Metaverse series #8: Metaverse, beware: Competition law is versatile, and the EU's DMA is ‘future proof’

We looked at the metaverse through an antitrust lens in our previous post earlier this year (spoiler alert: the metaverse is not immune from competition law, and in fact we would expect competition rules to play a significant role in shaping the metaverse). Now the European Commission has entered the debate - with a recent paper offering an antitrust regulator’s perspective on the metaverse and what it could mean for EU competition law enforcement.

As we pointed out, the European regulators already possess well-tested tools and powers that will apply equally to the metaverse – and the paper agrees. The recently introduced Digital Markets Act (DMA) also provides tools to foster contestability in the metaverse and merits some presentation of who are the likely ‘gatekeepers’ in this area and how the DMA could apply to them.

Meta-competitors?

First things first, the metaverse is a largely unexplored area, and various companies active in the tech sector are already taking swift steps to secure their presence in this new universe, including through strategic mergers and acquisitions (e.g., Nike’s acquisition of RTFKT, or eBay’s acquisition of the KnownOrigin NFT marketplace) and significant investments in intellectual property or to attract talent.

The first movers into the metaverse terrain are expected to be traditional media conglomerates, and of course the main digital players, many of whom have made massive investments in metaverse-related intellectual property. 

Specialised games companies are also shaping the metaverse - games such as The Sandbox or Highstreet seek to create a metaverse project, which blends games and crypto-based digital commerce in a variety of virtual assets, ranging from real estate to NFTs. As the metaverse develops, companies from diverse parts of the economy are expected to enter the space.

What about competition in the metaverse?

The metaverse is largely uncharted territory, and opportunities for revenue generation seem endless at this stage. From the basic equipment that is (at this stage still) required to join a metaverse platform, such as hardware and headsets, to e-commerce, advertising (e.g. sponsoring virtual concerts) and the provision of digital services, companies are free to come up with creative ideas that will allow them to monetise their presence in a metaverse “corner”. 

But as we’ve seen with Web2 (the current internet characterised by the rise of social media), big tech platforms are able to collect huge amounts of personal data – and, no surprise, this is only likely to increase in the metaverse (see our previous post on data in the metaverse).

Understanding the metaverse – a competition perspective

In its paper published in October 2022, Friedrich Wenzel Bulst, head of antitrust in the unit responsible for the media sector at the European Commission’s Directorate-General for Competition, and case handler Sophie De Vinck offer a competititon perspective on the metaverse. They note that the metaverse vision could promise more openness, mobility and connectivity, allowing users to seamlessly move their avatars or virtual goods and services across different metaverse “worlds”. 

The paper goes on to consider the threats to his promise. It draws a direct comparison between the current state of competition in Web2 and the risks that could arise and be amplified, as the ecommerce of Web2 moves towards the virtual reality and blockchain-enabled commerce promised by the metaverse and Web3.

• Gatekeepers: There is a risk of large metaverse platforms operating as closed ecosystems. Instead of there being more openness, consumers could end up being ‘locked in’ a closed system, that will essentially be the future ‘gatekeepers’ – the platform service operators offering a key gateway for businesses to reach consumers in Web3.
  
   
• Market tipping: In addition, metaverse markets may be characterised by strong network effects and prone to ‘tipping’, which could make entry of new businesses into the market more difficult.
  
   
• Abuse of dominance:  From a competition law perspective, the paper considers a number of abuse of dominance scenarios, ranging from bundling different types of products to charging excessive prices or “tying” third-party providers of metaverse services in exclusive deals. 

However the paper argues that  antitrust enforcement and merger control rules are “technology-neutral” and “versatile”. As a result it considers that the European Commission and national authorities already have a regulatory toolbox they can use to tackle the above challenges.

What about the DMA? 

The recently introduced DMA is also, is also considered to be one of the critical enforcement pillars that will foster open, interoperable metaverse ecosystems. The DMA may be relevant either because relevant services are within its scope or through the provisions on futureproofing.

While the scope of application of the DMA to the likes of Google and Amazon is currently being determined, the paper argues that the DMA is already one step ahead: it makes it clear that the ‘gatekeepers’ of Web3 will not escape scrutiny. 

In practice, there are a number of interesting questions as to how the DMA could apply to the metaverse:

• The DMA applies to designated “core platform services” offered by “gatekeepers”, including online search engines, social networking services, app stores, certain messaging services, virtual assistants, web browsers, operating systems and online intermediation services. As the metaverse is still in its infancy, it is yet to be seen whether a metaverse platform would fall within one of these categories or in fact escape that classification, in which case a review of the DMA may be required (based on its future proofing provisions).
  
   
• Equally, it will be interesting to see if and how the prohibition on, for instance, self-preferencing or leveraging will apply in a metaverse context. The early examples of enforcement of the DMA by the European Commission may provide some useful indications in this respect.

Regulatory interplay

It will also be interesting to see how the interplay between the different teams enforcing competition rules and the DMA will unfold. In theory, at least, the application of the DMA by a different team within the European Commission could free up resources for DG Comp to do some additional thinking around themes such as AI, algorithms or the metaverse. Equally, the practical lessons from the application of the DMA may also inform competition law policy.

Shared challenges

Finally, the paper makes clear that the challenges for competition law enforcement are shared challenges and discussion in fora such as the OECD and International Competition Network, in addition to bilateral structures like the EU-US Joint Technology Competition Policy Dialogue, will play a key role. After all, the metaverse knows no borders – or does it?

Read the full Metaverse blog series here Contemplating the metaverse: Opportunities and risks (linklaters.com)