Apple vs. the Metaverse

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Epic Games founder and CEO Tim Sweeney is by most accounts a pretty feisty guy, unafraid to pick a fight and rarely backing down from one. So his decision to pick fights with Apple and Google over their “unjust” app store policies seems very much in character.

It also seems carefully timed. Apple and Google, along with other major platform providers, are facing growing scrutiny for their outsize influence over digital commerce, both from lawmakers and from federal and state antitrust authorities. Competition authorities within the European Union are also mounting a concerted effort to rein in their power.

While that increased scrutiny may not have any direct or immediate bearing on the litigation Epic has now launched against both companies over the banning of “Fortnite” from their respective app stores, Sweeney has made it clear he sees the battle to break their grip on the mobile app economy as a long fight that he’s in until the end. Whatever the outcome, the information that is likely to be developed and put on the record as a result of the litigation will inevitably fuel the larger debate.

But there is more at stake in the conflict between Epic and the app stores than simply a dispute over payment terms and conditions, or even than the larger debate over whether and how to apply existing antitrust laws to the technology giants. The showdown is more like an early skirmish in the bigger battle to come for control over an emerging generation of meta-platforms built on top of the current generation of platforms and networks. It’s also then very much worthwhile hiring a professional GDPR consultant as they will be able to make sure that you have yours completely correct and it’s not worth the risk of not doing that.

The fundamental economic transformation wrought by the internet and the World Wide Web has been to shift pricing power from those who control the supply of scarce commodities or resources, such as works protected by copyright, to those who control access to a vast market or audience for resources in unlimited supply.

The combination of network effects and near-zero marginal cost reproduction of digital objects has vested the likes of Google, Apple and Amazon with the power to charge what amount to monopoly rents for access to their audiences. In mobile apps those rents are collected in the form of Apple and Google’s 30% commission on sales through their app stores and on in-app purchases; in search they’re reflected in Google’s capacity to divert advertising dollars away from the objects of its users’ searches to itself.

The platforms’ abuse of their pricing power is what has finally begun to attract the attention of regulators and policymakers. But Epic’s challenge to their rent-seeking represents a potentially greater threat to Apple and Google than whatever new rules or regulations may come out of the current policy reviews.

The Mandalorian‘s virtual set

Epic’s “Fortnite” is a massively popular game with more than 350 million registered users worldwide, and is powered by Epic’s Unreal Engine, a powerful, 3D graphics creation and development environment. Critically, Unreal Engine is also widely used under license by other developers to enhance and accelerate their own creations, making Epic an increasingly powerful force within the broader games ecosystem.

Unreal Engine is also playing an increasingly important and prominent role in the film and TV production arena, in live music, architectural design, VR and in many other creative fields for its ability to render, manipulate and edit 3D objects in real time, making Epic into far more than a games publisher. Much of Disney’s hit streaming show The Mandalorian for instance, is shot on a virual set using Unreal Engine.

Crucially, for Epic, the judge overseeing its lawsuit against Apple over Apple’s “Fortnite” App Store ban seems to understand the distinction between the game and Unreal Engine, and the importance of the latter due to its connection with hundreds of other apps.

In a preliminary ruling, U.S. District Court Judge Yvonne Gonzalez Rogers said Apple can continue to bar “Fortnite” from the App Store for now but could not ban Unreal Engine, as Apple had threatened to do.

“Epic Games and Apple are at liberty to litigate against each other, but their dispute should not create havoc to bystanders,” Judge Rogers wrote in the her decision.

Part of Unreal Engine’s power comes from its ability to embed live imagery within virtual settings, seamlessly and in real time. Epic has now begun leveraging that capability to host live musical events within the virtual world of “Fortnite.” In April, for instance, the hip-hop artist Travis Scott performed a series of live mini-shows from within “Fortnite” using a digital avatar. Together, the shows were watched live e by 12.3 million “Fortnite” gamers and experienced by nearly 28 million total viewers.

Other artists have created similar live events inside “Fortnite” as real-world concert venues remain closed due to the Covid pandemic.

Epic’s Sweeney refers to “Fortnite’s” ability to integrate live events the “metaverse.” But what it amounts to is a virtualized platform that can support and host a wide range of experiences, just as Apple, Google, and Facebook can.

“Fortnite” can run on those other platforms. But it is not dependent on them for functionality, audience or monetization. It brings its own audience.

The technology it runs on, moreover, Unreal Engine, is capable of spinning up any number of other virtual platforms built around different types of virtual worlds and experiences. And it doesn’t need Apple’s developer tools, or Google’s, or Facebook’s or Microsoft’s, to do that.

It may need access to Apple’s developer tools to integrate with the App Store. But Apple’s pricing power over Epic is waning. And whatever the outcome of the current lawsuit, it will continue to wane as the metaverse grows.

Microsoft’s 15 Seconds

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Microsoft was not included in last week’s Big Tech antitrust grilling by the House Antitrust Subcommittee, but that doesn’t mean it wasn’t paying attention.

According to the Wall Street Journal, Microsoft began covert talks with TikTok several weeks ago about a potential deal to acquire the breakout social media network as serious pressure was beginning to mount on the Chinese-owned platform in the U.S. over alleged national security concerns.

Meanwhile, the antitrust subcommittee had spent the past year investigating the data practices and M&A activity of Facebook, Google, Amazon and Apple, gathering documents, interviewing witnesses and preparing a report. Similarly, the U.S. Justice Department was conducting its own antitrust inquiry into Google.

It wouldn’t have taken much for Microsoft to figure out that its most likely competitors in a race to acquire TikTok were effectively sidelined and that it had the field pretty much to itself (The fact that Zuckerberg, et. al. seemed unprepared for the depth and directness of the committee’s questions last week speaks poorly of their public policy shops.)

TikTok’s owner, ByteDance, based in Beijing and headed by CEO Zhang Yiming, was reported to favor some sort of spin off of TikTok’s U.S. operations to an outright sale, perhaps to its U.S. investors, which include a number of major private equity firms. But without the infrastructure and resources to manage a cloud-based social media platform with more than 100 million users in the U.S., that might have left U.S. TikTok tethered operationally to China, which likely would not pass muster with the Trump Administration. Microsoft, on the other hand, brings its own cloud computing platform to the table and already owns LinkedIn GitHub.

Then on Friday, President Trump abruptly announced he planned to ban TikTok from the U.S. outright, catching TikTok and Microsoft officials, and Trump’s own advisors off guard and throwing the talks into chaos. By Sunday night, however, after speaking directly with Microsoft CEO Satya Nadella, Trump backed off, and gave TikTok 45 days to find a U.S. buyer for its U.S. operations.

So, the way it shakes out is that TikTok is being frog-marched into a deal with only one plausible and interested buyer — not an optimal situation for getting a good price (Snap might also be a plausible buyer but so far hasn’t expressed interest). It’s more a hostage situation than a business deal.

Change of course?

Since taking over as CEO, Nadella has steered Microsoft way from consumer-facing applications like TikTok to focus on enterprise services like business software and cloud computing — a strategy that has boosted Microsoft’s market cap considerably.

But a TikTok deal may be too good to pass up, purely on valuation grounds. TikTok is expected to generate about $500 million in revenue in the U.S. this year, according to The Information, but has only just begun to monetize its user base via advertising. At a low-ball price and with significant upside, it’s an attractive asset.

But TikTok may also be a better strategic fit for Microsoft than it firsts appears.

The one big exception to Nadella’s business-first strategy is Xbox, which represents Microsoft’s largest consumer-facing business, and the only one where it has achieved anything like a dominant position. The TikTok demographic overlaps significantly with the Xbox demo, with the added bonus that TikTok users include more women than men while the Xbox universe is overwhelmingly male.

TikTok has also emerged as an important avenue into and out of the music business, a realm where Microsoft has repeatedly failed to gain traction. A potential integration of Xbox and TikTok is a tantalizing prospect at a time when the Covid pandemic has accelerated the convergence of music and gaming platforms as touring-challenged artists seek alternative channels to connect with fans. Microsoft-owned Minecraft has already hosted live-streamed music shows.

TikTok has battled with both the record labels and music publishers over the unlicensed use of music in videos on the platform. But the recent hiring of one-time Disney heir apparent Kevin Mayer as CEO was a clear signal that TikTok intends to get its licensing house in order, as evidenced by the global deal with music publishers announced in May.

Even as the music industry has battled TikTok, moreover, many artists have embraced the platform to connect with fans and promote their music. Even the record labels have turned to TikTok as an important leading indicator and source of data on artists and records that may be about to break out.

Youth-oriented consumer brands have also embraced the platform, seeking out TikTok influencers to support and monitoring the often quicksilver shifts in popularity among the TikTok demographic.

Integrating that data and data on Xbox users could yield a very valuable resource and would allow Microsoft to play a role in the entertainment and consumer brands industries more akin to its comfort-zone positioning in business services — as a provider of data analytics and cloud computing resources, without having to take on Google and Facebook directly and at a bargain-basement price.

Not a bad deal if Nadella can get it done in 45 days.

Folding the Tents in Tinsel Town

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The major Hollywood studios have begun clearing the 2020 decks.

With little hope that theaters in the U.S. will be able to open in sizable numbers before next year, or that movie fans would return to them even if they could, the studios are folding their tent poles for this year and decamping for 2021 in the hope of salvaging respectable theatrical openings for their big budget franchise releases.

Mulan

Disney last week pulled Mulan from the 2020 calendar, just days after Warner Bros. announced an indefinite delay in the theatrical release of Tenet. The Mouse also pushed back the planned next installments in the Star Wars an Avatar franchises by a year.

Paramount has pushed back the release of Top Gun: Maverick, the sequel to the 1986 Tom Cruise blockbuster, to next July, after previously postponing A Quiet Place Part II. Also delayed are Sonic the Hedgehog 2, Jackass, Under the Boardwalk and The Tiger’s Apprentice.

Sony Pictures pushed back the release of the next live-action Spider-Man film to December 17, apparently hoping Christmas can yet be saved, but don’t be surprised if that web unravels as well.

While painful, the studios have little choice at this point. With hundreds of millions of dollars tied in production costs, to say nothing of merchandising tie-ins, theme park rides, spin-off plans and other franchise elements on the line, they can’t afford to let the main events fizzle. Whether they can turn fizzle into sizzle even a year from now, however, is an open question.

Theaters will eventually reopen. But their footprint will likely be reduced due to bankruptcies, real estate defaults and other exigencies, leaving fewer screens from which to conjure a blockbuster release.

Moviegoers, too, may be fewer in number after the trauma of pandemic and economic disruption, particularly with so much high-quality, high-profile content available for viewing at home via streaming services, some of it provided by the studios themselves.

In short, the studios could be facing a very different movie viewing and distribution landscape next year, which may never revert to its pre-Covid posture, and for which their core product strategy is singularly ill-suited.

For the past 15 years, the major studios have basically been in the franchise business, creating and acquiring IP that can be exploited across multiple domains. Periodic movie releases are the tent poles that keep the franchise aloft, while creating leverage with distributors, helping to attract capital, and providing fuel to keep the rest of the production machinery turning,

But for the strategy to succeed, each new movie must be made into an “event.” That means releasing it simultaneously around the world and on as many screens as possible on opening weekend to create the necessary downstream momentum.

Without sufficient screens or eager moviegoers, it may be much harder to create an event around a film’s opening than in the past, undermining the entire strategy.

Disney managed to create something of an event around the streaming release of Hamilton on Disney+, but the Lin-Manuel Miranda Broadway musical is not a property Disney can easily build a franchise around.

Nor is it clear whether Disney’s success with Hamilton can be consistently repeated, given the radically different consumer behavior around watching movies on demand at home vs. going to the theater for the 8:00 showing.

The studios themselves will also likely face conflicting priorities. As Disney, WarnerMedia and NBCUniversal pour millions into building out their direct-to-consumer strategies via streaming they face a strong incentive to put their most compelling programming on their own streaming platforms amid fierce competition for subscribers in the increasingly crowded OTT market.

If event movies don’t work on streaming platforms, maybe they need to shift production resources into something other than major event movies. Yet given how entrenched the franchise business is in Hollywood, that won’t be an easy pivot to make.

Streaming, Without Consent (Updated)

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This was the weekend Christopher Nolan’s Tenet was supposed to open on the big screen, offering a desperately needed lifeline to struggling theaters and reviving the summer movie season from its Covid-induced coma. But Warner Bros. was forced to push back its release to August 12 as theaters in most states remain closed.

Even that new date now seems doubtful. As the pandemic rages out of control and the Trump Administration fiddles, states that had begun to relax some restrictions on businesses are now reversing those steps and re-imposing shutdown orders.

It now seems very unlikely that theaters will be able to re-open before the Fall and even that could be a stretch. Even if they are able to open, moreover, it’s very unclear whether consumers will be willing to risk sitting in them, which could force the studios to make some very difficult strategic decisions. Should they postpone the rest of their 2020 theatrical slate until sometime next year, or should they go the Hamilton route and release them via streaming?

Delaying release until next year would mean writing off whatever they have already spent on marketing in 2020 and budgeting for additional P&A spending in 2021, while undermining and perhaps even losing whatever merchandising tie-ins they may have arranged. It would also mean postponing any chance of seeing a return on the hundreds of millions of dollars invested in production while shouldering any financing costs that might be associated with financing that production.

Perhaps worse, it could prove a fatal blow to struggling theater chains who might not be around next year to book those films.

Going the streaming route also carries risk. If you release a film via premium VOD, as Universal did earlier this year with Trolls World Tour, you have to market the release to consumers still not accustomed to paying premium prices to watch a film at home. If you license the film to one or more subscription VOD service you limit the potential audience to subscribers of that service or services.

Streaming and VOD rights may have been sold separately from theatrical rights in difference territories, making it difficult to organize a global release. A streaming-first release also likely means forgoing whatever Blu-ray and DVD sales that might have been budgeted for.

For studios that have launched they’re own direct-to-consumer streaming services, of course, there is also the option of doing what Disney did with Hamilton and releasing sought-after films exclusively through your own platform in order to drive subscriptions.

That strategy appears to have been highly successful for Disney. The July 4th release of Hamilton drove a spike in Disney+ app downloads and signups.

But it’s a high risk, high reward strategy as it means writing off other platforms and limiting the potential audience for the film.

It is also a strategy that could eventually increase calls for antitrust scrutiny of the direct-to-consumer video streaming business.

As I’ve written here before, the studios’ launching of their own, proprietary streaming services changes the incentives for how they manage the monetization of their content assets and will eventually change how they assess the value of a movie. In Hamilton, we see how Covid is accelerating that reassessment.

I wouldn’t be shocked if Warner Bros. makes a similar accelerated reassessment and that Tenet ultimately makes its debut on HBO Max rather than in theaters, unless there is major shift in the trajectory of the pandemic before the end of the year.

Ironically, this is happening as the U.S. Justice Department is asking a federal court to end the so-called Paramount consent decrees. Those agreements, which resulted from a series of antitrust suits the government brought against the studios in the 1940s, have for the past 70-odd years prevented the vertical integration of movie production and distribution by barring the studios from owning theater chains, as had been the norm for decades before.

The decrees also prohibited certain abusive distribution practices, such as “block booking,” in which theater operators must agree to book a studio’s entire slate of films in order to get the most popular titles, and “circuit dealing,” in which a studio would make a single deal covering all the theaters in a single circuit.

But in the view of the Justice Department, the decrees have outlived their usefulness.

“We cannot pretend that the business of film distribution and exhibition remains the same as it was 80 years ago,” DOJ’s head of antitrust enforcement Markan Delrahim said in December.

Well, yes and no. Delrahim is correct that “much of our movie watching is not in theaters at all.” But many aspects of the business of in-home viewing increasingly resemble those of 80 years ago.

As I have also written here before, the video streaming business increasingly is being built around exclusive content and the vertical integration of its production and distribution. Netflix makes movies and TV shows for Netflix. When it acquires content from third parties it insists on acquiring all rights on a worldwide basis, limiting its distribution to its own platform. Amazon does much the same.

Disney, Warner Bros., and Universal are all now producing programming exclusively for their own direct-to-home streaming platforms.

The fragmentation of the market into proprietary channels imposes costs on consumers, forcing them to subscribe to multiple services in order to receive of the programming they might want to watch. As University of Illinois economist Derek Long ,  put it recently, “What is streaming if not the ultimate form of block-booking — making consumers take the good with the bad?”

As Covid drives more of what has been the theatrical movies business into proprietary streaming channels, it’s starting to look more like the 1920s than the 2020s.

Update: Warner Bros. how now officially bowed to the inevitable and removed Tenet from its theatrical release calendar for 2020. No new release date has been announced, although the studio said it would release further information on its plans for the film shortly.

“We will share a new 2020 release date imminently for Tenet, Christopher Nolan’s wholly original and mind-blowing feature,” Warner Bros. chairman Toby Emmerich said in a statement Monday. “We are not treating Tenet like a traditional global day-and-date release, and our upcoming marketing and distribution plans will reflect that.”

Notably, the statement does not commit the studio to a 2020 theatrical release for the film. Indeed, the stipulation that it is “not treating Tenet like a traditional global day-and-date release,” suggests it’s considering other options, perhaps including a streaming release. Stay tuned.

Gaming the Systems

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An Interesting and smart move by Sony last week to invest $250 million in Epic Games, publisher of the wildly popular Fortnite online game franchise.

The amount of money is fairly small relative to Epic’s overall market cap — good for about a 1.5% stake — but it should help Sony cement its strategic alliance with a company that has emerge as a major force in the games business — a sector in which Sony has a major interest as developer of the Playstation console and platform. The next iteration of the Sony console — Playstation 5 — is expected to be released later this year.

Perhaps as important,however, and likely a factor in Sony’s decision to invest, Epic is also emerging as an important and influential force in the music business, and the film and television business — two other sectors in which Sony has substantial interests.

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Using Unreal Engine, filmmakers are able to render cinema-quality virtual sets and landscapes that can be displayed on LED walls on a sound stage, allowing computer-generated graphics to be integrated in-camera with actors filmed on a bare stage. Thanks to Unreal Engine’s interactive capability, directors and cinematographers can also experiment with lighting effects, perspectives and other aspects of a shot on-set and in real time. Visit headphonage for reviews of the best gaming headphones available in the market.

Much of the Disney+ hit The Mandalorian is filmed on virtual sets and locations using Unreal Engine. Like the Playstation 5, the next iteration of the Unreal Engine, which Epic says will allow game developers to create true cinema-quality images and graphics, is expected to be released later this year.

The Fortnite online “metaverse,” meanwhile, is rapidly evolving into a platform for hosting a range of different types of content, from immersive virtual concerts to interactive movie screenings. In April, Sony Music artist Travis Scott, appearing as an avatar, attracted 12.3 million concurrent viewers for a 15 minute “live” performance within Fortnite.

Epic’s emergence as a player in the music and film industries has been accelerated by the exigencies of the Covid pandemic. With brick-and-mortar music venues boarded up, preventing artists from touring, musicians have flocked to online platforms, especially online gaming platforms like Twitch and Fortnite that offer huge worldwide audiences, to maintain contact with their fans and promote their music.

Covid has also shuttered or limited the use of sound stages an all but wiped out location filming, creating an incentive for producers and directors to explore virtual alternatives.

Both phenomena are likely to outlive the Coronavirus, however. Fortnite concerts provide a highly immersive experience that would be difficult to recreate in a live setting. Once monetization strategies around them have matured it’s quite possible they will remain a popular complement to touring, allowing artists to create a new kind of experience for their fans and to reach audiences in places their live tours don’t reach.

The ability to move “location” shooting into a sound stage promises significant cost savings for filmmakers and financiers, as does the ability to limit the personnel needed on-set to film interiors.

Sony’s investment in Epic Games, in other words, helps strengthen its ties to a major player in one core business sector, but also gives it a front row seat to the development of a technology likely to be critical to the future of all of Sony’s core entertainment businesses (whether or not it ends up spinning off those businesses).

Moreover, Sony’s move comes at a time when a number of its Hollywood competitors are moving away from direct investment in the games business.

Disney moved earlier this year to unload the game development studio it inherited with the Fox acquisition, while WarnerMedia parent AT&T is exploring a spinoff of Warner Interactive, developer of the Mortal Kombat franchise, to help pay down some of the debt it took on to acquire Time Warner’s media assets.

NBCUniversal parent Comcast has also backed away from direct investment in games in favor of licensing its properties to third-party developers.

Epic is the developer of the Unreal Engine, a game engine that has also become an important tool for filmmakers, thanks to its highly sophisticated graphics capability, but they still produce great games you can play on your pc, and there are other games you play such as WoW, which is really popular and you can even buy WoW Classic Gold at https://gold4vanilla.com if you want to invest in the game.

All three of those companies, of course, are investing heavily in direct-to-consumer video streaming, and no doubt view games as a less-than-core business. But video games are already a bigger business than the movie and music industries combined, and both the business and technology of gaming appear poised to begin absorbing big chunks of their smaller brethren. For more gaming options and accessories, go to this helpful site.

By abandoning the field, Disney, WarnerMedia and NBCUniversal are leaving Sony with plenty of room to run into.