What is the Metaverse?
There has been considerable amount of attention among investors globally on the Metaverse, a concept many attribute to Neal Stephenson and his novel ‘Snow Crash’ published back in 1992. Companies today have started to articulate the way they envisage themselves living and playing in the space, while some have gone one step further to rebrand themselves as a testament to their focus on bringing the metaverse to life.
Exhibit 1: Document trend for the word ‘metaverse’
Source: Alphasense, Bank of Singapore (as at 14 December 2021).
Many believe that the Metaverse could eventually involve leveraging augmented and virtual reality (AR/VR) technologies to facilitate interactions in a shared, immersive virtual world through the internet. Users (potentially via digital avatars) could be able to travel, communicate and socialize in real time, tour virtual buildings, procure virtual goods and services, and attend virtual events.
However, there are still differing visions of what the Metaverse could be, which reflects the early stages of a space that has yet to be properly defined by market participants. Amongst the various debates, we believe there are two considerations that are appropriate to focus on at this juncture. First, if the Metaverse will be a centralized system governed or controlled by a single large entity, or a decentralized system where users govern policies on their own. Second, if the Metaverse can be accessed through hi-fi platforms that would provide a more robust experience but will require pushing the boundaries of software and hardware. Alternatively, low-fi platforms would be the easiest to implement with the lowest possible device/bandwidth requirements.
The jury is clearly still out on the eventual definition/construct of the Metaverse, but this precisely where opportunities are waiting to be uncovered.
In our view, there are several potential reasons that can explain this exponential increase in attention on the Metaverse:
Commercialization opportunities: Experiences/Discovery/Creator Economy
Digital advertising
Increasing usage of metaverse platforms, which should result in high traffic, can lead to stronger digital advertising demand. Real-life experiences in the Metaverse could also help to better monetize shopping intentions, while the popularity of the metaverse platforms among younger users is attractive given that this group will gradually become core spenders over time.
Commerce
We are witnessing evidence of marketplace businesses where companies are selling (for instance) digital-only apparel that can be auctioned as Non-Fungible Tokens or NFTs. The metaverse trend can also efficiently penetrate the social commerce market, which is growing from virtual stores on various platforms.
The next iteration of direct-to-consumer (D2C) could see new revenue streams available to companies such as:
Entertainment
Other business models could stem from the ability of game developers to elevate physical experiences into 3D social worlds. For instance, we have already started to see digital concerts hosted within games, and the usual revenue streams from the live entertainment business can conceivably be replicated in such a digital world as well. In our view, Covid-19 has accelerated these trends as the pandemic has encouraged artists and metaverse platforms to cooperate in order to offer real-life concert experiences to users.
Commercialization opportunities: hardware and infrastructure stack
The hardware opportunities in the Metaverse are typically associated with VR and AR. Intuitively, it is easy to understand why and the market opportunities are significant – PwC believes that VR and AR have the potential to deliver a USD1.5t boost to the global economy by 2030 as advances in this space help organizations create value and reduce costs.
We also believe the following bear opportunities as we look across the wider hardware and infrastructure stack:
Digital assets
What is a “Digital asset”?
In a primer published by the US CFTC (Commodity Futures Trading Commission), a “Digital Asset” can be understood as anything that can be stored and transmitted electronically, and has associated ownership or use rights. Essentially, digital assets are created and maintained in software (code) and exist as data on a network. Digital assets are enabled by both software and networks. Digital assets may be defined in a variety of ways, including as commodities, swaps or derivatives, depending on their design, function, and use.
By the end of the decade, BCG believes that digital assets are not only expected to be the largest financial asset class with a 13-digit market capitalization, but could also drive as much financial innovation as the explosion of derivatives and structured products in the 1980s. For financial institutions and their customers, they could increase market liquidity, transparency, accessibility and reduce transaction costs while reducing associated risks. Furthermore, blockchain can be utilized to develop new products and services, such as smart contracts.
Exhibit 2: Illustrative digital ecosystem
Source: Bank of Singapore as at December 2021. For illustrative purposes only.
Non-Fungible Tokens (NFTs)
A NFT is a cryptographic token that can be used to represent ownership of a unique underlying asset, stored in the blockchain where transaction and ownership information is verified through decentralization and is considered tamper-proof (immutable). Hence, a NFT can be understood as a certificate of authenticity or proof of ownership. Therefore, functionally, the use of NFT is for the ownership of digital files. The word “NFT” is currently most commonly associated with digital artworks, but NFTs can also be used to authenticate physical assets.
Challenges in building the Metaverse
While the potential of the Metaverse is vast, there are visible roadblocks in the path of its creation and risks worth considering:
1) Data Security & Privacy
Consumers have become increasingly concerned about how their data is tracked and used. Immersing ourselves into virtual worlds would likely mean an increase in the wealth of data collected, recorded, and possibly sold. This provides a potential pitfall of privacy risks to users. There are also differences between countries’ data protection laws and applying that in a universal digital space could prove challenging.
2) Interoperability Across Different Metaverses
Unlike the one universally accessible Metaverse that is common depicted in the media, the current ecosystem consists of many independent digital worlds owned by large companies and lack interoperability between platforms. Given that an essential element of the Metaverse is the ability to move digital assets across the various virtual platforms and the physical world, it would be ideal for companies to cooperate in creating an open, interoperable, and decentralized Metaverse. It remains to be seen if this will happen soon, as companies are still jostling in this space.
3) Regulatory risk
In accordance with its goal of “common prosperity”, China launched a flurry of regulatory crackdowns in the latter half of the year spanning many sectors. Earlier in September this year, many Metaverse-related stocks tumbled after the state media’s warning against investing in them. Given that video games are the most obvious path to developing the Metaverse, the recent video game restrictions have also cast a shadow over its development.
While many Chinese firms have declared their interest in building the Metaverse, concerns over regulatory risk remain. A potentially centralized Metaverse managed by large tech firms could go against the country’s goal of “common prosperity”, and concerns over data security and sharing are not trivial, given the earlier crackdown on certain high-profile internet companies.
Market participants have also highlighted areas of perceived speculation across assets (e.g. equities, tokens, other forms of digital assets), and thus increased levels of regulatory oversight/scrutiny could ensue.
4) Risk Accelerating Demographic Divide
The Metaverse has vast potential in areas such as commerce, digital advertising and entertainment. However, the question of accessibility remains. There already exists a digital divide between demographics and regions with the modern internet, which could potentially be exacerbated by the Metaverse. The immersive nature of the Metaverse also serves to further increase the risk of isolation and could effectively create a two-tier system of those connected and those that are not.
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