Virtual real estate isn’t a new concept. Second Life has been selling virtual land for almost two decades. It is not a big business.
And you may have forgotten that IBM really kicked off its 21st century pageant of overpromising and then utterly underdelivering (see SmartCloud, Watson, IBM Blockchain, IBM Cloud and seemingly now moving on to quantum computing), with “enterprise-class” virtual worlds (a related post was the first time I pointed to IBM’s CAPEX deficit). They’ve carefully scrubbed the evidently embarrassing episode from their web site, orphaned links be damned, but there are still traces.
Yet today we see a frenzy with people paying big bucks for tracts of metaverse territory.
In the physical world, real estate is very valuable. One estimate values global real estate at $326.5 trillion in 2020, comprising over half the world’s wealth.
Real world real estate prices vary enormously, based on both scarcity (“they’re not making any more of it!”) and proximity to other places (“location, location, location!”). Your real estate dollar goes radically different distances, depending on where and what you buy.
People plonking payments for prodigiously priced property seem to believe the same factors will hold in the metaverse:
“Imagine if you came to New York when it was farmland, and you had the option to get a block of SoHo,” he said. “If someone wants to buy a block of real estate in SoHo today, it’s priceless, it’s not on the market. That same experience is going to happen in the metaverse.”
“It’s location, location, location,” he said. “A parcel of land in the downtown core, which has a lot of visitor traffic, is worth more than a parcel of land in the suburbs. There’s a scarcity value.”
How do we explain the virtual real estate mania? Are we witnessing the early days of a new trillion-dollar asset class? Is real value being created or is it a virtual version of Chinese-style, real estate-driven “bezzle”? Or maybe just flush crypto investors throwing around “easy come, easy go” money without really thinking about what they are buying (see also: NFTs)?
I posit that applying physical real estate dynamics to the virtual world is axiomatically bankrupt. And believe the metaverse will escape the tyranny of unimaginative, rent-seeking skeuomorphism.
It turns out they are making more virtual real estate. Infinitely more, in fact, at zero marginal cost. There are no limits to how much virtual real estate can be created. There is never going to be a shortage of land in the metaverse. When you go to sell your property, a potential buyer will always have a greenfield alternative. We need a better rationale for virtual real estate being scarce beyond the fascination with the ability of blockchains to manufacture digital scarcity.
But more problematic for rent-seeking promoters of virtual real estate: some provinces of the metaverse aren’t charging for real estate. Rec Room (disclosure: small investor), for example, doesn’t charge for space in its virtual world. Come grab all you want – they’ll make more! While Facebook can’t help but put the meh in metaverse, they’re not remotely confused about the power of free. My guess is the Meta business model won’t be predicated on land sales. There won’t be a singular digital SoHo or New York City: a new one can always be spun up and the ones with cheaper real estate will have an advantage bootstrapping. Virtual Texas will outperform the virtual Bay Area. Who will pay for digital real estate when they can get it for free?
And to those waiting to retort boisterously with a Ballmer-esque triptych of “location, location, location!”, I say “teleportation, teleportation, teleportation!” In a virtual world, every location is equally close to every other location. In fact, software lets us overlay an infinite number of virtual neighborhoods that can recombine any set of properties in any imaginable way (it is meta all the way down). You could explore a neighborhood comprised entirely of all the green houses of Bauhaus architecture or a mall populated by every store in existence starting with the letter S (tagline: the “SMall” is anything but!). What is the unique advantage of proximity in a virtual world where there is no distance?
So I don’t really understand pricey metaverse real estate, but please tell me what I am missing.