China’s Big Tech leads in VR and AR patent applications. But China’s metaverse may look different from everyone else’s

January 27, 2022, 11:00 PM UTC

China’s Big Tech firms are racing to file metaverse-related patents and trademarks in a bid to outpace the intensifying competition to build what many expect will be the next iteration of the web: interactive virtual worlds where people socialize, work, and live.

Six of China’s top tech companies—including Tencent, Baidu, and U.S.-blacklisted Huawei and SenseTime—made the top 10 list of firms worldwide that filed the most virtual reality (VR) and augmented reality (AR) patent applications filed globally in the last two years, says a new report by Chinese-language IPRDaily. The report drew data from PatSnap, a data analytics startup focused on intellectual property (IP). 

Tencent filed 4,085 VR and AR patent applications in 2020 and 2021—the second-most in the world—slightly trailing only Samsung Electronics’ 4,094 applications. Tencent operates WeChat, China’s top social messaging app that has over 1 billion monthly users and is the world’s largest video gaming company by revenue.

Baidu, China’s leading Internet search provider and known as the country’s Google, filed 3,094 applications in the past two years. Last month, Baidu became the first Chinese firm to launch its own metaverse called ‘Xi Rang,’ which translates to the ‘Land of Hope.’ 

Microsoft, the only U.S. firm to crack the top 10, filed 2,108 AR and VR patents in 2020 and 2021.

Last year, over 1,000 Chinese tech firms filed 10,000 applications to register metaverse-related trademarks such as “metaverse OS”, says Chinese data provider Tianyancha. They’re trying to get a piece of what Bloomberg estimates will become an $800 billion opportunity by 2024.

Yet, China’s Big Tech metaverse rush comes amid the backdrop of a state clampdown on tech companies—and everything metaverse-related—from gaming, to cryptocurrencies to crypto-linked non-fungible tokens (NFTs). China’s rendition of the new, virtual world is likely to be tightly regulated, highly censored, and limited to China-only offerings, experts say. China’s metaverse will “never look the same” as in other countries, says Carlos Betancourt, founding principal at digital assets hedge fund BKCoin Capital.

Beijing wants to get ahead in the global metaverse race, but it still has “much discomfort with how this new space will be used—and who will be using it,” says Paul Triolo, head of geo-technology at consulting and advisory firm Eurasia Group. In recent months, Chinese state media and state-run think tanks have warned of the national security, financial, and social dangers that the metaverse poses.

Chinese tech firms need to tread carefully given heightened scrutiny by domestic regulators of the key building blocks of digital worlds—namely gaming, VR and AR tech, and payments, he says.

Cryptocurrencies for instance, won’t play a major role in Chinese iterations of the metaverse—unlike in other countries, where they are the basic economic structure underlying these virtual worlds, says Triolo. China has banned the use of cryptocurrencies and crypto mining, and has already launched a state-sanctioned digital yuan, which will be used at the upcoming 2022 Beijing Winter Olympic Games. In contrast, the most popular decentralized metaverse platforms, like Decentraland and The Sandbox, requires users to first set-up a crypto wallet before they can open an account. Beijing’s policy could stifle Chinese firms’ innovation and put them at a disadvantage, given that its global competitors will be able to access a larger portfolio of blockchain or crypto-based payments platforms, says Triolo.

China has also banned the sale and use of Oculus VR headset—the leading tech in the VR space, so far, from Facebook parent Meta—and blocked the release of video games, movies, and other entertainment that don’t comply with official censors’ requirements. Video games are oft-viewed as the building blocks of the metaverse, with games makers and publishers like Roblox, NetEase, Tencent, and now Microsoft (the proposed owner of Activision Blizzard). But in China, Beijing has used a heavy regulatory hand as it attempts to curb gaming addiction and citizens’ exposure to violent and what the government deems as unpatriotic imagery. Last August, Chinese authorities announced strict new rules to limit the amount of time children can spend playing video games to three hours per week, while state-linked media likened gaming to “spiritual opium.”

Tencent’s gaming and social app prowess—the company is China’s top games publisher and an investor in some of the globe’s biggest gaming studios—has primed it to capitalize on the opportunity of the metaverse, says Mario Stefanidis, vice president of research at Roundhill Investments, a New York-based investment firm which launched the world’s first metaverse exchange-traded fund (ETF) in June. But Beijing’s pursuit of stringent control has wiped out hundreds of billions in value from homegrown tech firms’ market capitalization since October 2020. The “most promising [metaverse] developments from China will come from loosening regulatory scrutiny, and allowing private firms to operate more autonomously,” Stefanidis says.

Regulators worldwide are vying for greater control over decentralized technologies, like cryptocurrencies and metaverse platforms—not only China’s.

Still, the Chinese tech companies building these virtual worlds come attached with a “different level of risk” given the prospect of Chinese authorities’ intervention, says Betancourt. But for now, “any investor pursuing an investment [on] Chinese metaverse-focused companies” should understand that the government can, on a whim, shut down or alter the course of the any company’s trajectory.

Fortune’s upcoming Brainstorm Design conference is going to dive into how businesses are building experiences in the metaverse. Apply to attend the event on May 23-24 in New York.