Big Tech Back the Metaverse: Strong Investment Expected in 2022

Catalyst

Technology is advancing at a considerable pace and what was only previously thought to be possible only in science fiction is starting to become reality. The Metaverse, a digital environment where people can communicate and have experiences which would otherwise be impossible in the real world could become a reality within the decade. The worlds largest tech companies have identified great commercial value in the metaverse and have started to invest in the development of 3D virtual world, where real and digital worlds are integrated using technologies such as virtual reality (VR) and augmented reality (AR).

Summary

Facebook will drive metaverse investment over the next decade. The social media giant recently rebranded its corporate name to Meta while also announcing a strong commitment to develop a metaverse which will allow people to create a digital version of themselves and interact with others within a digital environment. The company is expected to accelerate investment in VR and AR technologies which will be able to create a more immersive metaverse experience while also launching platforms such as Horizon to demonstrate how the company envisions its version of the metaverse.

Microsoft will also be a leading player in the metaverse and is expected to invest in the technology while using its experience in VR and AR development. Microsoft has targets corporations and enterprises with its VR and AR technology and its metaverse could follow suit. The company launched Microsoft Mesh in November 2021, labeled as a gateway to the metaverse, to create a more inclusive experience for people using Microsoft Teams. The metaverse is expected to have a key role in how companies operate and will capitalize on a growing number of people working from home which occurred during the pandemic.

For the metaverse to be successful there must be mainstream adoption of VR and AR technologies. These will most likely be the form factors used to integrate with the metaverse. While sales of VR and AR continue to grow, they remain a niche market and millions more consumers will have to invest in the technology for the metaverse to be accessible to the masses. For this to occur, significant investment will be required to accelerate the technology to reach consumer expectations of virtual and mixed reality experiences.

Metaverse investments could become the next big technology trend of 2022, with many large tech companies backing metaverse to become the next internet revolution, often referred to as “Web 3.0”. Companies envision the metaverse to be an immersive digital space where people can interact with a virtual environment and communicate with other users anywhere in the world. Big Tech companies expect the metaverse to generate a lot of cash in in the long-term and seem willing enough to risk spend billions of dollars in the short term to develop the unproven technology. The interest of companies such as Facebook, Google and Microsoft will likely attract other investors and smaller companies looking to gain a foothold in this emerging technology.

Facebook will drive investment in the Metaverse

Facebook is one of the ‘Big Tech’ companies pursuing the development of the metaverse and in October 2021, changed its corporate brand name to Meta to demonstrate its commitment to bring the metaverse to scale. The company intends to increase investment in its VR and AR technologies to create more immersive experiences that will allow consumers to interact with their metaverse. Facebook expects its investments in Facebook Reality Labs to reduce the company’s overall operating profit by approximately $10 billion in 2021. Reality Labs is the groups dedicated VR and AR research and development team and is responsible for the development of new form factors which will provide consumers with devices to access its metaverse, this includes its Nazare AR Glasses.

Meta Platforms also announced plans to hire an additional 10,000 employees in Europe for its Facebook Reality Labs segment over the next five years. This will double the company’s 10,000 employees currently building out Meta’s augmented and virtual reality efforts as of March 31, 2021.

During December 2021, Meta launched Horizon Worlds for free in the US and Canada. Horizon Worlds is a social VR experience where users can communicate, create their own digital environments and design and take part in games. The application is available exclusively to Oculus Quest 2 users and is an early indication of the direction Facebook plans of developing it’s metaverse.

Facebook continues to pour billions of dollars into the metaverse despite its virtual and augmented reality hardware and software only generating  limited revenue and having an overall negative impact on the company’s operating margin and profitability. The company expects this trend to continue in the coming years but is willing risk the investment in metaverse to generate long-term success. If the company’s investments are not successful longer-term, it will have a significant impact on the group’s financial performance. Skepticism continues to surround the idea of a metaverse with some people, such as CEO of Niantic Labs, John Hanke, labeling the Metaverse as a “dystopian nightmare”.

Figure 1: Horizon Worlds Image; Source: meta © MarketLine

Microsoft is likely to focus on a metaverse for enterprise

While Meta (Facebook) appears to be the driving force behind metaverse investment, Microsoft is also at the forefront of metaverse development but could take a different approach targeting companies instead of consumers. The company has been a leader in the development of AR technologies through its HoloLens untethered self-contained holographic devices, while also investing in mixed reality technologies including hardware such as the HP VR headsets and software including AltspaceVR, leading platform for live, virtual events.

So far Microsoft’s ventures into mixed reality have targeted businesses and corporations who are able to afford its pricey AR and VR headsets and has found commercial success in supplying business with its HoloLens, which have been helpful for training and supply chain optimization. For example, during Q1 2021, the company was awarded a $22 billion contract by the US government to build and supply custom HoloLens augmented reality headsets for training exercises.

Microsoft has announced its intentions to converge its cloud and edge computing technologies, experience in mixed reality, and autonomous systems to create Metaverse apps. This convergence of technology allows companies to make a digital copy of real-life objects and environments and run simulations in the digital world which can help determine how business decisions in the physical world. Businesses are already using Microsoft’s technology to improve business efficacy including the worlds largest brewing company AB InBev.

Figure 2: Microsoft Metaverse Technology Stack; Source: Microsoft © MarketLine

Metaverse will have a large impact for homeworkers

Companies developing the metaverse will hope to capitalize on a growing number of homeworkers and expect the technology to play a critical role in how employees interact and work in the future. In November 2021, Microsoft announced ‘Mesh For Microsoft Teams’ which the company plans to roll-out during 2022. Microsoft referred to Mesh as a gateway to the metaverse, making online meetings more personal, engaging and fun. The tool allows users to make digital representatives of themselves while organizations create immersive spaces (metaverses) within Teams. Users can then use their digital avatars to interact with colleges within a share digital environment

Since the emergence of COVID-19 and the start of the global pandemic in 2020, there has been a surge in the number of people working from home. Companies and employees have proven that it is possible to work out of office while online  tools such as Zoom and Microsoft Teams have allowed individuals to keep in contact and communicate. The Metaverse is expected to add another dimension to working from home by allowing users to feel even more present while reintroducing the feeling of a face-to-face meeting which is often absent in videocalls made online.

Blockchain technology could play an important role in metaverse development

Digital decentralized currencies known as cryptocurrencies are also expected to play a role in metaverse development. Metaverse projects will likely incorporate blockchain technology which enables users to digitally prove ownership for assets in the metaverse. Like how blockchain has enabled ownership of digital assets known as a non-fungible token (NFT), it could also enable users to own digital assets in the metaverse.

Some Early versions of metaverse have already been developed on blockchains including Decentraland, a virtual world where users can communicate; take part in virtual experiences including games challenges and artworks; and buy sell and trade digital plots of land, estates, avatar wearables in the Decentraland Marketplace using the cryptocurrency, Mana. During November 2021, crypto investor Tokens.com purchased a plot of virtual land on the platform for 2.4 million.

VR and AR devices will need to go mainstream for the metaverse to be profitable

For consumers to experience a fully immersive metaverse experience, they will likely have to invest in a formfactor that will facilitate entry into the digital environment. This will most likely be done using a VR or AR headset such as the Vive Headsets from HTC, Facebook’s own Oculus Quest and Microsoft’s mixed reality headsets. However, despite VR technology being commercially available for almost a decade, It is still considered a niche market and had struggled to achieve widespread adoption. For the metaverse to be a successful business, developers will need to find a way to encourage mainstream adoption of VR technology so that enough people are able to access the metaverse for it to be a commercially successful venture.

The global VR and AR market if forecast for growth. The market was worth $15.8 billion in 2020 up, 35.3% Y-o-Y and is expected to grow at a CAGR of a value of $47.2 billion, an increase of 198.9%. The number of virtual reality units sold worldwide is also forecast to reach a volume of 171.4 million units by 2025, an increase of 115.3% since 2020.

The Global VR market has shown signs of slowing down. In 2019 and 2020 the rate of market growth has declined suggesting a lack of interest in the technology.  Many consumers are waiting for the technology to develop before they invest in VR. For a lot of consumers, existing VR headsets still don’t perform as well as people expectations  and so significant investment will be required to accelerate the development of the technology to reach a standard which appeals to the everyday consumer. The idea of a metaverse could be the motivation big tech companies need to increase the capital dedicated to developing new VR systems which will help VR and AR systems break through into the mainstream market. *

Figure 3: Virtual Reality Market Growth Including Hardware and Software Sales ($bn) 2016 - 2020; Source: Nonfungible © MarketLine

* MarketLine Analyst Insights, January 2022

© MarketLine