The metaverse was a buzzword in 2021.  In 2022, it is clear that it is a genuine potential growth area and part of the commercial roadmap, not just for the software, arts and entertainment industries but also for brands and other consumer-facing businesses more broadly.  In this article we identify some of the real-world implications for IP commercialisation in the metaverse, and look at how to maximise the opportunities and minimise the risks in this space.

This article is the second in our series discussing the potential opportunities and risks for IP commercialisation in the virtual world.  The first part, focusing on NFTs, can be accessed here - IP Commercialisation in the Virtual World: Part 1, Non-Fungible-Tokens (‘NFTs’).

What is the Metaverse?

The term “metaverse” is not new – it was coined by Neal Stephenson in his science fiction novel "Snow Crash", published nearly 30 years ago.  In a prescient vision of the tech landscape of today, the novel describes a virtual reality-based version of the internet in which the characters use lifelike avatars of themselves as a way of escaping a dystopian reality.

Now, the concept involves individuals participating in the metaverse through their avatars and being able to interact with other avatars and experience a parallel version of the real world.  This will likely include (and in some cases has already included) going to concerts and sporting events, trying on clothes, attending meetings and conferences, and even undertaking complex simulated training.

A variety of technologies including, importantly, augmented reality (AR) and virtual reality (VR) headsets will enhance participation in the metaverse.  Other relevant technologies are yet to come – Elon Musk is already promoting his brain-computer interface company Neuralink (which plans to surgically implant chips in human brains) as a superior alternative to the current idea of the metaverse because “in the long term, a sophisticated Neuralink could put you fully, fully in a virtual reality thing”.

In the metaverse, individuals’ actual life experiences will be blended with their virtual world experiences. This amalgamation already exists to some extent today due to the popularity of social networks and the use of video technology for both social and work interactions, which has been fast-tracked by the Covid-19 pandemic. This existing blended user experience provides the foundation for substantial investment in the development of the metaverse, followed by widespread consumer and business adoption, once the technology is sufficiently affordable and compelling.

Although the terms “metaverse” and “Web 3.0” (or “web3”) are sometimes used interchangeably, they represent different concepts. Web 3.0 is the idea for a new iteration of the internet based on blockchain technology, which would decentralise the internet by placing users, collectively, in control. In contrast, the “metaverse”, is generally understood as indicating a network of interconnected 3D virtual worlds.

Will it really go mainstream, and when?

A key limitation on the metaverse’s potential to enter the mainstream is the dependence on VR and AR technologies.  To date, it has proven challenging to design devices that provide high quality graphics that are also mobile and convenient.  In addition, the cost is currently prohibitive, for example, the HTC Vive Pro 2 headset was priced at USD$799 plus controllers in 2021, and Apple’s planned new VR headset is rumoured to cost in the region of USD$3,000. If Elon Musk is right, even more innovation will be needed before the physical technology is good enough for everyone to want to stay in the metaverse for extended periods.

The metaverse may evolve in a number of different ways. At one end of the spectrum, a Web 3.0-based metaverse would likely be cloud-based and secured by cryptocurrency and blockchain technology.  In this case, the architecture of it would ultimately be driven by the open source community and Decentralised Autonomous Organisations (DAOs).  At the other end of the spectrum, the metaverse could involve collaboration between operators (e.g. Google, Sandbox, Epic, Roblox, Decentraland and Meta) to allow users to move seamlessly through their virtual worlds. The end result could be any combination of the two.

Certain elements of the metaverse are already present in online gaming universes, in particular, Fortnite, Roblox and Minecraft, however there is still a significant way to go for the metaverse to be fully functional and for the various worlds to be interoperative.

Current industry expectations are that the metaverse will take 5-10 years to build, which would take it well into this decade at least. However, it could be shorter. Forward-thinking organisations will use this lead time to lay the legal and commercial groundwork to allow them to take advantage of their place in the metaverse if and when the metaverse enters the mainstream.  

Opportunities for IP commercialisation

Commercialisation of the foundational technology

There is an enormous opportunity for commercialisation of the technologies that are needed to bring the metaverse to life. This includes the AR and VR devices themselves, the underlying image and video processing techniques, the platforms (outside of Web 3.0 where platforms will likely be open source), and the connectivity technology that is needed for the metaverse to function. Unsurprisingly, there is a huge upward trend in patent applications for these technologies, as well as for NFT-based assets (e.g. Nike’s “Cryptokicks” patent).

There is a large amount of investment capital currently available in this space, and with it comes significant opportunities for innovative research collaborations, joint ventures, and other forms of IP commercialisation arrangements.  It will be critical for participants to take into account the fast-moving nature of relevant technologies and frequent developments in the commercial environment when negotiating these arrangements.

Brand licensing and activations

Where commercialisation of IP becomes especially interesting in this space is within the bounds of the metaverse itself.  From a brand owner’s perspective, presence in the metaverse will bring increased brand exposure and offer the opportunity to reach different audiences with both real and virtual goods and services.  The level of media attention given to the recent collaboration between Balenciaga and Fortnite is an indication of the commercial potential in this area for brand owners and commercial metaverse operators alike.

From a commercial metaverse operator’s perspective, there is significant value in having recognised brands present in their environment, because they anchor the user’s experience of that environment to the real world. For smaller platforms, the use of recognised brands on their platform will likely boost the status of that platform itself.

Metaverse projects often require significant investment combined with an element of faith in the unknown.  As a result, best practice commercial diligence on platforms and partners and appropriate commercial terms are essential for these projects.  This is particularly the case for brands licensing third parties to operate their brand in the metaverse - these types of licensing agreements need to be treated with the same care as an exclusive licence agreement for a particular territory.  In Web 3.0, a key challenge will be modelling effective brand licensing arrangements with DAOs and end users – likely via NFTs that can be held in a digital wallet.

Licensing of publicity rights

Publicity rights form an additional opportunity for IP commercialisation in the metaverse.  Celebrities, influencers and sports personalities (or the owners of their personality rights) will have a new avenue for commercialisation of their likeness by way of their avatar.  This opportunity already exists to some extent in the video game world, but it will take on a new dimension by virtue of the increasing scale of the metaverse and numbers of participants.  This will give rise to significant legal conundrums, as the right of publicity varies enormously across jurisdictions.

Persons agreeing to publicity rights deals would be wise to turn their minds to the potential application of the contract terms to the metaverse and consider including an express reservation of rights of use of their likeness in the metaverse until the landscape is better understood.

Content licensing

The metaverse is likely to change the way users experience live events, artwork and music.  Concerts in online gaming universes are already a hit with users: in 2020 12.8 million Fortnite users tuned in live to watch a Travis Scott concert.  Since its rebrand, Meta has also been exploring the possibilities of transforming art in the virtual world, including by creating a 3D version of Henri Rousseau’s “Fight Between a Tiger and a Buffalo”.  No doubt it will not be long before other live events and forms of art are introduced to the metaverse, including films, plays, musicals and sporting events.  Such virtual experiences offer many commercialisation opportunities, from licensing the IP in the work to offering users virtual merchandise such as apparel, items and other equipment. 

Challenges for IP commercialisation

Platform terms and conditions

A key aspect for rights holders to consider when entering into a metaverse based deal are the terms and conditions of any platform that they are proposing to work with.  Platform terms and conditions are widely variable at the moment, particularly as between Web 3.0 and Big Tech platforms, but also within each category; first-mover platforms have the opportunity to set appropriate and balanced terms and to reap rewards in doing so.

Commercial metaverse platforms should consider their terms and conditions not only from a user perspective, but also from the perspective of rights holders who hold the valuable content that customers are looking to acquire in digital form.  These rights holders will be more willing to work with platforms that have taken into account the scope of rights that copyright owners are able and willing to give – especially when it comes to digital copies of works that are so easily pirated. 

Commercial platform operators will also need to balance the interests of rights holders in protecting their content and fitting within existing licensing structures against the value to prospective customers of being able to share their NFT off-platform. Individuals will expect to move freely between metaverse platforms and take their virtual branded goods (e.g. cars, clothing, accessories, and even consumables) with them.  The seamless experience demands consistency of rights to use brands and works across platforms.

In Web 3.0, terms and conditions are often developed by the community of users and a foundation is typically appointed as the corporate agent of the community.  Careful attention should be paid by rights holders to these terms and conditions, which may reflect a more “copynorm” approach to intellectual property rights, granting platform users more flexibility to use a third party’s IP than they would have in the real world. 

The challenge of anonymity in the metaverse

It will be challenging for brand and content owners to enforce their rights in an environment where there may be no obvious applicable law or jurisdiction, and where identities may be hidden by digital avatars and the anonymous nature of the blockchain.  The law will ultimately need to evolve to deal with these challenges in the same way that it is evolving for the current form of the internet (for example, site blocking legislation has gone from niche to mainstream and the Australian Government is currently proposing legislation that would require social media services to disclose the identity of anonymous defamatory commenters – the Social Media (Anti-Trolling) Bill 2021 (Cth)).  In line with current practice, it is likely that a combination of the following will be key:

• advanced technical solutions along the lines of those already being used by sophisticated rights holders to identify and geo-locate infringers in Web 2.0;
• NFT- and smart contract-based management of digital assets, which are able to recognise when a user attends a metaverse location “wearing” an unauthorised copy of another user’s original digital item, such as a branded t-shirt; and
• innovative legal and investigative practices and investigation methods, including sustained compliance monitoring efforts.

The role of take-down procedures

An obvious approach to managing the multitude of infringement issues that will arise in the metaverse is for metaverse operators to implement take down procedures, akin to the existing processes implemented by eBay and YouTube. However, these procedures will need tailoring to accommodate the metaverse environment, particularly given the likely volume of user generated content in entirely new formats and the likely perception by users that they “own” digital assets.

Clear communication of end user licensing terms to consumers will be essential to minimise public relations risk.  The more sophisticated platforms have an opportunity to set initial precedents for this. In Web 3.0, this could also be managed by tokens, which represent a financial stake, credential or reputation value. Bad actors could be subject to “slashing”, or other redemption/liquidation outcomes i.e. they may lose their ticket to the environment.

A key part of take-down is effective monitoring. In 2016 Cinemark, a large commercial cinema chain in the US, sued Roblox for permitting users to build virtual playgrounds or workshops which replicated Cinemark’s “real life” cinemas, including use of its trade marks. Of particular concern in this case was that users were virtually re-enacting violent real-world events, such as the 2012 shooting which took place at a Cinemark showing of “The Dark Knight Rises” and resulted in 12 deaths and 70 injuries. The complaint filed with the Court said that Cinemark had received complaints from customers in the United States concerning the violence being conducted in these virtual cinemas. Brands will need to carefully monitor how user-generated content in the metaverse uses their IP, particularly where the use is occurring in undesirable contexts.

Relevant considerations for IP agreements

Although the metaverse is a moveable feast, there are a number of key issues relevant to IP licensing that are worth considering today, including:

• Existing agreements: It will be important for rights holders to ensure that they can commercialise their content in the metaverse without breaching the terms of their existing agreements.  Determining who holds the right to distribute or make certain IP available in the metaverse will be challenging if the existing licensing arrangements are based on outdated contracts which do not include terms specifically dealing with the rights required for the metaverse. Pro-active re-negotiation of existing terms will minimise litigation risk;
• Territory: The territory of existing IP licence agreements may be worldwide or limited to specific countries only. Where agreements are limited to specific countries, the licence will often provide for how internet based sales are treated, e.g. they may be permitted through country code top level domains only (e.g. .au), or there may be a requirement to use a country-based landing page. To avoid debate about how the metaverse fits within existing definitions of territory, it should now be dealt with expressly (whether by inclusion or exclusion);
• Scope: Prescribing scope of use (e.g a rights holder may prescribe that its children’s brands cannot be used in any games depicting graphic violence) will become more challenging if and when the metaverse becomes decentralised and/or users are able to move easily between interoperable worlds. In that context, arrangements with end users will likely take on a much more pivotal role, covering both traditional and smart contracts as well as clear direct communication with end users;  
• Collaborations: Collaborations are already proving to be very popular in the pre-metaverse environment – for example, the recently announced Prada/Adidas NFTs.  Collaborations are a well-established mechanism for brand commercialisation, and provide a valuable way for each collaborator to boost their profile, reach new audiences and create “must-have” product. However, a host of new variables will apply to brand collaborations in the metaverse, and creative thinking will be required to draft agreements accommodating those variables, including to retain flexibility to exploit combined IP arising from collaborations for possible future uses;
• User generated content: User generated content may be combined with brand and/or platform IP, and the resulting IP may have a significant value. Taking a fashion line example, end users may create their own customisations on the clothing, which could “go viral” and become in demand for purchase by other users, or could even be adapted into “real world” items. Brands and platform operators will need to consider how to manage these sorts of scenarios via both contractual cross licensing agreements and end user licensing terms, all taking into account the PR context as well as the legal one. This is where careful consideration of Web 3.0 terms and conditions, particularly as they apply to IP, will be of critical importance; 
• Term and termination: At present there are many unknowns, and as such contractual exit rights in commercial metaverse deals will be very important. Monitoring obligations and audit rights which may trigger termination rights will likely take on a renewed significance, as IP owners are often reliant on technology providers and specialist agencies to enter the metaverse space and unauthorised use may be more difficult for brand owners to police than it is in the current online environment. Given the number of unknowns, shorter term or project-specific arrangements or arrangements with fixed review periods may be preferable for brands and content owners over fixed long term licence arrangements;
• Royalty models: Traditional existing licence structures for brand and content licences include fixed fee, per user fee, minimum royalties, percentage of net sales, or a combination of these. In the metaverse context, we are likely to see new ways of thinking about these models to take into account the best ways to track usage across platforms and devices, the way in which revenue can effectively be calculated, and how the level of user engagement will factor in to royalty streams. We know for example that influencers on Instagram are able to charge higher fees if they can demonstrate higher levels of user engagement, e.g through comments and likes, and similar models are likely to have a role in the metaverse.  As already demonstrated by the current NFT market, the opportunities that smart contracts provide for automatically allocating a potential of future sales to the original owner are an indication of the potential for IP owners to create ongoing revenue streams in this space;
• Supplementary registered IP protection: Many companies, particularly in the fashion industry, have started to make filings for use on various virtual goods and services. This includes Nike, Converse, Abercrombie and Fitch, Alice + Olivia, Urban Outfitters, and champagne brand Armand de Brignac or “Ace of Spades”. Interestingly, the Ace of Spades applications include shape trade marks for its sparkling wine bottle, reflective of the possible manner in which brands traditionally seen as two dimensional will adopt three dimensional identities in the metaverse. While it may be the case that reputation in the real world will ultimately be found to carry over to the metaverse, filing in class 9, 41 and 42 is a sound approach for brands that do not have existing relevant protection, in order to maximise IP commercialisation opportunities, provide protection against infringement and minimise the complexity of any necessary enforcement action.

Concluding thoughts

The concept of the metaverse is beginning to challenge traditional approaches to IP commercialisation. It is likely that, when it starts to reach its full potential in either Web 3.0 or commercial-based platforms, the opportunities and risks for IP commercialisation will be (virtual) worlds away from what we see currently.  Now is the time for businesses to put mechanisms in place that will help them transition from the real to the virtual world, in whatever form it ultimately takes.

When the metaverse is fully realised, it will probably be based on decentralised and cross-jurisdictional platforms. This likelihood arguably creates the biggest challenge for businesses looking to commercialise IP: preparation should begin sooner rather than later, with a focus on drafting agreements that take into account the lack of centralised regulation, relative anonymity of users, and the inapplicability of territorial limitations, among other things.  This needs to be underpinned by a solid understanding of the technology and approached with a creative and open mindset. 

Authors: Rebecca Smith, Anna Smyth and Amelia van der Rijt