Investing in the Metaverse

Part of how I earn my living is delivering keynote speeches at large events, corporate conferences and more intimate board meeting forums. The two topics everyone wants to hear about as we enter 2022 are the Metaverse and Web 3.0.

The volume of attention and money being poured into these technology sectors makes it imperative that investors investigate and understand.

Same But Different

Web 3.0 and the metaverse share some things in common. They both want to use crypto assets to power them. They both seem to want to separate themselves from the physical world.

But, if there is one thing we must remember when delving into these sectors, it is this: there is only so much of human existence that can be ‘virtualised’ or separated from our legal and corporate structures.

Eventually Web 3.0 and blockchain will upend traditional financial structures and decentralise all manner of marketplaces but the metaverse is more likely to be an island or, more accurately, an archipelago of virtual worlds.

As much as Mark Zuckerberg might try there won’t be a single metaverse in the same way as there isn’t one site which is the internet. Instead, it will be a series of places with their own rules, social etiquette and siloed economic systems. The underlying nature of metaverse(s) is not reality, but fantasy. When you think of the metaverse think of it as gaming environments, not work ones.

This is very different to the way our current internet or Web 2.0 operates. By necessity a certain level of interoperability was required because it functions on top of the real world.

A Digital Shadow

To understand the true nature of the metaverse and its investment potential, we have to look back at what we have already built.

The internet as we currently know it is a digital shadow. It is largely replication and augmentation of the physical world; business, objects, locations, transport systems, and people. All of the dominant forces of big tech became so by providing interconnections to create economic value, by adding digital layers to the existing economy.

Amazon provided a logistics system to connect disparate people and physical markets with goods the world over. Google created directories so it was easy to find businesses, people and places – essentially digitising old world ideas of lists, maps, video. Facebook replicated and expanded physical social connections. And Apple provided the digital ‘shovels and picks’ to facilitate these connections. Even real estate sites, job seeking sites, dating apps, Uber – they all facilitate the real world and are inextricably linked to what was and is physical.

All of that provided incredible consumer and business efficiency and utility.

This is why is it has become increasingly difficult to opt out. It made what we already had so much better.

But the metaverse is a different proposition. It wants to escape our physical world. This means participation will be more of a consumer choice than a necessity.

The Metaverse is a Digital Fantasy

It’s not going to be a real world, it’s going to be a world of entertainment – escape from reality. Anyone who thinks we are about to don clunky headgear to conduct a virtual board meeting needs to remember that simple Zoom calls provide enough headaches and connection issues. Yes, there’ll be business applications, like 3D designs of products, potentially consumer ecommerce applications, but mostly, the business side of the metaverse, this decade at least, will be a sideshow.

The main game will be games. It’s already a giant market which doesn’t get the economic attention it deserves in investment circles. The video game market reached $US85.86 billion in 2021, more than twice the size of the entire movie industry. In terms of participants, the numbers are mind-blowing, with 3.24 billion gamers globally.

Gaming the Metaverse

If you want to see who is well-placed in the emergent metaverse, then look at the top 10 gaming companies by revenue. Noticeably, Amazon, Google and Facebook aren’t present, but Microsoft and Tencent are. The metaverse isn’t a greenfield opportunity as it was presented by Zuckerberg. Rather it is a massive market with entrenched players who are unlikely to give ground or go open source on their titles or protocols to create a singular metaverse. Instead, it will become a battle for users, game titles and environments. In the short run, the real opportunity for investors will be in mergers and acquisitions.

Microsoft’s $US68.7 billion acquisition of Activision Blizzard (which owns titles including Call of Duty, Hearthstone and World of Warcraft), is the forerunner of where this space is headed. They also announced that their Xbox Game Pass subscriptions services has surpassed 25 million users. With each player paying $US16 per month, that’s about $US400 million in monthly revenue. While the worlds are not real, the money sure is. 

From here it will be interesting to watch the upcoming IPO of Epic Games. Epic owns Fortnite, which alone has more than 350 million players. With a potential market capitalisation of $US70 billion, this could be the perfect acquisition for Facebook’s metaverse ambitions.

Likewise, Roblox, which is now half of its November share price peak, could be swallowed up given it has all the features of what we seem to be defining as a metaverse.

Eyeball Arbitrage

It stands to reason that the gaming industry as we know it, will be targeted by Big Tech in the creation of ‘their’ metaverse(s). The gaming industry boasts the software, hardware, huge users bases and their encompassing meta / fantasy world environments. Meta (Facebook) alone has already made 94 acquisitions to garner its 3 billion global userbase.

The difference and opportunity for investors with this era is that many of the target acquisitions already trade publicly while the nascent social and search sectors operated largely as venture-funded private firms. We should only expect the big tech spending spree to continue, especially given there is a ready-made industry with a very large user base and desired online behaviour patterns which can be arbitraged.