DG COMP | Understanding the metaverse – a competition perspective

By Friedrich Wenzel Bulst & Sophie De Vinck, Directorate-General for Competition (DG COMP) at the European Commission [1]

Over the last two decades, our lives have become increasingly built on and around digital technologies. As a result, digital markets have become a central focus of competition enforcement. Following a flurry of reporting on the metaverse as the next digital frontier, this piece explores what we may expect from the metaverse and what that could mean for EU competition law enforcement. In particular, it gives a brief overview of a) current conceptions of the metaverse and its main components, b) what competition in the metaverse may look like and c) what challenges may arise for competition law enforcers.

What are the main elements of the metaverse?

The metaverse is many things at once: a buzzword, a vision of the future, a new version of the Internet, and perhaps most of all a concept around which there are still a number of question marks.

What seems clear is that the metaverse is widely understood as a virtual, immersive environment involving people interacting through avatars. While the first seedlings of the metaverse grew in the gaming world and it has a strong social networking component, it may potentially affect all areas of life. For example, it could impact how people interact in the realm of entertainment (e.g. gaming), creativity (e.g. digital fashion), or work (e.g. collaborative engineering) and could also be used to create simulations in various other domains (e.g. for developing industrial prototypes or for training healthcare professionals to experiment surgery in a realistic and safe manner).

Among the building blocks of the metaverse are Virtual Reality (VR), Augmented Reality (AR) and mixed reality, enabling the creation of an artificial environment as well as the combination of digital content with the physical world in a way that feels “real”. Different hardware devices, such as headsets, allow entry to the resulting interactive environment and several, partly novel, mechanisms will likely be used for financial transactions in the metaverse, including blockchain-based smart contracts and non-fungible tokens.

Among the things that we don’t know yet is to what extent the metaverse will live up to its hype. History shows us many examples of technological innovation being proclaimed as revolutionary, but technological changes seem to usually develop iteratively over time. Many of the metaverse’s building blocks are not new – virtual replications of the real world were also what made games such as Second Life popular a couple of decades ago. Whether the “new” iterations of the metaverse – said to provide new levels of creativity, interactivity, entertainment and connectivity – will turn out to be all that is promised (or feared), will depend on the interaction of various economic, socio-cultural, political and technological factors, at the right time and place. It may also be that certain applications of the metaverse (e.g. entertainment) will continue to target a more niche audience whereas others (e.g. the use of the metaverse for simulations in an enterprise environment) could become ubiquitous more rapidly.

In any case, it is important to start thinking about the potential opportunities as well as risks of the metaverse, including from a competition law perspective.

What about competition in the metaverse?

While the elements supporting a metaverse are still coming together, companies are already taking strategic steps, for example through mergers and acquisitions or by hiring a specialised workforce. Their objective is to secure a presence in “their” corner of the metaverse – or, in some cases, to have “their” metaverse be the game-changer in terms of user adoption.

At the outset, these companies include traditional media conglomerates alongside the main digital players and specialised gaming companies, but as the metaverse develops, companies from many corners of the economy are expected to follow. As companies start outlining their plans for the metaverse, it remains to be seen which business models and monetisation strategies could become prevalent. We can expect some revenue generation from the sale of headsets and other hardware, but it seems likely that the main monetisation strategies will centre on e-commerce, advertising and other digital services.  For example, the metaverse is expected to provide new marketing and advertising opportunities through virtual billboards, sponsorship of virtual events or other custom integrations. As the metaverse will further integrate the digital world into consumers’ day-to-day lives, it will generate huge amounts of information on users and their every-day activities. Data use and data monetisation strategies, including in relation to advertising, can, as a result, be expected to become important revenue drivers in a metaverse context.

The nature of competition for and in the metaverse will likely depend on how the metaverse platform(s) and their applications will be structured and how they will interoperate.

At this stage, the openness, mobility and connectivity of users, products and services on and in the metaverse, are often presented as essential characteristics of the metaverse and its competitive environment. But what that will mean in practice, remains to be seen. If one or more metaverse platforms essentially becomes a closed ecosystem, consumers would not be able to travel freely between different metaverse “worlds”. They would for example not be able to bring along virtual goods or services from one metaverse platform to another. This could – with consumers locked into a closed system – lead to the emergence of gatekeepers that control access to a metaverse and its users, similar to the developments observed in a number of core platform services identified in the European Union’s recently agreed Digital Markets Act. Moreover, metaverse markets may benefit from strong network effects and be prone to “tipping”, as businesses and users would tend to benefit from having a critical mass of other users present on the same platform. When this happens, it becomes very difficult for new competitors to break into the market or for existing competitors to expand further.

In such a scenario, the conduct of the company that is essentially controlling access to “its” metaverse may constrain its consumers, business partners and competitors in numerous ways. A metaverse gatekeeper could for example push users to adopt certain services or products by bundling them with “must-have” metaverse hardware or software. They could impose exorbitant prices for accessing the metaverse or some of their metaverse-based offerings. They could engage in exclusive deals with certain third-party providers of metaverse services, reducing consumer choice and limiting competitors’ access to their platform. They could also use their unique insights into user behavior (on the basis of access to certain data) to reinforce their market power inside and outside the metaverse market(s).

These potential competition challenges are not new – many have already been observed in other digital markets and ecosystems. At the same time, as the metaverse is still very much taking shape, there are also opportunities to make sure that certain problems from other digital contexts are not imported into the metaverse. Instead, one could also imagine the metaverse as an open competitive environment, organised on the basis of multiple interoperable worlds, between which users can easily move virtual goods and services in a secure way. This would for example mean that avatars could travel seamlessly from one to the other branded environment, for example meeting up with others to attend a concert in a different metaverse platform, without hitting any virtual walls. It is likely however that this would require extensive collaboration on underlying standards and technology, which in itself, depending on the circumstances, could have a restrictive effect on competition.

What are the challenges for competition law enforcement?

Economic activity is subject to competition law regardless of whether it happens offline or online – even when it happens in a virtual world. Just as companies develop their strategies for the metaverse, authorities will have to be ready to take action if and when appropriate. This includes EU competition law authorities, which continuously follow market and technological developments, including possible challenges that such developments may bring for the functioning of markets. Of course, other regulatory instruments will also be of importance to tackle certain other challenges surrounding the metaverse, including in relation to data protection and privacy, intellectual property or, last but not least, in relation to users’ safety and protection of their fundamental rights. For example, when it comes to wider societal challenges, the Digital Services Act provides tools aiming to ensure a safe metaverse environment where the fundamental rights of its users, such as freedom of expression, are adequately protected. In President von der Leyen’s 2022 State of the Union letter of intent, the metaverse is mentioned as one of the areas to look into in the context of the EU’s Digital Strategy.

To tackle possible metaverse-related competition challenges, the European Commission already disposes of many well-tested tools within traditional competition law enforcement. Our antitrust enforcement and merger control rules are technology-neutral and versatile.

Successfully applying these competition rules to the metaverse will contribute to ensuring that existing and emerging markets – whatever their final shape or form – function well for businesses and consumers alike.

In addition, as regards the broader competitive environment, the Digital Markets Act provides tools to foster contestability in the metaverse should it be at risk, either because relevant services are within its scope or through the provisions that ensure futureproofing of the Act.

These are shared challenges, which will have a worldwide impact and will be of keen interest to regulators on both sides of the Atlantic, as our technology markets are closely connected and interlinked. As such, we may expect that topics relevant to the metaverse will also (continue to) be discussed in specialised fora, both at the global level such as the International Competition Network (ICN) and the OECD, but also bilaterally, for example in the EU-US Trade and Technology Council. In parallel and specifically for competition, the EU-US Joint Technology Competition Policy Dialogue is a track of cooperation between the European Commission, the US Department of Justice and the US Federal Trade Commission, launched in December 2021, which focuses on competition policy matters and enforcement, and increased cooperation in the tech sector. The main objective of the Joint Dialogue is to maximise the impact of the EU and US competition authorities’ enforcement in the technology sector. Such continued cooperation will likely contribute to shaping policy approaches of relevance to the metaverse, for example on platform governance or international standardisation of emerging technologies.

In other words, even if the metaverse is still a concept surrounded by question marks, at least one thing seems clear: There are good reasons for competition law enforcers on both sides of the Atlantic to be actively accompanying technological and market evolutions in this area and to thereby increase the chances that the metaverse will be competitive, innovative and open.

Authors:

• Prof. Dr. Friedrich Wenzel Bulst, LL.M. (Yale) is head of the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition and an honorary professor at Bielefeld University.
• Sophie De Vinck, Ph.D., is a case handler at the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition.

[1] The authors wish to thank Denis Sparas for his valuable input on this article.

Compliments of the Directorate-General for Competition (DG COMP) at the European Commission.

Disclaimer: the information and views expressed do not necessarily reflect an official position of the European Commission.