Seven keys to success in the metaverse

Talk of the metaverse often centers on the large impact it will have on our society via the new social spaces it provides, particularly as they are adopted and used by Gen Z. That many companies find it impossible to fully evaluate business opportunities in the metaverse and struggle to plot metaverse-bound pathways to market entry should come as no surprise, given that the metaverse is a new marketplace with as-yet undefined rules and business practices.

That is precisely the nature of an emerging market, and a sign that any company willing to become an early adopter, establish a solid position and help shape the rules governing its new spaces will gain the keys to greater success down the road.

Read on for an analysis of the key factors for entry into the metaverse and commentary that will assist any company in speedily capitalizing on the market opportunities it provides.

I. The dawn of the metaverse

The term metaverse is a portmanteau of the words meta and universe, and is used to identify a wide range of services provided in online virtual spaces. The metaverse has found its way to the business agendas of C-suites around the world with a market size of USD93.9 billion as of 2022 that is predicted to continue growing by upwards of 40% per annum through 2030.¹

A closer look behind the curtains for the roots of such rapid growth reveals the presence of several powerful growth drivers: blockchain-enabled decentralization, AI, innovation in communications infrastructure and other technologies, and the particularly noteworthy levels of metaverse usage by Gen Z users, who will soon assume the role of the most impactful grouping of social actors and consumers. Understanding Gen Z’s willingness to embrace the metaverse requires recognition of the three underlying factors outlined below.

• Gen Z users spend a large percentage of their time playing video games or exploring virtual spaces, and are accustomed to virtual social interactions.
• The Gen Z tendency to construct identities for specific purposes gives them a natural affinity for the metaverse, where avatars can act as identities tailored to specific locations and purposes.
• Gen Z does not draw sharp distinctions between the real and the virtual, and accordingly defines value in terms of the connections they make rather than in the format of those connections.

The societal-level lifestyle changes imposed in response to the COVID-19 pandemic also contributed to the advent of the metaverse. Restrictions on the physical movement of people and things acted as tailwinds fostering the prominence of virtual spaces used for shopping, entertainment and social interactions, and birthed a collective societal recognition of such spaces as an essential part of everyday life.

The present acceptance of the metaverse marks a significant departure from the way it was originally understood, when some of the earliest metaverse initiatives—including the aptly named Second Life—were considered a mere escape from reality. Greater comprehension of the metaverse as a social space that provides a means for interactions and economic activity equivalent to that available in the real world has set the stage for it to gain even more prominence.

Note 1: Emergen Research, METAVERSE Global Trend Analysis and Forecast (2021)

II. Social, industrial and corporate practices transformed by the metaverse

As described above, major features of the metaverse seem perfectly attuned to Gen Z attitudes. This section takes a closer look at the effects the metaverse is poised to have on our social, industrial and corporate practices.

Use of the metaverse for entertainment, social interactions and economic activities is well underway among Gen Z and Gen Alpha, with the greatest difference between the metaverse and social media is the presence of avatar-defined digital identities. Every metaverse user can use avatars as an expression of their identity. Unilever allows users to hold wedding ceremonies for their avatars and receive NFT certificates of marriage on the metaverse platform Decentraland, thereby providing a space for users to affirm and assert their truest identities independent of gender, race and class.

The birth of the metaverse has impacted a wide range of industries in many ways, including through the increased efficiency XR and IoT technology brings to value chains in the primary sector and the manufacturing sector. The ROI of metaverse initiatives has been verified in a wide range of applications, such as the digital twinning of factories, AR head-mounted displays for assisted training of operators, and the VR testing of machinery. Players in the retail, real estate and other consumer-oriented sectors are treating the metaverse as a new point of contact with customers and accelerating the pace of investments across a wide range of innovative use cases, creating virtual property tours, avatars for shopping and virtual dressing rooms, and links between physical storefronts and events with the aim of regional revitalization. The services such companies make available to consumers are expected to induce changes in consumer decision-making processes, such as eliminating the consideration of distance or giving rise to preferences for experiential ways of obtaining product information.

Companies in all sectors are noting these changes and beginning to enter the fray of the metaverse market in pursuit of the new business opportunities it offers.

Japan-headquartered Sony Group is a notable forerunner in this regard with a full suite metaverse businesses, and has engaged EY to provide the support needed to bring its metaverse sports fan engagement platform from concept to reality.

Shugo Yamaguchi, in charge of the Sony Group’s new business exploration initiatives, shared his thoughts on the opportunities provided by the metaverse.

“The metaverse is going to have major impacts on the way society functions. Younger generations spend their time in ways which differ drastically from the generations before them; while this in and of itself is not a new phenomenon, we now have a generation of people who have had access to smartphones from a very young age, who have always been connected to the internet, and who think nothing of using SNS to broadcast a message or find information. Equipped with avatars as a new vehicle for expression and the resulting ability to have a self that differs from one’s physical identity, they are likely to ideate an even greater number of ways of self-expression. Our aims at Sony extend to connecting the physical world with those virtual spaces. Our efforts to create faithful metaverse-bound manifestations of the physical world with sensors and other technologies will parallel our explorations of other expressions of space that can only be accomplished in the metaverse.

The metaverse, though still in its infancy, brings with it a realm of possibilities. The Sony Group plans to leverage our capabilities in technology and entertainment to provide users and fans with brand new ways of having enjoyable experiences. We are confident that the near future will see large swaths of the younger generation enjoying themselves both in the real world and in the many worlds of the metaverse. Sony looks forward to partnering with other companies and individuals to bring these new worlds of fun into being.”

Participants in the metaverse are numerous, with a wide variety of companies joining the value chain alongside platformer developers such as Meta and Roblox.
(Shown below: The metaverse value chain)

The list of companies building metaverse-enabled businesses is expansive and includes IP holders², such as Gucci and Nike, who build areas for their companies in the metaverse and use those spaces to sell new goods and host time-limited events, as well as metaverse-focused advertisers and adtech companies, XR hardware developers, content developers and middleware developers.

Note 2: The term IP holder refers to companies that own brands, characters, or other types of intellectual property.

Particularly notable are the activities of IP holders in the luxury, apparel and sports industries who perceive the metaverse not merely as an avenue for marketing, PR and e-commerce, but also as a new standalone source of revenue, and who are exploring the use of NFTs to accomplish that aim. The purchase of virtual products in the metaverse is becoming commonplace, with Adidas earning a total of USD22 million when it sold out of all 30,000 of the NFTs³ it released in just a few hours after launch in December 2021, and news reports of a user in Roblox purchasing a limited-edition digital Gucci bag for USD4,115. IP holders aiming to expand into the metaverse should take note of the following three key factors:

Note 3: NFT is an acronym for non-fungible token, a piece of digital data equipped with an unforgeable and transferable certificate of authenticity or proof of ownership that is generated via the blockchain.

• Maintaining and increasing brand value:
  IP holders release some control over their assets when replicating products, events and storefronts in metaverse spaces, many of which allow users freedom to express themselves and interact with their environment. IP holders must therefore implement systems which allow them to maintain the integrity of their real-world brand, such as limitations on said user freedom of expression and interaction.
• Bridging the real and the virtual:
  Phygital is a neologism expressing customer experiences that bind the physical world to the digital, and this requires systems that link both of those worlds. The Roblox NIKELAND showroom uses accelerometers embedded in a user’s mobile devices to link offline actions to online gameplay, e.g., influencing the outcome of a long jump or a sprint.
• Community development:
  The metaverse acts as a social space for users, and as such customer lifetime value is given greater weight than traditional marketing indicators like brand recognition, conversion rate, and average customer spend. Because platformers hold the keys to the entirety of the platform’s customer experience, IP holders must collaborate with platformers to ensure that there is an unbroken stream of events that keep users interested and that there are natural mechanics built into the platform that encourage the formation of a community of users. One application of this principle is found in the form of decentralized autonomous organizations (DAO), which are gaining more widespread recognition; these blockchain-enabled communities are expected to play a major role in the development of the metaverse.

Masashige Komatsu, General Manager of the Sony Group Corporation Corporate Project Promotion Department, identified the following key factors necessary to make the most of metaverse collaborations between platformers and IP holders.

“The metaverse is developing into a new type of social space and should prove to be an effective method for IP holders to increase engagement with their users. This in turn will provide IP holders with the chance to grow their metaverses into new points of customer contact, into spaces that offer unconventional business opportunities. Forerunners into the metaverse have left us with a smattering of ideas for increasing engagement amidst these new spaces which enable the sharing of experiences across time, space and usernames, but no method has yet risen to the level of a full-fledged success. Each platformer provides users with a different user experience, and users of these different spaces gain a unique time and location to enjoy with one another. IP holders will find it vital to both have an understanding of the differences between the platforms and their userbases, and to leverage that knowledge in the design of the customer experience.

We recently announced a partnership with the English Premier League’s Manchester City Football Club. The aim is to conduct a proof of concept (PoC) that weds the Sony Group’s technology with the global IP of Manchester City in a way that bridges the divide between the physical and the virtual. The PoC will serve as a springboard toward the growth of new types of fan communities and the development of entertaining content that allows fans all over the world to engage with the team on a more personal level. The virtual space will feature a recreation of the Etihad Stadium, the home of the Manchester City team, and will provide fans with experiences only possible in the metaverse: visitors will be able to engage with players and learn more about the team all while interacting with other fans. Regardless of what part of the world they reside in, fans will be able to create fully customized avatars that embody their passion for the team and use those avatars to access a wide range of services that engender increased levels of engagement. Sony has a long track record of success in leveraging technology to increase fan engagement in music and other facets of entertainment. We look forward to joining hands with more IP holders to collaborate on metaverse initiatives, leveraging entertainment know-how and technology to build social entertainment spaces that foster greater fan engagement.”

III. Essential preparation for the metaverse

These great implications for our social, industrial and corporate activities present challenges for companies seeking to prepare for the launching of their businesses into the metaverse.

And although the metaverse is still a place of uncertainty with no clear winners in sight, close analysis of the constrained successes of the forerunners covered above and their positioning in the value chain paints a vivid picture of seven key factors for business success specific to the metaverse.

1. Ideal positioning
The current state of the metaverse calls to mind the infancy of e-commerce, AI and other currently indispensable technologies, and indicates that the metaverse is a business avenue that companies must continue to scrutinize. Companies should make haste to evaluate their positioning on the metaverse value chain—whether that be moving into an existing link or creating a new one—and ensuring that their internal workings are fit for metaverse duty.

2. Hiring of metaverse-capable talent
Regardless of the positioning of the business, metaverse-capable talent is essential to operating a business in the metaverse and developing the tools to do so. There is a particular lack of talent in these areas, however, due to the large divide between software engineering specializations, such as infrastructure engineers (who may focus on developing metaverse user matching functions) and engine development engineers (who may focus on developing engines like Unreal Engine or Unity). Collaboration with an IP holder requires the collaborator to have knowledge specific to the relevant industry. Companies will need to leverage M&A and headhunting in the quest to hire the right talent for such initiatives.

3. Customer experience design
The value of the metaverse is found more so in the creation of digital identities solidified through experiencing the virtual space in its entirety than in any singular experience it may allow. While users may differ in their preference for whether their metaverse identities should match or differ from their real-world identities, companies can ensure access to good experiences by aiding customers in the formation of identities in each space they make available. Accomplishing this requires both content design (e.g., events, games, items) and a governance framework capable of preventing fraud, trolling and other such untoward activity.

4. Organizational agility
Consumer activity in the metaverse occurs largely in relation to events. Examples include users who purchase character skins in anticipation of an upcoming special event or during chats with friends in the downtime surrounding a sporting event or concert. Fans of a certain brand may even want to purchase metaverse-specific items upon the launch of a new physical product. Companies wishing to compete in these spaces—narrow windows of time to deliver services or meet customer needs—will require agility throughout their organizations.

5. Ecosystem-building
Creating systems to monetize metaverse spaces requires a vast suite of capabilities from planning and development to marketing and partnering, no matter whether the targeted aspect is customer experience, ads, purchasable items or games. As securing all of these capabilities in-house would prove a daunting task, it is essential to build ecosystems that allow one’s company to focus on its core capabilities while partnering with other companies for non-core capabilities. Prominent examples of forerunners reducing the burden on their in-house content development teams include the Minecraft partnerships with more than 200 companies and individual contributors in its public developer program, and the Roblox program which matches brands with UGC creators.

6. Regulatory compliance
Compliance with regulations governing privacy, rights, and tax matters is essential regardless of a company’s positioning in the value chain.

• Privacy: Recent years have seen the EU enact stricter regulations on privacy policies and ongoing efforts to redesign the regulations governing the transfer of personal data between the US and the EU; in response, Meta has taken the newsworthy step of issuing public remarks⁴ concerning a potential withdrawal of Facebook, Instagram and other services it provides from the EU.
• Regulation of rights: The jury is still out on whether intellectual property rights intended for physical products can be applied to acts of infringement conducted in virtual spaces. We may soon have a verdict, however, thanks to litigation filed by fashion brand Hermes International alleging trademark infringement by a digital artist who sold “MetaBirkin” NFTs depicting the brand’s popular handbags.
• Tax: Governments are beginning to create frameworks for the taxation of NFT-derived revenue and digital item transactions. One such example occurred in February 2022, when the UK authorities seized NFTs and other crypto assets on suspicions of VAT fraud (tax evasion).

Note 4: Meta Platforms, Inc., Annual Report 2021, https://investor.fb.com/financials/ (Accessed 28 June 2022)

7. Monetization
As of writing, most metaverse monetization models have failed to provide enough revenue to cover development and operation costs, with the sole exception being in-app payments in video games and similar features. In fact, Roblox has a team dedicated to conceptualizing new monetization models. It is vital that companies build custom monetization models, whether they feature standalone economic systems such as digital currencies and tokens, secondary markets such as NFTs, testing for metaverse advertising value, or embedding data with value-based design.

Masashige Komatsu shared some additional insight into the monetization process:

“The challenge is figuring out how to shape the experiences you provide customers in a way that encourages them to return to your metaverse again and again. NFTs, digital currencies, tokens... these mechanics become fit for monetization only when embedded within a well-crafted network of experiences. Another factor that must not be overlooked is the cost of moderation and other activities that guarantee your metaverse provides users with both reassurance and measurable safety. The spotlight is often on the act of creating spaces within the metaverse, but the real keys to monetization are in the experiences provided within those spaces and the approaches platformoperators use to moderate those spaces.”

IV. Summary

The sections above present our insights into the impact of the metaverse on business activities and criteria for companies aiming for successful ventures into the metaverse marketplace alongside commentary rooted in analyses of metaverse forerunner activity and firsthand expertise gleaned from EY consultants on metaverse engagements. Despite ongoing attempts, the first established business models for the metaverse have yet to be created. As the world saw with e-commerce and AI, all companies are likely to—whether they presently have this intention or not—be forced to compete in the metaverse in the near future and should be preparing for that competition using the market entry principles identified in this article. Many of these principles highlight challenges such as organizational agility and access to in-demand talent; Japanese companies have long struggled with such factors and will need to undergo organizational transformations to address any insufficiencies prior to launching businesses into the metaverse.

Authors

Yujiro Taguchi
Senior Manager, Technology/Media Entertainment/Telecom Sector
EY Strategy & Consulting Co., Ltd.

Zhicheng Liang
Manager, Technology/Media Entertainment/Telecom Sector
EY Strategy & Consulting Co., Ltd.

Yohei Takinami
Manager, Technology/Media Entertainment/Telecom Sector
EY Strategy & Consulting Co., Ltd.

*Authors are listed under departments and titles as of the publication date.