Controlling the metaverse

When is a software company acquisition not just a software company acquisition? When the future of platform control is on the line.

Microsoft has agreed to pay about $70 billion to acquire Activision Blizzard. While the price tag might be the eye-popping news for some, the bigger takeaway is about the future of whatever the metaverse turns out to be.

To get there, you’ll need to rewind a bit. Microsoft was the dominant player in consumer tech from the late 1980s until the early 2000s. Its Windows operating system was without serious rival as it came to define the PC market, but the company came under intense antitrust scrutiny as a result. Nothing lasts forever, though. By the end of the decade it was surpassed by once-weaker rival Apple because it didn’t make a big enough investment in the next phase—mobile computing. Microsoft CEO Steve Ballmer’s reaction in 2007 to the iPhone remains the gold standard for how to see Microsoft’s blind spot on mobile:

It’s not as if Microsoft ever went away, but it lost its place atop the heap. C’est la vie mon ami. This is the arc of technology and innovation. The PC operating system was central to the Web 1.0 computing era, which was built around browsers and access. But the social and mobile era was not kind to the company. Desktop hardware and access were less important in what was to come, and Microsoft had no serious foothold in a marketplace that valued connecting to anyone, anywhere at any time.

Right now, it’s arguable that Facebook is 2004 Microsoft: top of the heap in the social platform era, which creates a type of incentive for companies to keep doing what works. Facebook is at a fork in the road and has to decide whether to keep feeding the platform that’s generating massive revenue or pursue at a loss what is to come. Platforms go away as technology evolves. Microsoft wasn’t taken down a few pegs by companies trying to compete in spaces Microsoft dominated. Instead it was upended by companies building dominance in places technology was moving.

I look at the news about the Activision deal as Microsoft learning from mistakes and setting its sights on the innovation that will challenge Facebook’s dominance. Thus the Activision acquisition is not a deal in a vacuum. After Microsoft acquired Bethseda last year, that gave it 23 studios under the control of the company’s Xbox Studios umbrella. Adding Activision would, according to reports, garner Microsoft brands the third-most revenue in the gaming industry. That’s significant. Did you know that the gaming industry brought in more than $180 billion in revenue in 2021? It’s a category that includes hardware, software and esports, but for perspective consider that the movie and sports entertainment industries (which we rightly think of as being quite dominant and possess and outsize reputation in the cultural conversation) brought in less revenue combined than gaming. Gaming is an under-covered monster of an industry.

So at base, the acquisition is a media consolidation story. Microsoft has been slowly gobbling up gaming studios and building out a stable that looks a lot like its acquisition strategy in the 1980s and 1990s, when it was acquiring competitors in spaces it wanted to dominate. But going back to the original anecdote, this is a space Facebook largely doesn’t dominate either. Microsoft tried its hand at social networks but it’s not going to win on Facebook’s turf. But it doesn’t take much to see a future where gaming-plus-social is ascendant, and that’s a space without a long-term dominant player. Facebook and Apple supplanted Microsoft. Something in the social gaming space is going to supplant Facebook.

Facebook certainly is trying to pivot. Its rebranding as Meta is a nod to the idea that the future will not be the Facebook platform, and perhaps a sign the company has learned from Microsoft’s mistakes. But while it builds a metaverse architecture, it doesn’t really have the compelling content to pull people in. So while Facebook builds infrastructure, I look at the Microsoft acquisitions as slowly building up content people would actually want to engage with in a metaverse. This is, interestingly, a strategy Facebook probably should pursue but also might be reluctant to do as it faces intense scrutiny from regulators. Acquiring gaming studios might be vital to its pivot to what’s next, but it also would invite attention from antitrust lawyers.

In the backdrop of all this is control. The web3 promise of the metaverse is being sold as openness and decentralization, but again the short history of the Web teaches us that it all trends toward centralization and control over time and the tollbooth operators end up being the winner (edit: someone noted Prof. Galloway apparently has made an argument about tollbooths as well so while this is new to me I’ll link to it here because it sketches out the argument in more detail; my point is less about whether the booth can exist and more about how controlling the way a platform is built allows for the existence of a booth at all). Facebook might be loath to do eyebrow-raising acquisitions of studios, so instead it’s trying to control metaverse architecture itself in an attempt to control how rents are extracted in the spaces we’ll occupy next. Perhaps it will fail, but if the shift to a metaverse yields a dominant player they likely would end up doing the same thing. Decentralization to centralization and rent-seeking, and then a new upstart decentralizes the experience again for a time. Wash, rinse, repeat.

From that perspective, Microsoft may not be the dominant player in computing anymore but it is trying to amass what it needs to be dominant in what’s next. The metaverse is boring without content. This isn’t much different than the world of streaming, as we’ve learned watching companies abandon Netflix and start their own services. Content is king, and controlling content can make you a kingmaker and dethrone royalty. Sure, Facebook has Oculus. But ask my students about Oculus. They are bored by it. Microsoft doesn’t need Oculus to win in this space. Gaming plus Discord/Twitch are just fine for the company as it waits for a better headset experience (which could end up being its own HoloLens product).

Platform dominance and lock-in matters. The early web was open and decentralized, but as a matter of organization it gave way to platforms that put things in one place and standardized experiences. As a result, the decentralized link structure of the open web gave way to the illusory walled garden of Facebook, such that the latter has become the web in many parts of the world. The danger of any one company rising to such dominance is that it gets to define the experience for all of us. We come to think about that company as the experience itself. The wild, wonderful chaos of the open web still exists, but we are all on Facebook and websites that are professionally designed to look alike.

From this corner, Facebook and Microsoft (and others) are competing to control how the public imagines the metaverse, and that will define how the public comes to think of what a metaverse even is given that the term is a relative abstraction to most. This is the early days of the gold rush, and to be thought of as the metaverse itself would be a huge win for a company, much in the same way Facebook benefits to being the web for many.

Theoretically the metaverse should be a place of open standards and cross-platform data that means nobody owns it and we can travel from place to place much as we would in a car between cities. In reality, a company can gain huge competitive advantage if we come to think of the metaverse in terms of one platform, one company. So you rename your company Meta and pursue strategy accordingly. The danger here is that defining a space in the public imagination really can have consequences. If someone cannot envision the web beyond what they see on Facebook, you’ve already placed limits on what someone is able to do with the web because they’re playing in boundaries you’ve erected. The metaverse will work the same way if it’s controlled and centralized by one or a few. This is largely the worry about nine companies controlling the future of artificial intelligence, it’s the worry about a few large social platforms hosting human conversation, and it remains the worry about the platforms to come despite the promises that web3 will be open and decentralized.

Facebook’s gambit might not work if it doesn't control the content. Microsoft’s strategy to slowly control gaming might not work if it doesn’t control the architecture. These companies are rivals for now. Tacit cooperation might be game over for everyone else.

Jeremy Littau is an associate professor of journalism and communication at Lehigh University. Find him on Twitter at @jeremylittau.