The transition to the metaverse presents a technological paradigm shift akin to the shift from desktop computers to smartphones, but today’s dominant platforms will do their best to erect artificial roadblocks to protect their market power and profits. Without explicit intervention to jump-start competition, a likely outcome is that Big Tech firms will muscle their popular product offerings into becoming the defaults in the metaverse.
The transition to the metaverse is happening now. Meta (ex-Facebook) has been a very public cheerleader of this transition, and it has also been putting its money where its mouth is: the company spent $10 billion last year in its effort to eventually move interested users into this vaguely defined virtual-reality world. Alphabet (ex-Google), seemingly not wanting to fall behind, is ramping up its investments in augmented reality engineers and hardware. There’s also speculation that Apple will be soon coming out with augmented and virtual-reality headsets, while Amazon is already introducing products in the hopes of marrying the convenience of e-commerce with the ability to “touch” or “try on” products in a virtual-reality setting.
Of course, there are οther players involved in developing this almost-sci-fi virtual world, but unless Congress passes new legislation now, the same powerful tech firms that control much of our current digital lives may also be in control of our future ones in the metaverse. Not coincidentally, the applications and business models we will inherit from these firms will almost certainly be timid refinements to the offerings they now provide as these firms have weak incentives to disrupt the approaches that have made them so dominant. While it is true that the transition from smartphones to the virtual reality of the metaverse would be a major technological paradigm shift, today’s dominant platforms will do their best to prevent too bold a departure from business as usual in their respective profitable domains. Without explicit intervention to jump-start competition, a likely outcome is that Google will muscle its search and other popular applications into becoming the defaults in the metaverse; Facebook will peddle in exploitative ad-filled virtual-reality newsfeeds; Apple will maintain its stranglehold in app distribution and monetization in its next-gen Apple VR headsets; and Amazon will dictate the terms by which firms can sell to consumers as they shop in its VR enabled marketplace.
The current leading tech platforms have tremendous incentives to prevent newcomers from succeeding in commercializing radical innovations. The enormous profits enjoyed by these firms mean that there is a lot at stake from losing their current leading market positions. However, despite the powerful network effects and scale economies that appear to secure their formidable positions, their dominance need not be permanent. Monopoly power in fast-moving technological markets can be stripped away under the right competitive conditions— naturally-occurring technological shifts, such as the transition from the internet to the metaverse, can enable market opportunities for new entrants and generate competitive threats for existing platforms. These technological paradigm shifts can create cracks in the armors of incumbents and allow for new firms to enter with radical innovations that can tumble even the seemingly all-powerful current set of tech giants. However, such leapfrogging entry can only happen if today’s market leaders do not erect artificial roadblocks to protect their market power and profits.
History has shown us that tech incumbents will go to great (anticompetitive) lengths to erect such barriers. A quarter of a century ago, Microsoft was the dominant platform in personal computing with its Windows operating system (OS) software. Microsoft witnessed a shift taking place from a PC-centric and business-focused approach to computing to one that was internet-enabled and centered on the home user. Microsoft recognized that new innovative apps such as Netscape’s Navigator browser had the potential to displace Windows as the dominant platform for app development, its executives responding to this potential development by unleashing a torrent of actions designed to thwart Navigator’s rise. Microsoft did so largely via exclusionary contracts with PC makers and internet service providers (ISPs). This multi-pronged strategy was successful and essentially “killed the air supply” of Navigator, which allowed Microsoft to win the “browser wars” with its own browser and eliminated the threat to its dominant Windows platform. The consequence was a world in which consumers experienced incremental improvements in Windows and Explorer and were denied the possibility for radical innovation in the transition to the internet by way of alternative platforms centered away from Windows.
Of course, what these radically different possibilities would have been are unknown because Microsoft ensured that we would not experience them. In browsers specifically, Microsoft went into “competitive torpor” for many years after defeating Netscape. Only when Mozilla Firefox began to gain traction and Google launched its own Chrome browser in 2008 was Microsoft forced to pay attention again to the competition. Microsoft attempted to make improvements to its browser with the release of IE 8, but by then it was too late; consumers embraced Google Chrome and have never looked back.
Just prior to the launch of Chrome, Google had become firmly entrenched as the dominant search engine on desktop computers. However, the introduction of the iPhone in 2007 and the inevitable transition to smartphones introduced a fragile opportunity for dynamic competition and the chance for radical innovation. Google realized that the migration to mobile had the potential to enable the entry of firms with potentially new ways of doing search that could threaten its monopoly. In response to this threat, Google, like Microsoft a decade earlier, undertook a series of exclusionary contracts with phone makers, wireless carriers, and browsers to prevent rival firms from obtaining a foothold in mobile search. Until 2017, these arrangements required the installation of Google Search as the default search engine on Android phones. Moreover, the contracts went even further: if a carrier like Verizon sold even one phone with an Android-based operating system that did not rely on Google apps—which is what Amazon offered for a short time with its Fire Phone—then Google would deny Verizon the right to sell any phone with Google apps.
In effect, sponsoring an entrant that promoted a non-Google vision of the mobile internet would have essentially implied committing commercial suicide for a carrier like Verizon. That was (and continues to be) an extremely anticompetitive strategy. (Since then, Google has sweetened the deal a little by offering payment in exchange for default status of its search engine.)
The result is that mobile search today is dominated by the same firm using essentially the same technology that dominates the desktop and that has existed since Google’s beginning in 1998 (despite continual incremental improvements in its quality over time). Had Google not been allowed to control the transition to mobile through its restrictive conduct, consumers could have experienced radically new ways of sorting through and making sense of the information on the internet, ways that could have been specialized to the mobile space and led by a firm not named Google. However, we will never know what those radical innovations would have been because Google ensured that only incremental improvements in search were possible during the transition to mobile.
Now, as the internet becomes liberated from desktop and mobile devices and flirts with a fully immersive metaverse, society will reap the most benefit if radical innovators do not get stopped in their tracks by anticompetitive conduct. Opportunities for disruption, dynamic competition, and radical innovation have a chance to blossom in these turbulent technological currents. But it is also in these settings that entrenched firms have the strongest incentives to deny these entrants the seeds to carry out their dynamic disruption.
So how can firms compete in a way that maximizes the likelihood of achieving radical innovation? Can competition policy prevent incumbent platforms from thwarting the leapfrogging inherent in a truly dynamic competitive tech environment? Some propose more vigorous antitrust enforcement as a solution. While antitrust enforcement should certainly be vigorous, and the efforts by the DOJ in its lawsuit against Google and the FTC in its action against Facebook are commendable, these cases are backward-looking and will not restore the lost radical innovation that could have existed in search and social networking. These lawsuits were filed many years after the anticompetitive conduct began and will likely take several more to resolve, without ever restoring the potentially lost innovation. In other words, antitrust lawsuits in this fast-moving arena of short and fragile technological paradigm shifts, are simply too little, too late.
What is now needed is agile regulation targeted at a few selected gatekeeper firms with “bottleneck” market power. At a broad level, this regulation would prevent a select group of platforms from denying distribution, marketing, and development possibilities for radical innovators. (This regulation would also need to be periodically updated to reassess the identity of the gatekeeper platforms and would provide a framework for efficient dispute resolution that does not take years to resolve.)
Europe is leading the way with the drafting of the EU’s Digital Markets Act (DMA) and the establishment of the UK’s Digital Markets Unit (DMU). Both efforts are designed to set pro-competitive rules for tech platforms. The DMA’s language is in the final stage of debate, so it is imperative that its rules be shaped to maximize the likelihood of radical innovation in the metaverse. For example, as currently written, the DMA lacks a clause that prevents leading tech platforms from self-preferencing their own platform services in a general sense. The current language simply restricts self-preferencing in the specific context of rankings, but would do nothing to prevent a platform from steering users to its own services in a virtual reality context devoid of explicit rankings. This needs to be remedied to open the door for new firms to offer radically innovative VR services. (The DMU has not yet obtained the approval of the British parliament to enable it to be fully operational, so the exact contours of its regulatory powers are in a state of wait and see.)
In the US, Congress must act as well before the opportunities to maximize the innovativeness of the metaverse disappear in a sea of self-serving choices by the current market leaders. The American Innovation and Choice Online Act, currently being debated in the Senate, is a good start and should be enacted into law as soon as possible. Among other restrictions, the law would prevent self-preferencing by dominant platforms and would outlaw tying of the platforms’ core services with other services offered by the platform. Together, these two rules would minimize the likelihood of Microsoft and Google-style anticompetitive conduct in the metaverse.
With regards to self-preferencing, the US bill is much more general than the DMA and would prohibit dominant platforms from i) favoring their own core products in the metaverse (e.g., through default positions), as well as ii) leveraging their dominance in their core set of products to control adjacent products and services. Some have argued that in this second context, the proposed American bill has gone too far in that it could prevent a dominant platform from achieving pro-competitive outcomes. For example, the blanket restriction on self-preferencing could restrict a dominant platform’s entry into markets where it does not have a strong competitive position and thus, where its entry could enhance competition. These same authors cite the example of Meta favoring its own marketplace and adding competitive pressure to Amazon’s marketplace that might benefit consumers. This is not a concern in the context of the metaverse, however, because there is no dominant firm to compete with yet, and the objective of any regulation should be to prevent today’s dominant platforms from extending their current dominance into that new realm. In any event, the US proposal allows for firms to make an “affirmative defense” and establish that its incursion into new markets would not harm competition and in fact would be pro-competitive.
In sum, competition policy for too long has focused on static concepts such as prices and output. Recently, some have proposed expanding the focus to include quality, privacy, and even political influence. Yet competition policy should also consider the forces that unleash radical innovation and lead to the leapfrogging of incumbents. If this type of innovation process is explicitly acknowledged and better understood, then we as a society can more wisely create competition laws and regulations that will maximize the chances that the metaverse will not be shaped by the same tech firms that dominate today, and that the wealth generated from these transformative technologies will be distributed more broadly.
Disclosures: In the last two years, with my consulting company RedPeak Economics, I have consulted for law firms who have brought or attempted to bring lawsuits against Google and Amazon. None of the cases involved issues related to the metaverse specifically. My consulting work for these law firms ended in 2021.
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