The metaverse is still in its infancy. Very few people are likely to have already had personal experience with the virtual reality. We are presently in a time that, in the future, could be compared to the "pre-smartphone" age.
The German and European competition authorities now have the opportunity to monitor and control the development and structure of the metaverse ecosystem at an early stage and to prevent possible distortions of competition. But, in contrast to the 2000s, the authorities today have more diverse intervention options with the DMA, the DSA and Section 19a German Act Against Restraints of Competition (ARC).
From a competition law and regulation perspective, for measures by the authorities it is crucial to identify which market is affected and how this market can be distinguished from others. In this and the upcoming articles, we discuss the relevant markets that shape the metaverse. We start this mini-series with the gateway to the metaverse - the virtual reality headsets.
As far as we know, there are still no published decisions by competition authorities that deal with this question in detail. So let's have a look at how the headset market could, on the hand, be delineated in product and, on the other hand, geographic terms.
Product market definition
The relevant product market is drawn along the lines of the demand-side oriented market concept and supply-side substitution.
According to the demand-side oriented market concept, all products and services which, from the perspective of potential buyers, are interchangeable in terms of their characteristics, intended use and price level in order to meet a specific need are to be assigned to the relevant supply market. The European Commission defines supply-side substitutability on whether suppliers other than those offering the product or services in question would offer the relevant products or services in the immediate to short term without incurring significant additional costs.
Let´s have a look to our VR headsets:
VR and AR headsets
A distinction must first be made between VR ("Virtual Reality") and AR ("Augmented Reality"). The German Federal Competition Office (“FCO”) considers the purpose of VR as to immerse the user in a virtual reality to such an extent that it is perceived as real. Complex, usually higher-priced headsets are used for this immersion. AR, on the other hand, is about enriching the perceived real environment with additional virtual information. This requires significantly less-complex headsets. According to Mark Zuckerberg, AR headsets have great potential to replace the smartphone as the gateway to the mobile internet. However, the immersion created by VR headsets cannot be substituted by AR headsets. Immersion can thus be used as a clear demarcation criterion. The result is therefore a market for VR headsets and a separate market for AR headsets. It has to be noted that many VR headsets also feature AR functionalities, but not vice versa.
Standalone devices
Some VR headsets, such as the Meta Quest 2 or the ByteDance Pico 4, are standalone products. They are designed as all-in-one devices and only require internet access and a user account to use all the functions of the headsets. Other VR headsets (such as the Sony PlayStation VR or the Valve Index) need a connection to another device. Usability in this case may depend on the periphery being used (such as PlayStation or a PC) or the software (such as Windows, macOS or others). We assume, from a potential customer's point of view, two separate markets at this point for standalone and connected VR headsets.
Entertainment or business
Last, there is a fundamental difference between the VR headsets for entertainment or business purposes. There are already VR and AR headsets specifically designed and marketed for professional end-users, such as the Microsoft HoloLens 2.
To distinguish between entertainment and business headsets may seem obvious with a view to the different price level of these headsets. For example, Microsoft's business headset, the HoloLens 2, costs more than six times the price of a Meta Quest 2. The Meta Quest Pro, designed for entertainment and business purposes, is more than three times the price of the Meta Quest 2. User will expressively decide whether they want to have the cheaper entry-level models or the pro-versions. However, similar to VR and AR headsets, the more expensive versions have the same functionalities as the cheaper versions and even more.
Supply-side substitution
Additionally, there is almost no supply-side substitutability. Because of the complexity of the high-tech devices, companies are not able to adjust their production from AR to VR headsets in a short period and vice versa. The development of new devices takes months or even years. The development of business application takes at least months even for the companies that are already established on the market.
Geographic market definition
These considerations also apply to the geographic market definition of headsets. As such, from the demand-side point of view, the delineation of the geographic market is determined by actually available geographic alternatives. On the supply-side, many companies are (at least) theoretically able to sell their devices worldwide over the internet.
From our point of view, the geographic market of VR or AR headsets is not worldwide, but limited to the European Economic Area (EEA) or even national markets.
There seems to be no worldwide market because of the custom duties and transport costs for the relatively cheap devices. We assume that customers from Europe won’t order headsets from the USA (for example).
The market could be limited to the EEA with a view to similar regulations in the tech sector and the absence of custom duties. It is also not apparent that, in the case of VR headsets, it would make economic sense to distribute different versions of the same VR headsets in different countries.
However, there are also some arguments for markets on a national level. This could be the case due to regulatory sales restrictions based on national peculiarities. The proceedings of the FCO against Meta have shown that there can be specific national legal requirements, outlined in our last blog article. Another example is the ban of Huawei devices in the USA. Additionally, there are different software functionalities depending on the country of origin of the headset. Some features of the Meta Quest are not available in Germany but in other countries in the EEA.
Conclusion
The development of the market for VR headsets will continue to be exciting. With the Meta Quest 2 and multiple acquisitions of companies in the VR sector, Meta has positioned itself as the top dog in the still budding market for standalone VR headsets. It remains to be seen whether it will prevail as the only one or one of a few of the big players in the future, or whether the gateway to the metaverse can be crossed by a slew of different end devices.
In our next article, we will take a look at the software, i.e. the operating system of the headsets.
Merry Christmas!
