scarce and starkly unequal in their distribution. It is also the leading example of what’s known as “Baumol’s Cost Disease,” which refers to “the rise of salaries in jobs that have experienced no or low increase of labor productivity, in response to rising salaries in other jobs that have experienced higher labor productivity growth.”
Teaching has seen a smaller increase in productivity compared to almost all other categories. A teacher in 2022 cannot, by most measures, teach more students than they could decades ago without adversely affecting the quality of their education. In addition, we have not found ways to teach for less time, either (that is, to teach faster). However, teaching salaries must compete with the salaries offered to someone who might otherwise become an accountant (or software engineer, or game designer), and must rise with the rising cost of living as a result of a growing economy. And beyond teacher time, education remains incredibly resource-intensive in terms of physical resources, from the size of the school, the quality of its facilities, and the quality of supplies.
It is difficult to imagine at-home or at-distance education ever fully substituting for in-person education. But we are slowly closing the gap through new and predominantly Metaverse-focused technologies, such as volumetric display, VR and AR headsets, haptics, and eye-tracking cameras.
Mindfulness, meditation, physiotherapy, and psychotherapy are likely to be similarly altered, by a mix of electromyographic sensors, volumetric holographic displays, immersive headsets, and projection and tracking cameras that collectively provide support, stimulation, and simulation never before possible. Dating is another fascinating category when considering the impact of the Metaverse.
The future of entertainment will probably involve similar remixing. “Film” and “TV” will not go away—just as oral storytelling, serials, novels, and radio shows still exist centuries after they were first created—but we can expect rich interconnection between film and interactive experiences (broadly considered “games”). Facilitating this transformation is the increasing use of real-time rendering engines, such as Unreal and Unity, in filmmaking.
Sports fandom is currently isolated between watching a game, playing a sports video game, participating in fantasy sports, making online wagers, and buying NFTs, but we’ll likely find that each of these experiences melds together and in doing so, creates new ones.
Others are reimagining entertainment at a more abstract level. From December 2020 to March 2021, Genvid Technologies hosted a “Massively Interactive Live Event” (MILE) on Facebook Watch, called Rival Peak. The title was a sort of virtual mashup of American Idol, Big Brother, and Lost. Thirteen AI contestants were trapped in a remote part of the Pacific Northwest, and the audience could watch them interact, fight to survive, and uncover various mysteries through dozens of cameras running 24 hours a day for all 13 weeks. While the audience could not directly control a given character, they could still affect the simulation in real time—solving puzzles to aid a given hero or create an obstacle for a villain, weighing in on the choices of the AI characters, and voting on who would be booted off the island. Though visually and creatively primitive, Rival Peak is an indication of what the future of live interactive entertainment could look like—that is, not supporting linear stories, but collectively producing an interactive one.
Finding the core “ad unit” for 3D-rendered virtual worlds is a challenge. Many games have in-game billboards, including the PlayStation 4 game Marvel’s Spider-Man, which is set in Manhattan, and the cross-platform hit Fortnite. However, their implementations are quite different. The size of these posters might vary by multiples, meaning a different image would likely be needed for one versus another (whereas Google Ad Words work regardless of screen size). In addition, players might pass by these posters at varying speeds, from varying distances, and in various situations (a leisurely walk versus an intense firefight). All of this makes it hard to value either game’s billboards, let alone buy them programmatically. There are many other potential ad units inside a virtual world—commercials played by in-game car radios, virtual soft drinks branded like real-world ones—but these are even harder to design for and measure. Then there are the technical complexities of inserting personalized ads into synchronous experiences, determining when an ad should be shared with your friends or not (it makes sense for the whole squad to see a banner for the next Avengers movie, but not necessarily for a medicinal cream), and so on.
METAVERSE WINNERS AND LOSERS
Those who pioneer in the Metaverse will be over-indexed to the young, grow faster than the companies leading in either the “digital” or “physical” economy, and redefine our business models, behaviors, and culture. In turn, venture and public-market investors will more highly value these companies than the rest of the market, thereby producing many trillions more in wealth to those who create, work at, or invest in these companies.
If Facebook is the most aggressive investor in the Metaverse, and Google the most poorly positioned, Amazon sits somewhere in the middle. Amazon Web Services has nearly a third of the cloud infrastructure market and, as discussed throughout this book, the Metaverse will demand unprecedented computing power, data storage, and live services. AWS, in other words, benefits even if other cloud providers take a greater share of future growth. However, Amazon’s efforts to build Metaverse-specific content and services have been largely unsuccessful and arguably less of a priority compared to more traditional markets, such as music, podcasting, video, fast fashion, and digital assistants.
Apple is also an inevitable beneficiary of the Metaverse. Even if regulators unbundle many of its services, the company’s hardware, operating system, and app platform will remain a key gateway to the virtual world, which will send billions in high margin revenue its way, and amplify its influence over technical standards and business models. The company is also better positioned than any other to launch lightweight, high-powered, and easy-to-use AR and VR headsets, as well as other wearables, in part due to their ability to richly integrate with its iPhone.
The most interesting GAFAM company in the Metaverse era may well be Microsoft, one of the leading case studies for displacement in the mobile era. As we know, gaming experiences now sit at the forefront of the industry—including at Microsoft. Recall that Microsoft Flight Simulator is a marvel of both technology and collaboration. Though Xbox Game Studios developed and published the title, it was built in partnership with Bing Maps and leveraged data from OpenStreetMaps, a collaborative and free-to-use online geographic, with Azure’s artificial intelligence bringing this data together into 3D visualizations, powering real-time weather, and supporting cloud data streaming. The Xbox division also has its own hardware suite, the most popular cloud game-streaming service in the world, a fleet of first-party game studios, and a handful of proprietary engines.
Then there’s Nvidia, a company built over 30 years specifically for the era of graphics-based computing. Alongside major processor and chip companies such as Intel and AMD, Nvidia will benefit from any incremental demand for compute. The high-end GPUs and CPUs inside our devices, as well as the data centers of Amazon, Google, and Microsoft, typically come from these providers. Nvidia, though, aspires for far more. For example, the company’s GeForce Now cloud game-streaming service is the second most popular in the world, several times the size of Sony, orders of magnitude larger than Amazon’s Luna or Google’s Stadia, and half that of market leader Microsoft. Its Omniverse platform, meanwhile, is pioneering 3D standards, facilitating the interoperation of disparate engines, objects, and simulations, and may yet become a sort of Roblox for “digital twins” and the real world. We may never wear Nvidia-branded headsets nor play Nvidia-published games, but at least in 2022, it looks likely that we live in a Metaverse powered in large part by Nvidia.
My great hope for the Metaverse is that it will produce a “race to trust.” To attract developers, the major platforms are investing billions to make it easier, cheaper, and faster to build better and more profitable virtual goods, spaces, and worlds. But they’re also showing a renewed interest in proving—through policy—that they deserve to be a partner, not just a publisher or platform. This has always been a good business strategy, but the enormity of the investment required to build the Metaverse, and the trust it requires from developers, has placed this strategy front and center.
METAVERSAL EXISTENCE
The Metaverse presents an opportunity not just for users, developers, and platforms, but for new rules, standards, and governing bodies, as well as new expectations for those governing bodies. What should these policies look like?
Dismantling the hegemony of Apple and Google would be a good start and quickly increase developer margins and/or reduce consumer prices, enable new businesses and business models to thrive, and eliminate the inconsistent commissions which encourage developers to focus on physical goods or advertising rather than virtual experiences and consumer spending. But, as we’ve seen, payments are just one of many levers that platforms use to assert control over developers, users, and potential competitors. Apple’s and Google’s goal is to maximize their respective shares of online revenues. Accordingly, regulators should force platforms to unbundle identity, software distribution, APIs, and entitlements from their hardware and operating systems. For the Metaverse and the digital economy to thrive, users must be able to “own” their online identity and the software they purchase. Users must also be able to choose how they install and pay for this software, while developers need to be free to decide how their software is distributed on a given platform. Ultimately, these two groups should be able to determine which standards and emerging technologies are best, irrespective of the preferences of the company whose operating system runs the resulting code. Unbundling would force OS-centric companies to compete more clearly on the merits of their individual offerings.
We also need greater protections for the developers who build on independent game engines, integrated virtual worlds, and app stores. Sweeney’s approach to Unreal’s license to developers is the right one—handing control over the termination of that license to court processes, rather than internal corporate ones. However, for-profit corporations should not be the only groups who decide where their de facto laws end and legislative/judicial processes begin. We cannot count on their altruism, even if, as in the case of Epic, that “altruism” is linked to better business practices. Critically, unless new laws are written specifically for virtual assets, virtual tenancy, and virtual communities, it’s likely that those designed for the era of physical goods, physical malls, and physical infrastructure will end up misapplied and exploited. If the economy of the Metaverse will one day rival that of the physical world, then governments need to take the jobs, business transactions, and consumer rights inside of it just as seriously.
Ultimately, we should want it to be as easy as possible to take a virtual immersive educational environment or AR playground from one platform to another—as easy as it is to move a blog or a newsletter. Granted, this goal isn’t fully attainable—3D worlds and logic aren’t as simple as HTML or spreadsheets. But it should be our target and matters far more than the establishment of standardized charging ports.
Beyond regulating the major platforms, we can identify other obvious laws and policy changes that will help produce a healthy Metaverse. Smart contracts and DAOs should be legally recognized. Even if these conventions, and blockchains overall, do not endure, legal status will inspire more entrepreneurship, protect many from exploitation, and lead to wider usage and participation. Economies flourish when this occurs.
One final proposal is that government should take a far more serious approach to data collection, usage, rights, and penalties. Today, what’s permissible is often up to the developer or the operating system that runs the developer’s application—and only lightly understood by the user. Regulators would do well to lead with, and then occasionally expand, what’s allowed, rather than merely respond to unforeseen consequences. Including under “what’s allowed” should be the user’s right to request the deletion of data, or to download it and easily upload it elsewhere.
If the Metaverse will play an ever-greater role in human culture and labor, then it’s also likely its emergence leads to more and stronger regional players. The most significant cause of fragmentation in the modern internet is nation-specific regulations across the world. The Chinese, European, and Middle Eastern “internets” are increasingly different from those accessed in the United States, Japan, or Brazil due to greater restrictions on data-collection rights, permitted content, and technical standards. As governments around the world contend with the need to regulate the Metaverse—and at the same time, as they try to reduce the power accumulated by the leaders in Web 2.0—the world will doubtlessly end up with enormously different outcomes and, dare I say it, “Metaverses.”