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Why Meta’s Virtual Asset Cut Will Fail

Meta’s strategy to achieve a metaverse vision — including its steep creator fee — leaves a lot to be desired.

Chances are still that if you ask a family member, friend or contact what their thoughts are on the metaverse, Facebook’s name is likely to come up. Remarks on Zuckerberg’s viability as a digital leader might even follow. But whether we like it or not, social media’s biggest mogul is still regarded by many as an unofficial showrunner in the emerging space, using the company’s rebrand as a way to tightly covet the term “metaverse” and all it encompasses.

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Unsurprisingly, Meta’s recent announcement that digital creators on Horizon Worlds (the company’s dedicated metaverse application) will be subjected to a 47.5% cut has been met with public backlash. It’s easy to be angered by these figures if we compare them to significantly lower cuts and creator fees placed by other outlets (such as NFT marketplace OpenSea or decentralised metaverse platforms Decentraland and The Sandbox). After all, many of the favoured tenets of a more decentralised internet include fairer compensation and a more enticing economy for creators — features that Zuckerberg himself has even promised.

This precarious announcement seems to have come straight after a rough first quarter of the year, where we’ve seen Meta lose upwards of $2.9 billion USD and experience significant blowback in the wake of its many controversies. As we dive into a greater breakdown of Meta’s new fee structure for creators, reflect on the social media giant’s most recent quarter and take a deeper glimpse into its penchant for capitalistic gain, we’ll explain why we think Meta’s sizeable virtual asset cut is destined to fail.

How will Meta’s fee structure work?

With Horizon Worlds, Meta is aiming to build an economy and open up metaverse commerce — creating something that can be compared to the systems currently available in platforms such as Rec Room and Roblox

According to Meta’s official statement: “The metaverse — by nature of its not being limited by physical space — will bring a new level of creativity and open up new opportunities for the next generation of creators and businesses to pursue their passions and create livelihoods.” Moreover, the company insists that: “Creators and entrepreneurs will have more freedom to find a business model that works for them… For example, someone could make and sell attachable accessories for a fashion world or offer paid access to a new part of a world.”

Interoperability and cross-app capability are still a far cry away, however. So far, it seems like items will only be compatible with the worlds in which they’ve originated, all while still being positioned to help creators monetise their items on the platform. “What the creators can do as part of building their world [is to] attach behaviours that trigger monetisation, which means that we actually don’t know all the things they can do to monetise,” Vivek Sharma, Meta’s VP of Horizon, recently told CNET.

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While creators will be offered the opportunity to make and sell assets in Meta’s Horizon Worlds platform, their earnings will be cut short significantly — as the company plans to take an overall cut of up to 47.5% on each transaction. Included in this cut is a 30% “hardware platform fee” for any sales made through the Meta Quest Store, coupled with a 17.5% fee charged by Horizon Worlds. To also incentivise engagement with VR, Meta claims that it will be adding a monthly performance bonus for creators. Similar to Instagram’s current monetisation strategy, this approach will follow a unique set of metrics.

While Meta cites these new rules as simply “tests”, they’ve also suggested that these approaches could continue to change and evolve. While there is a promise that assets will eventually be made more interoperable and capable of being carried across apps (Sharma alleges that Meta “wants to do this in a way that will scale eventually to cross worlds, into shared spaces and beyond”), it’s still quite unclear how the marketplace will be managed or what this roadmap might look like — particularly when it comes to figuring out whether items can one day live beyond Meta’s parameters.

In all, this news has both angered and excited those in the Web3 community. One Twitter user wrote: “If Meta wants 47.5% of NFT sales, they’ve gotta talk to the IRS — because I don’t even have that after taxes.” 

Sharma has since responded to the friction, defending the sizeable cut as a “pretty competitive rate in the market.” He also added: “We believe in the other platforms being able to have their share.”

A look back at a difficult first quarter

Earlier this year, Meta experienced a historic plunge in its stock price — with over $230 billion USD in its market value erased (the largest-ever one-day loss for any US-based company in history). Due to privacy changes made by Apple, the company also readied itself for another continued loss in the billions. The slump in stock price also caused Mark Zuckerberg to lose a whopping $30 billion in personal wealth.

In contrast with other Web3 platforms, Meta also failed to launch its own cryptocurrency and achieve a “deep compatibility” with blockchain. With a goal of empowering “billions of people” and hoping that 1.7 billion users would be able to create digital wallets, too much resistance from regulators led to the project ultimately failing and being shelved. Since then, however, reports have revealed that Meta hasn’t given up on entering the crypto space — having filed 8 trademark applications earlier this year (including applications for crypto tokens, crypto trading, blockchain software, wallets and crypto exchanges).

In 2022, Meta isn’t the only Big Tech company to come under pressure. As policies have tightened at the US Federal Reserve to decrease the industry’s rich valuations following years of ultra-low interest rates, the NASDAQ — which is primarily made up of tech and other growth stocks — fell by more than 9% in January. This was the biggest monthly drop since COVID-19 first struck the market in March 2020.

And while Big Tech companies were credited with driving gains for the wider market throughout the course of the pandemic, analysts believe that the market has now shifted. According to Brad McMillan, chief investment officer for Commonwealth Financial Network: “There’s a general sense that what’s been moving the market higher is not going to take us to the next level. The question is where is the next growth engine coming from.”

How does this stack up against Web3 traders?

As more metaverse worlds continue to rise in popularity, this raises an important question: should these worlds be open or closed? To clarify, a closed metaverse can be defined as one governed by a central authority (like Meta) that takes ownership of lands and items sold within its platform. On the other hand, an open (or decentralised) metaverse is one that allows users to buy and own metaverse land and items as NFTs, in addition to an ability to exchange them for cryptocurrency.

Comparatively, decentralised platforms and marketplaces appear to take much smaller cuts from creators. OpenSea, the leading NFT marketplace in Web3, currently only takes a 2.5% cut from each transaction — whereby creators usually take anywhere between 2.5% and 7.5%. LooksRare, another popular NFT marketplace, only takes a meagre 2% — while BinanceNFT charges only 1%.

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While critical of Meta’s large virtual asset cut, many Web3 community members have also seen this move as an unintended push towards decentralisation. “Facebook charging 47.5% for every NFT sale is the best thing to ever happen to us,” one person tweeted after the news was released, implying that Meta’s massive fee would ironically help steer more users towards open, decentralised platforms like Decentraland and The Sandbox

Other users, however, have expressed clear anger at the social media giant’s announcement, calling it “the enemy of decentralisation and freedom in Web3.” Following Big Tech’s reign of increased profit during the course of the pandemic (Facebook reported an increase of 10% from targeted advertising during COVID-19 lockdowns), it’s hard not to see this move as doubly harmful to online creators and small businesses who may seek out opportunities in Web3.

Prioritising growth over other concerns

If we take a long, hard look back at Facebook’s history and online trajectory (including its encounters throughout its pre-Meta days), it isn’t out of left-field to suggest that the social media giant has been primarily fuelled by greed and profit. 

At the time of writing, Zuckerberg owns the four most downloaded mobile apps in the last decade: Facebook, Facebook Messenger, Instagram and WhatsApp. Sources have long since accused Zuckerberg of seeing company acquisition as a means of neutralising potential competition and preventing users from ditching Facebook for alternative platforms. For instance, the social media tycoon’s initial acquisition of Instagram followed a general likening to Facebook’s features and revocation of other leaders’ rights (including those of company founders Kevin Systrom and Mike Krieger, who eventually left the platform after Zuckerberg took control).

In late 2021, internal documents known as “The Facebook Papers” were published by an international consortium of news outlets, following their access to the materials once they were made available by U.S. Congress (and now-revered whistleblower Frances Haugen). This assemblage of documents, according to the Financial Times, included “thousands of pages of leaked documents [painting] a damaging picture of a company that has prioritised growth” over other concerns.

The Associated Press, another news outlet reporting on the matter, summarised the documents as such: “These complaints cover a range of topics, from its efforts to continue growing its audience, to how its platforms might harm children, to its alleged role in inciting political violence.”

Following Haugen’s release of the documents, Jessica J. Gonzalez, co-CEO of advocacy group Free Press Action, remarked that the whistleblower revelations “confirm what many of us have been sounding the alarm about for years” — that the real problem behind Zuckerberg’s empire is actually the business model in which he’s used as a means of governing his platform all along. One that subsists almost entirely on greed and capitalistic gain.

Even as far back as 2010, Zuckerberg began touting his belief that “privacy was no longer a social norm”. And in the following years, Facebook users have been unwittingly trading their privacy for a seemingly more enhanced online experience. Studies have suggested that an estimated 4 in 10 users use social media accounts to follow their favourite products or brands, while 28% of online users claim that targeted ads on social media have effectively brought new services or products to their attention.

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On the other side of the curtain, our online data has been regularly harvested and fed to algorithms — serving as raw material for advertisers to make better predictions about what will generate the highest levels of profit. It’s a process called surveillance capitalism — and it’s allowed Big Tech companies to claim our online activity and turn it into their own proprietary knowledge for capitalist gain. In other words, our online personas have, in essence, become products themselves.

Author and tech analyst Shoshanna Zuboff refers to surveillance capitalism as “the dominant economic institution of our time”. Furthermore, “this system successfully mediates nearly every aspect of human engagement with digital information” and “today all apps and software, no matter how benign they appear, are designed to maximise data collection.”

This brings us to another important question: if a company should have no shame in monetising the very marrow it can milk from its users, then what’s stopping it from doing the same thing with any assets it hosts?

Why is Meta’s approach the wrong one?

Let’s circle back to the main subject — which is Meta’s proposed virtual asset cut for creators in Horizon Worlds. How might this approach be setting the company up for failure?

For one, many will know that Meta’s big cut isn’t the first instance of Big Tech greedily clawing funds away from small creators. For years now, Apple has come under fire (even from Mark Zuckerberg himself) for charging developers a 30% fee for in-app purchases made through its dedicated App Store. 

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Funnily enough, Zuckerberg has even raised Apple’s App Store fee as an example of what he claims he doesn’t want to repeat with metaverse creators. “As we build for the metaverse, we’re focused on unlocking opportunities for creators to make money from their work,” he said back in November 2021. “The 30% fees that Apple takes on transactions make it harder to do that, so we’re updating our subscriptions product so now creators can earn more.” In typical fashion, however, Zuckerberg has done just about anything but place the best interests of creators at the forefront of his roadmap. 

Like many of its other visions, Meta’s promise to build the metaverse has also been largely rhetorical and not fully clear. The company’s rebranding, name change and acquisition of Oculus have proven Zuckerberg’s seriousness about growing the VR ecosystem and developing a metaverse-building strategy. However, massive losses to the company’s Reality Labs Division and relatively low adoption rates of VR still indicate that the company isn’t quite dominating the space. 

A steep decline in Facebook use has also been a recent concern, with a reported 45% of users allegedly dropping from the platform. With competitor apps (not yet acquired) such as TikTok dominating the market — particularly with Gen Z users — Meta appears to be losing any hope of having a dedicated user base that will seamlessly migrate into the metaverse.

Other moves have also indicated Meta’s lack of clarity in winning the metaverse category. It recently shut down a project to build its own VR/AR operating system, instead choosing to build on the Android platform. The company is also opting to use Qualcomm chips in its upcoming augmented reality glasses, as opposed to utilising its own internal design. Unlike Apple, the company hasn’t embraced vertical integration and carved out its own adoption of particular hardware and chips that will ensure maximum performance. And so far, Meta has been unwilling to open its operating system to other manufacturers — an advantage that has historically allowed Microsoft to dominate the PC market over the last few decades.

While the Meta Quest 2 is currently the best-selling VR headset, this success is forecasted to change once other companies start releasing their own dedicated devices. Apple is likely to produce a high-performance headset that will be equipped with LiDAR technology — a feature that may allow it to one day dominate the headset market.

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So, is Meta a premium supplier of technology? Or will it serve as a trailblazing metaverse platform? The problem is that we still don’t know. Combine all of these shortcomings with a very steep fee and you have a particularly muddy strategy that’s likely to fail.

Other major tech leaders have also voiced their lack of belief in Meta as a leader in the emerging metaverse space. Reggie Fils-Aime, former president of Nintendo of America Inc., recently spoke about his stance on Meta in an interview with Bloomberg: “Facebook itself is not an innovative company,” he’s bluntly stated. “They have either acquired interesting things like Oculus and Instagram, or they’ve been a fast follower of people’s ideas. I don’t think their current definition will be successful.” Conversely, Fils-Aime has also expressed his belief that smaller companies will play a much larger role in creating successful metaverse worlds.

Keeping in line with Fils-Aime’s projection, Web3 presents a more creator-focused and community-driven approach to online content creation. Allowing creators to have greater ownership over their digital goods will let them move away from expensive, centralised platforms that are no longer serving them.

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