<Exploring Network Dynamics in the Metaverse: A Comprehensive Overview>
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The metaverse is not just a futuristic concept; it is already present and evolving rapidly. In my previous discussion about the metaverse, I highlighted its immense diversity in content and applications. This evolution is driven by a shift towards activity-oriented experiences, an explosion of creators, and a decentralized ecosystem that promotes the integration of content through linking and embedding.
A central question arises: how will creativity, innovation, and wealth be allocated among the metaverse's various markets? This article aims to explore that.
I identify two distinct models for the platforms that will facilitate the metaverse: one resembling Amazon, and the other more akin to Microsoft.
Emergent vs. Constrained Networks
The distribution of wealth in the metaverse is closely tied to its structural topology: how it is organized around networks, endpoints, and users. Key considerations include how distribution will be managed and how demand will be consolidated.
Let’s examine two contrasting models of network formation.
Hub and Spoke Model
The first is the "hub and spoke" model, where each node in the network connects to a central authority that manages access and transactions. This means that interactions between nodes occur through this central authority, rather than directly.
Scale-Free Networks
The second model is a scale-free network, where the central node serves more as a facilitator than an authority, allowing nodes to connect freely with each other.
True scale-free networks are uncommon, and perfectly constrained hub-and-spoke networks do not fully depict the reality either, as nodes may have some autonomy despite being governed by a central authority. The balance between how much control the central node exerts versus how much it facilitates interactions is crucial for understanding network structures.
Emergence
A network that aligns closely with the scale-free ideal is more likely to exhibit emergent properties, leading to groups of nodes that can generate significantly more creativity, innovation, or problem-solving abilities than originally anticipated by the central node.
Some instances of networks approaching this ideal include:
- The internet
- Open-source software development (including ecosystems like Linux and Windows)
- Smart contract blockchains that allow for emergent, decentralized applications
- Wikipedia
- Facebook (within its own social network, rather than its development ecosystem)
Notably, the last two examples illustrate networks that exist "in" the ecosystem rather than "on" the platform, a distinction I will elaborate on later.
Why Some Networks Approach Scale-Free
Metcalfe's Law suggests that the value of a network increases exponentially with each additional device. This principle explains the value of both the telephone network and the internet.
Conversely, Reed’s Law posits that Metcalfe's Law may underestimate the value of networks, especially those conducive to subgroup formation.
Examples of Reed’s Law in practice include:
- Social media platforms where users serve as the center of their subgroups.
- Messaging apps like Discord that facilitate group formation for discussions.
- Open-source software that rapidly evolves by welcoming contributions from anyone.
- Wikipedia, where community members manage and enhance content.
- Online games with social components that foster community and engagement.
In constrained networks, forming subgroups can be difficult or even impossible, leading to value creation being concentrated with the central authority. In contrast, true scale-free networks allow for easy subgroup formation, generating immense value across the network.
Radoff’s Law
I propose "Radoff’s Law" as a heuristic to understand the consequences of Reed’s Law and the emergent properties of scale-free networks:
The degree to which a network facilitates interconnections determines the extent of its emergent creativity, innovation, and wealth.
The Wealth of Networks
Returning to the comparison between Amazon, Microsoft, and the metaverse, I previously hinted at the differences between networks like Amazon (or Facebook) and those resembling the internet and open ecosystems like Windows.
Different types of network effects exist, as outlined by Ben Thompson in his Moat Map. To summarize, there are internalized and externalized networks.
Internalized and Externalized Networks
Internalized network effects operate within an application. For instance, Facebook's social network is confined to its platform, while Google's value comes from its internal data and search intelligence. In contrast, Microsoft and Apple focus on the ecosystems of developers and creators they support.
Reed’s Law suggests that to maximize the value of an internalized network, forming connections within must be easy, much like befriending someone on Facebook. For an externalized network, the network owner must excel at facilitating connections among its units.
Internalized networks can generate significant value for their owners:
On the other hand, externalized networks can create substantial wealth for both the network facilitator and the participants within a scale-free ecosystem. Bill Gates has famously commented on the difference between platforms and mere applications, emphasizing that true platforms generate more economic value for their users than for their creators.
Commoditized and Differentiated Suppliers
Facebook’s users are the suppliers, and they are effectively commoditized, presenting themselves in a templated manner, unlike the World Wide Web, which allows for greater expression. Google commoditizes web pages by offering similar search results for all.
Conversely, Microsoft and Apple support applications that can vary significantly, leading to a higher level of differentiation and facilitating emergent networks, which is crucial for maximizing wealth in their ecosystems.
Once again, I emphasize:
The degree to which a network facilitates interconnections determines the extent of its emergent creativity, innovation, and wealth.
Differentiated Supplier Networks
Ecosystems with highly differentiated suppliers tend to thrive on externalized network effects, promoting connectivity and integration. To cultivate internalized networks, commoditization is necessary, allowing a single entity to foster subgroup formation as per Reed’s Law.
When content is highly differentiated, it becomes challenging for one entity to enable various differentiated subgroups. A more effective approach is to delegate research and development to suppliers with ample options.
Let’s now consider the implications for the metaverse.
Trajectory of the Metaverse
Roblox is often cited as a form of metaverse, serving as a social network, a creative game development platform, and a space for enjoying shared experiences. The content on Roblox is relatively diverse due to its creative tools, although it does not reach the level of differentiation seen in a game developed on Unity, which benefits from a broader ecosystem.
Room Enough for Two. Or Two Million.
Despite their negative connotation, walled gardens serve essential functions, including setting rules, maintaining community standards, and appealing to specific demographics. They can be aesthetically pleasing.
However, it’s important to note that walled gardens are a part of the metaverse, not the entirety of it. The diversity of experiences within the metaverse will likely prevent suppliers from being commoditized to the extent found in the lower-left of the Moat Map.
Companies like Roblox resemble Amazon in their market positioning:
- They control user distribution.
- They provide access to a somewhat differentiated set of suppliers (the "builders"), who primarily interact with the platform.
- They set the regulations that govern supplier activities.
Other platforms like Rec Room, Facebook Horizons, and Manticore are also pursuing similar strategies but targeting different market segments.
Most creators will likely resist the limitations imposed by any single walled garden. Just as the web, Windows, and open-source development have maximized the variety of applications, the metaverse should be decentralized, permissionless, and built on open technologies. This approach will enable the greatest variety of games and experiences, leading to optimal wealth creation.
Unity and Epic
While it remains uncertain which companies will dominate the upper-right of a Metaverse Moat Map, two key players have emerged in 3D engine technology: Unity and Epic’s Unreal Engine.
Unity is the most widely used 3D engine, and its business model revolves around aggregating advertising demand across all Unity games. Their platform is so open that users can opt for different ad networks if preferred.
Epic’s Unreal Engine is also open from a technological standpoint and has significantly influenced the creation of games and 3D content. However, Epic’s business model is shifting towards walled gardens with Fortnite and the Epic Game Store, focusing more on controlling distribution than on demand aggregation.
Patterns from Ecommerce
A useful lens for predicting the metaverse's evolution is to examine trends in ecommerce. If platforms like Roblox and the Epic Game Store emulate Amazon’s successful walled-garden model, while Unity aligns with Microsoft’s open ecosystem philosophy, we must consider how the upper-right market will evolve.
Shopify, along with its competitor BigCommerce, has created an ecosystem of diverse customers (the stores) alongside a market for plugins, applications, referral partners, and consultants. They focus on aggregating demand rather than controlling distribution, unlike Amazon.
With Shopify, merchants engage directly with their customers while benefiting from a broader ecosystem of services and components. Ben Thompson captures this in a Stratechery post.
The metaverse consists of numerous components, including 3D engines, creator tools, and live services that facilitate immersive experiences. Ecommerce offers insights into the business models likely to emerge in the metaverse.
Roblox and the Epic Game Store may function similarly to Amazon by controlling distribution to a vast consumer base. Metaverse creators will compensate these platforms not only for tools but also for audience access.
Other companies may operate similarly to Shopify, where creators are responsible for customer acquisition while benefiting from an interconnected ecosystem of services and vendors.
The metaverse will encompass games, social spaces, augmented reality, and other experiences limited only by our imagination. This suggests a market rich in differentiated content and a platform ecosystem characterized by both walled gardens and open architectures.
This raises an important question: will it become a winner-takes-all environment where one walled garden captures the majority of wealth?
If history with the internet and ecommerce serves as a guide, we may achieve both models, but it will thrive in an open and free metaverse where the majority of opportunities are created.
Further Reading
- In Experiences of the Metaverse, I define the concept of the metaverse and its functionalities.
- In The Market Map of the Metaverse, I categorize key companies ranging from semiconductors to telecommunications and their roles in building the metaverse.
- Ben Thompson explores how various companies establish moats based on distribution and demand, contrasting commoditized and differentiated suppliers.
- Learn about emergence through an engaging episode of Radio Lab.
- Nick Szabo offers insights on social scalability and the rise of blockchains.
- Scientific American has published an article detailing scale-free networks for a deeper understanding.