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Investors looking for the next big thing in tech are embracing virtual worlds and investing in companies that seek to redefine the internet ecosystem – and how we live and work.

This week all focus is on the earnings reports of the big tech companies, which are increasingly trying to look beyond their past and present and toward the future and the next big thing in tech. But what is the next big thing?
 
If you ask Mark Zuckerberg, it’s the “metaverse.” We agree, but it won’t be just Facebook that will design the metaverse, but a generation of “new tech” companies that will build a whole new ecosystem. Many of these companies are backed by venture capital, and every industry vertical is pursuing investments in a metaverse or an augmented / virtual reality (AR/VR) solution. In this week’s commentary, we discuss what in the world is the metaverse, why so many are interested in it, and ways to invest in it.
 

Beyond the (physical) universe

The literal translation of the term metaverse is “beyond” (meta) our existing universe, which to date has primarily been physical but, during the pandemic, increasingly moved to video, gaming, and social platforms.

The metaverse is envisioned as a common digital space where people can gather, share experiences, and engage socially without having to be in the same physical space. Each person is represented by a digital avatar that translates the physical self into a digital setting.

In the virtual office, digital avatars can attend meetings sitting around a conference table and can move around the room rather than being restricted to boxes on a screen as in a Zoom or Teams call. They can try on virtual clothes at a virtual retail store and then have the real-world counterparts delivered to their (physical) door. At night, they can dance at a live, albeit virtual, concert.

The possibilities of the metaverse are vast – as is the opportunity for companies looking to define and build it. Indeed, besides Facebook, which is attempting a metaverse makeover, videogame makers Epic Games, Roblox, and Ethereum blockchain-based Decentraland have already deployed metaverse experiences. Just last week, for example, Paris Hilton performed in Decentraland’s Metaverse Concert, the first of its kind on a decentralized platform. Last year, 33 million people worldwide tuned in to a Lil Nas X concert on Roblox,1 many of them with digital avatars that can be seen dancing like they are below at Marshmello’s Fortnite concert in 2019.

Source: IGN via YouTube, February 2, 2019. For illustrative purposes only.

Sizing the metaverse

For those not living inside one of these applications already, it might be hard to understand the appeal. Why would you opt for this digital experience which, while well-suited to the pandemic, is unlikely to live up to the real world people are so eager to return to? We offer three reasons.

1. A more immersive kind of screen time
The metaverse won’t replace getting a coffee with a colleague or attending a concert in the physical world; rather, it is going to change how we spend time in front of our screens.

We’re already spending a significant portion of our day in front of screens. Worldwide, the average person spends a total of 6 hours and 55 minutes looking at a screen each day, and that number is on the rise.2 This includes traditional television, direct-to-consumer streaming services, social media, videogaming, and shopping on (mostly) smartphone apps. And the recent trends clearly show that younger consumers spend less time on traditional live TV and more time on mobile apps and TV-connected devices such as game consoles.3

Younger consumers shun traditional TV, opt for digital platforms

Additionally, online gaming is increasingly gaining traction. Currently, there are 2.96 billion videogame subscribers globally, a number that is expected to reach 3.32 billion by 2024.4 At the same time, the eSports gaming industry is also expected to see rapid growth, with the current eSports audience of 435 million projected to grow to 577 million by 2024.5

With so many subscribers on these platforms – some of which already call themselves a metaverse – it makes sense that other forms of content could be offered to this existing audience or that other platforms will adopt the metaverse concept. This can be a win-win-win for content creators (who might still be restricted from live performances), platform providers like Fortnite, and consumers who are likely to embrace an additional form of entertainment delivered via an already familiar app.

Finally, on its latest earnings call this week, Facebook highlighted its goal to help the metaverse reach one billion people and hundreds of billions of dollars of digital commerce by the end of the decade. The metaverse is likely to become a big marketplace for digital assets like non-fungible tokens (NFTs) for scarce, original digital content created within the metaverse as well as a conduit for purchases of physical goods.

2. The clear case for augmented reality across industries

The metaverse is not just for existing and/or aspiring gamers. Businesses across all industry verticals are taking augmented/virtual reality (AR/VR) very seriously, especially since the pandemic made the use cases for it readily apparent. The percentage of companies investing in AR rose markedly in 2020 from 2017, with the automotive, tech, media & communications, and retail & consumer sectors leading the way.6 As the pandemic forced factory shutdowns, lockdown measures, and a post-pandemic labor shortage, these sectors doubled down on AR investments in an effort to maintain productivity.

For example, the use of new AR applications has helped automaker BMW Group speed up the process of vehicle prototype engineering by as much as 12 months.7 In the consumer space, retailer Kohl’s recently collaborated with Snapchat to create Kohl’s AR Virtual Closet. This platform allows customers to step inside an AR dressing room, try on clothes, and then purchase those items without needing to walk inside the store.

The automotive and consumer sectors aren’t the only areas expected to benefit from AR investments. Worldwide spending on AR/VR is forecast to accelerate out of the pandemic, growing from just over $12.0 billion in 2020 to $72.8 billion in 2024, a five-year compound annual growth rate (CAGR) of 54.0%.8

Augmented reality investment is growing across sectors

3. Remote work isn’t going anywhere

McKinsey estimates that more than half of employees prefer a hybrid work model coming out of the pandemic.9 For most of us, this often means video conference calls with some participants together in the room interacting with a flat wall of video boxes, which doesn’t feel so “normal.” Perhaps the metaverse could help. Accenture recently introduced an “nth floor” which uses virtual reality to enable the company’s 500,000 employees to meet, interact, and collaborate in a virtual setting. Early-stage companies like Spatial build software that allows employees in different locations to collaborate in shared virtual spaces using 3D avatars or by projecting a hologram of colleagues into a physical conference room.

As a result, few segments are growing as fast as VR is projected to grow in the next five years. For instance, the internet advertising vertical – increasingly (and in our view, rightfully) challenged due to data privacy concerns – is set to grow only 8% compared to the 30% 2020-2025 CAGR penciled in for virtual reality.10 According to Bloomberg Intelligence, VR could become an $800 billion market, with especially robust growth in live entertainment in a metaverse environment.11

How to invest in the metaverse?

Given the large size of the market, the metaverse-related companies represent an expansive scope of investment opportunities. Across its tech competitors, Facebook has been the top acquirer of and investor in AR/VR companies.12 However, other tech peers like Apple – and the venture capital (VC) community – share and are positioning for the metaverse vision. The capital raised by VCs in the AR/VR vertical has risen steadily, with $12.9 billion cumulatively raised since 2010.13 There is no shortage of companies to fund, with an estimated 4,630 private companies in the AR/VR verticals, which stretch across a wide range of areas including virtual worlds platforms, asset creators, hardware interfaces, avatars, crypto wallets, asset marketplaces, and much more.14

Finally, while the big tech incumbents might have the advantage of scale, what’s also attracting investor interest in these smaller private companies is that the newer entrants offer the potential to re-design the internet ecosystem in a way that addresses the pitfalls that have plagued big tech recently. The metaverse version of the internet could focus on de-centralized applications built on a peer-to-peer blockchain and emphasize data privacy, secure digital identity, and user compensation for sharing personal data and original digital content. This concept of a more consumer-friendly version of the internet may be attractive to many investors.

what-makes-the-metaverse

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(1) Source: Billboard Music, as of November 17, 2020.
(2) Source: DataReportal, June 2020.
(3) Source: Nielson, 2020 Audience Report, August 2020.
(4) Source: Newzoo, 2021 Global Games Market Report.
(5) Source: Newzoo, 2021 Global Esports and Live Market Streaming Report.
(6) Source: PwC, 2017-20 Global Digital IQ Survey, Oxford Economics.
(7) Source: BMW Group, BMW Group uses augmented reality in prototyping, September 2020.
(8) Source: IDC, Worldwide Augmented and Virtual Reality Spending Guide, November 2020.
(9) Source: McKinsey & Company, Reimagine Work: Employee Survey, April 2021.
(10) Source: PwC, Global Entertainment & Media Outlook 2021-2025.
(11) Sources: Bloomberg Intelligence, IDC, Two Circles, Statista, as of October 25, 2021.
(12) Sources: Quid, Recode, as of April 2019.
(13) Source: Pitchbook Data, as of October 25, 2021.
(14) Source: Pitchbook Data, as of October 25, 2021.


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Anastasia Amoroso

Anastasia Amoroso

Anastasia Amoroso is a Managing Director and the Chief Investment Strategist at iCapital Network. In this role, she is responsible for providing insight on private market investing opportunities for advisors and their high-net-worth clients. Previously, Anastasia was an Executive Director and the Head of Cross-Asset Thematic Strategy for J.P. Morgan Private Bank, where she identified and invested in emerging technologies and disruptive trends such as artificial intelligence, decarbonization, and gene therapy. She also developed global tactical ideas and implemented institutional-level implementation across asset classes for clients. Anastasia regularly appears on CNBC and Bloomberg TV and is often quoted in the financial press. See Full Bio.