Competitive rivalry in virtual worlds. Part 2/5 – The power of suppliers

What role do suppliers of virtual world services play in terms of influencing the level of competition in the metaverse sector? Using the Porter’s Five Forces strategic framework, it is possible to identify the supplier-related factors and then suggest appropriate methods for virtual world operators to manage their power and influence.

Firstly, who are the suppliers to virtual worlds and what do they supply? This is by no means an exhaustive list.

• Graphic artists/designers
• General programmers/developers
• User experience specialists
• Community managers
• Marketing agencies
• Server companies
• E-commerce/payment gateways/billing
• Metaverse strategists

On an overall basis, supplier power is high is there’s a limited number of vendors and virtual world operators are highly reliant on their services. These are the elements influencing the bargaining power of suppliers…

Supplier concentration

Where are the companies operating virtual worlds based and does this have an impact of supplier location? Below is a selection of worlds and their head office locations.

• Second Life: San Francisco, California

• There (Makena): San Mateo, California, USA

• Kaneva: Atlanta, Georgia, USA

• Active Worlds: Newburyport, Massachusetts, USA

• Whyville: Pasadena, California, USA

• Club Penguin: Kelowna, British Columbia, Canada

• Habbo (Sulake): Korkeavuorenkatu, Helsinki, Finland

Two clear points here. Firstly, the concentration of metaverse operators is largely biased towards North America. Secondly, the west coast and specifically California attracts the majority of owners.

So, with the current state of play, virtual world operators without a North American presence to a degree suffer from a high power of suppliers – many of the vendors they require to develop a virtual world are in California. Furthermore, one would have to also assume that these vendors are already contracted by other worlds, so there’s also an issue with supplier pricing, explained in the next section.

But hang on a minute – this is a virtual world right?! – a digital place not bound by geography. Surely this must mean that supplier concentration isn’t an issue? It depends on which side of the virtual fence you sit on. If the supplier provides services required to create a virtual world (primarily programming) then more often than not these services are required locally – they need to be near the metaverse operator. If the services provided are in-world (community management for example) then as these people operate inside the world then location is less of an issue.

Taking all these factors into account, supplier concentration currently means a medium to high power of suppliers.

Supplier profitability

This relates to the degree suppliers can exercise higher pricing policies for the services they provide. The higher the prices, the higher the bargaining power of suppliers.

Virtual worlds are an emerging category and this means that the number of companies offering services required by virtual worlds is still low. Low supply + increasing demand = higher prices.

On this basis, for supplier profitability, the bargaining power of suppliers is high.

Forward integration

How feasible is it for suppliers of virtual worlds services to move up the supply chain and acquire the virtual world(s) they service?

Usually the case for supplier forward integration is driven by the possibility for economies of scale – being able to lower their overall cost base and scale their services. However, given the current state of the metaverse sector, forward integration is unlikely.

This is because the majority of virtual worlds are still delivering against their initial business plans and funded either by venture capital or wealthy ‘parent’ companies. This means that these virtual world fundors, are in the game for a little while longer. They would not want to sell. However, we are seeing instances of third-party investment taking place in the virtual worlds sector, just not from suppliers.

Perhaps a more compelling reason in this instance is the infancy of the sector as a whole. Virtual worlds are still focusing on growing their population bases and revenue streams are still being examined and explored.

Switching costs

How easy is it for suppliers to find alternative customers? Short answer, not that easy.

Even though there are several new virtual worlds in development, these operations are likely to have secured and agreed the skills and inputs they need to launch.

The opportunity for switching gives more power to suppliers in the medium-term as virtual worlds look to expand their services and manage larger population numbers.

Firstly, what about the volume of potential customers.

Threat of substitute inputs

Are suppliers at risk from alternative vendors taking business away from them?

At the current stage of evolution in virtual worlds, there’s a limited number of suppliers for the key elements required. So threat of substitute inputs is low, therefore increasing the bargaining power of suppliers.

The major risk for suppliers at present though is the fact that for more consultative inputs, these suppliers are probably contractually obliged to the metaverses they are working for.

To summarise, due to the low supply of vendors in the virtual worlds sector and the combined factors listed above, it’s a good time to be providing services to virtual worlds. The bargaining power of suppliers is high.

Read part 1, the bargaining power of buyers here.