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Rec Room is one of the companies that has a shot at leading the tech and games industries into the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One.
The company has raised $100 million at a $1.25 billion valuation, giving it a strong war chest at a time when other makers of user-generated content (UCG) are coming on strong.
Users-as-creators is a big theme in the latest gaming boom, which has seen UGC platform Roblox go public and Overwolf raise $52.5 million for PC gaming mods and helper apps. Rec Room debuted as a free-to-play virtual reality experience in 2016, and now it has 25 million lifetime users. Revenue grew 566% in the past year as monetization came together, and user activity has grown 600%.
After the VR market cooled down and grew more slowly than expected, Rec Room pivoted to other platforms, such as game consoles, PCs, and mobile devices. That has helped it grow much bigger, and users are creating millions of rooms where friends can explore, entertain, and communicate.
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These are the types of things that CEO Nick Fajt believes people want to do in the metaverse, which he defines as the next evolution of the internet. Fajt said the company remains focused on making easy-to-use creative tools, letting users charge others in-game currency in selling their own items, and offering a subscription service as an easy way for users to buy in-game currency.
Fajt said we’re in the early days of building the metaverse, and he doesn’t like to say any company has already built the metaverse. We don’t know if it will be open or closed, and what activity will be the most popular in it. But Fajt believes that core to any metaverse will be designing an experience so that one human can have a virtual experience that feels like they’re in the same room with another human.
Rec Room is available on iOS, Xbox, PlayStation, Oculus, and Steam. I spoke with Fajt in a recent interview where we talked about everything from the key trends like nonfungible tokens (NFTs), the future of immersive experiences, and the ethics of the metaverse.
Here’s an edited transcript of our interview.
GamesBeat: How’s the metaverse coming along?
Nick Fajt: It’s going. It’s in the early innings.
GamesBeat: With so many things happening on this front, what do you decide is worth focusing on?
Fajt: A big thing for us is — 1), we don’t use the term all that often. It’s probably attracted more attention and created more confusion than clarity in recent times. But the big meta-point we look at, we think the shape of all software is changing. There’s this tide change coming, where instead of having software live in tiles, dragging tiles around your screen or on your phone, we think that software in the future is going to look a lot more physical, a lot more 3D. It’ll look like rooms and objects and avatars.
The real question is, how do you solve this problem? How do you let objects authored by one person work in rooms authored by someone else with avatars that might be authored by many different people? How do you create order in that very chaotic world? That’s the problem we like to dig into and solve on the Rec Room side. How do you have a Wikipedia-esque game world?
GamesBeat: Is it almost like visualizing software in ways that people can understand?
Fajt: It’s a lot more than just the visual component. There’s a question of more rules. Who’s allowed to spawn what object? What is an object allowed to do in a particular room? Who sets the moderation standards? Who sets the economic standards? How do these things trade and move back and forth? There’s a social substrate that’s being built to facilitate a lot more than just how these things render on top of each other.
GamesBeat: Sometimes the rule-making is where all the big decisions get made. If you set the rules you can lean them in your favor.
Fajt: We’re still learning what the big decisions are. It’s just so early. We’re still learning — if you build a platform like Rec Room, where are the important decisions you need to make to help creators make money, to keep the community a fun and welcoming place? Where do you need to think about those rules?
GamesBeat: Were there rules that you hit upon that turned out to be good ones?
Fajt: We’re still learning like everyone else. The two big ones that I think you’re seeing everyone dig in on are, first, how do you have a space where you can have the rules of reality not apply? You can go and chat with anyone, anywhere in the world. How do you keep that a fun and welcoming place? How do you keep that a safe place? How do you keep that a moderated place? What are the rules there? That’s one of the big challenges you see everyone grapple with.
With Rec Room we’ve tried to tackle this from the beginning by establishing a firm code of conduct. We’ve always invested heavily in tools that players can use to block, mute, report other players. We’ve always had an outsized moderation team to try to review these, and we’ve always had an outsized dev team working on automation features to scale up that effort. That’s one big area.
The other area is — for a long time Rec Room was built by hobbyists. It was just people messing around with the tools. We’ve spent a lot of time trying to figure out — these people are doing amazing work, so how do we make sure they’re getting compensated? From the very beginning we were trying to reward them with in-game currency, and what we’re trying to focus on right now is how we scale that up. How do we provide them real-world currency, and how do we keep growing that real-world currency they’re earning?
GamesBeat: Everybody thinks about the question of the royalty rate.
Fajt: I think we’ll see it shift over time. Anyone that’s building an app on one of these platforms right now has — it’s important that we have something that makes sense relative to the platform’s royalty rate. But as those things change, you’ll see the platforms like Rec Room evolve very quickly as well.
GamesBeat: When it comes to choosing a platform, whether it’s VR first or otherwise, what’s the right answer on that? Right now it seems popular to try to make cross-platform happen, but what’s going to be important about how this evolves in the future? Deciding on the platform for you.
Fajt: The question of what platform is most important is probably a misnomer. The really important part is cross-platform. If you want to be a player in this space you need one contiguous world, and you need every device that every person has serving as a window into that world. That’s the way we experience the internet today. I don’t think of a mobile internet versus a desktop internet. This is just a device I have in front of me. I want to read my email, read the news, chat with my friends. That’s afforded to us by the largest platforms. They work well whether you’re in an app or a browser, desktop or phone.
In the future you’re going to want to access these virtual worlds from a wide variety of devices. Depending on your situation, depending on where you are, depending on how much time you have. The spaces that are going to shine for consumers are the ones that have thought deeply about how you want this virtual world to show up on each platform, and how you make sure you can connect with another human regardless of the device they have. So rarely am I thinking, “Well, I really want to connect my phone with your headset.” I want to connect with you, connect with the human on the other side. So how do we get the hardware out of the way and just help you make that connection?
GamesBeat: There’s still a gap between the platforms — what you can do on a phone versus what you can do when VR gets to where we want it to be. Is there a time for a Rec Room 2.0 or 3.0 opportunity?
Fajt: If you look at existing mediums, watching a movie on my phone versus on my TV versus at the theater, these are very different experiences. But I can’t go to the theater every time I want to watch a video. It’ll probably be the same thing. It will be hard for any other device to ever match the presence and immersion of VR. But it will be hard for VR to ever match the ubiquity and ease of use of a phone. If I’m on the subway it’ll be hard for me to put on a headset and move around. But it’ll be easy for me to take out my phone and hop into Rec Room. The alternate example, if I really want that deep and immersive experience, it’ll be hard for my phone to do that. But if I’m at home and I have my VR headset and I have the space and time to jump in there, that’ll be great.
GamesBeat: What do you feel like you have energy and money to do on your own, versus how you would be one piece of the metaverse? What would you focus on doing, and what would you let other people do, because you don’t have $10 billion?
Fajt: Not yet! But with Rec Room we focus on being a fun and welcoming place. That’s really the focus. There’s a bunch of other people that probably are focused on use cases that are less fun and less welcoming. Rec Room is always going to focus on a fun and welcoming community. A lot of times that means hanging out with friends and making new friends, having activities to go and do. That’s where I want our focus to be in the near term. Rec Room is the place to come for fun, the place to come and make new fun memories with other people.
GamesBeat: Where do you think you want to be five years from now?
Fajt: In five years the way that we interact with other people and the way we interact with software is going to be fundamentally changed. We’re going to spend so much more time interacting with these kinds of spaces, these kinds of digital objects. I want Rec Room to play an important part in that. It’s a great tool for bringing people together, a great tool for helping people meet other like-minded people, a great tool to help people build whatever creative idea they have in their head, and a great tool for them to not just build it, but distribute it and scale it out.
It’s important that Rec Room has married up both the creative tools and the distribution capabilities. There’s a lot of platforms where you can create something. The question is, will anyone else ever see it? Rec Room has made it really easy for you to get a very large audience for whatever you’ve built. I want that to keep improving. We can keep putting larger and larger audiences in front of a group of better and better-enabled creators to make fun memories for people of all ages.
GamesBeat: Where are we today on how many people can fit in a Rec Room area?
Fajt: We’re about to roll out some changes which will allow you to replicate stages to tens of thousands of users. If you wanted to have a Q&A in Rec Room, you could broadcast this to a bunch of instances. In one contiguous room we still have a limit of about 40 people.
GamesBeat: Is there an efficient way to do that, as opposed to the way where it’s more based on how many servers you can line up? Are we getting better technology on that front, where it’s not necessarily just a brute force solution to enable that many people viewing?
Fajt: Experiences are developing such that it’ll be possible to have 10,000 people in a room. It doesn’t seem like an unsolvable problem to me. We’d love to have a Bumbershoot music festival where tens of thousands of people show up. We want to have large sporting events where you can have 100,000 people watching that event live and cheering along. It doesn’t seem impossible for us to do it. These large platforms are starting to scratch the surface of that, and I think it’ll be a problem that’s solved in the next couple of years.
GamesBeat: How do you view your direct competition now?
Fajt: The funny thing is, over the years you could have pointed to three or four different competitors. Each of those has had their ups and downs. It’s never impacted Rec Room in any way. If you just look at the number of players that play, the amount of time they spend, it just seems like we’ll succeed or fail on our own merits. I’m more worried about how we ingest the data that we get from our community about what they want, and how we make sure that shows up in the app as quickly as possible. I worry less about what so-and-so is doing. This is the next internet-sized opportunity. I don’t think there’s any shortage of opportunity here, for Rec Room or for others.
GamesBeat: Lots of energy going into this subject right now. Hopefully, it turns into great things.
Fajt: It’s so funny. You and I probably met back in 2016, when Rec Room was just Wii Sports in VR. Back then we were telling people that we were going to try and build this metaverse thing. The next question would be, “What’s the metaverse? What are you talking about?” It’s interesting to see that term bandied about so freely now. It really does feel like we’ve tipped over an inflection point in business understanding, investor understanding, consumer understanding. Everyone wants this idea. Everyone is trying to pull this future forward. We’re excited to be a part of it. We’re excited that we’ve been working on it for five years. It’s a big validation of a bunch of the work that we’ve done.
GamesBeat: How big is your team now?
Fajt: 130, 140, something in that range. We plan to double that by the end of next year. If you know any devs, send them my way.
GamesBeat: Do you see machine learning and AI coming into your design process at all? Is that going to be part of scaling to what the metaverse is going to be?
Fajt: I think there’s no way to scale moderation or trust and safety without deep levels of machine learning and AI. It seems inevitable.
GamesBeat: Do you have confidence in that, though, that machine learning and AI can be the answer to those problems?
Fajt: If you look at the existing social networks right now, you can see areas where that’s working well for them and areas where there’s still a strong blind spot. For Rec Room my guess is that it will never be, hey, we have this automated system that moderates Rec Room and that’s the end of it. Human moderators will always play a very important role in moderating these spaces. But in order to scale the decision-making of those human moderators, you’ll need automation and AI or machine learning processes.
GamesBeat: The other issue may be to get the power of the users on your side, to get them to do the work.
Fajt: From a community perspective, what we’re seeing is — if you look at what people build in Rec Room, it doesn’t follow the clear analog of a game. In the same way that a YouTube video is not a short Netflix show, a Rec Room room is not a user-generated game. It’s not simply that. We see people moving the community and the culture of Rec Room in very creative ways that we would have never imagined. That’s one of the exciting things about working in this space. We’re building tools, but once those tools are out in the wild, people are incredibly creative. A lot of times they build things we never would have thought of.
GamesBeat: Do you think we’re going to see a lot more on the front of play-to-earn, where those kinds of users are rewarded for what they create?
Fajt: I certainly think that in these worlds you’re going to see a lot of digital commerce, a lot of digital entrepreneurs. There will be opportunities for people. The platforms that really scale — it’ll be like the internet now. The platforms that really scaled have figured out how to help creators make money. Whether it’s YouTube or Twitch or Instagram, there are clear mechanisms there for creators who are producing great content to also make money. I have to believe it’s going to be the same with these worlds. When people are building great content, or contributing something important to the ecosystem, it will be important that the ecosystem pays them back.
GamesBeat: How much of a role in the metaverse do you see for things like decentralization and blockchain technology?
Fajt: I’m pretty interested in that space, I would say. We’re still figuring out exactly what roles these things play, what utility they provide users. Right now they’re mostly being used as a financial mechanism, but over time you’ll see them evolve past that and start driving new styles of play, new styles of engagement. It feels like we’re at the very beginning there.
GamesBeat: I heard Gabe Leydon say that the early days of NFTs here reminded him of the early days of free-to-play on the iPhone. He thinks it’ll be just as big in the end.
Fajt: It’s a trend that you’ll ignore at your peril.
GamesBeat: It’s always a good question as to whether these waves are tidal waves, coming to sweep through everything, or if they’ll just get your feet wet.
Fajt: With a lot of these, they ebb and flow. You can see with Bitcoin. You’re long Bitcoin, but it’s gone up and dropped and gone up and dropped. If you zoom all the way out there’s a clear upward trend, but some people, whether it’s crypto or VR or AR or the metaverse, they zoom in too close and they focus too much on the month-to-month changes. If you zoom all the way out on these trends, you can see this is pointing in an interesting direction, if you take a decade-long view.
GamesBeat: What are some milestones people should look for as to whether or not this is turning into that big tidal wave or not? Not just for things like NFTs, but other technologies as well. What should we watch for?
Fajt: The one I’m always looking for is true consumer delight. That’s an unfakeable signal. Not if an early adopter is excited, or if one individual spent a lot of money. The trend I normally look for, is this really bending the arc of the median consumer? You saw that with streaming very early on. Streaming is a good example. The original Netflix streaming service had almost no interesting content on it, and yet a lot of people were really using it. A lot of people abandoned mailing in discs, even though they could have gotten the latest releases that way. They’d watch 17-year-old reruns on the streaming service. It really changed consumer behavior. We’re at the beginning of some of these things now. With crypto, with the metaverse, with VR, with AR, you’re seeing some consumer behavior starting to build around these things.
GamesBeat: There’s one of those metaverse ETFs now. Matthew Ball got together with his friends and created 50 stocks you can invest in around the metaverse. I think it was valued at $800 billion or something already, the market cap of those 50 companies. I guess the message from that was that the metaverse is already here, but if you watch this basket of companies, you’ll see it grow much bigger.
Fajt: Again, if you think back to the early days of the internet or the early days of mobile, there were some very big companies that were emerging early. There were some people that said, “Wow, are these valuations really justified?” And the answer was yes. That turned into so much bigger of a wave than we could have guessed. It took longer than we thought, but it ended up being much bigger than we thought.
This will be the same thing, I think. If you look 10 years from now, you’ll see multi-trillion-dollar companies built around this idea. This is the next wave of very large companies. This is going to change the way that a lot of us interact with technology and each other.
GamesBeat: Do you think we have to define the metaverse?
Fajt: Are you asking me to apply a definition to the metaverse? I think the easiest way to think about it is, it’s an evolution of the internet. It’s an evolution of the internet, but it’s far more physical, 3D, in real time than the internet. That’s as far out on the limb as I want to go, though.
GamesBeat: Does that count out some of the smartphone stuff, then, like how Niantic believes augmented reality is more like the metaverse?
Fajt: I’m not familiar enough with their plans to comment. I don’t think an AR world is at odds with what I just described. I imagine I could invite you–I could be sitting in this chair in my office and your hologram could be sitting over there. You could be in a virtual world that looks like my office. That seems totally in bounds to me. It’s an extension of the internet, it’s physicalized, it’s 3D, but it’s focused on real-time interaction. AR will certainly play a role here. In my background, I spent five years working on HoloLens before Rec Room. I’m a true AR believer, for sure.
GamesBeat: It’s interesting how there are different predictions people have. One company will build it, or a bunch of companies will, or it’ll be a multiverse where there’s no single dominant company, or it’ll be some alternative thing like on our mobile phones. People go in different directions when they try to define it.
Fajt: The way that Matthew has set up his ETF is probably the right way to think about it. I think the metaverse will be the product of many companies. Some will be bigger than others. Just like the internet. There’s no shortage of companies that have been founded around the technology of the internet, and some are bigger than others. It seems likely that this will play out the same way.
GamesBeat: Epic CEO Tim Sweeney’s been very vocal about the open metaverse. I wonder how much you value that as well, whether that’s a future you want to see come about.
Fajt: We’re still trying to figure out what open versus closed means. A bunch of people are playing with the metaverse idea, and as far as I know, none of them are locked in yet. Exchanging objects, avatars, user data — if you can figure out a way to do that, there are some very interesting unlocks you can create. It seems like there will be significant challenges in making that work for all parties involved, though. We’re just at the beginning.
GamesBeat: There’s the ethical question, too. What should we do?
Fajt: I’m very bullish on this. I think one of the reasons this trend is emerging is because a bunch of us have realized that social media does not make us happy. Scrolling through a feed contributes to higher levels of loneliness and anxiety. What we need as humans is real time interaction with other humans. A lot of our social software is not providing that. A lot of our social software is not very social. Scrolling through a feed is not interacting with other humans. It’s interacting with an algorithm.
We’re getting much closer to that experience of hanging out in a room with someone else. That’s a positive experience for people psychologically, for their overall well-being. I’m incredibly excited about this future. It stops us from scrolling and it gets us back to interacting. I’m excited about that.
The main takeaway is that we’re at the very beginning. We’re all learning what this is going to look like over the next few years. The thing that it seems like the world has finally agreed on is that yes, this is going to be a very important space. It’s a good place to be.
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