If you have an opinion about digital real estate, it’s a polarized one — you’re either all-in or think it’s the silliest thing in the world.
What Is Digital Real Estate?
Without getting too technical, let’s break down what digital real estate is, where the opportunities currently lie, and where its future may lead. I’ll reveal my own opinion at the end, but with emerging technologies such as the metaverse, it’s important that you formulate your own.
What Is Digital Real Estate?
It’s an ironic name – a “real” estate in a “virtual” digital world.
In classic thinking, investing in real estate meant purchasing property early in a location where you had forecasted that people would want to be. Whether that’s commercial traffic, residential housing, agriculture, or a great place to create advertising, real estate is made up of some type of market opportunity involving a physical presence of human beings.
In the digital age, the concept of an estate gets a bit more blurry. Properties could take an array of forms — you could own a plot of land in a virtual world, or a “seat” at a virtual concert venue, or a billboard in a virtual rendering of Paris. And a “digital world” isn’t limited to VR (virtual reality) or the metaverse. A digital property could even be an item shop in the middle of a custom map in Fortnite or a special conference room in a virtual workplace.
Since properties can take so many forms and we are talking about the digital universe, the worlds you can buy them from are unlimited; there’s always a new digital world being built, presenting new opportunities with new interested audiences.
Digital real estate doesn’t follow the classic economic model of supply and demand, because while there’s only a finite amount of land on earth, there is an unlimited amount of virtual worlds that can be built, constantly evading the problem of increasing scarcity. And that, turns out, is a bit of a problem for investors.
How Will Digital Real Estate Work in Practice?
With the constant marketing of a VR world in the metaverse (largely because Meta is in our face every minute of our lives), many people have thought that VR is the only place where digital real estate exists. And since they’re not users of VR, this isn’t interesting to them.
But I personally predict that VR is not the endgame, or even the long-term opportunity, because it replaces the world we live in with a digital world that (currently) doesn’t have nearly the depth of experiences of our physical one — the feeling of a breeze, the smell of mud, the unexplainable feeling of someone’s presence right behind you.
Instead, I believe that AR (augmented reality) is where we’ll see the virtual world unfold. AR expands our existing world, rather than attempting to replace it. For example, imagine wearing your sunglasses, looking at a sushi shop across the street, and being able to see reviews of that shop in the lens of your glasses.
This makes location-based digital properties a lot easier to grasp — you could own a plot in the middle of Times Square where you could place an ad or create a game for people to play there.
The Risks of Digital Real Estate
You’ve probably already picked up a couple of basic issues with the “value” of digital real estate. But let’s put them right on the table for clarity.
What Are the Risks of Digital Real Estate?
- No scarcity
- No foot traffic
- The off button
1. No Scarcity
The limited amount of land on earth means there’s a limited amount of land to buy, and as more people buy real estate, its demand (and value) increases due to less availability. But in the digital universe, nothing stops anybody from creating a copy of something. If a world shows promise, a new server can be spun up and replicate the same thing. (Of course, people do tend to gravitate to the original. Think of how many knockoffs of Angry Birds there are, but the original stands tall.)
If a digital world becomes popular, you could argue that the scarcity resides in the opportunity available within this world — you’d rather buy in the center of the most popular location instead of the middle of a digital desert — but there’s still no hard limit, dictated by the laws of physics, as to how many things can be in one spot.
In the real world, “this town ain’t big enough for the both of us” could hold some truth, but in the digital universe we can theoretically fit millions of copies of the same exact experience.
2. No Foot Traffic
The limited currency in the digital world is not space, but the attention of the users. For comparison, if you own a liquor store on the Las Vegas strip, you’ll probably make lots of sales just on foot traffic, but there’s barely any concept of traveling through nearby properties in the digital world. User attention is transient in digital experiences — as quickly as you can attain it you can lose it. If a user wants to experience something, they can plug in a URL, click a link, or input a location, and they go directly to that experience. They don’t hop in their car and drive home and pass by your storefront each day reminded of how good your product was, they just simply disappear.
3. The Off Button
Anything digital runs on a server. At any moment, someone can turn that server off. And you don’t have any control over that.
This means that everything you built on that world vanishes. Any cost you sank into it is lost. Your only recourse is to legally pursue the person who pushed that button, but that’s probably going to be pretty difficult, especially since they probably already prepared for this outcome before they turned it off.
Think about if Shopify stopped its servers, or if Medium turned off its site. All content generated, all accounts created and audiences built, that all vanishes. These brands have accountability so legal recourse is a bit more straightforward, but in the wild west of the digital world behind the mask of a keyboard, people can be much harder to find, if you can find them at all.
How to Mitigate the Risks of Digital Real Estate
With all that risk, what’s the opportunity?
How to Mitigate the Risks of Digital Real Estate?
- Don’t buy, rent
- Think like a developer
- Take notes on what currently exists
1. Don’t buy, rent
Most of this risk can be mitigated by limiting your exposure to the time that you’re invested in a digital world.
Let the creators of a digital world create the core experiences, and ride the coattails of the popularity of those experiences. This looks more akin to sponsoring something, instead of investing in something. This allows you to be present where users currently are, stay involved only while it’s already valuable, and get out when it no longer presents an opportunity.
If you still anticipate a digital world will be an investment opportunity, consider investing in a metaverse company traditionally like investing in a startup, rather than sinking money into their product that can disappear tomorrow. This gives you direct legal protection and potentially a stronger overall opportunity.
2. Think like a developer
If you are going to be present in the digital universe, you’re going to have to create a valuable experience to capitalize on that presence. This means actually creating or providing something in that digital world that is intrinsically valuable to those users. Figure out what they want, what entertains them, what motivates them, and how you can provide something that will make your presence actually worth something to them.
This might mean that you now turn into a digital experience developer, or leverage an existing developer network with expertise in the world you are building in. You can’t just throw money into a pot and think it will grow. You should really deeply consider what a real opportunity in this specific location of this specific world might be.
3. Take notes on what currently exists
What we’re discussing here might be hard to think about because it often is associated with buzzwords like blockchain, VR, metaverse, which are generally nebulous concepts because they’re still so new. But they have almost nothing to do with what a digital property actually is.
Take Fortnite, for example. Fortnite is one of the world’s most popular digital games, and they host virtual concerts on occasion, where your character is taken to a special island. This island has a stage or two, but also has lots of games and experiences that are scattered around the island. These are often sponsored, like a Monster Energy Target Shooting or Epic Games Flight School. They create a valuable experience for the moment in a specific location for precisely the users who will exist in that world during that time. It’s an example of a small digital world where “investors” in a location-specific property provide something that users appreciate, creating a positive association for that brand (and revenue in some cases where advertising isn’t the sole purpose).
My Take On Digital Real Estate Investment
Try it if you like what you see, but hedge your bets.
I don’t see the purpose in blindly throwing money into things like “Decentraland” or other virtual worlds because I haven’t seen any true value created for users in these worlds other than “this is a digital real estate investment opportunity.” There could be a valuable experience placed there eventually, but this is like finding a needle in the world’s riskiest haystack — the odds are slim that you’d capture a location that will replace a user’s world (in VR’s case) and hold that user’s attention for an amount of time that’s worth investing serious money into it. As of now, the market seems to be proving my thesis correct.
Where I see opportunity is by keeping acutely aware of the experiences that users are gravitating to, understanding how many actual users are participating, and partnering with the creators of those experiences to “rent” a digital property to capitalize on existing attention that users are already giving. Consider it a premium you pay for mitigating your own risk.
I think the world of the metaverse is exciting, but I don’t believe current concepts meet the desires of users, and it will be a long time before they do. As with any investment, you should put yourself in the shoes of a consumer of that product and ask yourself whether you understand it, whether you’ve enjoyed it, and whether you personally see it as something that’s important to you in the near future.
