Exploring the metaverse

How will the metaverse reshape the digital landscape? In January, the 15th TSE Digital Economics Conference dedicated an exploratory roundtable to this cutting-edge topic, inviting a panel of international experts on digital markets to discuss the wide-ranging implications for areas such as competition policy, gaming, advertising, and privacy. 

The metaverse has been promoted by Facebook founder Mark Zuckerburg as the next digital revolution, Web 3.0: a more immersive experience, where our avatars will experience richer virtual worlds and interact in completely new ways, offering new opportunities for business, jobs, entertainment, education, and many other areas. Instead of navigating through platforms and websites, said economist Arturo Gonzalez (NERA Economic Consulting), the metaverse will allow us to uncover new economic opportunities, explore the new frontiers of multi-dimensional meta-worlds and meta-galaxies. However, there are also concerns about access, privacy, security, and the potential for addictive or isolating experiences—just has been the case with previous digital innovations. 

Market power will likely be another key issue, given that regulators have struggled to keep up with the explosive growth of today’s tech giants. Will the metaverse introduce more competition to digital markets or consolidate Big Tech power? “Current firms will still be around – Big Tech, consumer electronics, telecom, media, entertainment – but new firms are likely to arise,” believes economist Martin Peitz (University of Mannheim). “An important determinant of market structure will be which part of our identity will be transferable across platforms, and which instead will be locked within the ecosystem.”

Non-fungible tokens (NFTs) can provide insights into the likely impact of interoperability for competition in the metaverse, said economist Scott Kominers (Harvard University). In NFT markets, an important role is played by digital ownership: “In Web3, users hold data, credentials, and others digital assets in personal ‘crypto wallets’ that they control. This is a sharp distinction with Web 2 platforms, where data is stored on the platform, and users may not be able to extract it all. Because digital assets reside with the user (in Web3), it is relatively easy for the user to transfer them from platform to platform.” This reduces switching costs and lock-in, and thus should hopefully stimulate competition between marketplaces to attract users. “An established web of interoperable assets makes it easier for new platforms to enter and gain market shares.” Interoperability of digital assets will thus be crucial for competition between meta-providers. It will also generate new types of network effects, with the balance shifting from the platform to the digital asset. 

Gaming will have an increasingly important, active role in the metaverse, observed tech competition lawyer Stjin Huijts (Geradin Partners): “Up to now, the gaming industry has been a key but passive participant in Web 2.0. Games have provided content and monetization opportunities that helped build and maintain dominant ecosystems. The gaming industry is pioneering many aspects of the metaverse, from virtual worlds experienced in real-time rendered 3D, to live events experienced online. Moreover, games are increasingly used as a social network.” 

Advertising is central to monetization in several digital markets. Will it change in the metaverse? “In this moment, (metaverse) advertising is still very limited,” said Kominers. “But as participation increases, ads will arrive and there will be more pressure to make them compatible with the environment.” Targeted-advertising models will need to evolve, suggested Gonzalez. At the same time, Huijts noted that the metaverse could mitigate some of the privacy problems of personalized ads: for example, using an avatar may allow consumers to protect their identity. 

However, advertisers and other private firms will still need policing in the metaverse. Regulation, such as the Digital Market Act, and enforcement will continue to play an important role, noted Peitz: “If what is privately owned becomes a public space, regulation will be needed.” The metaverse will not be viable at scale, said Kominers, unless we do more to protect consumers. Overall, Huijts expects a huge task for regulators, dealing with “a complex technology, spanning cloud service providers, telcos, game-engine builders, GPU companies and decentralized financial infrastructure”. 

Traditional institutions built on bringing people together physically, like church or political parties, are unlikely to be threatened by the metaverse. “The metaverse will not replace all real-world experiences,” said Huijts. “Rather, it will open up opportunities for people who cannot enjoy these experiences in person.” For Peitz and Kominers, much will depend on the substitutability and complementarities between virtual and real-life experiences. 

But the metaverse will also allow us to move beyond geographical boundaries, observed Gonzalez: “Tribalism is part of human nature and internet creates tribalism bypassing geography. Already we can see some forms of tribalism not bounded geographically, like supporting a football team in another country.”

Find out more on the Digital Economics Conference’s website