23 Feb 2022 5 min read

What is the metaverse, and is it really the next big thing?

By Lars Kreckel

In the first of a two-part blog, we delve into the metaverse, and consider how far the vision is from becoming a (virtual) reality.

Metaverse VR AR.jpg

Of the 1,600 words in his 2021 Founder’s Letter, a single line encapsulated Mark Zuckerberg’s conviction in his company’s strategy: ‘From now on, we will be metaverse-first, not Facebook-first.’

With Meta Platforms* alone spending more than $10 billion on metaverse R&D (roughly equal to Ford’s* annual earnings) last year, there’s a lot at stake as the tech giants jostle for pole position. But what exactly is the metaverse, which parts of our lives could it change, and how likely is it to become a reality?

Today, the metaverse is a vision – or more accurately several overlapping, competing visions. From a cynic’s perspective, it’s a rebranding exercise, a new name for the virtual reality (VR) experiences that were pioneered by engineers at NASA and MIT in the 1970s, combined with the newer augmented reality (AR) in which digital images are superimposed on representations of the real world.

However, it’s worth remembering that as recently as the mid-90s very few people would credit that the apparently niche Information Superhighway (remember the days of using your dial-up modem to access a bulletin-board system?) would soon become today’s internet, a force that has upended business models in most sectors of the economy.

The next universal device

For optimists such as Zuckerberg, the metaverse describes a VR-enabled digital world in which people can work, play and live. VR hardware, he believes, will become the next ‘universal device’, rivalling the mobile phone in terms of ubiquity.

Beyond the basic definition, there are some key characteristics of the metaverse that distinguish it from existing, less-ambitious digital worlds. The first is persistence, meaning that the metaverse is always on and doesn’t pause when a user exits the environment. Another is inter-operability, meaning a user's identity, possessions and other important attributes can be taken from one environment to another.

The metaverse can be seen as the next step in how people interact with the internet, with its multi-sensory ambitions simply reflecting the increasing convergence of our physical and digital lives.

For an easy introduction to the metaverse, the film Ready Player One is a good place to start. Or for those who prefer books, ‘Snow Crash’ by Neal Stephenson is often credited with having first envisioned the metaverse.

The real deal

As the content served by the internet has evolved from basic text-driven webpages to social media and real-time video, the boundaries between the real and the virtual have begun to fade. Taken to its logical conclusion, the human brain will eventually not distinguish between reality and the metaverse. This might sound fanciful, but the social lives of younger people are already intimately intertwined with social media, and we know that the emotions stirred by these interactions are every bit as real as those rooted in the physical world. One example of the strong personal bonds created in virtual worlds are the in-game funerals for gamers, often attended by hundreds of fellow gamers, with avatars equipped with black clothing, holding tributes and processions.

Brands, too, already live or die online, with physical stores an extension of an online identity rather than the other way round.

The graphic below offers a less philosophical but more quantifiable example of how online activity has become a part of our lives. As we spend an ever-increasing proportion of our waking hours online, the debate about whether this activity is ‘real’ or not becomes rather academic.

Metaverse blog chart.png

Early adopters

Existing digital worlds offer a glimpse of what we might expect from the metaverse. Second Life is an online multimedia platform that has been in operation for 18 years, and at its peak it had around a million users. The platform has its own currency, the Linden Dollar, which can be exchanged with real currency.

Although Fortnite is in many ways less ambitious, sitting comfortably within the game category, the real-world value of items such as Fortnite skins is indicative of the scope for value creation in a virtual context. Rapper Travis Scott is among those recognising the commercial opportunity presented by the Fortnite environment, and his virtual concert held within the game world attracted 27.7 million unique users, as well as earning Scott a reported $20 million.

Games are currently the most obvious place for virtual world creation, but the pandemic-led work-from-home trend raised interest in virtual office environments. Meta Platforms has consistently emphasised the collaborative ambitions of the metaverse, and Microsoft* recently announced that Teams users will be able to appear as avatars – animated cartoon versions of themselves – within the first half of this year and could eventually inhabit digital replicas of real-world offices.

How far away is it?

Aside from small-scale virtual worlds and press-release renderings of Mark Zuckerberg’s avatar, for now the metaverse remains a pipedream. We believe the areas requiring development broadly fall into three categories:

  1. Hardware – rendering a three-dimensional virtual world in real-time has proved a decades-long computing challenge. VR headsets, meanwhile, must become light enough to be wearable for extended periods. The Meta Quest 2, Meta Platforms’ current model, still weighs just over half a kilo.
  2. Software – building digital worlds such as those found in Fortnite currently demands vast amounts of human labour. The creation of much more ambitious worlds will rely on advances in software.
  3. Content – virtual worlds are only likely to become mainstream if they hit a critical mass of active users who contribute content. Beyond the hardware and software challenges, there are social and legislative problems that must be addressed, likely requiring developments in artificial intelligence to augment human policing of the metaverse.

Solving the challenges in the first two categories has already taken decades, and clearly there is still a need for further progress. Sales of Meta Platforms’ Oculus VR headsets remain comparatively low at around 7 million in 2021, and notably they did not spike during lockdown, as some had predicted.

The final category represents a more complex problem. Second Life found itself mired in legal debate around intellectual property, child protection and privacy, and it remains unclear how practical it will be to monitor and moderate unwanted user behaviour in the metaverse. In the UK, the authors of the upcoming Online Safety Bill have made it clear that platform providers face heavy fines if they attempt to use the metaverse to dodge regulatory requirements.

Not every amazing idea becomes a reality, and the path to realisation can be long and bumpy. Turning back the clock on another transformative technology, the mobile internet was an exciting and widely discussed idea in 2000, but the first iPhone didn’t arrive until 2007, and it wasn’t until 2010 that smartphones truly took off. But, keeping in mind the staggering rise of the internet over the past three decades, we believe it pays to keep an open mind.

In part two of this blog, we will turn our attention to the economic and investment implications of the metaverse.

 

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Unless otherwise stated, information is sourced from company reports and LGIM analysis as at February 2022.

Lars Kreckel

Global Equity Strategist

Lars is not your average German: he owns the house he lives in, has two children and drives Japanese cars (one electric). Maybe that’s also why he covers equities rather than bonds?

Lars Kreckel