Roaming the Metaverse under a Digital Market Lens

Tech giants are already positioning themselves in burgeoning virtual worlds. Is the digital market ready to foster the Metaverse?

Introductory remarks

There is currently a common practice of addressing different Metaverse platforms as if users were able to seamlessly move across interoperable virtual worlds – i.e., as if there was a Metaverse. However, this is misleading since these platforms do not yet provide their users with any kind of horizontal or vertical interoperability. In fact, the Metaverse involves several platforms and operators, which provide different immersive virtual environments, such as Decentraland, the Sandbox, Roblox, Meta’s Horizon Worlds or even Fortnite. For the purpose of this article, the term ‘Metaverse’ is understood as comprising several metaverse platforms that incorporate virtual worlds or XR (extended reality) experiences (i.e., either VR (virtual reality) or AR (augmented reality)).

The Metaverse’s growing digital economy is expected to reach $700 billion by 2030, having come under the regulators’ spotlight due to its impact on the EU’s digital economy. In the 2022 State of the Union Letter of Intent, President Ursula von der Leyen identified virtual worlds as a key driver for the European Union’s digital regulation strategy, within the European Commission’s “A Europe fit for the digital age” initiative. Moreover, Thierry Breton, European Commissioner for the Internal Market, disclosed the launch of the Virtual and Augmented Reality Industrial Coalition, bringing together market players and policy makers and providing an open communication channel to identify the key challenges associated with this sector. Interest has also arisen within civil society, with some independent entities having been created, such as the Open Metaverse Foundation, the Open Metaverse Interoperability Group (OMI), the World Metaverse Council and the Metaverse Competition Agency.

How far are dominant players from the Metaverse?

The digitisation of the internal market allowed certain actors to firmly establish themselves in the market, enjoying entrenched, durable, and indisputable positions. This situation creates entry barriers, facilitates unfair practices vis-à-vis business users and collides with the need of guaranteeing a free, reasonable, innovative, and non-discriminatory (FRIAND) market. In a 2021 Opinion, the French Competition Authority stressed that, regardless of the sector, competition risks, such as “anti-competitive agreements and abuses of dominant position”, may arise from using blockchain as a technological infrastructure. Although such practices are deemed illegal and incompatible with the internal market policy, in light of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), they may be aggravated by the lack of transatlantic regulation or sectorial supervision. In an article penned by Friedrich Wenzel Bulst and Sophie De Vinck, both with leading roles at the European Commission’s Directorate-General for Competition, the authors expressed similar concerns. As a matter of fact, the main threats that may hinder the Metaverse’s digital economy are mostly related to abuse of dominant positions, market tipping, self-preferencing or refusal of access, tied-selling and killer acquisitions.

Big tech players such as Meta or Microsoft are already entering the Metaverse. Meta has put in place certain restrictive compatibility requirements that require either business or end users to have a specific hardware gateway (Oculus VR Headsets) in order to access the full immersive experience of its platform. If Meta is considered to have a dominant position in both markets – namely, of VR headsets and Metaverse platforms – this can amount to technical tying, hence distorting competition. However, even if one considers that such practice cannot be deemed as an abuse of dominant position, due to Meta not holding a dominant position in the relevant market, it may still come under the spotlight. By leveraging its dominant position in one market into another where it does not hold that same position, Meta may also be distorting competition by, again, abusing its dominant position. Oculus’ app store is also being investigated by the US Federal Trade Commission (FTC) for self-preferencing practices in its own apps against its competitors – the same self-preferencing practices that ignited the ‘Google Shopping’ case. These practices are likely to enhance any entrenched, durable, and indisputable position, which should be prevented to guarantee a free and open digital market. Additionally, the network effects that digital multi-sided platforms may experience will enhance market tipping by hindering the entry of new businesses into the market, while one offer becomes dominant. These issues will continue to be uncovered as Metaverse platforms develop further monetization strategies and attract more consumers to enter their very own digital economy.

A FRIAND Metaverse under the Digital Markets Act

The Digital Markets Act (DMA) aims to complement the existing regulatory framework, namely, competition rules, the P2B Regulation and the GDPR. Since national regulatory initiatives may deepen the fragmentation of the internal market, the European legislator opted to resort to a regulation to provide for fully-fledged harmonization across the European Union, targeting large digital platforms.

Nonetheless, is the DMA fit for the Metaverse? Although Metaverse platforms’ monetization strategies are still an uncharted territory, with a continued growth outlook, it is yet to be seen how they will unfold as multi-sided platforms. For now, these platforms’ financial streams already rely on several core platform services, such as advertising services, online intermediation services, operating systems and hardware, thus acting as a gateway between business users and end users.

The DMA targets providers of core platform services when: (i) there is a high concentration of multi-sided platform services, with such providers unilaterally setting the commercial conditions; (ii) large digital platforms act as gateways for business users to reach end users (customers) and vice-versa; and (iii) the gatekeeper power of these large digital platforms is misused by means of unfair behaviour vis-à-vis economically dependent business users and customers. For this purpose, there are three main requisites for a platform provider to fall under the scope of the DMA: the platform provider offers a digital service, which qualifies as a core platform service, and is operated by a gatekeeper.

The DMA outlines how to designate a provider of core platform services as a gatekeeper: through quantitative metrics, presumptions, and market investigations (case-by-case qualitative assessments). In the wording of Article 3, providers of core platform services may be designated as gatekeepers, by the Commission, if they have a significant impact on the internal market, operate one or more important gateways to customers (either business users or end users) and enjoy or are expected to enjoy an entrenched and durable position in the market.

A provider of core platform services is presumed to have a significant impact on the internal market if it has achieved an annual turnover equal to or greater than €7.5B in the last three financial years, or where the average market cap or the equivalent fair market value of the undertaking was at least €75B in the last financial year and it provides a core platform service in at least three Member States. The same provider of core platform services is also presumed to operate a core platform service acting as a gateway between business users and end users if it has more than 45M monthly active end users located in the Union and more than 10,000 active business users in the last financial year. These thresholds, when reached, will also satisfy the presumption related to the entrenched and durable position of the provider of core platform services.

Additionally, the DMA establishes a series of obligations that gatekeepers must comply with, aimed at restricting unilateral conducts that a company subject to the DMA may engage in, and which pose a threat to a fair and competitive digital market. Considering the market cap of the Metaverse, the above thresholds are likely to be reached by successful businesses in the future, despite the fact that when regulators enacted the DMA digital platforms in the Metaverse were not considered part of the digital market. Therefore, classifying a provider of core platform services as a gatekeeper under the DMA is a challenge that the Commission will still face, particularly given that the abovementioned requirements for the classification of core platform service providers as gatekeepers still lack practical implementation within this context. Nevertheless, due to the current lack of interoperability, it is possible to observe that consumers are locked in closed systems, whereas providers of core platform services offer a key gateway for business users to reach consumers, reducing their choice and greatly limiting competitors’ offers.   

Synergies and acquisitions with a pre-emptive effect are two other challenges that gatekeepers pose to current legislation – both are an obstacle to innovation and rely on an aggressive strategy to eliminate challengers to their position. For the past 10 years, Google has acquired one company every 3 weeks, with the GAFAM group (Google, Amazon and Facebook) having “acquired about 1000 firms”. Since the DMA’s scope of application is not concurrent with EU competition law, it is yet to be seen if the current merger thresholds will also be adapted to a transaction volume threshold, allowing better control over killer mergers and acquisitions. If such tactics continue to be implemented by tech giants in the Metaverse, innovation will likely be hindered, and competitors will either face greater entry barriers or end up being acquired and hence eliminated.

Final remarks Although the European Union is strengthening its regulatory framework to guarantee a free and competitive digital market, the future-proof applicability of instruments such as the DMA is still to be confirmed. While attempting to adopt or create a one-size fits all regulation, more grey areas are likely to emerge, considering that core platform services and gatekeepers operate in a very different way, according to the market where they are established. In the short term, tech giants are expected to continue to explore this market, further strengthening their entrenched position, outgrowing the competition, and extending their power over these burgeoning worlds.

Os Insights aqui publicados reproduzem o trabalho desenvolvido para este efeito pelo respetivo autor, pelo que mantêm a língua original em que foram redigidos. A responsabilidade pelas opiniões expressas no artigo são exclusiva do seu autor pelo que a sua publicação não constitui uma aprovação por parte do WhatNext.Law ou das entidades afiliadas. Consulte os nossos Termos de Utilização para mais informação.

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