As with any investment, capital is at risk.
Making sense of the metaverse calls to mind the fable of the blind men and the elephant. In the story, three sightless men feel a different part of the animal’s body and draw radically different conclusions about its appearance. Many company leaders exhibit similar behaviour in earnings calls and interviews. You sense them grasping to define the metaverse through the prism of their own activities, their only certainty being that their own business is destined to play a critical role.
Enter Matthew Ball. The venture capitalist and former Amazon executive presents a more holistic view of what he describes as the “quasi-successor” to the internet in his book The Metaverse and How It Will Revolutionize Everything. In it, he suggests that the technologies involved will “forever alter” our lives and bring about changes worth “tens of trillions of dollars”. And he identifies some of the companies best poised to capture that value – and what might stand in their way.
To start with, he provides a much-needed definition, saying the metaverse will be: “A massively scaled and interoperable network of real-time rendered 3D virtual worlds that can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications and payments.”
That’s a lot to unpack. But the critical point, Ball explains, is that the metaverse won’t replace today’s internet but rather provide “next-generation” enhancements.
The net’s foundational communication protocols were “built for 2D information, not 3D data,” he explains, and not “real-time” interactions.
“[Today] we load a webpage, not connect to one. In addition, we experience it separately,” he adds. By contrast, the metaverse will provide a “parallel plane of existence for us all”.
It’s still hard to conceptualise what that means in practice. So, I ask for his most impressive metaverse-like experience.
“Microsoft Flight Simulator,” Ball replies. “Its map is over 500 million square kilometres, just like the real planet Earth. And it’s not static, either. [It] reproduces much of the real world’s weather, flight traffic and architectural changes over time. When you play the game using a high-end virtual reality headset, it’s impossible to come away from the experience without feeling that we are on the cusp of something transformative.”
Ball stresses that the metaverse’s potential goes far beyond gaming. But he acknowledges that video games are the biggest driver of its development, with companies including Epic Games, Roblox and the graphics chip maker NVIDIA among those leading the charge.
“They’re experts in creating virtual worlds we actually want to be in,” Ball says. “Games are the only entertainment category based on learning through failure,” he adds, suggesting their developers have “greater insight into motivational design than many social giants”.
That comment nods towards Meta, the company formerly known as Facebook. Mark Zuckerberg and his colleagues have spent more than $100bn on virtual and augmented reality projects1 to date, based on a belief that Meta will recoup the investment many times over through sales of related software and services once it catches on.
But despite the corporate rebrand, Ball makes clear that Zuckerberg faces competition – and not only from the other tech giants.
In his book, he predicts “there will be many wars in and over” the metaverse and that “insurgent start-ups” have ambitions to define its standards, provide its content and enjoy resulting revenues.
Furthermore, he quotes Epic Games CEO Tim Sweeney’s warning that “if one central company gains control of this, they will become more powerful than any government and be a god on Earth”.
So how realistic a prospect is that?
“I think Sweeney is being a little hyperbolic,” Ball replies. “[But] the metaverse is being built for, or at least around, controls and for profit. Given the significance of the internet today and the potential value of the metaverse in the decades to come, I think Sweeney’s right to be concerned.”
Epic is best known for its video game Fortnite, but it also makes Unreal Engine. The software tool allows users to build high-fidelity virtual worlds and other 3D immersive experiences without needing to know how to code.
Similarly, Roblox lets creators bring their imaginations to life in digital form. Its visuals may be less refined than Unreal’s, but it’s easier to use, which has helped attract millions of young developers and other enthusiasts to the platform.
Ball suggests these companies and others like them, including Unity Technologies, Niantic’s LightShip and NVIDIA’s Omniverse, could play foundational roles in creating the virtual future. But he warns that Apple and Google, rather than Meta, pose the greatest threat to achieving the metaverse’s full potential in the near to medium term.
Ball argues that the sizeable 30 per cent cut the two firms take from iOS and Android in-app fees will disincentivise creators from building experiences. Since those enthusiasts and professional developers will also need to pay taxes and the virtual platforms’ commission charges, he suggests the margins left will be too thin. And he reserves his harshest criticism for Apple, citing its refusal to let users install iOS apps from anywhere but its own store and noting that the firm accounts for the bulk of mobile app revenues.
“Apple uses this power to stifle competitive threats – as the most valuable non-state operated company in the world, generating more cash than any other in history, with control of the most successful product ever, it’s unlikely it wants a change to the status quo. Especially one which shifts the platform to virtual networks rather than the device.”
Epic has sued both Apple and Google, claiming their policies are anti-competitive. If those cases fail, Ball suggests regulatory intervention may be required. Of note, shortly after the interview, Bloomberg reported that Apple is considering giving users access to alternative app stores on its iPhones and iPads to avoid such a threat.
To wrap things up, I ask Ball what he thinks most investors get wrong about the metaverse.
“The metaverse is not VR [virtual reality], nor does it require it,” he replies, adding that “the appropriate timeline to observe the development of the metaverse is in decades”.
That takeaway supports Scottish Mortgage’s belief that a long-term, patient approach is required to invest in companies seeking to create the next generation of the internet. Moreover, as growth investors, our focus should be on businesses developing disruptive technologies that could underpin the metaverse’s development rather than the ‘ageing tech superheroes’ building headsets, smart glasses and other consumer-focused hardware at this early stage.
1 Virtual reality refers to an immersive environment that replaces the user’s view of their physical surroundings. This view might be computer-generated or involve 180-degree or 360-degree pre-recorded video. Augmented reality – sometimes known as ‘mixed reality’ – involves adding digital elements to the user’s view but not shutting them off from the real world.
Claire Shaw is a portfolio director and plays a prominent role in servicing Scottish Mortgage’s UK shareholder base. Before joining in 2019, she spent over a decade as a fund manager with a focus on managing European equity portfolios for a global client base. With a background in analysing companies and communicating investment ideas, Claire is also responsible for creating engaging content that makes the Scottish Mortgage portfolio accessible to all its shareholders. Beyond that, she works closely with the managers, meeting with portfolio companies and conducting in-depth portfolio discussions with shareholders.
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