Meta Putting a (Deep) Stake into the Ground to Monetize the Metaverse

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By Michael Inouye | 2Q 2022 | IN-6539

Meta announced high transaction fees for digital assets sold on its Horizon platform (47.5% fee). The initial reaction to the high pricing was largely negative, which comes at a time when the broader NFT market is seeing some corrections from its recent hype cycle. Meta’s Horizon platform, including other nascent metaverses, need to focus on user growth by establishing standards and guidelines for digital asset cross-platform support and more favorable pricing models. The metaverse and broader NFT markets must move past speculative drivers and short-term investing to build towards a stronger future.

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Meta Announces a Hefty 47.5% Fee for Digital Items Sold on its Horizon Worlds Platform

NEWS


Many companies have already started exploring ways to monetize the metaverse, but the largest player (Meta) had largely stayed on the sideline acting more like a cheering squad than a mastermind behind a metaverse playbook. Meta finally unveiled its first concerted effort to monetize its Horizon Worlds platform and it comes in the form of a 47.5% fee on virtual asset sales. The 47.5% fee breaks down as a 30% “hardware platform fee” tied to Quest platform (Horizon Worlds is currently a Meta Quest exclusive) and 17.5% for the Meta App Store.

Considering Meta’s criticism of Apple and Google’s mobile platform rates (up to 30%) the 47.5% charge was surprising and drew some criticism. While the initial virtual items may not be Non-Fungible Tokens (NFTs) on a blockchain, the rates charged by NFT marketplaces like OpenSea are also considerably lower in comparison (2.5% transaction fee from the platform and up to 10% creator fee). One key difference is Meta is providing the user platform and in some cases the toolsets while the NFT marketplaces are just exchanges, but they still offer a higher value proposition to the creator community, at least until Meta can offer larger user bases to shift monetization drivers towards volume sales.     

Just a First Step, But Not a Particularly Postive One

IMPACT


Putting aside the seeming hypocrisy, the high fees send the wrong message to the fledgling metaverse industry and sets a bad precedent coming from the largest player in the world. There are no arguments companies need to monetize their platforms as this is an essential way companies will make money in the metaverse, but by charging such high fees it paints Meta as a gatekeeper or ecosystem builder, rather than a facilitator. The high fees suggest Meta will, like other walled gardens, protect these revenue streams by limiting access to external marketplaces. Restrictions like this run antithetical to the metaverse and is a prime reason Meta has been critical of mobile app stores.

Fees in excess of prevailing industry rates incentivizes Meta to restrict the flow of digital assets from external platforms to its properties because the converse, digital asset interoperability with Meta’s platforms, would push creators to do business from external, more lucrative alternatives. Unfortunately, Meta’s high fees comes at a time when the NFT market is correcting after the recent hype cycle. According NonFungible.com, the total number of “Active Market Wallets” has declined from a peak of 118K in early November 2021 to between 12K and 30K in April 2022. The number of daily NFT sales tracked by NonFungible has also declined from several peaks around 200K between August 2021 to early November 2021 down to the 10K to 32K range in April 2022. Total sales volume also declined from a peak in late August 2021 of US$418 million to US$24 million to US$90 million in April 2022.     

Despite some of the high NFT transaction volumes discussed in the media, the number of users in these early “metaverses” is quite small compared to traditional platforms and media services. The low number of digital wallets alone points to high transaction volumes from a limited number of individuals, but subscriber/user counts also pale in comparison to Facebook (~2.912 billion Monthly Active Users (MAUs)). Among the largest platforms, Naver Corp’s Zepeto passed 300 million users (20 million MAUs and 2.4 billion plus digital since August 2019), followed by the Sandbox with around two million registered users, and SK Telecom’s Ifland with over 1.1 million MAUs. Decentraland has over 300K MAUs, a similar value announced by Meta for its Horizon World’s platform—the latter of which also has 10K worlds, suggesting quite a few worlds go uninhabited most of the time.

Meta Horizon will eventually extend to the web and other devices, which should reportedly reduce the fees to 25%, creating a more conducive environment for creators. Digital asset availability to other Meta properties (i.e., Instagram) could take some time to gain significant momentum due to the current challenges in the market and users accustomed to “free”. Most significantly is the need to begin reaching larger user bases.   

Target Growth and Cross-Platform

RECOMMENDATIONS


Younger generations are already adopting social platforms outside of Meta and in some cases favoring more immersive alternatives—Zepeto is a prime example in South Korea. Meta’s desire to support Oculus and push Horizon is therefore understandable, however, the larger metaverse opportunity currently resides with conventional devices (mobile and PC). Meta needs to accelerate its plans to extend Horizon to other devices and in doing so effectively reduce its fees.

The goals for many of these nascent metaverse platforms needs to put user base growth near the top of their priorities. ABI Research expects the broader market correction among the virtual land sales and NFTs to reduce the growing fragmentation. Consolidation and the emergence of dominant players will also help create some levels of scarcity, which today is illusory where supply is only constrained by the limited number of early entrants (as new metaverses come online this scarcity conversely declines).

Consolidation will also help the remaining platforms to begin establishing the necessary standards and guidelines for cross-platform interoperability. Interoperability is paramount to increase the reachable user base(s) and to begin enhancing the value of digital assets; wider platform support also helps ensure longevity of digital assets (less impact if a platform shuts down). This is an area where the enterprise side is ahead of the consumer space—NVIDIA Omniverse is a prime example here and one Meta should seek to emulate, albeit dropping any limiting requirements (i.e., Omniverse’s requirement for NVIDIA RTX Graphic Processing Units (GPUs)).       

To date, the NFT market has largely been driven by speculation, short-term investors, and questionable trading practices (e.g., market/price manipulations and wash trading). Meta needs to begin creating real value within these virtual spaces—the video game industry has already proven consumers are willing to pay for virtual items, Meta needs to take this to the next evolutionary level beyond loot boxes, DLC, and cosmetics.   

 

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