Pessimists could argue that the reasons for these companies’ disillusionment is structural, and that we should have seen this deep winter coming. The metaverse was certainly a managerial flight of fancy: According to Forrester’s 2022 surveys, 75% of chief marketing officers were excited about the metaverse, whereas only 35% of consumers showed interest. The metaverse ecosystem also never took off, perhaps due to greed. Complementors’ pickings have been slim. The development of tools and creator rewards programs were underwhelming last year, and metaverse platforms, such as Horizon Worlds, have retained nearly 50% of transacted revenues. And, looking beyond developers, complementary technologies disappointed: VR headsets are clunky and often cause motion sickness, leading to limited uptake.

But, despite these chilly signs, look again—and data suggests that the metaverse is awake and green shoots abound. The number of total monthly active metaverse users crossed 500 million in the first quarter of 2023—up from 373 million in the corresponding quarter of 2022, according to Metaversed. Gaming platforms, such as Fortnite and Roblox, drew 200 million users a month, on average, last year, with the latter meeting its daily-active-user growth target of 23% by the end of 2022. 

Unsurprisingly, companies are lining up to enter the metaverse, even if with less fanfare. Among them are retailers such as Walmart, which created two virtual experiences last October; clothing brand PacSun, which launched a PacVerse campaign in November 2022 and a second Roblox experience, LA Tycoon, this February; and H&M, which launched Looptopia in January. Even the industrial metaverse is gaining traction: BMW Group recently announced that it would expand its use of Nvidia’s Omniverse platform to design and optimize manufacturing plants virtually before constructing them. 

Several factors are drawing business to the metaverse. First, companies that wish to be perceived as visionary can’t miss out on the market created by the Internet’s next generation. Second, business can use the metaverse to build brands and better understand customers—especially the next generations, because the majority of metaverse users are from Gen Z and Gen Alpha. Third, some companies are already generating revenues there: Nike, for instance, reported $186 million of non-fungible token sales in 2022. Above all, the rising excitement around the birth of a whole new market has drawn attention to the metaverse. And the first movers’ beliefs and actions will only induce more companies to enter the metaverse. 

The metaverse’s dark dimensions

Attractive the metaverse may be, but businesses may not quite realize that they face novel challenges there. Metaverse strategies demand a deeper level of engagement; companies have to offer immersive experiences and sell digital assets themselves, which is not without peril. McDonald’s learned that the hard way recently, when it didn’t realize that a racial slur had been recorded in its McRib NFT collection. 

If companies invite users to enter the virtual worlds they’ve created, society expects them to take responsibility for user experiences, just as people believe that it’s the company’s fault if its ads or promotions appear next to hate speech, violent images, and sexually inappropriate content on social media sites. That’s why business has to take its “Digital Social Responsibility”—or DSR, as we like to call it—seriously if it is to succeed in the metaverse. 

Companies faces three types of challenges in the metaverse. 

Targeting children. Many companies market to children, tweens, and teens, which constitute the biggest user segment at present in the metaverse. This brings to the fore the ethics of targeting young people as well as the concern that business is taking advantage of the demographic’s naivete. After all, children are unlikely to have developed the ability to distinguish between fantasy and reality, which can wreak havoc. According to the U.S. not-for-profit Parents Together, several families have complained that their children have spent anything from $1,100 to $7,200 on in-app purchases in the metaverse. 

Addiction. While gamification is important in the metaverse, gaming addiction has become a major psycho-social problem. According to a recent survey, the propensity for addiction in VR-enabled gaming is 44% higherthan in conventional gaming. Some parents have reported that children get anxious when they aren’t playing metaverse games and, after they stop, have to deal with anger management and impulse issues in the real world. Even governments are taking note: China passed laws four years ago forcing companies to limit the amount of time and money children could spend on online gaming, and strengthened those laws in 2021. 

Harassment. Common social media challenges, such as sexual harassment, racial slurs, verbal abuse, and the invasion of personal spaces, are amplified in the metaverse. An immersive experience, supported by haptic technology, can transfer touch from the virtual world, making it feel real. According to Sum of Us, the global non-profit advocacy organization, its researcher-avatars encountered sexual harassment, including virtual rape and groping, in several worlds such as Horizon Worlds and Rec Room. Undoubtedly, society will hold business responsible whenever users are made to feel uncomfortable in branded metaverse worlds. 

Lighting the pathways

Companies need to develop strategies to establish that they take their DSR seriously, before regulators force them to do so. They can turn a proactive approach into a strength, ensuring that regulation will make the metaverse work even better. Companies need to act on three fronts simultaneously: 

Influence the platforms. Business should engage with platform-owners to deal quickly and firmly with problems in the metaverse, even before they occur. The platform owners possess the technical resources, the business rules, and the expertise to do so. For instance, Meta has developed the ability to create safety bubblesaround avatars, which will help avert physical harassment. 

Companies must influence the platforms, their partners in the metaverse, to do more to protect users—just as they have done with social media platforms. Three years ago, when hate speech escalated on Facebook, over 500 companies—from Adidas and Best Buy to Unilever and Volkswagen—joined the Stop Hate for Profit campaign launched by several not-for-profit organizations, and threatened to stop advertising their brands on the platform. It forced Facebook to hire civil rights leaders to examine the charges, and to crack down on extremism in public and private Facebook groups. 

By pushing the platforms to develop preemptive measures, such as A.I.-based content moderation, companies can reduce the risks of doing business in the metaverse. By incorporating these capabilities into their DSR strategies, companies will also be better prepared for impending regulations such as the U.K.’s Online Safety Bill.

Create standards. Industry-wide standards can work well, especially in the absence of laws, and will facilitate better regulation. The norms may initially affect revenues, but they will eventually bring several benefits. 

For instance, voluntary standards have worked in the video gaming industry in Japan. In 2002, the Computer Entertainment Suppliers Association of Japan established the Computer Entertainment Rating Organization (CERO), which helped tackle criticism about gaming content and improved companies’ images by awarding ratings to games. By introducing a widely accepted rating system, the industry increased the degree of freedom for creators, especially those designing games rated 18+. In fact, Japan’s government highly recognized the CERO system such that they chose to work with CERO to refine the ratings system in 2006. 

In the same way, business should adopt industry-wide standards to tackle, say, the problem of metaverse gaming addiction among children. Don’t forget, when the regulations in countries such as China spill over to other nations, governments will start with the prevailing standards. Developing them proactively will better position companies to work with governments, and may even eliminate the need for laws. 

Develop compliance capabilities. Sooner or later, metaverse marketers will have to develop the capabilities to deal with regulations as the policies governing social media and online gaming gradually extend to include the metaverse. For instance, the U.S. Federal Trade Commission recently used the Children’s Online Privacy Protection Act to fine Epic Games, which developed the Fortnite game, $520 million. 

With the metaverse platforms drawing criticism for allowing children-targeted advertising, new regulations to tackle the problem may soon emerge. Business must seize the moment to demonstrate its DSR by building compliance capabilities quickly. 

Setting up internal teams to comply with regulation will be essential. In China, for instance, when the government announced stricter regulations on gaming in 2021, the market leaders had to respond rapidly. One set up a team to interpret the new regulations, design preemptive measures, and monitor countermeasures for the future. Another introduced several new control points in its review process to ensure that the content in its games would be compliant with the new legal requirements. 

While companies can look to the metaverse to drive growth in the long run, they must get ready to confront the related challenges. They must develop a set of DSR principles whose execution must be the joint responsibility of platforms, companies, and governments. Indeed, the metaverse ecosystem’s stakeholders must ensure alignment not just in value creation and capture, but also in making the metaverse a safe place for every user. 

Read other Fortune columns by François Candelon. 

François Candelon is a managing director and senior partner at BCG and the global director of the BCG Henderson Institute. 

Michael G. Jacobides is the Sir Donald Gordon Professor of Entrepreneurship and Innovation at London Business School, Advisor at BCG and Evolution Ltd.

Lisa Krayer is a project leader at BCG and an ambassador at the BCG Henderson Institute. 

Winson Chen is a project leader at BCG and an ambassador at the BCG Henderson Institute. 

Some companies featured in this column are past or current clients of BCG.