The Metaverse And How it Will Revolutionize Everything

Highlights

Throughout the remainder of 2021, the term “Metaverse” almost became a punchline as every company and its executives seemed to trip over themselves to mention it as something that would make their company more profitable, their customers happier, and their competitors less threatening. Prior to Roblox’s IPO filings in October 2020, the “Metaverse” had appeared only five times in US Securities and Exchange Commission filings.3 In 2021, the term was mentioned more than 260 times. That same year, Bloomberg, a software company that provides financial data and information to investors, catalogued more than a thousand stories containing the word Metaverse. The prior decade had only seven.

▶ 0:05

By the end of 2021, more than 150 million people were using Minecraft each month—more than six times as many as in 2014, when Microsoft bought the platform. Despite this, Minecraft was far from the size of the new market leader, Roblox, which had grown from fewer than 5 million to 225 million monthly users over that same period. According to Roblox Corporation, 75% of children ages 9 to 12 in the United States regularly used the platform in Q2 2020. Combined, the two titles amassed more than 6 billion hours of monthly usage each, which spanned more than 100 million different in-game worlds and had been designed by over 15 million users. The Roblox game with the most lifetime plays—Adopt Me!—was created by two hobbyist players in 2017 and enabled users to hatch, raise, and trade various pets. By the end of 2021, Adopt Me!’s virtual world had been visited more than 30 billion times—more than fifteen times the average number of global tourism visits in 2019. Furthermore, developers on Roblox, many of whom are also small teams with fewer than 30 members, have received more than $1 billion in payments from the platform. By the end of 2021, Roblox had become the most valuable gaming company outside of China, worth nearly 50% more than storied gaming giants Activision Blizzard and Nintendo.

▶ 0:50

In 1998, Paul Krugman, who would win the Nobel Memorial Prize in Economic Sciences a decade later, wrote an (unintentionally) ironically titled article “Why Most Economists’ Predictions Are Wrong” in which he stated: “The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

▶ 2:19

Four years after Apple launched the iPhone’s App Store, three years after Apple’s famous “There’s an app for that” ad campaign, and two years after Sesame Street, of all things, parodied that campaign, the social networking giant was still focused on browser-based experiences. While Facebook did technically release a mobile app the same day Apple released the App Store, and it quickly became the most popular way to access Facebook on a mobile device, this app was really just a “thin client” that loaded HTML inside a non-browser interface. In mid-2012, Facebook finally relaunched its iOS app, which was “rebuilt from the ground up” to focus on device-specific code. Within a month, Mark Zuckerberg said that users were consuming “twice as many newsfeed stories” and that “the biggest mistake we made as a company was betting too much on HTML5. . . . We had to start over and rewrite everything to be native. We burned two years.”15 Ironically, Facebook’s late shift to native apps is part of the reason the company is seen as a case study for successfully pivoting a business to mobile.

▶ 2:56

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.”

▶ 4:01

Growth in the number of virtual worlds should drive increased usage of virtual worlds. Some leaders within the virtual worlds space, such as Tim Sweeney, believe that eventually, every company will need to operate their own virtual worlds, both as standalone planets and as part of leading virtual world platforms such as Fortnite and Minecraft. As Sweeney has put it, “just as every company a few decades ago created a webpage, and then at some point every company created a Facebook page.”

▶ 4:26

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. During Facebook’s 2021 Metaverse keynote, John Carmack, the former and now consulting CTO of Oculus VR (which Facebook bought in 2014 to kickstart its Metaverse transformation) mused that, “If someone had asked me in the year 2000, ‘could you build the metaverse if you had one hundred times the processing power you have on your system today . . .’ I would have said yes.” Yet 21 years later, and with the backing of one of the world’s most valuable and Metaverse-focused companies, he believed the Metaverse remained at least five to ten years away and there would be “serious optimization” tradeoffs in realizing this vision—even though there were now billions of computers that were a hundred times more powerful than the hundreds of millions of PCs operating at the turn of the century.

▶ 4:54

Both the Metaverse and Web3 are “successor states” to the internet as we know it today, but their definitions are quite different. Web3 does not directly require any 3D, real-time rendered, or synchronous experiences, while the Metaverse does not require decentralization, distributed databases, blockchains, or a relative shift of online power or value from platforms to users. To mix the two together is a bit like conflating the rise of democratic republics with industrialization or electrification—one is about societal formation and governance, the other is about technology and its proliferation.

▶ 5:48

In 2021 alone, over $16 trillion was settled through blockchain/cryptocurrency networks, which to many experts are foundational enablers of the Metaverse (more on this in Chapter 11). Visa, as a point of contrast, processed an estimated $10.5 trillion.1

▶ 6:28

Nvidia’s CEO, Jensen Huang, didn’t start his company with the intention of it becoming a gaming giant. In fact, he founded it based on the belief that eventually graphics-based computing would be needed to solve queries and problems that general-purpose computing never could. But to Huang, the best way to develop the necessary capabilities and technologies was to focus on video games. “The condition is extremely rare that a market is simultaneously large and technologically demanding,” Huang told Time magazine in 2021. “It is usually the case that the markets that require really powerful computers are very small in size, whether it’s climate simulation or molecular-dynamics drug discovery. The markets are so small, it [sic] can’t afford very large investments. That’s why you don’t see a company that was founded to do climate research. Video games were one of the best strategic decisions we ever made.”

▶ 6:48

The classic way to differentiate the two is by likening your internet connection to a highway. You can think of “bandwidth” as the number of lanes on the highway, and “latency” as the speed limit. If a highway has more lanes, it can carry more cars and trucks without congestion. But if the highway’s speed limit is low—perhaps due to too many curves or because it’s laid in gravel not pavement—then the flow of traffic is slow even if there’s spare capacity. Similarly, a high speed limit with only one lane results in constant congestion, too—the speed limit is an aspiration, not a reality.

▶ 7:39

Culturally, at least, the idea of collectively shared but privately owned infrastructure is already well understood. Anyone who installs solar panels at their home can sell excess power to their local grid (and, indirectly, to their neighbor). Elon Musk touts a future in which your Tesla earns you rent as a self-driving car when you’re not using it yourself—better than just being parked in your garage for 99% of its life.

▶ 8:16

The delay had several causes. One was the unequal impact of Apple’s store policies, which primarily charged “new economy” businesses and waived fees on old economy ones. Apple established three broad categories of apps when it came to in-app purchases. The first category was transactions made for a physical product, such as buying Dove soap from Amazon or loading a Starbucks gift card. Here, Apple took no commission and even allowed these apps to directly use third-party payment rails, such as PayPal or Visa, to complete a transaction. The second category was so-called reader apps, which included services that bundle non-transactional content (for example, an all-you-can-eat Netflix, New York Times, Spotify subscription), or that allow a user to access content they previously purchased, such as a movie previously bought from Amazon’s website that the user now wants to stream on Amazon’s Prime Video iOS app. The third category was interactive apps in which users can affect the content (in a game, or cloud drive, for example) or make individual transactions for digital content (such as a specific movie rental or purchase on the Prime Video app). These apps had no choice but to offer in-app billing.

▶ 8:43

While these interactive apps could offer online browser-based payment alternatives, like reader apps, players could still not be told about these options inside the app itself. As such, these alternatives were rarely used—if known.

▶ 9:58

Because the App Store’s revenue came primarily from a tiny, but fast-growing, segment of the world economy, it also took time for the App Store to become a large business worth scrutinizing. Ironically, even Apple seemed to doubt it would become one. Two months after its launch, Jobs reviewed the nascent business with the Wall Street Journal. In its report, the paper stated that “Apple wasn’t likely to derive much in the way of a direct profit from the business. . . . Jobs is betting applications will sell more iPhones and wireless-enabled iPod touch devices, enhancing the appeal of the products in the same way music sold through Apple’s iTunes has made iPods more desirable.” To this end, Jobs told the Journal that Apple’s 30% fees were intended to cover credit card fees and other operating expenses for the store. He also said that the App Store “is going to crest a half a billion, soon . . . Who knows, maybe it will be a $1 billion marketplace at some point in time.” The App Store passed this $1 billion mark in its second year, with Apple noting that it now operated “a bit over break-even.”

▶ 10:14

Take Netflix, as an example. In December 2018, the streaming service chose to remove in-app billing from its iOS app. As a “reader app,” this was the company’s right, and its financial planning team had decided that while asking users to sign up on Netflix.com and manually enter their credit card would cost them some sign-ups versus Apple’s one-click in-app alternative, this missed revenue was less than the 30% that it would have to send Apple.‡ But in November 2021, Netflix added mobile games to its subscription plan, which turned the company into an “interactive app” and forced the company to return to Apple’s own payment service (or stop offering an iOS app altogether).

▶ 11:20

The average annual interest rate on unsecured credit card loans is 14%–18%, while most states have usury prohibitions that cap rates at 25%. Even the most expensive malls in the world don’t charge rents that work out to 30% of a business’s revenue, nor do the tax rates in the highest-taxed nations’ highest-taxed states’ highest-taxed cities come close to 30%. If they did, every consumer, worker, and business would leave and every taxing body would suffer as a result. But in the digital economy, there are only two “countries” and both are happy with their “GDP.”

▶ 12:02

Furthermore, average small-to-medium business profit margins in the US are between 10% and 15%. In other words, Apple and Google collect more in profit from the creation of a new digital business or digital sale than those who invested (and took the risk) to make it. It’s hard to argue that this is a healthy outcome for any economy. Considered another way, cutting the commissions of these platforms from 30% to 15% would more than double the profits of independent developers—with much of that money then reinvested into their products. Many if not most would agree that this is probably better than funneling more money to two of the richest companies on earth.

▶ 12:40

Here is another hypothetical, this time focused on Activision, a virtual-first company, unlike Nike. If a Call of Duty: Mobile user buys a $2 pair of virtual sneakers for her character, Apple collects $0.60. But if Activision asks the user to instead watch $2 worth of advertisements in exchange for a free pair of virtual sneakers, Apple collects $0.

▶ 13:21

A “blockchain vending machine” would enable the two collaborators to write what’s called a “smart contract” for this arrangement, and then after accepting each individual payment, the device would then automatically (and incorruptibly) deliver the appropriate amounts (half and half) to the appropriate owner. At the same time, the blockchain vending machine might have automatically paid everyone responsible for that candy bar as well—5¢ to the person who stocked the machine, 7¢ to the machine’s owner, and 2¢ to the manufacturer.

▶ 13:46

How much of the blockchain remains hype versus how much is (potential) reality remains uncertain—not unlike the current state of the Metaverse. However, one of the central lessons of the computing era is that the platforms that best serve developers and users will win. Blockchains have a long way to go, but many see their immutability and transparency as the best way to ensure the interests of these two constituencies remain prioritized as the Metaverse economy grows.

▶ 14:18

We can see this in the iPhone 12, which was released in 2020 and was the company’s first 5G device. Irrespective of Steve Jobs’s brilliance, there was no amount of money that Apple could have spent to release the iPhone 12 in 2008. Even if Apple could have devised a 5G network chip back then, there were no 5G networks for it to use, nor 5G wireless standards through which to communicate to these networks, and no apps that took advantage of its low latency or bandwidth. Were Apple able to make its own ARM-like GPU back in 2008 (more than a decade before ARM itself), game developers (who generate 70% of App Store revenues) would have lacked the game-engine technologies required to take advantage of its superpowered capabilities.

▶ 14:49

More than 75% of American children game on a single platform, Roblox. In other words, nearly everyone born today is a gamer. Which means 140 million new gamers are born globally each year.

▶ 15:37

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.”1 This is not a critique of teachers. Rather, it reflects the fact that most jobs have become far more “productive,” in economic terms, as a result of the many new digital technologies and developments over the past several decades.

▶ 15:52

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),

▶ 16:36

Crucially, it will still be possible for these virtual classes to be supplemented by a dedicated, live teacher. Imagine the “real” Jane Goodall reproduced in a virtual environment and guiding students through Tanzania’s Gombe Stream National Park, with these students’ “homeroom” teacher joining in and further personalizing the experience. The costs involved with such an experience will be a fraction of that involved in a real field trip—certainly one to Tanzania—and may even offer more than such a trip could.

▶ 17:06

Of course, such experiences raise the potential for considerable abuse (more on this soon), but also questions of platform power. None of the major mobile or console computing platforms enable for sex or pornography-based applications. PornHub.com, which typically ranks among the 70–80 most used websites in the world; Chaturbate, which ranks in the top 50; and OnlyFans, which ranks in the top 500 but whose revenue exceeds that of The Match Group (owners of Tinder, Match.com, Hinge, PlentyofFish, OkCupid, and more), are not permitted in the iOS or Android app stores.

▶ 17:36

For the same reasons, today’s fashion brands will also need to “enter the Metaverse.” As more of human culture shifts into virtual worlds, individuals will seek out new ways to express their identities and show off. This is demonstrated clearly through Fortnite, which has spent several years generating more revenue than any other game in history, and primarily monetizes through the sale of cosmetic items (and as I mentioned earlier, these revenues exceed many of the top fashion labels, too). NFTs reiterate this as well. The most successful NFT collections are not for virtual goods nor trading cards but identity- and community-oriented “profile pictures” such as Cryptopunks and Bored Apes.

▶ 18:14

But comparing surgery with AR to surgery without it is like comparing driving with GPS to driving without it—the trip will be made regardless of whether the technology exists, while its use depends on whether it has a meaningful impact on the outcome (e.g., a shorter drive time). For surgery, this means a higher success rate, faster recovery time, or lower cost. And while the technical limitations of today’s AR/VR devices doubtlessly limit their contributions to surgery, even a slight impact will justify their cost and use.

▶ 18:58

While testifying as part of Epic Games’ lawsuit against the company, Apple CEO Tim Cook told the judge that even allowing developers to have an in-app link that would send them to alternative payment solutions would mean “essentially [giving] up the total return on our IP.”

▶ 19:35

In April 2021, Microsoft announced that games sold on its PC Windows Store would pay only a 12% fee, rather than the customary 30% (which remained in place on Xbox), and that Xbox users could play free-to-play games without needing to subscribe to the console’s Xbox Live service. Two months later, this policy was revised so that non-gaming apps could use their own billing solution, rather than Microsoft’s, and therefore pay only the 2%–3% charged by an underlying payment rail, such as those of Visa or PayPal.

▶ 19:51

“I would not trust any of our predictions because reality has so far exceeded them by such a great degree that we’ve been reduced to spectators just like you, watching this amazing phenomenon.”

▶ 20:27