Secret Stash ep 4: Matt Ball reveals the secret to the metaverse

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Secret Stash
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Jul 19, 2024

Matt Ball literally wrote the book on the metaverse - with a new update out July 23, 2024. So who better to chat all things metaverse and distribution with?  In the last several years, Matt has become known as one of the most astute writers and thinkers about the nature of business, innovation, IP, and the deep structural factors that shape the entertainment and gaming industry - and we couldn't be more excited to have him on our podcast.

In this episode of Secret Stash, co-hosts Justin Kan and Archie Stonehill sit down with Matt Ball and discuss:

  • streaming war winners and losers (sorry, Hulu)
  • why big tech companies never hugely invested in games
  • what the metaverse actually (hint: not VR and NFTs)
  • the impact Apple and Google had on mobile and gaming

Tune into our latest episode wherever you listen to your podcasts. Or, keep reading for the highlights. 

The streaming war: Why did Hulu lose?

Flash back to 2019 - the year the streaming war started. Apple TV+ went live November 2nd and Disney+ on November 12th. In April that year, Peacock and Quibi launched, in May HBO Max, and in fall Paramount Plus. 

But today, nearly five years later, Netflix is still the biggest of them all. 

According to Matt, if any of those streaming companies started just two years earlier, it would have probably succeeded more in toppling Netflix. But the fact that they all launched at the same time meant they all got fewer subscribers, had to spend more to get it, and had to work harder to keep them. 
Back then, many thought Hulu was primed to win the streaming war and beat out Netflix - “they had three, later four, of the major media companies behind it, a guaranteed pipeline to content”. 

But “no one came after Netflix except for Amazon, which had “one of the world's largest balance sheets”. The other companies who could have pursued that opportunity and did have the content or the balance sheet, didn't have the audacity to do it, were too worried about what that would do to their existing business, or didn't believe in the opportunity.” 

So why didn’t Hulu win the streaming war? At its start, Hulu’s board was made up of multiple different competitors - like NBCU, Disney, and Fox - and for each of those competitors, their conviction on streaming and Hulu differed. That led to:

  • complexities of its joint venture structure
  • principal agent problem
  • unequal conviction problem

On top of all that, Matt pointed to “fundamental undermining”. While Fox was building up its own app and Disney launched WatchABC, Netflix was knocking on these companies’ doors saying ‘why put money into that thing your competitors own? I’ll just give you $100M for those rights’. 

In comes Amazon

Amazon was one of the few companies that tried to take on Netflix. But at the time in the early 2010s, they were mostly a content delivery platform. So why streaming and why have they succeeded?

Matt talks about Amazon’s brilliant test culture - “they are probably the best company on earth at new business creation - so you're just constantly diversifying, or growing, or changing, or challenging. Amazon has this kind of perspective that is like, well, let's just ask the customer. Is there a low cost and fast way to ask the customer? Do they like this? And so Amazon just started a little bit more modestly with a slate of shows that were lower budget than House of Cards and a little bit slower to ramp up, but they're just like, let's ask customers.”

Beyond that, Amazon really saw the opportunity in video - with Matt noting that the industry “has a huge TAM in terms of time, people, engagement, and then money.”

In fact, according to Matt, 6B people watch video per day, with the average person watching 2.5 hours. “If you can believe it, 40% of all subscribers to HBO just watch their movies. 70% of viewing is just HBO. We think of HBO as being Game of Thrones and a remarkable television, but most people got HBO for the movies.  Then when you add in TV and ads, it’s a 700 billion industry … Then on top of that, you have extraordinary margins. In the United States, the EBITDA margin for a major cable network is about 40%, even in 2020.”

So why not games?

Matt pointed out that “it's remarkable to me how disinterested all of the major tech players were in video games over that time period, because … the gaming space was even more attractive …  If anything was a fit for your business, it should have been interactive content and gaming content. Whether you're pushing it in 4G or 5G, no one's buying a cell phone to watch Netflix. But they are doing it to play a video game.” 

“There's not a single acquisition of a gaming publisher you could have made a decade ago that wouldn't have several times over exceeded the returns of buying one of the major media companies for which extraordinary value has been produced.” 

“While Amazon has invested pretty heavily into video gaming assets beyond Twitch, the commitment to Prime Video far exceeds that. Apple has spent tens of billions of dollars on video, despite being the world's largest gaming platform. Google spent a little bit of time in Stadia. It is remarkable the extent to which, yes, video is a more popular and profitable market, but it's a lot less synergistic than gaming and had far fewer tailwinds and yet largely ignored.”

In fact, in 2019, Matt tweeted that “you can tell that Google isn't serious about gaming because they haven't bought a publisher yet”. 

What is the metaverse?

First, here’s what the metaverse isn’t: VR and NFTs. 

Matt explains that the internet is a collection of protocols and standards that are universally supported across a few thousand domain registrars, 200+ countries, several billion devices, and 100K+ autonomous networks. They’re not coordinated - it’s just data networks supported by millions of apps and billions of websites, all adhering to some standard baseline of exchanging information. 

So the metaverse, in his words, is a layer on top of what we know as the internet, which supports “synchronous and 3D real time experiences”. 

Like he mentions, the internet was not designed for shared, live, 3D experiences. It’s why we’re all familiar with 2D file formats like text and mp3 - but we don’t have that for 3D. “We're talking about building that for 3D - building representations, the location of information physically, assets and avatars.” 

A quick history of the metaverse

The metaverse’s first peak was in the early 1990s with the advent of 3D graphics. The second peak was around 2006, with Second Life making the cover of Time magazine. Then in 2018, with Fortnite, the metaverse really started to come together.

That year in 2018, Matt wrote an essay arguing that what most people considered unique about Fornite Battle Royale wasn’t actually. It was the highest revenue generating game of all time, and it was free to play, cross platform, IP mashing, had cross play, and pivoted from another game. “What was new was that they were all happening together … and it was new in that the combined effect was allowing them to draw an audience … So I named the article ‘Fortnite Is the Future, but Probably Not for the Reasons You Think’ explaining, ‘yeah, those five attributes are impressive and rare, unique in combination, but not unique individually.’” 

“But here's how you can see this long-considered opportunity, the 30-year old term metaverse century-old idea actually happening. In 2018, no one was talking about anything beyond this as a fun and cool game. Certainly no one was talking about the metaverse, and certainly no one was talking about this being Epic's bet.”

How do we get to the metaverse?

“The major achievement is not about the establishment of a standard. It's the establishment of the economic force that requires different parties to adopt them.” In other words, technology is the easy part, but getting everyone to adopt it and shift behaviors is the hard part. 

Why didn’t mobile ever open up?

It’s an economic question for Apple. Matt believes that the App Store is “the single most profitable product of all time, owned by the most profitable company of all time … and their desire to open it up versus close it is pretty profound. If Apple gets $6B a year in cash flow just from the App Store being closed, every month, the argument of ‘what would it be and when would it be’ is pretty hard.”

Another reason, according to Matt, is that “gaming is essentially the single biggest exception to all app store policies. They're not just punitive, they're targeted … The judge made this point of ‘you're charging gamers to subsidize Wells Fargo’. Because Wells Fargo gets access to all the APIs and all the economic opportunities on the iPhone but doesn't pay a dollar. Nor does Starbucks, nor does McDonald's.”

“When the App Store launched, mobile gaming was basically not a business … Every other category got exceptions because they basically adhere to that consulting rule of three or four big players. Can you really bully the big three retail banks? Could you bully Disney and Netflix and Hulu? You couldn't, right? You couldn't bully Amazon. You wanted McDonald's to have an application? You wanted that marketing scheme, if there's an app for that, to work?” 

Meanwhile …”mobile was 6% of revenue for Fortnite, so they could afford to lose the channel.” 

Apple “was a company in control of a single shareholder and that that shareholder had a lifelong mission to be successful. There were really three different parties that joined in the primary push against Apple. And that was Match Group behind Tinder, Spotify, and Epic. And let's talk about what happened. 

  • Spotify was the first to cut its own deal. Why? Because Spotify was an unprofitable company. Two, Spotify was a public company. Three, Spotify was not owned and controlled by the founder. And number four, is if Spotify ever left the App Store, 65% of its revenue would go away. Could not afford it. 
  • Then you have a company like Match. And Match is profitable. It was rapidly growing during the pandemic. And so while it didn't have a single shareholder in control, it could afford to fight a little bit harder. But eventually they cut their own bespoke deal too.

Without having a 30-40% player in the games market, you needed extraordinary circumstances to fight back against that. And so we'll see what happens.”

Archie chimes in that the tides might be turning - with mobile slowly opening up, namely Apple. 

  • “One, the industry is more consolidated. So you have more forceful and capable actors.
  • Two, the technology and the consumer behavior has changed to allow for end runs around the app store policies, notably with web shops.
  • Three, cross platform gaming, mobile to PC, has enabled a disintermediation of the app store fees
  • The stance of regulators has changed massively in the last 10 years on digital antitrust actions, both in terms of countries that don't have an economic incentive to tolerate the big techs, like the European Union, the UK now, South Korea, who has a lot to gain because of the OEMs, and then in America.”

Archie added that “the case for Apple is non obvious from an economic perspective” - using Steam as a comparison. Steam flourished because it was innovating due to competition in the space.

About the Author

Secret Stash

Secret Stash is the podcast spilling all of gaming's secrets, hosted by Archie Stonehill and Justin Kan.
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