App Stores Starting to Open Up Steps Towards the Metaverse

Facebook has recently rebranded itself as “Meta” to emphasize its direction as a company and the critical importance of the metaverse. Mark Zuckerberg’s Founders Letter 2021 addressing these changes made several statements relevant to this insight and the development of the metaverse. Despite the name change, which some may view as Facebook’s attempt to become the metaverse, Zuckerberg emphasized “the metaverse will not be created by one company” and his belief is “the lack of choice for consumers and high fees for developers are stifling innovation and holding back the internet economy.”

While a range of negative publicity has surrounded Meta/Facebook, Zuckerberg’s statements regarding the metaverse is spot on and if the company holds true to these convictions then another massive tech player has embraced the pathway to the metaverse. Standing in the way of pursuing the metaverse are the numerous walled gardens and platforms that favor controls and restrictions over facilitating interconnectedness and choice—mobile app stores are one key battleground where companies are starting to challenge the status quo, both in the name of fairer competition and the metaverse.

To this end several recent industry developments and potential legislation are starting to shift the market dynamics around app stores (and more broadly digital marketplaces), creating potentially seismic changes to ecosystems controlled by major tech companies like Apple and Google. These cases hold significant implications for a future metaverse that, as stated upfront, is dependent upon open systems.

In what could have amounted to a landmark case, a federal judge largely sided with Apple in a lawsuit filed by Epic Games. At stake was Apple’s ability to maintain firmer controls of its app store (and ecosystem) by keeping third party app stores external to its payment system, thusly maintaining its current revenue splits with developers. While the judge ruled Epic had violated its developer agreements (thereby supporting the separation in payment systems) and directed the company to pay damages equal to the 30% of total revenue collected by the company through Apple’s app store, the ruling also stated it was anticompetitive to prevent developers from directing users to other payment systems external to the Apple app store ecosystem. While it was largely a victory for Apple, there are other areas where the tide may be shifting.

South Korea’s parliament recently passed a bill which will amend the country’s Telecommunications Business Act, to prevent app store owners from requiring developers to only use in-house payment systems. The South Korean law only pertains to its borders, but it could have broader implications, especially if other countries follow suit. The US, for example, could one day impose similar legislation as South Korea; in August 2021 US Senators Blumenthal, Blackburn, and Klobuchar introduced the “Open App Markets Act” bill, which effectively creates a more open app economy by imposing similar changes on digital gatekeepers such as supporting third party app stores/payment systems and sideloading of content. Elsewhere, the European Union’s Digital Markets Act (DMA) proposal (submitted December 2020) is broader legislation (covers more than the app economy) that would also target digital gatekeepers to promote a more competitive environment, although currently it would not require gatekeepers to open ecosystems to external payment systems. If the market continues in this direction what does it mean for digital content and services and the future of the metaverse?     

A working metaverse economy cannot exist if most transactions must go through only a handful of stores or payment systems. Imagine how different the ecommerce market would look if most transactions had to go through Amazon’s and Walmart’s payment systems – you could still buy goods from Best Buy, Target, etc., but the easiest way to shop was through only those two companies’ payment systems, who would then take a percentage of the revenue. In many ways, this is the argument facing Apple and Google regarding the dominance of their mobile app stores. 

Counter to the closed ecosystem, Microsoft has recently taken the step to open its Windows store to third party app stores, with Amazon and Epic Games as two early announced storefronts. Microsoft has also stated it will not collect revenue if sales occur through alternate payment systems, outside of games (although it has reduced its commission, as have other platforms). This is a significant step towards a more open app ecosystem, enacted by another industry giant, pushing the tech industry closer to an open system and the metaverse.

The large installed bases of these platforms and services, however, have tremendous networking effects and provide developers with massive user bases, versus a fragmented market that greatly limits revenue potential unless high investments are made to support a large number of platforms. For consumers, more curation of content and apps means well-defined user experiences and expectations along with an environment more conducive to security. Knowing where the market is today it isn’t an easy transition from walled gardens to an open metaverse. Even if these walls were breached or knocked down, would this mean the end of the dominant positions? Would this accelerate the pathway to the metaverse?        

The metaverse is an appealing “end goal” because it means the information and technology industries were able to come together and effectively create what could be the largest transformational change since the Internet (or at least on par with smart phones and mobile devices). Like the Internet, the metaverse can’t be owned or controlled by any single (or select number) of entities so it seems to reason the walls from these established market leaders should come down to make way for the fast lane to the metaverse. Again, things aren’t so simple.

If extreme action were taken and some of the largest companies were broken apart, say separating the business units for software/platform from hardware into separate companies, this could make the market more competitive to new entrants, but it could also destabilize the digital markets we know today. Mobile app developers, who today largely pick between Android and iOS, may see a much more fragmented market, not unlike the earlier days of connected TV (or even mobile devices). The business cases for app development become more challenging and costly in a more fragmented market. Despite these risks there are lawmakers who support breaking up these large companies, going above and beyond app store or digital ecosystem legislation.

If app stores were forced to become more open there is still a good chance the existing mobile duopoly and dominance of Facebook/Meta in the social networking market could still continue. If the view is these markets are anti-competitive due to these large incumbent user bases, then the most viable option may be splitting up these companies. Compromise, however, is the best option and one the large incumbents should support.

Eventually the digital marketplaces will become more open, the momentum is building, and it will continue push incumbents towards this end goal. Microsoft is early in this regard but others (i.e., Apple and Google) should follow suit and use this compromise to help reduce some of the pressures around anticompetitive practices. This doesn’t mean incumbent app stores will become vast marketplaces with lots of competing storefronts and no central or main storefront– Apple, Google, and the rest still need to offer a more curated store experience next to alternate store fronts. While some revenue opportunity will be distributed amongst the wider competitive field the large players will still be able to maintain solid market shares, emphasizing the same attributes and benefits (security, curation of content, etc.) they highlight with walled-gardens, but in a more open ecosystem. If the competitive storefronts offer poorer content, less security, and overall weaker experiences consumers will still favor the larger players, which speaks to the heart of competition to drive innovation. 

By taking this approach these larger platforms will eventually help form the foundation for an interoperable and open metaverse and in many ways could jump start it by bringing in large numbers of users. Some control needs to be relinquished to move forward, but in the end, consumers will still gravitate towards the best experiences and developers will support those platforms which provides them the best opportunities to monetize their content. For the large incumbents, this may mean more investments into innovation and quality of experience to maintain their shares, but that should be viewed as a win-win and steps in the right direction. It also ensures the incumbents can continue to help push the markets forward, driving innovation, without the cloud of anti-competitive practices.