The disruptive potential of the metaverse is becoming increasingly apparent as early adopters are already experiencing its real-life benefits. The term’s definition remains fluid, but its impact is already profound. A way to think of the metaverse is that rather than engaging through a flat screen on a device such as a smartphone or a PC, the metaverse will be more immersive and interactive.
The metaverse is the next step in shrinking the world, removing the barriers of physical distance, and enabling opportunities that are today limited by geography and the sometimes-annoying laws of nature. We will look at the leaders shaping the space and the possibilities in this virtual new world.
Today’s proto-metaverse consists primarily of online gaming, with an expected market size of just under $50 billion in 2022, growing to nearly $700 billion by 2030. We are still in the very early days of the metaverse evolution but the technologies that enable it can be broken down into four key areas:
- Infrastructure and hardware
- Enabling technologies
- Content and experiences
Investment in the metaverse has been accelerating, which means growing opportunities. In the first five months of 2022, over $120 billion was invested in its related technologies by private equity, venture capital funds and corporations. That’s more than double the investment for all of 2021, with over half coming from Microsoft’s (MSFT) acquisition of Activision (ATVI) for $59 billion. For example, Meta’s (META) commitment to the space is enormous, having reported net losses of nearly $17 billion for fiscal years 2019 through 2021. The company’s CFO has stated that those losses will be substantially higher in 2022. Then there is the name change.
Infrastructure and Hardware
Just as today’s internet requires data connectivity, storage and processing power, so does the metaverse; it just needs a lot more of everything. To fully realize the power of the metaverse, we need exponentially more powerful graphics engines for higher-quality rendering to create photorealistic environments, and we need greater network capacity to store and transport data without noticeable lags. This category is all about the underlying infrastructure, from cloud storage to semiconductors to the networks moving the data around.
Regarding microchips, Nvidia (NVDA) is one of the clear leaders in Graphics Process Units (GPUs) and is a major supplier of chips to the gaming industry. Micron Technology (MU) is a leader in DRAM products (Dynamic Random Access Memory). These semiconductors have low latency and provide high-speed data retrieval, which is increasingly important as the world moves toward 5G. Both companies are U.S.-based, thus potentially benefitting from the recently passed CHIPS Act.
Edge computing will also play an essential role in the metaverse by allowing data to be captured, stored, and increasingly, processed locally across various smart devices and local networks rather than in the cloud. This can help solve the problem of limited bandwidth and latency. The major players in this space include Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) and Cloudflare (NET).
This category also includes the human interface. Whereas today’s internet is accessed via PC, tablet or smartphone, the metaverse is designed to be immersive, which means virtual reality (VR), augmented reality (AR), and eventually extended reality (XR) devices, rather than looking at a screen. XR devices, such as contact lenses or someday in the future, brain-computer interfaces (often referred to as “wetware” in sci-fi stories) , are likely more than a decade away or longer if the creepy factor remains too high.
The global VR headset market grew 241.6% YoY in the first quarter of 2022, with VR headset shipments expected to reach 13.9 million units for all of 2021. Today, there are roughly ten major AR/VR devices available at a price range of $300 to $3,000, and ten more are expected to launch in the next few years. The market is currently dominated by Meta, which enjoys around 90% share, followed by TikTok owner ByteDance’s Pico at 4.5% market share.
Apple’s first headset may be announced as early as January 2023 and is expected to be geared primarily toward early adopters. The company has reportedly enlisted Hollywood A-listers such as Jon Favreau to develop compelling content, and frankly, we are pretty giddy at the thought of an immersive dinosaur chase. AR-focused Apple Glasses are believed to be the company’s longer-term goal, but their release date is further off. Sony (SONY) is expected to release its PlayStation VR2 headset later this year.
This category refers to the tools for building immersive, life-like experiences and includes game engines, creator tools, and Artificial Intelligence services. It also consists of the platforms that facilitate the delivery and discovery of metaverse experiences and content. Today, there are over 100 virtual worlds, with many of them focused on either gaming or social experiences.
Given the immersive nature of the metaverse, it requires a range of sophisticated types of developer software, including 3D, vector design, animation, games creation, video editing and digital art software. Unity Software (U) provides a platform for creating and operating interactive, real-time 3D content. Unreal Engine from Epic Games is one of the most heavily used solutions. Other significant players in the space include Autodesk (ADSK), Adobe Inc’s (ADBE) After Effects, Amazon’s Lumberyard and Nvidia’s Omniverse. Microsoft is building several metaverse enterprise solutions, including Dynamics 365 Connected Spaces, Microsoft Mesh and Azure Digital Twins.
As for examples of how these tools are being used, BMW (BMWYY) is building a digital twin using Nvidia Omniverse for all its auto factories. According to Michele Melchiorre, Head of Systems for Production, Planning, Tools and Plant Engineering in the BMW Group, “This opens up completely new possibilities for us to implement new detailed planning and minimal change in existing structures in a more efficient, accurate and convenient way.”
The major players in the platform space include:
- The Sandbox (private) is a decentralized NFT gaming metaverse based on the Ethereum blockchain where users can purchase, sell, create and trade digital assets and use the cryptocurrency SAND.
- Decentraland (private) is a browser-based 3D virtual world platform where users can purchase “virtual” land in the form of NFTs via the MANA cryptocurrency, which uses the Ethereum blockchain.
- Roblox (RBLX) allows players to create their own games, which can then be played by other users. The company reported 50.4 million daily average users in May 2022, up 17% YoY, representing 3.6 billion hours of engagement, up 10% YoY.
- Crypto Voxels (private) is one of the primary NFT trading platforms.
- AnamXR uses game-engine technology to create virtual 3D immersive shopping experiences for luxury brands. According to AnamXR cofounder and CEO Irene-Marie Seelig, “Consumer behavior has largely shifted toward adopting digital personas, yet many brands have yet to provide a solution. This opens up a whole new revenue model for brands who can supply digital assets like clothing.”
- Horizon Worlds from Meta is an online video game with an integrated game creation system and was launched in December 2021.
Metaverse enabling technologies include security, content moderation and payments.
As we’ve seen with today’s internet, the more our lives move into the digital world, the more opportunities there are for nefarious actors. The importance of data privacy and cybersecurity will only increase and expand. This means ongoing tailwinds for companies such as Check Point Software (CHKP), Palo Alto Networks (PANW) and CyberArk (CYBR).
Content moderation is becoming increasingly complex with the growing complexity of virtual worlds. Beyond the theft of sensitive data, the potential for deepfakes is growing – remember this one of Nancy Pelosi? The more “real” this virtual reality becomes, the more users can feel vulnerable, such as when the avatar of a tester of Meta’s Horizon World was groped.
The more “real” this metaverse becomes, the more dangerous it can be, particularly to those who are most vulnerable, such as children. As Rob Lowe, managing director of Digital Play at LEGO Ventures, puts it, “This is the right time to be thinking, okay, in real life, you have playgrounds and schools. And very clearly, they’re fun, playful spaces. But, equally, in the same way, that you wouldn’t have a child walking alone after midnight in the middle of Soho, you wouldn’t want the same thing to happen in the metaverse.”
We expect that existing cybersecurity companies will continue to expand their offerings to address as these virtual worlds evolve.
The metaverse payment structure is primarily crypto-oriented versus the more traditional payment methods used for Web 2.0, such as credit/debit cards. This means tailwinds for companies such as cryptocurrency exchange platform Coinbase (COIN) and e-commerce platform Shopify (SHOP), which launched a beta version of an NFT program last year that will allow merchants to create and sell their own NFTs.
Content and Experiences
This category is all about the virtual worlds created on the metaverse platforms, those environments where users can gather, watch concerts and play games. It also includes content that enriches the experience and specific use case applications such as educational tools.
As Marc Petit, VP of Epic Games’ Unreal Engine Ecosystem, puts it, “It’s going to be important to create a truly creator-focused economy in the open metaverse, where creators can realize the value of their creations and not just be at the mercy of a gatekeeper that takes all the profit off the top because they are at the gate and they can do it.”
High-end fashion brands are using the metaverse to further connect with customers. For example, Kering Spa (PPRUF) subsidiary Gucci launched Gucci Garden on Roblox along with the launch of similar physical spaces. According to Gucci Executive Vice President and Chief Marketing Officer Robert Triefus, “There is probably an underestimation of the value being attached to individuals who want to express themselves in a virtual world with a virtual product, [through] a virtual persona. The idea that everything has to be physical is very quickly being disproven.”
He’s got a point. For the three billion gamers in the world today, the virtual goods economy is estimated to comprise nearly 75% of global gaming revenues.
VF Corporation (VFC) subsidiary Vans launched Vans World on Roblox on September 1, 2021, as a permanent addition to the platform where users will get updates over the month with new accessories and has seen over 60 million visitors since its launch. Nike (NKE) launched Nikeland on Roblox as an event starting on November 18, 2021 and ending on December 7, 2021.
NFTs have been getting a lot of attention over the past year and rightfully so. Adidas’ (ADDYY) NFT collaboration with Bored Ape Yacht Club generated sales of more than $100 million, not exactly yawn-inducing.
One of the most exciting opportunities for this immersive world will be in education. Imagine learning by walking around ancient Greece with a virtual Aristotle teaching you philosophy or being so small you can walk around inside a virtual human eye or an ostrich egg, learning physiology in a way that is today impossible. Imagine students from anywhere in the world virtually attending courses taught by world-class teachers, providing educational opportunities for billions of children and enabling them to connect socially with one another in a world that exists outside of political and geographical boundaries. We aren’t quite there yet, but companies like MetaMedicsVR are creating 3D healthcare training worlds where students can practice procedures. Optima Classical Academy is creating 3D virtual learning environments where students and teachers can interact, regardless of geography.
The Bottom Line
We are in the early days of the metaverse, and just like with the early days of the dot-com era, there will be plenty of stars that shine brightly only to flame out spectacularly. Many will have the right idea and garner plenty of glowing headlines, but be too early or suffer from poor implementation, like Webvan, eToys, and Global Crossing. Other incumbents won’t understand the massive changes coming at them and end up like Kodak (KODK) or struggle to find their footing in this new world like Microsoft did for over a decade. As is often the case, the adoption may be slower than initially expected, but the impact of the change could be well beyond anyone’s imagination. For investors, the opportunities will come from discerning the eToys from the Amazons and having the discipline to buy at an attractive price rather than when everyone is singing a particular stock’s praises.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.