Good morning,
One bit of follow-up to yesterday’s Daily Update about Square’s Afterpay acquisition comes from Damon Callaghan from ECP Asset Management, who has written extensively about Afterpay. In an email Callaghan tied Afterpay’s core differentiation with consumers to a rationale about why Apple’s proposed competitor isn’t as strong as it might seem (this a bit of a paraphrase of his email):
- First, Afterpay is highly incentivized to not put customers too deeply in debt; yes, they have late fees, but given that a customer in arrears can’t use Afterpay, that actually limits their ability to make money via merchant fees.
- This alignment increases consumers’ trust in Afterpay and accelerates the Afterpay network effect, where consumers are much more likely to buy a product if Afterpay is an option.
- Apple’s reported Pay Later plan sits on top of credit cards; the structure reported by Bloomberg is, as my reader notes, “debt on debt”, and it ignores the fact that most BNPL users rely on debit cards, not credit cards.
What makes this alignment possible is that Afterpay actually takes on the credit risk; Apple/Goldman Sachs is simply extending a credit card’s payback period.
I think this is a very compelling argument, precisely because it taps into why BNPL offerings are different; at the same time, it doesn’t change the fact that for Square the biggest risk in not buying Afterpay is time, if not because of Apple, then because the opportunity, and network effects on tap, really are very vast.
On to the update:
Facebook’s Metaverse Opportunity
While Metaverses, Tuesday’s Weekly Article, was about the Metaverse concept in general, I do think that Facebook’s efforts deserve some additional comment. CEO Mark Zuckerberg said on the Facebook earnings call:
I think that overall this is one of the most exciting projects that we’re going to get to work on in our lifetimes. But it’s going to take a lot of work, and no company is going to be able to build this all by themselves. Part of what I’ve learned over the last five years is that we can’t just focus on building great experiences — we also need to make sure we’re helping to build ecosystems so millions of other people can participate in the upside and opportunity of what we’re all creating. There will need to be new protocols and standards, new devices, new chips, new software — from rendering engines to payment systems and everything in between. In order for the metaverse to fulfill its potential, we believe that it should be built in a way that is open for everyone to participate. I expect this is going to create a lot of value for many companies up and down the stack, but it’s also going to require significant investment over many years.
There are two important points to be made here. First, the reason to be bullish about Facebook specifically is that I believe that building out a fully realized metaverse will in fact require one company to be at the core of the entire entity, a la L. Bob Rife in Snow Crash. Someone needs to set the ground rules and create the world — I’m very skeptical that this will arise globally via agreed-upon protocols — and Facebook is the most well-placed company to do exactly that, thanks to their massive user base and the fact they aren’t tied to one of mobile’s dominant ecosystems.
At the same time, Zuckerberg is right that building out this vision will require many more companies than just Facebook, which is to say that Facebook needs to become a true platform company, a la Microsoft. That is why I thought the most interesting sentence in Zuckerberg’s remarks were when he referenced “what I’ve learned over the last five years”; you will recall that Facebook’s initial platform efforts, pre-mobile, were rather Apple-like in their attempts to dictate the user experience and levy a tax (in the form of requiring Facebook credits). Then, mobile-era Facebook platform efforts were completely focused on what was good for Facebook, particularly in terms of collecting data.
The big question is whether or not Zuckerberg and Facebook have learned their lesson, and in this I think the company’s Apple experience will perhaps be useful: Zuckerberg knows what it is like to be on the wrong side of a platform owner that wants to own it all, and I think there is a scenario where Facebook wins in the multiverse not only because of their head start and massive user base, but also because Zuckerberg decides to be the anti-Apple as far as unleashing an ecosystem is concerned. Given the fact that a multiverse will have to be sold to consumers — mobile sold itself — I think such an approach will be critical.
An Interview with Matthew Ball About the Multiverse
I last spoke with Matthew Ball a year ago, primarily about Disney and the entertainement industry generally. Ball has extensive experience in this space, both as the global head of Strategy for Amazon Studios, and as a Director at The Chernin Group. For the last few years, though, Ball has been focused on The Metaverse; earlier this year he published a ten-part Metaverse Primer, and he is actively investing in the space.
Ball graciously took the time to talk to me about his view of the Metaverse opportunity, and we debated points where we both agreed and disagreed. You can read the transcript of our conversation below, or listen to our discussion in your podcast player.
On to the interview:
Normally one would not want to do a interview from a hotel quarantine with one’s kids nearby. But if one is writing about the Metaverse, you have to take the opportunity to talk to Matthew Ball. Thanks for jumping on, I really appreciate it.
Matthew Ball: My pleasure.
We talked a couple years ago, or I think it was last year, mostly about entertainment stuff, Disney, things along those lines. It’s kind of funny because that was pre-pandemic, or it was just starting, and I think we talked about the impact of Disney in China. Needless to say, things have changed quite a bit. It’s interesting, I think actually in some ways they’ve changed in a meaningful way when it comes to this Metaverse concept and this is something you’ve spent a lot of time focusing on and writing about. And I guess I want to hand it off to you to start, because you’re the leading thinker about this idea. What is the Metaverse? What is it that compels you so much that you spent so much time writing about it? I know it drives a lot of your investment theses. I’m just going to hand it off to you, and you take it and run with it.
MB: Well, I think the easiest way to think about it is to recognize that there’s no binary before or after the Metaverse, or Web 3 as it’s sometimes considered, or the broader crypto revolution or blockchain revolution. It’s not that there’s clearly a difference from what came before. Instead, it is a recognition of substantial changes in the devices we’re using, in the behaviors, in the apps services software, the way that a digital or Internet-based economy works. Mobile is the clearest difference. One can’t say that the mobile Internet is entirely different from the fixed-line Internet, obviously it built on top of that. But of course the devices we used, in many instances the companies we patroned, the nature of services, user behaviors, and the demographics of those driving change all evolved. And so I see the Metaverse as an iterative successor state to the mobile Internet.
In this instance, it is not about shifting from a fixed-line Internet, a physical computer on your desk at home, to a supercomputer in your pocket that is always effectively on the Internet. But instead, shifting more of our time, services, life spending into virtual environments, into interconnected simulations, that is definitely something that has been growing for years. Most of these ideas, whether you want to refer them to novels from the 90s or games from the 90s, are not entirely different. But over the past five years, the pieces have really started to fall into place in a way that feels very different.
Why isn’t it fair, or is it fair, to say that the Metaverse is virtual reality? What makes it distinct from that? Or is that a fair shortcut?
MB: I wouldn’t say it’s a fair shortcut. One of the interesting ways to think about this is, I’m often asked this question: how do you describe the Metaverse in ten words, or in three sentences? And there was a funny Morning Brew article that had said, “even the guy who popularized the term doesn’t know how to define it”. He needs ten or seven variables, however, many I used in the most recent essay.
Ten variables, I think it was ten multi-thousand word essays. So just to be totally clear on it.
MB: (laughs) Yes, that’s fair. But I think if you ask someone to describe the Internet today, or the mobile Internet today, you’ll find that most people still struggle to come up with that answer. Instead, they’re more inclined to speak to their personal experience. For some people that’s a smartphone, so people will say it’s effectively my iPhone. A technologist will probably talk about standards and protocols. A network engineer will probably talk about the tubes. And so you see this enormous answer variance. But of course, it’s one thing to try and describe it now, it’s even harder to try and describe the mobile Internet in the 90s. That’s one of the challenges with the Metaverse. As a result, a lot of people typically reduce it to virtual reality because many of the attributes we talk about — persistence, presence, shared virtual spaces — it almost makes more sense if you’re talking about in VR and certainly to the extent in which having clear differentiations helps cognitively, in much the same way the iPhone didn’t start the mobile Internet era but it’s a very easy way to put a flag in or draw a line in the sand and say, this is pre and post. VR, for one reason or another, tends to be an inextricably linked for a moment. But in the same sense, you would never say that the mobile Internet only exists because of smartphones, only exists because of the iPhone. And you wouldn’t say that it’s only relevant because of consumer grade applications either.
I guess the question that I have is, there’s a fair bit of, just to be blunt, hand-waving going on here, right?
MB: Totally.
Where it’s like “Well we’re not there yet, but it’ll be there and it’ll be this sort of things.” I still have a hard time understanding, what is the delineation point between here and there? And I guess your mobile Internet point, I guess the point you’re making, and correct me if I’m wrong, is that your argument is the mobile Internet was something distinct from Internet 1.0, which was tethered to your desk, you had to go to a computer to use it, by virtue of being accessible everywhere. Is that the same idea you’re talking about here, where we’re going to get to a point where this persistent environment, it’s not like accessing information on the go, it’s actually going to a place perhaps not physically, but in the way we experience it? And that even though it’s the same protocol and it’s built on the same technology, just as the mobile Internet was built on the same technology as the desktop Internet, that’s the distinction. So it’s still the Internet, it’s just a new way to experience the Internet. Is that closer to what you’re driving at?
MB: Yeah, I think that’s a good frame. I always talk about, and I wrote this a little bit in my essay, that it’s like if you actually try to ask this question: “When did the mobile Internet era start?” You can start to talk about 2G, which was the first digital network. You can talk about WAP browsers, which for the most part allowed people to access the Internet from a mobile device. You can talk about 3G, which made the mobile Internet usable. You can talk about the iPhone as the device that modernized it, mainstreamed it, set most of its precedents. The answer is it was not any single one of those things, it was a progressive stage. Certainly from there, you take a look at 4G making the Internet work for video. People now talk about the relevancy of latency, and perhaps that’s relevant for the Metaverse. But yes, it is all being built off the same underlying technology, but in a way that starts to feel cumulatively very different. Part of that is from ongoing advancements, like 1G, 2G, 3G, 4G. Some of it’s from altogether new hardware, others from other technology.
I think one of the ways that I like to think about this, and why we come to this question of why the Metaverse now, is because many of these technologies individually, but especially collectively, are coalescing to something that feels scalable and different. I’ll give a few examples. If you go back to 2015, there were almost no visually rich immersive experiences that could sustain high CCUs, or high concurrent users. You were essentially limited to twelve or sixteen people in a shared simulation. You fast forward to 2021, there’s about 300+ million people every day who participate in battle royales with one hundred to one hundred fifty people. You go back to 2015, the number of people participating in UGC virtual creation platforms, your Roblox, your Minecraft, is about 20 million per day, now we’re at about 150 million per day globally. The virtual goods economy, buying and selling skins and extra lives in those types of environments, did about $54 billion in transaction revenue last year, go back to 2015, you were at sub $5 billion. You go back pre-pandemic, and time spent in virtual worlds was stigmatized. It was often the virtual or modern analog of a middle-aged man going to his basement and playing with his train set. An unfair analogy, but one that was certainly seen as behavior that at best is not aspirational, and at worst is antisocial. Today, that behavior has been legitimized. It’s been touted promoted by schools, there are education programs, parents see this as legitimate social behavior.
Then on top of that, you can take a look at NFTs, cryptocurrencies, you’re seeing the legitimization of incredibly high valuable assets that purely exists virtually. Now some of these reflect societal changes, generational changes, dispositional change. Some of them reflect technological enhancements, that’s the high CCU experiences. But collectively they feel very different, they’re not always correlated exactly with when they’re possible. Of course, we could have made Facebook in 1999. The experience would have been worse, of course, but there was nothing structural preventing you from that. And so right now it does feel like these creation of virtually persistent spaces augmented by hardware, we’re finally seeing VR start to take off. Augmented by investments in industrial businesses, plants, factories, shifting to immersive scans of their environment. We have construction companies, there’s a sector AEC (architecture, engineering, construction) that are now producing hyper-realistic scans of their facilities that are then monitored in real-time, put into persistent simulations. Not made available publicly, but allow people from a remote perspective to assess the development of a plant, of a construction site, of any build. These are behaviors that have been growing for quite some time, build on everything that came before, but there’s been an order of magnitude uptick in most of those values of the past few years that feels different.
You covered a whole lot of ground there. So there’s a few things I want to get into that you brought up in that. I’ll start here. I purposely called my article this week Metaverses, as in plural, and you keep referring to the Metaverse. Is there a meaningful distinction there, because I think this is one of the things that I have the hardest time with is I just have a hard time seeing how we get to a world where there’s one Metaverse and we have the interoperability that you’ve talked about and there’s one online economy, and it’s almost like there’s a parallel world to the world that we’re in. That just doesn’t seem very plausible to me, and we can get into some of the possible factors why that is, and also the things that can unleash that. I definitely wanted to talk about cryptocurrencies later, which I didn’t in my article.
I can definitely buy the small scale Metaverses — I think the industrial one is actually quite interesting, there’s a reason I led with Microsoft. A lot of people are mocking, “Oh, Microsoft’s talking about Metaverses.” Well, they were actually first, they were talking about it first, and they actually have it out in the field where you have a digital version of a plant. And that digital version is kept up to date by sensors in the plant, so you can actually go in and see what’s happening without physically visiting the place and that is to your point, that fits I think, one aspect of your definition, but it’s not like you or I can walk into that digital plant or that’s going to be connected to a Snow Crash type street, public street that anyone could walk up to and get access to.
So is the singularity of a Metaverse, is that critical to your view of the future, or is a potential future where there’s a bunch of Metaverses fit in where you see this might going? Where do you fall down on that?
MB: It’s a really good question. Of course there’s a lot of debate as to, and frankly, most of it’s just dogmatic and not particularly relevant to the development of any of these technologies as to what the nomenclature should be. I tend to fall in the category of people who find using a singular, as opposed to the definitive article, “a Metaverse” versus “The Metaverses” is a bit like saying “an Internet” versus “The Internet”. We don’t say Facebook is an Internet. We don’t say Google is an Internet.
I still have people very mad at me because I still capitalize Internet. I refuse to give in on this one, because to me there’s one Internet. Now I’m going to get angry email.
MB: It’s funny, you can really see the generational divide here. I tweeted “Who still says Internet with a capital I versus lowercase?”, as I was writing my Metaverse essay and I was pretty taken to town by anyone under 40, who thinks it’s absurd that you would capitalize it. And so in my essay, it’s all lowercase for Internet, but I do capitalize the M in Metaverse and that’s me fighting back a little bit.
(laughing) We all have to choose our battles.
MB: Right. So I think the interesting question is this question of the Metaverse, I actually think the best analog is the Internet, because when we have to look at the Internet, there is one Internet, but that does not mean that everything free flows. Your data, your accounts, your permissions, there are private networks, there are public networks, there are gates, there’s overlapped, but not fully shared identity. In some regard, that’s how the real world works, right? You can use your passport in some places, your social in other places, but you can’t use your social to get into your company, you have to use a corporate ID. And in some instances you can’t wear your own clothes into the office or your civies, so to speak, you can’t drive your car into a project facility.
I think that the right way to think about it, to extend this metaphor, is to say that there is a Metaverse, but that doesn’t mean that you can take your avatar, you can take your data, you can take your items, you can take whatever anywhere. It is instead something more aspirational, expectation that is more about how different assets builds an information on a B2B layer or construction can be repurposed or reused or read. Not about whether or not I can bring my Peely skin from one place to another? There’s a reason why the JPEG file format is used on Facebook, it’s understood on Google Photos, you can upload it to TikTok and upload it to Snapchat. That doesn’t require Facebook to allow you to take all of your user data into Snapchat, but it’s about the commonality of the building blocks. So in this instance, it is less about whether or not Satya Nadella sells a product to a business, let’s say BMW, and that interior connects into Roblox, or whether or not an individual employee can wear their Peely avatar or their Snapchat lens into that environment. But it is instead talking about whether or not assets, the information, can interconnect. That simulations can be built, that they’re cross understood, importable, exportable. That’s separate from a business policy decision about what to allow.
Well, I think the business policy point is a super important one though. I think my view on the matter is the core Internet protocols were developed in an era when no one even considered the Internet to be a place to make money. It was this academic project that folks were working on for different sorts of reasons and different sorts of motivations. Obviously today, the view towards the Internet is very, very different. The Internet is not just a place to make money, it’s the place to make money. I think one of the most striking things about this current set of earnings emerging from COVID is the reality that digital is everything, right? And everyone’s crushing it from a digital advertising perspective. I think that speaks to a broader reality that the economy increasingly is the Internet, right? The Internet isn’t something separate.
Part of that is I just have a difficult time buying or believing that we’re ever going to get a better set of interoperability protocols or common data formats and means to share them beyond what we already have. It seems likely to me that if you want to use a singular and to go back to my personal capitalization, it is the Internet, right? And the Internet is the connective tissue that will link these different things together. The Internet is the street, to use the Snow Crash metaphor and then you can leave the street and go into these much more richer experiences that speak to the technologies and the experiences and the persistence and the economies that you’re talking about. I just have a difficult time seeing how they’re going to be linked into one common Metaverse instead of being a bunch of ones that live side-by-side.
MB: Yeah. This is an interesting place where I disagree with, or not disagree, but have slight disagreements with, many Metaverse enthusiasts, which is to say, look, if you ask me what is the most likely outcome for the future, I am optimistic about interoperability, I’m optimistic about interchange, partly because I think the utility of the overall Metaverse economy, if you want to use it, is positively advantaged by these things, in much the same way Disneyland benefits from allowing you to wear things that you didn’t buy at Disneyland.
Right. That’s a good analogy.
MB: Imagine going to, I’m in Toronto right now, if I could only wear a Raptors jersey inside the stadium, and I couldn’t take it elsewhere, I couldn’t wear it on the street or in the bar, I would buy fewer Raptors jerseys. I just wouldn’t buy them at all. I would spend less on the ones that I did buy if I had to. And so there was some reason to believe that the overall utility of interoperability is advantageous. The fact that you don’t need to rebuild everything over and over will drive some interoperability. And again, this is where photos is a good example. If Facebook didn’t allow you to import photos from Apple Photos, if taking photos on your iPhone meant you could only use Apple services, then you probably wouldn’t buy an iPhone, or you’d be different about how you take photos. In this instance, when you’re talking about virtual assets instead of photos — I’ll add as a side point that I think one of the things that we haven’t gotten to yet is the point in which it’s 2030, and consumers have already bought nine jerseys in their nine favorite games, and then they go to their tenth game and that tenth games says buy it again. We’re so early in the curve that people aren’t frustrated by repurchasing but we also know from the music industry that people do exhaust of that, and then they seek alternatives and piracy.
Just to go back to the photos one, I think it’s an interesting point because remember when the Clubhouse thing was really blowing up and Clubhouse launched last year, but it was really blowing up earlier this year, and suddenly people were very concerned that you could import your contacts. It’s interesting because importing your contacts has been a standard capability for mobile operating systems from day one. It’s been a critical way for different networks to grow for over a decade now and suddenly people are up in arms about it and looking to lock it down.
I guess it goes back to my point where we had these certain assumptions from the beginning of the Internet that favored openness, that favored interoperability, that favored sharing and I guess the concern I have is I like your vision, I believe in your vision and I absolutely buy that the overall economy, both broadly speaking and also virtually, would benefit from more openness and more sharing and these sorts of things. But the reality as it’s playing out, and this is the point I was trying to make, where I feel like the Internet is turning into Stephenson’s real world, where you have all these different fiefdoms and it’s actually not at all like the Metaverse at all.
The reality is that we’re getting all these local maxima where everyone’s optimizing for their narrow use case and they’re not concerned about the broader helpfulness. This has been egged on by the press, being egged on by regulators that are obsessing over these privacy concerns and overlooking the broader benefits of more sharing interoperability. I guess maybe I’m just a pessimist here, I just don’t see this trend reversing. Even if I agree with you, that it would be great if it did.
MB: Yeah. And this is where I disagree with a lot of consensus thinking, the most likely outcome in the Metaverse, I should say in any optimistic scenario, is probably marginally better than we have today, but still one where there are virtually impossible to see numbers of experiences, but the vast majority of usage, data, and revenue is within a few horizontal destinations and horizontal platforms that do close. I mean, it is notable that as optimistic as the blockchain community is about blockchain-based solutions, most of the leaders are venture backed and valued at billions of dollars even though the market is still comparatively slow on a global basis. This is because there’s an expectation of significant ability to capture profits. We know that most of the leaders of today’s mostly closed systems believe in the open web — they benefited from it. And yet, as you’re alluding to, they make a conscious choice, which is while they understand the collective TAM benefits of openness, they fear that they have more to lose from giving up control than they have potentially to gain from an expanded pot.
I think it takes a lot of optimism to believe that the Metaverse will be structurally different. It may be marginally much healthier, but it’s still likely to be dominated by a few major destinations and it’s notable that one of the primary advocates for the Metaverse is Roblox. And Roblox, of course, does not allow you to just export your builds in Roblox studio and they certainly don’t make it easy to export anything and then just upload it into Minecraft.
Obviously the other big thing about their business as a whole, and you’ve written about this and I wrote about this at the IPO, is it’s tough to build a business when you’re paying 30% to Apple for…purposely left blank. Apple and Google basically have a complete duopoly on mobile, which is the primary entry point to the Internet and presumably by extension, the long run access to the or a Metaverse. What’s to be done about this? I mean, I’ve been on the App Store thing for ages, and I feel like you came along and you were the opposite of me here. You’re like, “Oh, it can’t be that bad. Is it?” And then you’re like, “Oh my God. It’s almost worse than I expected”. How much of an obstacle is that to your vision and what do you think can be done about it?
MB: There’s a few different ways to think about it from an obstacle perspective. I mean, look, for the most part, we can see through the success of Roblox and Fortnite Creative Mode and Minecraft that no matter how prohibitive the rules are, they have not precluded cross-platform experiences from growing, from taking off, from having successful economies and happy users.
The big challenge is the fundamental premise of the Metaverse is persistent, largely endpoint agnostic, or at least endpoint ubiquitous simulations. That fundamentally means the commodification of some elements of hardware, I like to think of it as you’ve talked about the Internet as the road. We all understand the difference between a Mercedes and an old Toyota. They both work on the road, it doesn’t mean we won’t pay more for one versus another, but the model that Apple runs is a lot more oriented to proprietary Mercedes roads and so forth. So the problem isn’t necessarily that the Metaverse isn’t being or can’t be built without. It’s that there’s an enormous constraint.
Some of that constraint is how Apple adversely affects the development of new business models and technologies but the biggest issue is just the double taxing. If the Metaverse is a new horizontal platform, agnostic platform, virtual platform that needs to generate its own income in order to fund R&D that’s the 30% or 60% takes, it is virtually impossible for it to thrive, and most importantly, for the developers underneath it to thrive. If you’re also paying a 30% tax to a hardware platform that can eventually cut off users because it’s the access gateway, as you mentioned.
I do want to ask you about cryptocurrencies in particular because I think that there is an aspect where any problem that we’re facing on the Internet, the answer is cryptocurrencies. But in this case, I think that one of the great promises of cryptocurrencies is this idea that you can create a public ledger, a public database that is broadly shared and more importantly, broadly accessible and so it’s an interoperability solution. Cryptocurrencies are the kryptonite to aggregators because this idea of instead of having everything centralized, everything is distributed. It’s basically the exact inverse of the way the model works today.
How important are cryptocurrencies? And I actually thought this was the most interesting part of your ten piece primer, which we’ll put links in. Everyone should read the whole thing. But how important are they? Are they the key to unlock this vision that you have? Can we get to a broadly interoperable, broad vision Metaverse without cryptocurrencies? Or are they actually the ramp to get to where you’re going to?
MB: I think it’s difficult to say that they are a structural requirement to get to this endpoint.
I’m being very sloppy on nomenclature. By cryptocurrency, I mean blockchain technology, generally. Just to be clear about that.
MB: The same point applies. I lack the specific belief in exactly how the Metaverse is going to play out that would be required to say, this is the only solution. I also tend to be a little bit more of a strategic optimist, I believe that there are a bunch of different paths here. And I think frankly, we haven’t spoken about Epic, but they’re perhaps the most important force for this outcome. As it relates to blockchain, there’s two primary arguments here that I find compelling.
One is that payment rails drive our economy and most of the payment rails that we use today are highly inefficient, slow, expensive, predominantly focused on gatekeeping, irrespective of a specific version for the Metaverse. If you say that the future is more digital transactions for digital only goods, then a digitally native payment rail, which cryptocurrencies seem to be in a way that PayPal, Square, even Stripe are not, that use cheaper, faster, more, reliable, not oriented around rent-seeking or regulatory capture is just good for the efficiency and development. That’s one argument. It’s not particularly Metaverse specific.
The second is to argue that what is required for an effectively open source or non closed controlled for-profit technology to become mass adopted in a standard. The historical problem for all of these alternatives has been fighting with the economics of private alternatives. There have been standards for rendering, for data exchanges, for accounts, for VR, that have existed for years, but they’re not adopted. Instead private and closed systems are because they typically offer developers much greater profitability, especially faster. They offer this because those who produce and operate them invest heavily in engineering, in R&D, in exclusive content, in loss-leading hardware, and in customer acquisition. It’s one of the reasons why publishers make for Xbox and PlayStation rather than say, Steam Machine years ago. And so if you say that we want the fundamental architecture going forward to operate on open issue standards or non-controlled standards, we need a way for those standards to proliferate while driving immense profitability to developers, and in a way that arguably exceeds closed alternatives and works for both small developers and large institutions.
When you take a look at what’s happening for Axie Infinity, for other development platforms, for sale platforms like OpenSea, or NBA Top Shots, we are seeing a system based on openness, trustless, permissionless, interoperable, and exchangeable assets that are not captured by an intermediary, that are not owned by a specific corporation that is meeting that standard, at least thus far. Extraordinary revenues, relatively high conviction in resiliency from an IP perspective, and we see an enormous pipeline coming behind it. So if you say, what is right now, the most broadly appealing, broadly adopted solution that is meeting those definitions, it does seem to be blockchain-based technologies.
Let’s also keep in mind though, to return to your Apple question — that does not obviate or get around the problems of Apple’s controls. For example, there’s a reason why almost all of the blockchain-based games are not using rich real-time rendering. And that’s because if you want to do a rich real-time 3D environment, you need to use a native app and if you want to use a native app, you have to go through the App Store. As a result, most blockchain based games are either low fidelity or browser-based, and that limits what you can do and what you can offer. You can basically imagine one of two scenarios. If publishers start using this as a way to get around the App Store, Apple will change the rules. And if there is a need for more realistic experiences that require apps, that blockchain economy breaks. No one’s going to pay a $3,000 tax to the App Store to buy a $10,000 parcel in Decentral. And so it’s not sufficient.
So two questions on two companies real quick and I’ll let you go. So number one is, Facebook gets a lot of skepticism about this in the talk about the Metaverse, but this seems like a pretty good bet by them, in part because Facebook has universality, they have 3.5 billion users. I think folks got eyes glazed over when they passed a billion or maybe 2 billion, but they’re still growing so they have this sort of universal nature that would be entailed in The Metaverse. They could create a Metaverse that is accessible to everyone. Again, there could be multiple ones, but this is one that could be available.
They obviously have the investments going on many years now in VR and AR, and I’m not sure if folks realize, I saw on FinTwit, people are like, “Oh, what are they wasting their money on this Metaverse idea?” — Facebook’s largest expenditure for multiple years now has been VR, and so they’ve been making the money and making the profits they have while throwing the vast majority of their money over the wall in a place that’s not making any money at all and so this is almost just a rebranding of what they were already doing.
To the extent we do get a consistent, persistent, single economy, you go there and everyone’s there and you have a place where different companies come in and different developers can come in — and Facebook’s been been scarred, I think, by the Apple experience, and seems highly motivated to go in the opposite direction, in a more Microsoftian direction, and being very developer-friendly. I think there’s an aspect where they tried to be the tax-skimming platform developer pre-mobile, and it kind of blew up in their face and it almost feels like they have the mentality and the position where this shift might actually be more than just a PR stunt. It actually could be something meaningful for them in the long run. Do you buy it?
MB: I do. Look, there’s so much that’s compelling about the Facebook story or potential here, one of which is just the extent to which their identity system is used everywhere. The fact that most people are logging into Tinder with their Facebook profile, and that their Facebook profile is providing utility beyond the account information, tells you about the relevance in all virtual and digital environments of using the Facebook identity system, Facebook social graph, and that’s continuing to grow. I think there’s a big story here. But I think ultimately, Zuckerberg understands the importance of having a developer-centric perspective here. I mean, we’re talking about building up an enormous mirror world, virtual world, virtual twin, if you prefer, and that’s going to require enormous investment from independent developers that requires enormous expectation of profit at the end of the day. They also understand that the reputation with developers, historically, has been eroded by various missed promises on the original app developer program, changes with Facebook Live. So I understand this as both an understanding of what’s required, plus a need of what’s required for them. But it is very clear that there’s strong conviction here and of course it’s notable that, as the one major GAFAM, if you prefer the acronym, tech company without an operating system, Zuckerberg is also particularly conscious of the limitations. I think it’s very clear that that company today, if it weren’t disintermediated by a gatekeeper OS, such as an Android or an Apple, would operate very differently, and therefore this is the opportunity to get out from there.
Yep. I think so, and I think there’s an aspect where they’ve felt the pain of being on the other side that may make them a more benevolent platform operator than they would have been had they been a platform from day one. They’ve learned the lesson. We’ll see.
The last question is Epic, this is the company you mentioned earlier. I want to give you a chance to talk about them. You’ve spent a lot of time writing about them, and the way they’ve thought about this, and Fortnite. Why is this company so compelling to you, and to your mind, the pivot point as far as your thinking about the Metaverse goes?
MB: Look, we could spend an hour talking about this topic —
(laughing)I sprung it at you at the very end! You’re the one that has to go, so you decide when this conversation ends.
MB: There’s a few different ways to think about it, but the most important, beyond the individual assets that they have, is the philosophy with which they are executing their Metaverse strategy, and the way in which it can have path-dependent consequences. So, the philosophy has a number of different elements. Epic, for example, has continuously purchased companies, and over the past two years, every time they do that, they cut their store fees by 50%. For the most part, when you’re buying multiple different services from Epic, even though they are obviously different, they net back part of the fees. So for example, you pay 5% for Unreal, you pay 12% on Epic Games Store. Those are obviously different services, but if you use both, you pay only 12%, you don’t pay 17%. You essentially get Unreal for free or 5% off. This combines against all of their assets, so we see enormous effort in terms of what they are acquiring in order to make it easier for developers to build the Metaverse with tools.
In addition, there’s an enormous investment in making sure that the profits flow, that they make it easier, not just technically, but also financially, to build what is required. We also see this more extensively with the lawsuit. Obviously, Epic had for the foreseeable future, a lot more to lose from being lost on iOS. It’s notable that Free Fire is now the largest battle royale in the United States. That is obviously a position that Fortnite would likely have help if they were still available, but they believe that this is a critical fight that is required for developers to succeed.
There are a number of different non-philosophical efforts that I think start to get to some of your questions on interoperability earlier. One of the ones that I find most compelling is what they’re starting to do with asset entitlements that go across all games. It’s important to highlight that, sometimes, we talk about the fact that your assets or virtual items are interoperable. It’s not really that they’re interoperable, you’re not literally taking a car from Fortnite into Rocket League. You’re not literally taking a skin, which is just a texture pack, and bringing it over. It’s a data-and-account-based system so that it can be read into environment.
Right, it’s a business deal.
MB: My point is, it is just data. It’s a system.
Right. You have a right.
MB: And what’s interesting about this is, we often ask this question of, “Well, why would Call of Duty and Battlefield, or any other game, League of Legends, interoperate their goods? They have a lot to lose. There’s revenue leakage.” Well, what Epic is doing is saying, “We’ve got this ever-growing portfolio of titles. We are going to start driving them to free-to-play, we’re going to stitch together their player networks, and then we are going to drive cross-title achievement. You go to Rocket League with your friends, you unlock something, you get it in Fortnite, you get it in Fall Guys.” If that ends up being economically significant in either driving additional discovery of titles, driving incremental price points — it stands to reason you would pay more for something that runs in four places than one — or drives people to buy more in the first place, then we can actually imagine this as being one of those path-dependent changes to the industry where the other competitors that say, “I’d prefer my closed economy, I’d prefer to sell you an NFL Jersey the ninth time,” will be forced through economic and competitive necessity to open up. And so Epic’s such a brilliant company because we see not only a great philosophical push that is clearly, in every way, going to enable developers to build, but also some actions through both what’s happening with Apple and also what they’re doing through their portfolio, that could actually lead to The Metaverse, not infinite individual Metaverses, and that’s really inspiring.
And that was a brilliant way to wrap everything in a bow and end this podcast. Matthew, it was great to talk to you. Last time, you wanted to talk more about the Metaverse, and I didn’t, and I’m glad I saved it, because this was worth to devote the whole thing to it. It was great talking to you again. Thanks for jumping on, and I look forward to talking to you again soon.
MB: That sounds great.
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