Why investors should support an open metaverse

Life imitating art

The race to build a fully fledged metaverse is under way. While no-one can say for certain what the outcome might be, it appears reasonable to suggest that one of two visions is likely to emerge.

The first, broadly speaking, would be a metaverse that is truly open to all. The second, also broadly speaking, would be a metaverse that is in effect controlled by a select few.

An extreme version of the latter can be found in Snow Crash, the early-1990s science-fiction novel that introduced the metaverse concept. The book portrays a single company, the Global Multimedia Protocols Group, holding sway over all the real estate on the Street, the lone road spanning the circumference of an otherwise featureless virtual planet.

This scenario has long since proven strangely prophetic. Remember that Snow Crash was written when even the internet was still in its infancy: fast-forward 30 years and we have a worldwide web in which, while there might be no monopoly per se, power is essentially concentrated among a handful of tech titans.

Policymakers failed to prepare for such an eventuality. Today, as evidenced by the raft of antitrust legislation belatedly grinding its way through the US political system, they are desperately playing catch-up – and they do not want to make the same mistake again.

As a result, antitrust forces are now turning their gaze toward the metaverse. For example, the US’s Federal Trade Commission (FTC) has already noted that Meta – formerly Facebook – is likely to pursue anti-competitive practices in seeking to realize Mark Zuckerberg’s declared dream of an “embodied internet”.

Should investors – rather than, say, devotees of Fortnite – care about this unfolding battle? As someone who believes in both the primacy of free markets and the enormous disruptive capacity of innovation, I have no doubt that we should. Let me try to explain why.

“Copy, acquire, kill”

The regulatory community’s inability to keep pace with innovation is sometimes known as the pacing problem. Big Tech’s iron grip on the internet represents a classic instance of this phenomenon, with Facebook’s dominance of social media maybe the most compelling illustration of all.

Facebook spent almost 20 years cementing is pre-eminence. Central to its rise was a strategy of swallowing up other social media start-ups – most famously Instagram and WhatsApp – in what critics branded a “copy, acquire, kill” approach.

In 2020, when it sued the company over these purchases, the FTC cited internal emails showing how Facebook executives drew up plans to deal with the threats posed by would-be rivals. One message detailed Zuckerberg’s conviction that it would be “better to buy than compete”.

In October of the same year, following a 16-month inquiry, the US Congress’s House Subcommittee on Antitrust, Commercial and Administrative Law finally published a set of recommendations to promote more competition in tech markets. Six related bills were advanced by the House Judiciary Committee in June 2021.

Although it does not identify specific businesses, the proposed legislation is obviously aimed at leading tech platforms. It covers concerns such as mergers and acquisitions, data accumulation and self-preferencing – the last of which is a controversial modus operandi among the likes of Amazon, Apple and Google.

Analogous measures have been set in motion elsewhere, including in the European Union, the UK, Australia and South Korea. Thanks to the pacing problem, all are to some extent burdened by a sense that the stable door is being closed after the horse has bolted. There is progress, but it is at best slow and at worst tortuous.

In the meantime, as is often the way, there are growing signs of history rhyming – if not repeating. Along with its fellow tech behemoths, the company once known as Facebook is now being accused of trying to corner another nascent market.

Big Tech rises again

In 2014, long before the metaverse began to garner mainstream attention, Facebook bought Oculus, a manufacturer of virtual-reality (VR) headsets. Facebook became Meta seven years later, and today its Oculus Quest 2 brand enjoys around 75% of all VR headset sales.

One reason for the size of this share could be that Oculus’s headsets are several hundred dollars cheaper than any comparable device. The FTC is reportedly investigating whether they are deliberately being sold at a loss.

At least one start-up in the VR headset space has publicly complained that it is impossible to match Oculus’s mix of cutting-edge tech and bargain-basement pricing. Yet this, of course, is not strictly true.

Perhaps tellingly, those apparently undeterred include Apple and Google. Each is said to be working on VR headsets that could compete both in terms of technology and, presumably, in terms of cost.

Meanwhile, Meta has also snapped up Within, a specialist in products, content, software and tools for both virtual and augmented reality. Said to be worth $400 million, the deal is subject to yet another FTC probe. Other acquisitions have included a string of VR game developers, including Downpour Interactive, Unit 2 Games, BigBox VR, Beat Games and Sanzaru Games.

Similarly, in January this year Microsoft revealed its intention to secure Activision Blizzard, one of the world’s largest gaming companies, for around $70 billion. This, too, has piqued the FTC’s interest.

In light of these and other moves, it is easy to appreciate claims that only the major players can expect to prosper in the metaverse arena. It is also easy to understand fears that everyone else must face a stark dilemma: either agree to be acquired or accept near-inevitable obliteration.

The case for an open metaverse

Interviewed last year, Epic Games CEO Tim Sweeney warned against the prospect of another online oligopoly. “The popular thing now for tech companies is to just do whatever you think you can get away with,” he said, “and that doesn’t really cut it.”

Sweeney is among the industry’s foremost proponents of an open metaverse. He made his stance clear when Epic launched Fortnite, a milestone in the creation of virtual environments, in 2017.

With cross-platform compatibility practically unheard of at the time, Sweeney encouraged the sector’s most well-known names to cooperate. His persuasive skills led to the users of various gaming consoles being able to play Fortnite together.

This ideal persisted until August 2020, when Apple removed Fortnite from its app store after Epic implemented its own in-app payment system. The pair later went to court, with Epic challenging the legality of Apple’s 30% commission and payment restrictions.

Epic also took action against Google. “Apple and Google are collecting a sweet, sweet tax by taking our money – which they had no role in earning – and they have services that they forced us to use,” Sweeney said last year. Amid numerous appeals, the case rumbles on.

Notwithstanding the legal complexities, Sweeney’s argument is straightforward enough. He is a disciple of Metcalfe’s Law, which basically states that the value of a network goes up with the number of users.

“The benefit of more activity and openness to everybody is much stronger than any other temporary benefit from having lock-in,” Sweeney has said of the metaverse’s future architecture. “We want each component of the system to stand on its own merits and not use dominance or significant market power to force adoption... Only that way can you get a really enduring, free and fair economy.”

Oligopoly versus enlightened self-interest

Other advocates of an open metaverse include Roblox, which went public in 2021 and just months later unveiled plans to construct a virtual environment around its user community. Crucially, the company has consistently stressed that users themselves should do much of the constructing. Like Unity, another respected platform, Roblox favors a business model that relies on users generating content and monetizing their work.

Even Snow Crash author Neal Stephenson wants to thwart the threat of a real-life Global Multimedia Protocols Group. The man credited with inventing the metaverse is now launching his own under the aegis of a project known as Lamina1. “There are a lot of people who want to get in on the metaverse and build their dreams, build their ideas, realize their creative notions or their commercial ambitions,” he said earlier this year.

According to Sweeney, a truly open metaverse would constitute a spectacular reflection of enlightened self-interest. This is the philosophical notion that those who help others are ultimately helping themselves.

As investors, we could very likely profit from a metaverse in which the giants are able to perpetuate their rule. We should also not lose sight of the fact that markets are intrinsically Darwinian and meritocratic, as a consequence of which the established leviathans are bound to flex their muscles from time to time.

Yet oligopolies tend to stifle innovation in the long run. By contrast, a healthy mix of competition and collaboration is liable to keep fueling progress. A market is likely to offer more opportunities – both for investors and for consumers – if new entrants feel that they have a decent chance to survive and thrive.

Antitrust legislation may assist the genesis of the metaverse in this regard, even if only by conveniently tying Big Tech in bureaucratic knots for a couple of years. We will see.

Beyond that, investors can play their part by identifying and supporting attractive metaverse businesses all along the market-cap spectrum. We can also contribute by remembering that, just like a virtual universe, an investment universe is invariably enriched by the multiplicity and variety of its constituents.