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Kindle Notes & Highlights
by
Matthew Ball
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July 19 - July 27, 2022
the Metaverse economy will follow the patterns of real-world ones. Most experts agree on many of the attributes that produce a thriving real-world economy: rigorous competition, a large number of profitable businesses, trust in its “rules” and “fairness,” consistent consumer rights, consistent consumer spending, and a constant cycle of disruption and displacement, among others.
From 2010 to 2021, cash’s share of US transactions fell from over 40% to roughly 20%.
The most common payment rails in the United States are Fedwire (formerly known as the Federal Reserve Wire Network), CHIPS (Clearing House Interbank Payment System), ACH (Automated Clearing House), credit cards, PayPal, and peer-to-peer payment services like Venmo.
The virtual economy is also large. In 2021, consumers spent more than $50 billion on digital-only video games (in contrast to physical discs), and nearly $100 billion more on in-game goods, outfits, and extra lives. As a point of comparison, $40 billion was spent at the theatrical film box office in 2019, the last year before the COVID-19 pandemic, and $30 billion on recorded music. What’s more, the “GDP” of the virtual world is growing rapidly—it has quintupled on an inflation-adjusted basis since 2005.
In 1983, the arcade manufacturer Namco approached Nintendo about publishing versions of its titles, such as Pac-Man, on its Nintendo Entertainment System (NES). At the time, the NES was not intended to be a platform. Instead, it played only titles made by Nintendo. Eventually, Namco agreed to pay Nintendo a 10% licensing fee on all of its titles that appeared for NES (Nintendo would have right of approval over every individual title), plus another 20% for Nintendo to manufacture Namco’s game cartridges. This 30% fee ultimately became an industry standard, replicated by the likes of Atari,
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the 30% standard has endured and expanded to all in-game purchases, such as an extra life, digital backpack, premium pass, subscription, update, and more
The most pointed critique of the 30% cut focuses on the console’s proprietary tools, APIs, and services. In many cases, they add cost to the developer, rather than aid them. In other cases, they produce limited value. And in some cases, they serve only to lock in customers and developers alike, and to the detriment of both groups.
For a game to run on a specific device, it needs to know how to communicate with that device’s many components, such as its GPU or microphone. To support this communication, console, smartphone, and PC operating systems produce “software development kits” (or SDKs) that include, among other things, “collections of APIs.” In theory, a developer could write their own “driver” to talk to these components, or use free and open-source alternatives. OpenGL is another collection of APIs used to speak to as many GPUs as possible from the same codebase. But on consoles and Apple’s iPhone, a developer
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The variations in API collections and lack of open alternatives are partly why developers use cross-platform game engines such as Unity and Unreal, as they are designed to speak to every API collection.
In the mid-2000s, Microsoft’s Xbox Live managed almost all of the “work” for an online game: communications, matchmaking, servers, and so on.
Yet 20 years later, almost all this cost is now borne and managed by a game’s maker. The transition reflects the growing importance of online services, and the shift to support cross-play. Most developers now want to manage their own “live ops,” such as content updates, competitions, in-game analytics, and user accounts, and it doesn’t make sense for Xbox to manage the live services for a game that’s integrated into PlayStation, Nintendo Switch, and more. But game developers are still obligated to pay the full 30% to gaming platforms and work through their online account systems.
no part of that fee goes to the developers whose games justify its existence and who pay the most in server bills.
Steam solved these problems by creating a “game launcher” that indexed and centrally managed game installer files, but also took care of a user’s rights to these games and automatically downloaded and updated the games a player had installed on their PC. In exchange, Steam would keep 30% from the sale of every game through its system—just like the console game platforms.
Steam is seen as one of the most important innovations in PC gaming history, and a critical reason the segment remains as large as console gaming, even with its greater complexity of use and higher cost of entry (a decent gaming PC still costs more than $1,000, while meeting the specifications of newer consoles requires $2,000 or more).
In 2011 gaming giant Electronics Arts launched its own store, EA Origin, which would exclusively sell PC versions of its titles (thus cutting distribution fees from 30% to 3% or less). Eight years later, EA announced it would return to Steam.
Steam’s ongoing success is partly due to its outstanding service and rich feature set. It is also protected by its forcible bundling of distribution, payments, online services, entitlements, and other policies—just like consoles.
The most notable effort to compete with Steam came from Epic Games, which launched the Epic Games Store in 2018 with the explicit purpose of reducing distribution fees in the PC gaming industry. To attract developers as well as users, Epic sought to offer all of the benefits of Steam, but with fewer limitations and better prices.
EGS offered 12% store fees (which dropped to 7% if the developer was already using Unreal, thereby ensuring that even if a developer used Epic’s engine and store, they’d pay no more than 12% combined, even if multiple distinct products were bought, used, or licensed).
On December 3, 2018—only three days before Epic launched its store—Steam announced that it would cut its commission to 25% after a publisher’s title exceeded $10 million in gross sales, and to 20% after $50 million. This was an early victory for Epic,
With nearly 200 million unique users in 2021, some 60 million of which were active in December, EGS does seem popular (Steam has an estimated 120–150 million monthly users).
The average user spent between $2 and $6 on non-Fortnite content throughout the entirety of 2021 (and received $90 to $300 in free games). Leaked documents from Epic Games suggested that EGS lost $181 million in 2019, $273 million in 2020, and would lose between $150 and $330 million in 2021, with breakeven occurring in 2027 at the earliest.
When the App Store launched, the gaming industry generated just over $50 billion per year—$1.5 billion of which was in mobile. By 2021, mobile was more than half the $180 billion industry and represented 70% of growth since 2008.
By 2020, the App Store had become one of the best businesses on earth. With revenues of $73 billion and an estimated 70% margin, it would’ve been large enough to be a member of the Fortune 15 if it was spun off from its parent company (which is the largest company in the world by market capitalization, as well as the most profitable in dollar terms).
the entire world is becoming game-like. That means it’s being forced into the 30% models of the major platforms.
But why, exactly, does Apple’s 30% “outlaw” the Metaverse, to return to Sweeney’s pre-lawsuit remark? There are three core reasons. First, it stifles investment in the Metaverse and adversely affects its business models. Second, it cramps the very companies that are pioneering the Metaverse today, namely integrated virtual world platforms. Third, Apple’s desire to protect these revenues effectively prohibits many of the most Metaverse-focused technologies from further development.
High Costs and Diverted Profits In the “real world,” payment processing costs as little as 0% (cash), typically maxes out at 2.5% (standard credit card purchases), and sometimes reaches 5% (in the case of low-dollar-value transactions with high minimum fees). These figures are low because of robust competition between payment rails (wire versus ACH, for example) and within them (Visa versus MasterCard and American Express).
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.”
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. In short, the consequences of Apple’s policies will shape how the Metaverse is monetized, and who leads that process.
Today, a high school tutor can sell video-based lessons directly to customers via web browser, and if they choose to offer an iOS app, they can opt against in-app payments. This is because video-focused apps are “reader apps.” But if this tutor wants to add interactive experiences, such as a physics class that involves the construction of a simulated Rube Goldberg machine, or an instructional course on automotive engine repairs with rich 3D immersion, they are obligated to support in-app payments because they’re now an “interactive app.”
The policies of Apple and Google limit the growth potential not only of virtual world platforms, but also the internet at large.
For many, the World Wide Web is the best “proto-Metaverse.” Though it lacks several components of my definition, it is a massively scaled and interoperable network of websites, all running on common standards and available on nearly every device, running any operating system, and through any web browser.
Several open standards are already being shepherded, including OpenXR and WebXR for rendering, WebAssembly for executable programs, Tivoli Cloud for persistent virtual spaces, WebGPU, which aspires to provide “modern 3D graphics and computation capabilities” inside a browser, and more.
Cloud gaming is even more threatening to Apple’s relationship with mobile app developers. To release an iPhone game today, a developer must be distributed by Apple’s App Store and use Apple’s proprietary API collection, Metal. But to release a cloud-streaming game, a developer could distribute through nearly any application, from Facebook to Google, the New York Times, or Spotify. Not only that, but the developer could use whichever API collections they wanted, such as WebGL or even those the developer wrote themselves, while also using whichever GPUs and operating systems they liked—and still
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Microsoft and Facebook (which was also working on its own cloud game-streaming service) were quick to publicly criticize Apple’s revised policy. “This remains a bad experience for customers,” Microsoft reported the day of Apple’s update. “Gamers want to jump directly into a game from their curated catalog within one app just like they do with movies or songs, and not be forced to download over 100 apps to play individual games [that stream] from the cloud.” Facebook’s video president of gaming told The Verge, “We’ve come to the same conclusion as others: web apps are the only option for
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Allowing Call of Duty: Mobile to connect to a cryptocurrency wallet would be akin to a user connecting the game directly to their bank account, rather than paying through the App Store. Accepting NFTs, meanwhile, would be like a movie theater permitting customers to bring their grocery bags to a film—some people might still buy a box of M&Ms, but most wouldn’t. What’s more, it’s impossible to imagine how a platform might justify taking a 30% commission from the purchase or selling a multi-thousand- or million-dollar NFT—and if such commissions did apply, the entirety of the NFT’s value would
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the only blockchain-based games that can run on the iPhone are those that use the web browser.
In August 2021, a bill passed in South Korea banning app store operators from requiring their own payment systems, arguing such a requirement was monopolistic and harmed both consumers and developers. Three months later, and before the law changes were set to come into effect, Google announced that apps which chose to use an alternative payment service would have to pay a new fee for using their app store. Its price? Four percent less than the old fee—almost exactly the cost of its old fee, less the fees charged by Visa, MasterCard, or PayPal. As such, any developer who chose to use another
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The centrality and influence of hardware helps to explain why Facebook, in particular, is so committed to building its own AR and VR devices, and investing in fanciful projects such as brain-to-machine interfaces and smartwatches with their own wireless chips and cameras. As the only member of the big-tech giants without a leading device and/or operating system, Facebook is uniquely familiar with how operating solely on the platforms of its largest competitors is an impediment.
China provides a useful case study.
When Tencent’s WeChat launched in 2011, China was primarily a cash society. But within the span of a few years, the messaging app hurled the country into the digital payments and services era. This was a consequence of many of WeChat’s unique—and in the West, effectively impossible—opportunities and choices. For example, WeChat enabled users to connect directly to their bank account rather than require an intermediary credit card or digital payments network, which is prohibited by the major gaming consoles and smartphone app stores. Without intermediaries, and because Tencent wanted to build
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However, Tencent grew so powerful and so rapidly in China that even Apple was forced to allow WeChat to operate its own in-app app store, and directly process in-app payments—and iPhone launched in China two years before the messaging service. In 2021, WeChat processed an estimated US $500 billion in payments, with an average value of only a few dollars each.
For the Metaverse to emerge, it’s likely that developers and creators in the West will need to find ways around the gatekeepers. Here, finally, we arrive at why there’s such enthusiasm for blockchains.
SOME OBSERVERS TODAY BELIEVE THAT BLOCKCHAIN is structurally required for the Metaverse to become a reality, while others find that claim absurd.
Put simply, blockchains are databases managed by a decentralized network of “validators.” Most databases today are centralized. A single record is kept in a digital warehouse, managed by a single company that tracks information.
For example, JPMorgan Chase manages a database that tracks how much money you have in your checking account, as well as detailed records of prior transactions that validate how that balance was accumulated. Of course, JPMorgan has many backups of this record (and you might too), and it really operates a network of different databases, but what matters is that these digital records are managed and owned by a single party: JPMorgan. This model is used for almost all digital and virtual information, not just bank records.
Decentralization has its downsides. For example, it is inherently more expensive and energy-consuming than using a standard database because so many different computers are performing the same “work.” For similar reasons, many blockchain transactions take tens of seconds, or even longer, to complete as the network must first establish consensus—which can mean sending information across much of the world just to confirm a transaction two feet away. And of course, the more decentralized the network, the more challenging the problem of consensus typically becomes.
most blockchain-based experiences actually store as much “data” as they can in traditional databases, rather than “on chain.” This would be like JPMorgan storing your account balance on a decentralized server, but your account log-in information and bank account in a central database.
Critics argue that anything that is not fully decentralized is in effect fully centralized—in the above case, your funds are still effectivel...
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why is a decentralized database or server architecture seen as the future? It helps to put aside the idea of NFTs, cryptocurrencies, fears of record theft, and the like. What matters is that blockchains are programmable payment rails. That is why many position them as the first digitally native payment rails, while contending that PayPal, Venmo, WeChat, and others are little more than facsimiles of legacy ones.
Advocates also like to highlight that the trustless and permissionless blockchain model means that the “revenue” and “profits” from operating its payment network are set by the market. This differs from the traditional financial services industry, which is controlled by a handful of decades-old giants with few competitors and no incentive to cut rates. The only competitive force on PayPal’s fees, for example, are those charged by Venmo or Square’s Cash App. For Bitcoin, fees are pushed down by anyone who chooses to compete for a transaction fee.
