The Key Technologies That Power the Metaverse and the Companies Creating Them
If you were around at the tail-end of the last century, you will remember hearing about this new thing called the internet, which started in the 1960s as a U.S. Department of Defense Advanced Research Projects Agency (ARPA) networking project (ARPANET). It has since blossomed from a California-based four-node network into a global system that exhausted its pool of approximately 4.3 billion IPv4 addresses back in 2019. It has also seen an over 30-fold increase in retail sales from 2000 to 2021 from $27.6 billion to $870.8 billion, not to mention the trillions of dollars of market cap the ecosystem has spawned.
In fact, every U.S. company with a market cap north of $1 trillion is tied directly to the internet, including Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN). If you asked many what they thought the “World Wide Web” would evolve into back in 1999 or even 2009, you might have gotten a Henry Ford attributed (incorrectly as it turns out) “faster horses” type of response. Essentially a “do what we’re doing now but make it easier and faster to do” type sentiment.
The last five or so years have seen a similar scenario start to emerge with what has been referred to simply as “the metaverse.” To be clear, the metaverse is a constantly evolving space and seems to be defined solely through the lens of what potential benefit can be wrangled from it. Research firm Grandview estimates the North American metaverse market at $15.1 billion in 2020 and forecasts a 39.4% compound annual growth rate through 2030 to $418.4 billion, a 26-fold increase in only 10 years as compared to the 30 times, 20-year growth of the broader internet.
Who Owns the Metaverse?
Just as no one owns the internet, no one person or company owns the metaverse. But there are companies that are creating the technologies and tools needed to build the metaverse.
The Front End
The one thing that differentiates the metaverse from the internet is its immersiveness. While we are decades, if not centuries away from having a Star Trek-like Holodeck experience, Hollywood special effects developer Industrial Light and Magic (ILM) has been offering an immersive environment dubbed Stagecraft. It brings greenscreen technology from a post-production process into the real world as discussed in this video. It is truly amazing stuff, and we highly recommend watching that video.
For the rest of us, immersive environments have traditionally been dependent on what budget you may have for monitors and surround sound systems. That has changed over the past few years, and what started as very clunky or poorly adopted headsets have now evolved into devices we fantasized about only a decade ago.
Reading through the specifications for the Meta (META) Quest 2 ($299) headset kit on the Oculus website really doesn’t get into any nuts and bolts of the device, but it does mention things like “3D positional audio,” 1832 x 1920 pixel resolution screen per eyeball, various screen refresh rates (60, 72, 90 Hz) and 6 Degrees of Freedom (DoF). This means the device captures movement along three axes: front/back, up/down and left/right. Additionally, the device has a three-axis gyroscope and a three-axis accelerometer that are manufactured by companies like STMicroelectronics (STM). A more detailed breakdown really gets into it and calls out items like Qualcomm (QCOM) manufactured Snapdragon processors and Western Digital (WDC) subsidiary SanDisk storage modules.
One thing that is interesting is that Oculus and other headset manufacturers are in the process of moving away from OLED screens to LCD screens which they are positioning as “Fast-Switch.” Despite the fact that OLED screens by all accounts provide better contrast, color gamut and uniformity, developers are counting on improved software to make up for any difference in quality in screen technology like lower power consumption and much better cost efficiency.
Reviewing a teardown of a Microsoft HoloLens 2 ($3,500 - $5,199) headset which was available only to corporations and developers until June 2020 again mentions Snapdragon processors. Another goes to great pains to find components manufactured by Microvision Inc (MVIS).
The Back End
Bandwidth, storage, processing power and increasingly, geography, all play into what we would describe as the back end of the metaverse. If we were to pinpoint one aspect of internet infrastructure that will benefit from the evolution of the metaverse, we would have to cheat a little because while headsets are becoming more powerful, that power has more to do with delivering positional telemetry, higher quality graphics and sound processing than it does generating gameplay or running applications. The devices and environments that do all the heavy lifting are still consoles, personal computers, and increasingly, data centers.
Data centers tie in all four items mentioned earlier. We have seen a growing trend of data centers providing not just storage but also processing power. Further, as users demand lower latency responses, data center developers are becoming more strategic about the geographic placement of these centers. Names in the data center space include Equinix (EQIX), Digital Realty Trust (DLR) and VNET Group (VNET). Component providers that are active in this space include names like Switch (SWCH), Broadcom (AVGO), Skyworks Solutions (SWKS) and Cambium Networks (CMBM).
Content
As much as the metaverse relies on the front- and back-end structures we’ve discussed, what good is an immersive environment if you don’t have anything in which to immerse yourself? To date, the bulk of content development has been focused on video games, which tie into the Sony Group (SONY) PlayStation and Microsoft Corp (MSFT) XBOX environments and individual game developers like Electronic Arts (EA). One company that is poised to continue to do very well is Roblox (RBLX), which provides a development platform for any user to create and monetize their own content. As we discussed in a recent piece on Virtual and Augmented Reality, there have been a number of advances made incorporating V/R and A/R technology in learning, both in academic and real-world situations from studying human anatomy to learning aircraft maintenance.
Conclusion (Virtuous Circle)
The metaverse is a great example of what we like to describe as the Virtuous Circle of digital infrastructure. The premise is that given a set amount of storage, bandwidth and processing power, developers and users alike will max out the system’s capacity, prompting growth and innovation in that system’s infrastructure. Once that buildout creates more headroom, the cycle repeats itself. What is happening in the metaverse is exciting in its own right, but our interest in this space is in those companies that are facilitating the future of the internet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Chris Versace
Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.
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Mark Abssy
Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.
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Lenore Elle Hawkins
Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.
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