Metaverse
The metaverse is a trending topic among consumers, gamers, content creators, investors, the developer ecosystem, and more. Notably, the metaverse is where digital identities live in a digital space, with the bold vision of building a new, more immersive version of the internet. Today’s newsletter will unbundle “the metaverse” from a buzzword to a series of current practical applications and future potential developments.
Additionally in this newsletter, Drawing Capital will share insights and potential investment ideas related to the metaverse, virtual worlds, and gaming.
In our opinion, the key takeaway is that we believe the metaverse is just in its early beginnings and will become an opportunity that will be measured in the trillions of dollars. We hope you enjoy reading about this exciting topic.
3 Versions of Real Life: Physical, Virtual, and Hybrid Worlds
Obviously, the coronavirus pandemic altered humanity, and changes occurred in the lives of billions of people around the world in the past 27 months. From a work environment, there has been a tremendous increase in hybrid work and remote work environments. During a coronavirus-induced lockdown environment, many people relied on digital technologies to remain connected and manage various aspects of their lives, giving rise to topics such as food delivery apps, e-commerce, video conferencing, gaming, telehealth, cloud software companies, RNA development, and so much more.
Increasingly, it seems like people will live in 2 separate or interconnected worlds: living in real/physical life and living a digital life. 1 person may have a similar or different persona and identity as they traverse between their physical life and digital life. Augmented reality and the intersection of the physical and virtual worlds represent the hybrid world.
In the professional workplace setting, an example of a hybrid world is being in a Zoom meeting that takes place in a conference room, and as a result, some meeting attendees are attending physically in the conference room while others are attending virtually via video conferencing.
Additionally, it’s likely to see further experimentation and changing cost structures between physical and digital assets. Digital files like JPEGs or digital skins in video games don’t necessarily suffer from wear-and-tear, while physical clothing and houses certainly require maintenance and endure wear-and-tear over time.
Early Examples of Virtual Worlds
The key insight is that while virtual worlds are not a new concept, the metaverse is expanding the interest in virtual worlds and engaging with more immersive and real-time communication and interactions.
Early Examples of Virtual Worlds:
Gaming in Virtual Worlds: Neopets, Club Penguin, Runescape, World of Warcraft, League of Legends, EVE Online
Online Social Networking: SocialNet, Friendster, MySpace
Gaming with Interactive Devices: Nintendo’s Wii Sports was an early example of fitness and gaming with avatars in the virtual world. Compared to traditional video games with physical handheld controllers, the Wii remote created a new interactive experience with movement. For example, physically moving one’s arm to serve a tennis ball in Wii Sports while holding the Wii controller was an action that was mimicked in the virtual gaming environment.
3 Traits in Virtual Worlds
Virtual worlds rely on 3 traits: belief, utility, and value.
Do people believe in it?
Do people derive utility from it and fulfill a person’s or company’s need or desire?
Do people create, share, transfer, and earn value?
Each network will have its own narrative and sub-narratives. When the network's value increases, then there is growth in 1 or more in these 3 traits. What is fascinating about virtual worlds is that it represents a call option or positive asymmetry on the future of digital creativity, and the uncertainty of this by itself is interesting.
The underlying premise with the metaverse is the rise of immersive experiences in communities that connect and communicate with each other in both new ways and in ways that may resemble physical connections in a virtual world.
Defining the Metaverse
Fiction writer Neal Stephenson coined the term “metaverse” in his 1992 science fiction novel titled “Snow Crash”, which is a story about people interacting with each other using avatars in a 3D world.
“Metaverse” is a combination of two words: “meta” (implying going beyond or transcending something) and “universe” (which indicates the vastness in all of space and time). Metaverse describes an alternative digital reality and place where people socialize, play, and work.
10 Attributes in the Metaverse
The following list highlights a series of 10 attributes for the metaverse. Growth in these attributes leads towards further development in the metaverse.
7 Layers in the Metaverse
The key takeaway is that there are several layers in the metaverse in which consumers and companies can create and exchange value for others and themselves.
Sample Metaverse Risks
While we are incredibly fascinated by the metaverse and are curious in both learning more and learning about investable opportunities, it’s also important to acknowledge that risk factors and uncertainties remain. The following 10 red boxes highlight 10 sample risks with the metaverse.
Stages of Value Creation: Enter, Explore, Create & Connect in the Virtual World
We believe there are 3 stages of value creation in virtual worlds:
The first stage emphasizes hyper-focus on creating a digital product or virtual world.
The second stage is the exploration stage and the establishment of product market fit to design a virtual world that consumers relate to and be a part of in developing a community.
The third stage involves creating content and a platform of products in the metaverse, along with connecting the virtual world and developing real-time, synchronous, and engaging interactions.
Convergence of 4 Trends is a Multi-Trillion-Dollar Tailwind
Identification (or identity), virtualization, democratization, and decentralization are the 4 core intersecting traits for the metaverse. When measured in potentially trillions of dollars, there is obviously a large total addressable market and large potential market opportunity.
Intersection of DeFi & Metaverse is Creating Value
Digital Property Rights and Non-Fungible Tokens (NFTs)
Several consumer companies are exploring and experimenting with NFTs. Although this may sound silly to some people, the reality is that large companies are increasingly experimenting with selling virtual goods to promote their brand, connect with consumers & younger audiences, and generate higher corporate revenues.
One of the best advantages of the underlying blockchain technology for NFTs is that it allows content creators and artists to verify authenticity, provide proof of ownership, retain copyright ownership, and receive credit (either via name and/or via royalty revenues). Many NFTs use the underlying Ethereum blockchain.
Examples of Publicly-Traded Gaming Companies
The left column highlights several of the largest publicly-traded gaming companies in the world. While NVIDIA was excluded from this slide, we will highlight NVIDIA later in this newsletter.
Activision Blizzard and Zynga are highlighted in purple since they have received acquisition offers, although these acquisitions are pending as of early March 2022. Microsoft announced a $68.7 billion cash offer to acquire Activision Blizzard, and Take 2 Interactive offered a deal value of about $12.7 billion to acquire Zynga.
Additionally, it’s clear that gaming is global, and beyond American companies, several large publicly-traded gaming companies include Singapore-based Sea Limited, French-headquartered Ubisoft, Sony and Nintendo from Japan, and Tencent and NetEase in China.
For those of you that prefer an index fund approach to gaining exposure to specific themes, VanEck’s Video Gaming & eSports ETF under ticker symbol “ESPO” seeks to track an index consisting of global video gaming and esports companies. For an example of a metaverse-focused ETF, Roundhill Investments is the creator of the Roundhill Ball Metaverse ETF under ticker symbol METV. Additionally, both ProShares and Fidelity Investments recently made filings to indicate a potential launch of metaverse-themed funds.
Illustration of Companies with Large Metaverse or Gaming Initiatives
Growing Metaverse Categories, as Defined by CB Insights
Notable Quotes from Tech CEOs and Industry Analysts
“We believe the metaverse will be the successor to the mobile internet”. - Mark Zuckerberg, Co-Founder, Chairman & CEO of Meta Platforms
“The commerce and economy of the virtual world will be much, much bigger than the economy of the physical world… The virtual world is not limited by the conservation of mass nor energy… The metaverse is a 3D extension of the internet that will be much, much bigger than the 3D physical world”. - Jensen Huang, Co-Founder & CEO of NVIDIA
“When we think about our vision for what a metaverse can be, we believe there won’t be a single centralized metaverse, and there shouldn’t be. We need to support many metaverse platforms as well as a robust ecosystem of content, commerce, and applications. In gaming, we see the metaverse as a collection of communities and individual identities anchored in strong content franchises accessible on every business… Today, three billion consumers around the world play games, and we expect this number will reach 4.5 billion by 2030”. - Satya Nadella, Chairman & CEO of Microsoft
“We think this [the metaverse] could be as much as an $8 trillion dollar opportunity on the revenue and monetization side.” - Eric Sheridan, Analyst at Goldman Sachs
“Our social lives and gaming are converting and creating a large, fast-growing virtual goods consumer economy. It is estimated that revenue from virtual gaming worlds could grow from ~$180 billion in 2020 to ~$400 billion in 2025”. - David Grider & Matt Maximo, Head of Research & Research Analyst at Grayscale
“[Metaverse] development will continue and bespoke companies capitalizing on the evolving opportunity will emerge. While we believe that the development accomplished by the middle of this decade could be in the $800 billion range, incorporate these infrastructure companies and accelerating change more broadly could mean a $2.5 trillion opportunity by 2030, resulting in a 17.5% CAGR between now and the end of the decade.” - Mario Stefanidis, VP of Research at Roundhill Investments
Summary of Meta Platform’s Metaverse Initiatives at the Connect 2021 Conference
4 Focus Areas: New technologies, new & immersive experiences, creator economy, and building communities. The metaverse will enable people to “embody experiences with a deep feeling of presence” as opposed to just virtually and passively “viewing experiences”.
Directional Arrow of Technology: Technology has given more voice to express ourselves and experience the world with ever greater richness, efficiency, complexity, and divergence in viewpoints.
Avatars: In the future, avatars won’t be 2-D static images. Instead, avatars will be 3-D dynamic expressions of our emotions & expressions, our desired avatar image, and our digital identities. Additionally, there will be virtual wardrobes designed by different creators, companies, and apps to wear on avatars.
Virtual Teleporting: Within the future state of the metaverse, people will be able to virtually teleport across different spaces and worlds. Additionally, “In order to unlock the potential of the metaverse, there needs to be interoperability…teleporting around the metaverse is going to be like clicking a link on the internet, and it’s an open standard” - Mark Zuckerberg.
What’s Next for Meta Platforms in the Metaverse: Meta has identified 8 themes in the metaverse and is exploring practical metaverse applications in industries such as fitness, gaming, travel, and education. The key takeaway is that because the metaverse is in its early building stages, there seems to be endless possibilities of imagination, creativity, and value creation in the metaverse.
Intel’s Perspectives on the Metaverse
The “Metaverse” Term: Author Neal Stephenson coined the term, “metaverse”, in his 1992 science fiction novel titled Snow Crash.
Technological Transformation & Transition: “The metaverse may be the next major platform in computing after the world wide web and mobile… There are reasons to believe that we are on the cusp of the next major transition in computing”.
Defining the Metaverse: “Metaverse has come to represent a utopian convergence of digital experiences fueled by Moore’s Law - an aspiration to enable rich, real-time, globally-interconnected virtual and augmented-reality environments that will enable billions of people to work, play, collaborate, and socialize in entirely new ways”.
Current Technical Constraint: “Truly persistent and immerse computing, at scale and accessible by billions of humans in real time, will require even more: a 1,000-times increase in computational efficiency from today’s state of the art. Beyond the hardware improvements, we also need new algorithms and software architectures”.
What’s Next in Metaverse Computing Technology: Intel has defined 3 layers in the building blocks for the metaverse: meta intelligence layer, meta ops layer, and meta compute layer. In defining these 3 layers, we quote Intel’s published perspectives directly as the following: “Within the meta intelligence layer, our work focuses on a unified programming model and software development tools and libraries that are open in order to enable developers to deploy complex applications more easily. The meta ops layer describes the infrastructure layer that delivers compute to users beyond what is available to them locally. And finally, the meta compute layer is the raw horsepower necessary to power these metaverse experiences.”
NVIDIA’s Perspectives on the Metaverse: NVIDIA Omniverse Enterprise
For initiatives related to the metaverse, NVIDIA is specifically focused on Omniverse, a platform focused on both collaboration and simulation in the enterprise by enhancing current workflows and productivity through the creation of virtual worlds.
Additionally and in our opinion, we believe that NVIDIA is an enabler of many technological trends and high-growth themes, as seen by the following illustration below:
Conclusion
Changes in Consumer Behavior: The consumer shift towards online activities is a long-term trend and was accelerated by COVID-19. With the rise of digital adoption and digital transformation, the directional arrow of communication is more online, more immersive, and more voluminous. Increasingly, many people will experience 3 versions of “real life”: physical world, virtual world, and a hybrid world. The prevailing trend, especially given the preferences of Millennials and Gen-Z, is that the future of work, socialization, and interpersonal connections will increasingly take place in hybrid or entirely virtual environments.
Identity & Persona Management: With more online interactions, there has been a rise in multiple personas, changing roles, and increasing ambiguities of identities. We believe that the convergence of pseudonymity and decentralization will accelerate these trends and validate the importance of identity management.
Value Creation Today: While some public commentators express these views as a far-off destination for our population, many of these experiences are translating into tangible value today. We can see examples of this in markets such as e-commerce, gaming, content creation, productivity tools, social media, and the creator economy. Additionally, There are several publicly-traded gaming companies and a few ETFs related to gaming, virtual worlds, and the metaverse.
Digital Trust: In order to remain competitive over the long-term, companies are increasingly allocating resources to establishing digital trust with users. We believe that businesses which under-allocate towards digital trust will likely see increases in customer churn and pressure on their existing market share as virtually-enabled environments continue to take hold.
Introduction to the Metaverse: Several layers, attributes, traits, and intersecting trends exist for the potential multi-trillion-dollar metaverse opportunity. The early innings of the metaverse trend indicate lots of growth opportunities ahead with the acknowledgement of uncertainty.
Enthusiasm: There currently exists tremendous enthusiasm among many tech executives, industry analysts, venture capitalists, content creators, and more for e-commerce, creator economy, digital software technologies, the metaverse, and decentralized finance & the cryptoeconomy.
Metaverse-Focused Companies: Connecting and intersecting the developer ecosystem, creator economy, and consumers will be essential for the success for the metaverse. Key components of building more immersive experiences are multi-sensory interactions and embodied experiences with deeper feelings of real-time presence. Across the 7 layers of the metaverse, there are several methods of companies participating in the metaverse to create value for others and themselves.
Connecting DeFi & NFTs with the Metaverse: Digital property rights and NFTs have real utility and value. Additionally, the intersection of DeFi and the metaverse is already creating value, with more to come.
References and Sources of Quotes:
“The Seven Rules of the Metaverse” by Tony Parisi, 10/22/2021, https://medium.com/meta-verses/the-seven-rules-of-the-metaverse-7d4e06fa864c
“Back Around the World: 2021 in Review” by Mark Yusko, 12/16/2021,
“The Metaverse Value-Chain” by Jon Radoff, 4/7/2021, https://medium.com/building-the-metaverse/the-metaverse-value-chain-afcf9e09e3a7
“The Metaverse and How We’ll Build It Together - Connect 2021” by Meta, Published on 10/28/2021,
Yahoo Finance Interview with NVIDIA CEO Jensen Huang, 11/12/2021, https://news.yahoo.com/nvidia-ceo-the-metaverse-will-be-much-much-bigger-than-the-physical-world-174256652.html
Microsoft & Activision Blizzard M&A Conference Call Transcript from Koyfin, 1/18/2022
Exchanges at Goldman Sachs: Understanding the Metaverse and Web 3.0, 1/11/2022,
“The Metaverse: Web 3.0 Virtual Cloud Economies” by David Grider and Matt Maximo at Grayscale Research, Published in November 2021, https://grayscale.com/wp-content/uploads/2021/11/Grayscale_Metaverse_Report_Nov2021.pdf
“Intro to the Metaverse” Blog by Mario Stefanidis, Roundhill Investments, 6/24/2021, https://www.roundhillinvestments.com/research/metaverse/intro-to-the-metaverse
“Powering the Metaverse” by Raja Koduri (SVP at Intel), Intel Newsroom, 12/14/2021, https://www.intel.com/content/www/us/en/newsroom/opinion/powering-metaverse.html
CB Insights (as of September 9, 2021), https://www.cbinsights.com/research/metaverse-market-map/
“Market Map of the Metaverse” by Jon Radoff, 4/13/2021, https://medium.com/building-the-metaverse/market-map-of-the-metaverse-8ae0cde89696
Coindesk, “Fidelity Seeks Approval for Metaverse ETF”, https://www.coindesk.com/business/2022/01/28/fidelity-seeks-sec-approval-for-metaverse-etf/
Coindesk, “ProShares Files Application for a Metaverse ETF” https://www.coindesk.com/business/2021/12/29/proshares-files-application-with-sec-for-a-metaverse-etf/
Microsoft and Activision Blizzard Acquisition Announcement, 1/18/2022, https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/
Take-Two Interactive & Zynga Acquisition Announcement & Investor Presentation, January 2022, https://ir.take2games.com/static-files/23d9f00c-d7e7-4992-b16d-84e67dc58622
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