The Metaverse supply chain is the set of steps that pass in between consumers and manufacturers. Who controls the distribution, thus is more vertically integrated also has more long-term moats.
Supply chains, distribution and long-term competitive advantages
While many have analyzed the Facebook move into the “Metaverse” more from a corporate political standpoint. Here we’ll look at another key aspect for long-term survival and thrive: Distribution!
When Facebook announced Meta, the company highlighted:
The metaverse will feel like a hybrid of today’s online social experiences, sometimes expanded into three dimensions or projected into the physical world. It will let you share immersive experiences with other people even when you can’t be together — and do things together you couldn’t do in the physical world.
All nice words, but what does that mean?
Understanding the attention merchant business model
Facebook, together with Google, is the most profitable attention merchant. The company has emulated successfully the Google advertising machine. The most powerful money-making machine ever created on the Internet.
Yet with a couple of slight differences in their business models.
First, Facebook’s ads are pushed to the users via targeting, wherein in Google’s case these ads are pushed based on contextual search. This, if at all, is an advantage to Facebook, which growth potential is even greater than Google. In fact, Google has been trying to emulate that unsuccessfully in the last decade.
The power of the Facebook advertising machine stands in the fact that it can be easily adopted by the masses. You don’t have to be a nerd to use Facebook Ads. Quite the opposite. While to understand Google Ads, you need to understand the nuances of search, algorithm scoring. And most of all how search intent works.
Second, where Google’s distribution passes through ownership of hardware (Google manufactures the Pixel), browser (Google owns Chrome), mobile operating system (Google runs Android), and search. Thus, Google (Alphabet) is way more vertically integrated.
What does that imply? We need to look at the digital supply chain.
The interesting part is that a supply chain where the row materials are data gets flipped upside down compared to a traditional/physical supply chain.
In fact, in a data supply chain the hardware component is also a data harvesting tool, as it usually runs a closed operating system controlled by the same company together with an hybrid marketplace (closed in terms of rules who are defined centrally by the organization, and open in terms of developers that can participate in creating applications on top of the marketplace).
Thus, looking something along these lines, if we look perhaps at how Google’s supply works:
Therefore, where Google has tight control over the supply chain, both on desktop and mobile. Facebook’s distribution is primarily based on strong brand names. With the acquisitions of Instagram, WhatsApp, and Oculus, Facebook has kept a strong distribution, yet primarily based on the strength of these brands.
This leads to the next point.
Metaverse and market expansion theory
A market expansion usually consists of building new markets, out of existing ones. These new markets use the previous as foundation, yet they develop their own logic. And are prone to wider mass adoption. And in turn, the business people operating there will need to master a whole new business playbook.
Why does it matter here?
Well, because the Metaverse would give Facebook both the defense to keep its distribution strong; and an attack to build a wider market than mobile. To do that though, it will need to create a business ecosystem and what I like to call a “business platform” which is something different from a technical platform:
A business platform like in the example above is the combination of hardware, and software, combined with a developer’s and entrepreneurial ecosystem. It’s an hybrid model of closed and open.
Thus, from here we can really really explain the swift move that Facebook made into the Metaverse.
Blitzscaling into the Metaverse
We can argue that Mark Zuckerberg’s Meta is in a Blitzscaling mode. In short, he’s both trying to defend its business model, and attack the market, by creating a whole new industry, potentially bigger than mobile, as explained above.
In fact, Apple’s changes in privacy are affecting badly all the main mobile advertising players. The ones that will survive in the long-term are those who have their own physical and distribution pipeline.
And Facebook is not among those!
By June 2021, Apple announced all its changes to the UI to enhance privacy.
As Craig Federighi, Apple’s senior vice president of Software Engineering announced:
Privacy has been central to our work at Apple from the very beginning, every year, we push ourselves to develop new technology to help users take more control of their data and make informed decisions about whom they share it with. This year’s updates include innovative features that give users deeper insights and more granular control than ever before.
This move by Apple, already started to erode the digital advertising industry. And it’s hitting the most, those players that do not have control over the supply chain of data.
Among them, Snapchat. As Evan Spiegel, Snapchat’s CEO explained:
Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July,” CEO Evan Spiegel said during a call with analysts. “While we anticipated some degree of business disruption, the new Apple provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.
Players like Facebook and Snapchat, therefore, are the most involved and those who need to move fast into the metaverse!
Zuckerberg’s Bill Gates moment?
As we saw, unless Facebook, now Meta succeeds in building up the Metaverse it might really face a survival threat in the coming years. In fact, while many look at this moment for Marck Zuckerberg, as the Bill Gates moment, there is a huge difference.
For a bit of context in 1995 Bill Gates realized the importance of the Internet, thus moving the whole company in the direction in what he called the “Information Superhighway.” However, the “Information Superhighway” was a term used by “business intellectuals” to describe more an interactive TV on the web. Rather, the web how it really evolved.
Therefore, it was more like a linear projection of the future. However, native and much simpler, bottom-up applications turned out to be the killer apps of the web: browsing and searching.
As Bill Gates realized that, Microsoft turned to its distribution strength to take over the browser market, dominated by Netscape. In fact, the initial version of Internal Explorer (a knock-off of Netscape) took immediately traction, as it was bundled together with Microsoft office, and therefore a no-brainer for most PC users.
Yet, this was a clear abuse of dominating position, which attracted the attention of the antitrust, and it led Bill Gates to sit for hours and hours in a court room, toasted by antitrust lawyers.
This was 1998. And Bill Gates, eventually drained by the antitrust. Slowly passed the reins (we don’t really know what happened in the backstage, and it might be possible that Bill Gates had to leave as CEO to prevent Microsoft to be broken up) to Steve Ballmer.
A slowed, threatened Microsfot, eventually lost the browser war, the search war and the social media war. And yet, it survived all this, thanks to its distribution advantage (if you run a startup, you might be surprised to figure that many large corporations still run Microsoft Office).
And eventually, what won was not the top-down, linear model where you pour billions and bring the TV online. On the opposite side, the content of web 1.0 (1995-the 2000s) was much more amateurish, yet it was not centrally controlled, which made it way more appealing. Only much much later on, as Internet speed, and other complementary tech picked up, players like Netflix fully transitioned to streaming (around 2007), thus proving the viability of what Bill Gates had in mind.
And also then, the format was not the same as TV. The content model and formats had completely changed, and the “Hollywood Model” didn’t longer apply. This was particularly clear, when Kevin Spacey, Speaking at the Edinburgh Television Festival urged the industry to nurture talent and give audiences: “what they want, when they want it.”
And Kevin Spacey continued: “If they want to binge then we should let them binge.”
He stressed how the media industry could learn from the unlearned lesson from the music industry as it tried to resist the unstoppable rise of the web: “Give people what they want, when they want it, in the form they want it in, at a reasonable price, and they’ll more likely pay for it rather than steal it.”
To sum up, the most important lesson here, is that we completely lack imagination when it comes to reinventing the future (and we can argue the more “business experts” we are the more we lack it) and that we apply to the future a linear innovation model. Where you take the future tech and without imagination we stuck the old tech on top of it.
A vision of the future from 1934: pic.twitter.com/6d20AdSgwL— Jon Erlichman (@JonErlichman) November 8, 2021
Therefore, in the case of the Information Highway, here the TV was supposed to be brought online.
Instead, the bottom-up model saw the first real web players (Google going forward) take over. In fact, the first Internet players like AOL were still managed as walled gardens with a centralized and controlled user experience and a subscription-based monetization model. The new web players instead succeeded because they enabled billion of users to generate amateurish content in a messy way (which over time evolved into pro content, yet a completely different format than TV – see Netflix).
There is a huge difference, therefore, between Facebook of today and Microsoft of the time. Microsoft in 1995, while running after the Internet, already owned and controlled the distribution (Microsoft today is among the most valuable companies on earth, still thanks to its distribution advantage).
Facebook today does not own the distribution, or the billions of hardware consumer devices coupled with an operating system, and a marketplace, which instead other tech giants do have.
The only parallel we can make here, is that today like then, we’re using a buzzterm like Metaverse, to describe the future. And players like Facebook are trying to design a whole ecosystem top-down, by pouring in billions of dollars. And Facebook today, like Microsoft back then (Microsoft invested $1 billion back then to ramp up the Information Highway) is investing over $10 billion into the Metaverse (some might argue cinically and they might be also right that Facebook is doing these investments to clean its brand from all the scandals of the last years appealing to the EU with a massive cash infusion, as a “lobbying investment”).
This leads us to the Metaverse, which is the survival escape for Facebook.
Inside the Metaverse Supply Chain
Let’s now try to answer on how the Metaverse supply chain might look like.
As reported by uploadvr.com, Facebook CEO Mark Zuckerberg and VP AR/VR Andrew Bosworth hosted a live Ask-Me-Anything session on Instagram, in which they explained:
These new platforms are so different from everything that’s come before it – not just the input, but the app model, how you’re going to discover things, how tightly they need to be optimized. If you’re building a pair of glasses that need to look like normal glasses, you need to have the system be so tightly optimized so you can basically do all the computation that you would expect from a modern computer, but do it on someone’s face within a thermal envelope and a power envelope that can last all day long. So that’s a very big challenge.
The team is pretty far along in this, at this point. We’re building a microkernel-based operating system, which is the architecture that you want to segment the pieces to make it as secure as possible. That way you have a small [set] of pieces that you know are going to be fundamentally trustworthy that you can build on top of. But at the end of the day, we need to basically be able to design and customize every layer of the stack in order to build out the performance and efficiency that we need in order to deliver these systems.”
And they highlighted how the company is building a “reality operating system.”
Andrew Bosworth, transitioning as CTO of Meta will play a key role in this development.
However, as Andrew Bosworth also highlighted in an interview for The Verge:
There’s lots of things that you can do in the metaverse by yourself as experiences and that’s going to be great. But a lot of it is going to be quite new because I think the metaverse is largely a synchronous experience. You’re there with people in real time having an experience in real time. There’s something meaningful about it.
This is a key point, as it highlights what makes the whole Metaverse different. And questioned about how crypto and NFTs fit into the puzzle he highlighted:
When you think about interoperability, entitlements, as we would call it in the game industry, is an important concept. Like who owns this thing and what rights do they have to it? Can they make copies of it? Can they sell it? Can they take it with them into every single location? What locations can they take it into? And that’s not hard to do with the database if the entire metaverse is controlled by one company, which we don’t want it to be. And we don’t think it can be. It’s not necessarily hard to do with a database if we have a really good standardized schema and you can pick which database it’s in and it goes here and there and everyone kind of has access to that. But another way to do it, that could be really strong, is NFTs and crypto, where you’ve got the ledger.
Therefore, the blockchain might work as a decentralized ledger for goods that exist in the Metaverse. And:
Instead of having to store it in a database somewhere, which has its own downsides, you store it in the blockchain.
Let me describe how this chain might look like, from the bottom up:
- Raw data: the raw data might consist the universe of things that metaverse users will do within the virtual environment, plus all the actions performed and items/virtual spaces they own.
- Portable data: that data need to be portable. So that users can transfer it anywhere in the metaverse/parallel mateverses. As this data might represent the whole digital identity of the user it’s critical that this is also transferable to the blockchain, so that it can be controlled by the user.
- Owned data: while the Metaverse company might have the right to use the data for advertising purposes. An advertising marketplace will have to reward users for the data used and also enable them opt-in mechanisms for how this data is getting used in the advertising process.
- Mixed data: the Metaverse might also bring data from the real world into the digital world through AR and make it interoperable.
Initially as a viable option, a minimal operating system integrating all the piece of a virtual and mixed experience will need to be highly optimized to track the user movements, and the interactions across the digital worlds.
In the application layer the development ecosystem will be able to build worlds, and things that can be done by users in each digital environment.
The ownership layer might be a mixture of data marketplace combined with blockchain. So that it can be controlled, it must be portable and it can be tokenized, to be reused in many other ways. So that the digital lidentiy is not tied to a single platform, but it can be resued across the Metaverse.
- Rather than looking at Facebook’s move into the Metaverse from just a rebranding standpoint, this is a distribution move. And a move to guarantee the survival of the company.
- A Metaverse might be much more of what envisioned by Facebook, to comprise an additional layer of ownership through blockhain technologies, to enable ownerhsip to be distirbuted, decentralized, portable and controlled by each user.
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