The Metaverse
McKinsey's metaverse report offers a version of an exciting future, but at this stage much of the technology does not, yet, exist.
Below is a summary of a recent metaverse report by McKinsey. There are problems conceptualising the metaverse at this stage, but the money invested in the sector suggests big things can come from it.
A key point is that the metaverse device is yet to be developed. It is likely going to be a smartphone type, personal device, that offers a more immersive online experience. At the heart of the device will be a GPU1. To date, personal devices don’t have GPUs. When they do, there will be an explosion in demand for a product with an addressable market equivalent to the current smartphone market (six billion users).
If this occurs, GPU producers, Nvidia, and AMD, and the fabless ecosystem, TSMC, ASML, Lam Research, Applied Materials, and KLAC will perform amazingly well over the next decade.
Nvidia could be at a new revenue growth inflection point.
The Metaverse
Mark Zuckerberg, as he changed Facebook’s name to Meta, said:
“The metaverse will be the successor to the mobile internet. We’ll be able to feel present—like we’re right there with people no matter how far apart we actually are.”
For a middle aged man with a romantic vision of past human interaction, the 1980s for instance, the metaverse sounds horrible. But it’s clearly creating excitement and receiving substantial investment. Meta has committed more than $10 billion into its Reality Labs division. Microsoft’s $69 billion acquisition of gaming company Activision Blizzard would “provide building blocks for the metaverse.”
At its most basic, the metaverse will have three features; a sense of immersion, real-time interactivity, and user agency. Ultimately, the full vision of the metaverse will include; interoperability across platforms and devices, concurrency with thousands of people interacting simultaneously, and use cases spanning human activity well beyond gaming.
Such that the metaverse exists, today, it is gaming. Roblox, a gaming platform, has nearly 55 million daily average users, generating $1.9 billion in revenue in 2021. Minecraft has 140 million monthly active users, and Fortnite 80 million.
The buzz, however, argues that the metaverse will extend beyond gaming into retailing, travel, conferences, and entertainment. A particularly interesting use case is industrial. By building virtual factories and installations, prior to building them in reality, designers might be able to identify issues at a stage when changes are possible.
Digital twins: We are also seeing new innovations such as BMW’s effort to build a digital factory twin on Nvidia Omniverse, which is expected to drive efficiency improvements across its supply chain. By building virtual replicas of physical settings and objects that generate data in real-time, far richer analyses can be generated than previously to enable improved decision making.
Investment Thoughts
My most basic thought is skepticism. The quote highlighted below gets to the heart of my skepticism. I don’t have a “digital persona” and nor do I want one. My overwhelming desire, is to expand my IRL persona and the associated network.
That said, I remember clearly having Web 2.0 explained to me in 2002, around the time of the World Cup in Japan and South Korea. It highlighted the ability for user generated content to be created. It seemed a good idea, but I had no idea how it would evolve, nor how to invest in it. In hindsight, it was a substantial missed opportunity. Is the metaverse a similar opportunity?
It likely is worth tracking.
For the moment, however, the opportunity is in the technology it needs to exist.
According to McKinsey, the technology required to truly realize its potential doesn’t yet exist and presents arguably the greatest challenge to the development of the metaverse of people’s imaginations. Advancements will be required in compute infrastructure, network infrastructure, and devices. For instance, there are limits on the number of players on gaming experiences, and low-quality rendering means devices without GPUs (smartphones) cannot present the photorealistic environments needed for immersion. (This is Nvidia’s space.) There are also issues with latency, and buffering, that makes the experience sub-optimal, and the hardware to engage in the metaverse as imagined does not exist.
Based on McKinsey’s assessment, there are very substantial technological constraints on the metaverse’s growth. But gaming, a $200 billion industry, will provide the capital to fill many of the gaps. Consequently, the hardware producers, particularly in semiconductors, are likely to offer strong returns in this early phase. Over time, it will be possible to identify software and community winners.