The Practical Metaverse
A Guide for Non-Endemic Companies to Operate in the Metaverse
The term “metaverse” evokes grand visions: a successor to the mobile internet, a parallel plane for human existence, and the final computing platform. It has also become an umbrella term encompassing mixed reality, web3, blockchains, NFTs, online multiplayer games, and more. It's evident that these ambitious goals cannot be achieved by a single company. We need numerous well-funded, both endemic and non-endemic, companies to contribute to the long-term visions of the metaverse.
The primary challenge in engaging more non-endemic companies is distinguishing the customer-focused Practical Metaverse from the technology-focused Sci-fi Metaverse. The secondary challenge involves encouraging companies that shy away from the term “games” to learn from game products and business models, as games are the closest existing representations of the metaverse. The practical metaverse includes online multiplayer games such as Minecraft, Roblox, Fortnite Creative, Eve Online, and more. These metaverses attract hundreds of millions of customers who invest money and attention in them today.
The technology-focused metaverse emphasizes networking, self-sovereign identity, standards, concurrency, interoperability, etc. While these technology components are essential and require improvement, only a handful of companies have both a metaverse-centric mission and the substantial capital needed to invest in these advancements (e.g., Meta).
“One of the things I’ve always found is that you’ve got to start with the customer experience and work backwards to the technology. You can’t start with the technology and try to figure out where you are going to try and sell it.” — Steve Jobs
Most companies will not delve into metaverse infrastructure technology and should instead concentrate on customer experiences, which predominantly manifest as games today. Many CFOs are understandably hesitant about their companies venturing into the hit-driven business of game development. However, most companies will not need to create games; rather, they must learn how to develop or interact with virtual worlds, virtual items, and avatars, which are all integral components of online games today. Players customize their avatars and participate in social experiences and mini-games within virtual worlds. These virtual worlds and metaverses generate revenue by selling virtual items to players.
Many online multiplayer games are metaverses comprising millions of virtual worlds like Puma DLC (Minecraft), Adopt Me (Roblox), and Coachella Island (Fortnite). In 2022, Roblox players visited over 15 million virtual worlds on the platform, with developers and creators publishing more than 15,000 experiences daily. Top virtual worlds like Brookhaven RP can garner over 12 billion visits in a year.1
Creators of virtual worlds generate income through various methods across different platforms. On Roblox, the primary revenue source comes from selling virtual items. In contrast, Fortnite Creative creators earn money based on engagement, sharing 40% of net revenue from the majority of real-money purchases made within Fortnite. Minecraft creators generate income through downloadable content, which encompasses not only virtual items like skin packs but also virtual worlds such as adventure maps.
Virtual items represent a significant business opportunity. In Roblox, players use a virtual currency called “Robux” to buy virtual items. The company refers to Robux sales as "bookings." In 2021, Roblox generated $2.7 billion in bookings, 25 million virtual items were created by the Roblox community, and 5.8 billion virtual items sold (both free and paid).
Players typically buy virtual items for "affinity” and/or utility purposes. The business model behind many successful online games today is free-to-play (F2P). F2P games provide players with access to a significant portion (or all) of the content at no cost, often including competitive or social elements that reward skilled players. To support these games, players purchase affinity items such as skins (cosmetic) and emotes (social).
Examples of "utility" virtual items in F2P games include keys that unlock chests containing random affinity items and items that increase levels faster (grants no competitive advantage vs. other players). While many games market themselves as F2P, most strive to avoid the pay-to-win (P2W) label. P2W games have the stigma that players can buy powerful items, buffs, and other advantages with real money, allowing those with greater real life financial means to win as much or more than skilled players.
Avatars serve as a fundamental way for people to express their identity (or multiple identities) in apps, games, and the metaverse. Avatar customization can include fictional or real characters, animals, personal representations, and more. Mark Zuckerberg recently announced that over one billion Meta avatars have been created. In Roblox, one in five daily active users updated their avatar, resulting in over 165 billion avatar updates in 2021.
Non-endemic companies can benefit from the gaming industry's decades of experience in building virtual worlds, virtual items, and avatars. The first step in understanding these practical metaverse components is to understand the needs and desires of current customers.
The Playground and the Stage
Today's practical metaverse customers primarily consist of Gen Alpha and Gen Z, for whom gaming is an integral part of their lives. Gen Alpha, the demographic cohort succeeding Gen Z, includes children born in or after 2010. By 2025, this generation will number almost 2 billion, making it "the largest generation in the history of the world." According to Newzoo:
9 in 10 Gen Alpha and Gen Z are game enthusiasts, respectively, compared to 79% of the total online population.
70% of Gen Z are interested in socializing in in-game worlds beyond gameplay in the future (% definitely/probably).
50% of Gen Alpha and Gen Z spend money on video games, respectively, compared to 42% of the total online population.
Market research firm Interpret has been collecting data on these players through their syndicated GameByte study since 2012. Their 2020 report revealed that sandbox games, which offer players substantial creative freedom like Minecraft and Roblox, strongly resonated with this demographic.
Legendary game investor Mitch Lasky uses "The Playground and the Stage" framework to describe the interaction between sandbox games (playground) and the user-generated content of these games (stage). Sandbox games have open-ended gameplay with little to no goals, reflecting the timeless play pattern of using imagination to create stories. The players decide what they do. The popularity of games like Minecraft and Roblox among children is well-known, but lesser-known examples include Toca Boca games.
Toca Boca, a Swedish game developer, dominates the mobile kids' games category. As of March 2023, eight out of the top 12 paid iPad apps for kids on the Apple App Store were created by Toca. Toca games are popular because they enable kids to use their imagination to create stories for the characters in the games. Children enjoy unrestricted creativity, with no rules or goals, reminiscent of Montessori-style play. Kids want to roleplay what they see their parents or others doing, but in their own way.
Toca Kitchen allows kids to cook up weird/fun dishes to eat, while Toca Life: Vacation lets kids experience vacations in their own way. Toca Boca was the first mobile game studio to tap into this insight, with others like Dr. Panda following suit. Games like Minecraft and Roblox extend this play pattern to older demographics.2
Sandbox games are not only fun to play, but also fun to watch. In 2020, the top two games watched on YouTube were Minecraft and Roblox. Minecraft grew from an estimated 20-30 million monthly active users (MAU) in 2014 to become one of the largest games of all time (140 million MAU). By 2021, Minecraft had also become the most-watched game on YouTube with over 1 trillion views. Minecraft creators and players have developed various map types over the years, such as adventure, survival, puzzle, parkour, horror maps, and more. Minecraft creators are incentivized to make content because they earn money and fame through platforms like YouTube and Twitch. Up to a third of Minecraft players discovered the game through user-generated video content, strengthening the play-create-watch flywheel.
Gaming has evolved into a cultural phenomenon, becoming increasingly important in the lives of Gen Z, Gen Alpha, and future generations. Many popular sandbox games leverage the Playground and the Stage framework to activate a flywheel of: 1) leverage imagination and no rules in play, 2) show off and monetize engaging content, and 3) acquire new players/audience through user-generated content who will play and create.
This framework also explains why virtual worlds are the most common entry point for non-endemic companies; numerous executives witness their own children or other kids playing, watching, or talking about these games.
Virtual Worlds: Experiences, Islands, and Maps
Microsoft CEO Satya Nadella believes that virtual worlds are to the metaverse what websites are to the internet. Microsoft's experience with virtual worlds is extensive, having acquired Minecraft in 2014.
Companies that agree with Nadella's virtual world-website analogy will need to know how to create virtual worlds. Virtual world creation used to require proprietary game engines built by hard-to-recruit game developers. The gaming industry has been improving this product for decades. Nowadays, players, creators, and brands can quickly create simple virtual worlds on platforms like Minecraft, Roblox and Fortnite Creative. The three most common ways to build virtual worlds are: 1) build a branded world, 2) brand integrations into an existing world, or 3) build a platform-native game.3 Different platforms are better suited for these options.
Roblox is the leading platform for building branded worlds. I estimate 100-200 branded worlds on Roblox, ~40 on Fortnite, and ~15 on Minecraft (if you have better numbers, please reach out!). Examples of branded worlds include Gucci Garden (Roblox), Verizon 5G Superbowl Stadium (Fortnite), and Burberry: Freedom to Go Beyond (Minecraft). Branded worlds typically operate for a few months, whereas some platform-native games have operated for years.
Roblox is also the leading platform for brand integrations. The Home Depot recently integrated into Redcliff City, a Roblox virtual world. Universal has been integrating movie launches within the popular Adopt Me (Puss in Boots, Minions). Integrating into existing virtual worlds eliminates the risk of building an audience from scratch and the burden of operating a live game. Read this post for more details on brand integrations on Roblox.
Fortnite Creative is the leading platform for integrating IP and celebrities. The platform boasts numerous IP/celebrity collaborations (e.g., Marvel, Mr. Beast, Spiderman), so many that a dedicated wiki is required to track them all. A few years ago, each of these deals would have made major gaming news, but now the steady stream of collaborations is almost taken for granted.
Marketing teams have pushed for branded worlds to reach younger demographics and invest in metaverse platforms as new advertising channels with low CPMs. Meanwhile, creator-led agencies (e.g., Beyond Creative) and VC-backed startups (e.g., Gamefam) have focused on platform-native games. These startups also engage in work-for-hire branded world builds.
Branded worlds and brand integrations have lower risk and cost but also lower potential rewards. Platform-native games have the potential to become significant businesses. For example, the top game on Roblox, Adopt Me!, generates an estimated $50M in annual revenue. It would rank as the ~197th top mobile game globally by revenue. Games like Adopt Me! succeed because they prioritize core gameplay and then offer opportunities for brand integration.
The focus of platform-native games is delivering a fun experience rather than showcasing a brand. Platform-native games have not been widely adopted yet because it's more challenging. According to data.ai, 1,419 apps and games generated over $10 million annually in 2022. This cohort of mobile game developers faces challenges due to macro advertising and tracking headwinds. Non-endemic companies and brands should collaborate with these developers to build platform-native games in Roblox, Fortnite, Minecraft, and more.
If an opportunity arises to work with Minecraft, seize it, as they are particularly cautious about commercializing their platform. There have only been a handful of Minecraft branded worlds as compared to Roblox and Fortnite, so a brief overview may be helpful. The Minecraft Marketplace provides these options for creators and brands: 1) skin packs, 2) texture packs, 3) mash-up packs, 4) adventure maps, 5) mini-games, and 6) survival spawns. Skin packs comprise virtual items (skins) for avatar customization, while texture packs are “skins” for the virtual world. Adventure maps, mini-games, and survival spawns represent virtual worlds, and mash-up packs are bundles that combine skin packs, texture packs, and virtual worlds.
The maturity of developer ecosystem varies across each platform. Roblox boasts the most robust developer ecosystem, which includes some VC-backed startups. Some of the top Roblox developers could be found on the Roblox Innovation Awards winners list (full list of finalists here). I’ve personally had a great experience working with Supersocial; they excel in creating impressive brand experiences, such as NARS Color Quest. More importantly, they're pushing the boundaries of Roblox-native games (though I can't reveal specifics at the moment).
The Fortnite Creative developer ecosystem has been less developed so far. However, this is about to change significantly with the recent launch of the Unreal Editor for Fortnite (UEFN). As part of this announcement, Epic Games will now share 40% of Fortnite revenue with eligible Islands (the term for virtual worlds in Fortnite Creative). This means that Epic Games has increased their creator payout pool to an estimated $800M per year, assuming $2B in revenues.4 In comparison, Roblox paid out $623.86M in creator fees last year. Many Roblox developers have already reached out to me, wondering if they should establish a Fortnite Creative vertical. I’ve had positive experiences working on Fortnite Creative islands with Beyond Creative and KyberPlay.
The best developer of branded worlds on Minecraft is Blockception. They just won a 2023 Webby Award in the “Best Partnership or Collaboration Metaverse, Immersive & Virtual” category for their work with Burberry.
Many non-endemic companies have focused their metaverse efforts on virtual worlds, often treating virtual items as secondary to the experience. However, virtual items deserve more attention as it has a great business model: low fixed cost, zero marginal and zero distribution costs.
Virtual Items Create Real Value
Popular virtual items on Roblox have garnered millions of impressions, as measured by favorites, and in 2022, virtual items on the platform generated a total of $2.9 billion. Creating virtual items typically requires just a single creator or a small team, who can complete the task within a few days to weeks, sometimes for as little as a few hundred dollars per item. There are four major approaches to working with virtual items: 1) branded virtual items within branded worlds, 2) standalone virtual items, 3) "phygital" items, and 4) NFTs.
Branded virtual items typically exist within branded worlds, but they can also be standalone items. Players usually don't pay to access a branded world; instead, they purchase cosmetic virtual items that offer social value. The investments made by brands into branded worlds suggest a belief that existing real world brands will transition into the digital realm, beginning with online games. Luxury fashion brands have invested the most in this transition.
Gucci has established fashion-focused virtual worlds in Roblox, Zepeto, and the Sandbox, while Burberry is present in Minecraft and Balenciaga in Fortnite. Other luxury fashion brands participating in metaverse fashion include Louis Vuitton, Nike, PRADA, Hermès, and more. Gucci was the first luxury retail brand to launch a permanent branded virtual world in Roblox, in May 2022, which featured eight virtual items such as the Gucci Colourblock Zip Jacket, Gucci Oversized Sunglasses, and Gucci "Hair Piece 1." Building a permanent virtual world demonstrates a significant commitment to the community. Gucci has been experimenting with Roblox since October 2020 when their first virtual items appeared in the game, followed by a limited-time immersive experience, Gucci Garden, in May 2021. One of the most expensive Gucci items in Roblox, the Dionysus bag, sold for 350,000 Robux (then worth about $4,115), which was more than the price of the physical purse.
The Minecraft x Burberry activation explored “phygital,” a term for experiences that involve both physical and digital elements.5 This phygital experience included the following elements:
A branded virtual world (Burberry: Freedom to Go Beyond)
15 free skins bundled in the virtual world, five of which are modelled on the physical capsule collection
The Minecraft x Burberry capsule collection consists of classic Burberry garments combined with Minecraft-inspired prints. For example, this is the Minecraft version of the iconic Burberry Check Scarf (original scarf here).
In select Burberry stores where the physical collection is available, screens displaying scenes from the game will line the walls and floors (photo here).
QR codes can be found in Burberry flagship stores. When scanned, it’ll take users to a site where a code will be generated to access 5 Character Creator Items. This code can be redeemed at Minecraft.net (video explanation here).
Character Creator Items are different from skins as they are items/assets that customize individual body parts like arms, legs, hair, etc. Skins are whole-body textures that are placed on a character. Skins can also be higher resolution (32x32 pixels) whereas Character Creator Items are 16x16 pixels - but can be animated.
Minecraft and Burberry jointly donated $100K to Conservation International’s forest protection and restoration programs. Anyone who donated to Conservation International from Nov’22 to Jan’23 also received the aforementioned Character Creator Items.
The concept of "phygital" items assumes that there will be consumer demand and value in owning a physical object with a digital counterpart, and vice versa. For instance, using the Minecraft x Burberry example, would a Minecraft player enjoy the free skins enough to be convinced to purchase a physical item from the Minecraft x Burberry capsule collection? Alternatively, would a non-player become interested in Minecraft (and potentially download or play the game) because they see the branding in physical stores?
A key term noticeably absent in the Minecraft x Burberry example is NFTs. Many phygital experiments have been associated with the web3/NFT hype as NFT creators sought ways to provide utility for their NFT holders.
In March 2021, RTFKT Studios sold 608 pairs of NFT sneakers in just six minutes, generating more than $3 million in revenue. Nike acquired RTFKT in December of the same year. RTFKT's model has focused on granting existing holders priority access to new digital, physical, and phygital drops. Some purchase these items as collectors, while others speculate on their resale value.
Another example is a Bored Ape Yacht Club (BAYC) NFT owner who opened a burger restaurant in Long Beach, California. Other BAYC NFT holders can receive perks like free meals, discounts, and merchandise at this restaurant.
One of the biggest debates surrounding NFTs is whether they are necessary to deliver their intended benefits. Just last month, Roblox announced Limiteds, a type of virtual item in Roblox where creators can set limited quantities and earn 10% from every resale. The scarcity and creator royalties features of Limiteds closely resemble NFTs.
Generating virtual item revenue will be a long-term goal for specific product categories (appliances, flooring, etc.). A viable goal today is to use virtual items as a testing ground for physical products. Digital fashion is an excellent category for this.
In Roblox’s Metaverse Fashion Survey, “70% of Gen Z said their avatars dress at least somewhat like their IRL style, with equally as many (70%) saying they also get physical style inspiration from dressing their avatars.” Forever 21 is on track to sell 1.5 million black beanies in Roblox for $0.70 cents each. This beanie and other digital-first items were first tested in Roblox before they launched it in stores.
There are numerous intersections between digital fashion, virtual items, and avatars. As we explore the third component of the practical metaverse (avatars), it is valuable to dedicate time to understand the various ways in which the term "avatar" is used.
Avatars and Digital Fashion
Every metaverse experience starts with digital identity creation through an avatar system. The avatar system generates the visual asset that users select to represent themselves in a digital experience. A significant emphasis in metaverse experiences is placed on avatar customization: hair, facial features, body shape, and more. Non-customizable avatars are typically employed to portray specific characters in games or other interactive media. Avatar fidelity spans a range from cartoonish (games) to photorealistic (Meta’s Codec Avatars). A vast majority of companies will not need to develop their own avatar system. Instead, they choose the platform on which they want to create a virtual world, and then customers create their avatars through the platform's avatar system.
Many people are referring to digital fashion rather than avatar systems when they say “avatar.” After all, fashion brands have been some of the earliest investors in branded virtual worlds, where they are selling (or giving away for free) branded virtual items. These virtual items are “worn” by avatars. Some may question how digital fashion works with Minecraft’s and Roblox’s boxy avatars, but they should consider how players think.
Tim Sweeney, CEO of Epic Games, recently responded to a tweet about an unconventional and unpolished Fortnite Creative island being the most popular, saying that, “The only thing that all games have in common is fun, and if 47,000 players are having fun with this right now, more power to them!” This is reminiscent of the classic debate of gameplay versus graphics. Ultimately, fun is what keeps players engaged and avatar systems are products that can evolve (see below).
Roblox is the leading metaverse platform for digital fashion and their 2022 Metaverse Fashion Trends report highlights the following insights that underscore the importance of digital fashion and avatar customization for their players6:
The influence of creator communities on fashion is accelerating
The impact and prestige of digital fashion is on the rise
Self-expression and inclusivity in digital fashion is essential for Gen Z
IRL trends influence metaverse fashion and vice versa
Survey says, nearly 3 in 4 Gen Z will pay for digital fashion
It’s essential to include Zepeto in the discussion of avatars and digital fashion. Zepeto is Asia’s largest metaverse platform, with a reported 15 - 20 million MAU. Zepeto's audience composition (70% female, mostly aged between 13 and 21) sets it apart from the current metaverse games, which tend to attract teenage males. The most popular virtual world on Zepeto is Runway Z, a fashion tournament game. Runway Z resonates with the platform's predominantly young adult female audience who have a strong interest in fashion.
Some of the previously mentioned agencies offer virtual item creation, but independent creators are also viable options. For instance, Rebecca Minkoff hired 23-year-old Roblox creator Samuel Jordan to create a 20-piece virtual fashion collection and a 5-piece limited purse collection. Additionally, there are up-and-coming metaverse fashion designers like Arjun Goel, a high school student in India.
Alternatively, companies can train their existing staff in metaverse fashion design through various courses. Roblox and Parsons School of Design recently collaborated to create a digital fashion course, teaching students how to use Roblox tools. Parsons also offers a CLO Virtual Fashion, a platform-agnostic virtual fashion tool, design course. Launched in 2009, CLO Virtual Fashion has gained increased attention as digital fashion grows in popularity. [Update 5/12] - a few days after I posted this, Epic Games and CLO Virtual Fashion announced that they have purchased shares in each other. I think points to Fortnite Creative enabling the sale of creator items within their experiences in the near future.
The influence and prestige of digital fashion is on the rise. Global digital fashion revenue grew from an estimated $119M in 2021 to $340m in 2022. This substantial growth underscores the increasing importance of virtual items, avatars, and digital fashion.
The Metaverse Is Dead, Long Live the Metaverse
As we transition away from the peak of the metaverse hype cycle that characterized 2022, companies are now wrestling with how they are going to capture a part of the $5 trillion in metaverse value that McKinsey predicted or the $8 to $13 trillion metaverse addressable market that Citi predicted. Meanwhile, generative AI is taking up a lot of the limited innovation bandwidth companies have.
In my opinion, companies still stand to reap tangible benefits from testing in the practical metaverse. These include engaging Gen Z and Gen Alpha audiences authentically, using virtual items as a platform for testing physical products, and for fashion brands, exploring how IRL trends influence metaverse fashion and vice versa.
Ultimately, it’s going to take a lot of boring but steady execution and product innovations in virtual worlds, virtual items, and avatars to help companies realize demonstrable impact and value through their practical metaverse efforts. I'm excited to see companies continue to innovate in this space.
For example, Amazon announced today the launch of Amazon Anywhere, an offering that enables discovery and purchase of physical products from Amazon stores in mobile games and apps. The word “metaverse” was not used in their press release but they are clearly testing the intersection between physical goods and digital experiences.
Roblox is the leading platform for companies to build virtual worlds and the virtual items used within them, including those for avatars. Companies can experiment with virtual items for as little as hundreds of dollars to building branded virtual worlds for hundreds of thousands of dollars.
The most popular virtual worlds on Roblox can attract up to 12 billion visits in a single year. This figure is comparable to the annual number of visits on Instagram.com or Walmart.com. Virtual items have one of the best business models: low fixed cost, zero marginal and zero distribution costs. Companies are using virtual items as testing grounds before commuting to expensive and long lead-time physical product development. Finally, Gen Z and Gen Alpha are self-expressing themselves through avatars and 3D social worlds are a top destination where they socialize with each other. The sci-fi metaverse may be dead (for now), but the practical metaverse is alive and thriving.
I focus on Roblox figures as they are public traded versus Fortnite, which is made by a private company (Epic Games). Meanwhile, Microsoft rarely publishes data on Minecraft.
Kudos to my colleague Steve Robert, formerly an Executive Producer at Spin Master, a toy company that acquired Toca Boca in 2016, for providing this context.
Virtual worlds are called Experiences in Roblox, Islands in Fortnite, Maps in Minecraft, Rooms in Rec Room, and so on.
Information from the Epic v. Apple lawsuit revealed that Fortnite generated $5.5B in 2018 and $3.7B in 2019. I'm assuming a natural decline in revenue from 2020 to 2023 due to the lawsuit and increased competition from other forever games.
I will use the word “phygital” although some people have already started to try to cancel that word, for good reasons, similar to what’s happening with “metaverse” and “NFTs.”
There is a tremendous amount of supporting data for each of these insights in the report.