Metaverse – The Why? (Direct Revenue Streams)
This is the second article in a series I am writing on the Metaverse covering The What, The Why and The How of Metaverse development. Please keep in mind very few things have been battled-tested in this space. Such is the nature of innovation. We try, we fail, we try again.
Alright, we have a working understanding of the metaverse, onto the next question. Why do we care? What’s the point? Where’s the beef?
The conversations I’m in often turn to revenue, or more specifically, direct revenue streams very quickly. How can I make money in the metaverse?
This makes a lot of sense because private enterprise usually have objectives or KPIs linked to bottom line revenue and KPIs are usually measured on a quarterly or even monthly basis.
Side bar: for anyone who works in enterprise innovation you’ll know how big a challenge this can be when you have to prove significant return on investment (ROI) within a month or a quarter. It can be quite stifling.
So, bearing this in mind I’m going to try and unpack a variety of things available in the metaverse. Whilst commercialization should be a priority, I do think we need to be more nuanced and comprehensive in how we articulate the benefits of the metaverse. I’m going for breadth not necessarily depth here.
Value Drivers
Insert new buzzword. I’m going to use the term value driver from now only because I think it more accurately articulates why metaverse products and services are worth exploring. Everything I’m about to chat about should be considered as one of many potential drivers when building in the metaverse.
As I mentioned in Metaverse – The What, the metaverse is a new frontier. It’s a new channel or medium for creative digital experiences. This evolution is about shifting how we understand digital identity, ownership and governance in our interactions and the metaverse can be our vehicle to stake our claim in this new world (figuratively and literally).
Critically, we need to understand users are already deriving significant portions of their identity from their online interactions. Much like how we spend money on our physical appearance and attending events these same core drivers are powering digital interactions. The difference now is the metaverse promises a sense of presence and control over your digital interactions. This is enabling the biggest shift in customer behavior and willingness to spend on digital assets and experiences. The key word here is spend.
Direct Revenue Streams
I said let’s be more nuanced, but we should get this one out of the way first. It’s why you clicked on this article after all. The hottest value driver is of course how we get $$$ in the door. We’re going to chat about Digital Assets, Royalties, Freemium services, Play-to-Earn (handle with caution) and Subscription services. This list is non-exhaustive, but canvasses some of the major value drivers.
Digital assets & NFTs– The promise of the metaverse includes the promise of commercializing digital goods (whether as NFTs, tokens or some other digital asset). Nike, the well-known footwear giant, is possibly the largest enterprise brand success story in this space. Nike’s NFT collection has amassed $185.3million in revenue from their NFT drops of which $93m comes from primary sales of their NFT artworks (https://businesscloud.co.uk/news/in-crypto-nike-just-did-it-huge-nft-revenue-sees-it-lead-pack/).
Similarly, some of the web3 native platforms (those that offer in-platform NFT integrations and purchases) have seen some success focusing exclusively on designing & selling digital assets as direct-to-consumer goods for avatars to wear and in-game skins to change your appearance.
i.e. The Sandbox - $443k trading volume in last 7 days (https://www.nft-stats.com/collection/sandbox)
The elephant in the room is obviously that NFT sales have demonstrated a high correlation to cryptocurrency market prices and technology stocks. The ongoing bear market and rapid fall in trading prices across all these sector has impacted trading volumes and price of many current digital assets. No, this does not mean we should be jumping ship but it does mean this sector isn’t free from the complexities of global economics.
Notably, some of the non-web3 metaverse platforms (those that don’t offer NFT integrations or any sense of decentralized/web3 access) like Roblox are still dwarfing these web3 native platforms consistently hitting over 30million active daily users but their commercial model is focused heavily on a freemium gaming model with its currency Robux, advertising and licensing (more on this later).
NFT / Token royalties – A dual-benefit of digital product sales also comes from automated NFT royalties generated from secondary market sales. Of the $185.3million accrued by Nike mentioned above, $92m of those have come from royalties.
These sales include everything from enabling digital wearables (skins or clothing you can display on your avatar in a virtual world), providing access to future events, providing holders access to future NFT drops, the ability to claim a physical product that resembles your NFT or even a way to commercialize and use the NFT image itself (check out Bored & Hungry - https://cryptonews.com.au/bored-ape-nft-owners-launch-bored-hungry-pop-up-restaurant)
The extra operational benefit worth highlighting is much of these royalties are automated due to smart contracts. As an NFT is a token native to a blockchain, there’s a whole host of automated rules and fee-taking mechanisms to simplify and streamline collections and treasury management.
Most importantly, I think direct sales & royalty revenue streams should really only be justified by looking at either token utility or token collectability. Utility is a strange concept in web3. The idea that NFT holders will either receive an immediate functional benefit (like an ability to access limited edition products, virtual events or access) or the token comes with a promise (not legally enforceable) that there will be a future functional benefit provided to holders.
Whilst not an exact science, where there is utility there is (arguably) something quantitative that we can attempt to put a price and premium on in the market.
There are also some arguments that NFTs can carry a collectibles premium on them to justify their price and market penetration. Whilst I think collectibles markets are rarely a predictable or sustainable venture (unless it’s a first edition base set Charizard of course),some of the big brand success stories like Nike or Bored Apes Yacht Club have certainly benefited by community engagement driving a collectibles premium on their NFTs.
Freemium services & Pay-to-Win – This path has already been carved out by many popular web2 games like Roblox, Hearthstone, Diablo Immortal, Clash of Clans and pretty much any mobile game you might see ads for online. The ‘core’ product or service can be accessed by anyone for free but to fully experience everything on-offer (or to remain competitive) there are fees or additional costs involved.
Despite some animosity amongst the gaming community towards constant spending to remain competitive (https://www.gamedesigning.org/gaming/pay-to-win-games/) and a high correlation with gambling (https://www.researchgate.net/publication/352273299_Pay-to-Win_Gaming_and_its_Interrelation_with_Gambling_Findings_from_a_Representative_Population_Sample/link/60c19f12299bf1949f448fcf/download), the freemium style of commercializing gaming continues to grow year-on-year with many AAA rated games finding new ways to embed in-game purchases into the experience.
Roblox, that I mentioned earlier, is one of the bigger success stories capitalizing on ecosystem and network effects of integrated gaming. This is (ironically) the same promise of our web3 integrated metaverse, but this is a centralized solution where Roblox provides their own game development platform for users to create and share games, all whilst taking their own platform fees along the way.
Side bar: like many web2 platform solutions (i.e. Roblox, Uber, Spotify, Airbnb) their fees tend to be quite high. Anywhere between 30-70% of sales revenue for providing the platform. One of the promises of web3 native platforms is significantly lower fees.
Additionally, their target audience tends to be users under 16 which comes with its own complexities for types of content and experience.
Having said that, established brands and events are already seeing some success investing and gamifying their own experiences on these platforms, like Wimbledon 2022, allowing fans to play virtual tennis, interact socially and purchase digital merch and collectibles.
Play-to-Earn - There’s another model popularly known as play-to-earn as an emerging web3 model that promises players the more they play a game or interact with a platform the more they will earn value back through collecting cryptocurrencies or NFTs.
Some of the most popular games include Axie Infinity which at its peak boasted 3 million daily active players and a marketplace trading over $3billion worth of Axie NFTs and in-game assets (https://app.axieinfinity.com/marketplace/). Players collect digital Axies (a bit like Pokemon) and battle them in 3 v 3 style turn-based games using unique abilities to defeat their opponents.
Having said that, I tend to be a little pessimistic about play-to-earn as a sustainable business model. Very few of these games have sustained their NFT prices and platforms are reporting a -90% decreased in value across both their in-game items as well as their in-game currency (usually a native, fungible style token). This includes many of the web3 ‘success’ stories like Axie, Cryptokitties and The Sandbox. Additionally, these games also had quite a high barrier to entry as users often needed to purchase their own NFTs in-order to even play the game.
The irony of Axie Infinity was also boasting a play-to-earn model, but very much relying on a pay-to-win model where players need to constantly keep buying the most competitive NFTs with the best abilities in order to win.
Despite this, enterprise (even those that don’t think they’re gaming companies) will still likely greatly benefit from testing the waters with metaverse integrated NFTs that provide perks or benefits within a particular metaverse environment. There’s plenty of lessons to be learned by these experiments.
Subscription Services – Similarly, a lot of these paths have already been laid by existing Web2 products. From gaming (World of Warcraft), audio streaming (Spotify), video streaming (Netflix) and even e-commerce platforms (Amazon Prime), the commercial model of these products relies on an element of direct subscription fees and/or advertisements.
Currently there are few large enterprises rolling out subscription services within metaverse platforms probably due to the fact that the value proposition of the experience isn’t quite there yet. Especially when competing with platforms like Roblox or Fortnite.
It’s worth mentioning there’s a growing number of challenger web3 products trying to disrupt the traditional streaming subscription model. Audius is one such challenger disrupting the Spotify or SoundCloud audio streaming model.
Audius relies on a mantra of giving artists exclusive ownership of their music and how it’s monetized via streams, one-time payments or selling songs as NFTs. Content generated is exclusive managed by creators in an attempt to remove some of the expensive intermediaries in traditional models like record publishers and platform providers. There’s a few other technical components (for another day) around a native token ($AUDIO) to power the ecosystem, a decentralized content hosting solution and a content management solution.
However, perhaps ironically, my main criticism that these platforms are actually creator-first platforms. In principle this is a good thing. Rewarding artists appropriately, limiting intermediary fees and giving control to creators. But the success of Spotify style subscriptions are that they are consumer-first platforms. They favor accessibility, large catalog access and very few gates or limitations between artists, genres or content. Additionally, payments are directly proportional to streams ensuring incentives are aligned to consumer behavior (and not the other way around). There’s a whole bunch of complexities to unpack here, but let’s leave that for a future article.
I’m an advocate for web3 principles, but the winners in the next few years are those that can balance web3 features with some of the ease-of-use and accessibility available in web2. This is where I think we’ll some big success stories.
Let’s go make some money!
My intent was to provide a flavor of some of the direct revenue streams we’re currently seeing in this area. This list is definitely not exhaustive and only canvasses some of the major events and success stories over the past few years. It’s likely we’ll see similar models crop up over the next few years as the appetite for metaverse products grows.
It’s also a little tricky to separate some of the business models of web3 products (like Axie Infinity) that is primarily a browser-based experience that relies on NFT ownership of assets versus pure metaverse immersive experiences like acquiring skins or wearables to equip your avatar either in The Sandbox or a non-web3 platform like Roblox. In any event, we’re seeing a convergence of features and (if you remember this picture from my first article) the ideal metaverse should enable us to seamlessly integrate all three of these features & principles.
Some of these value drivers have had a bit more market testing than others, but like any blockchain-enabled product many of them are suffering from the whims of speculative markets. Don’t let it dissuade you too much. The winners are those that take risks and experiment early.
Next up we’ll chat a bit more about other value drivers including indirect revenue streams and virtual experiences.