How will the Metaverse impact the investment landscape?

In this edition of the Emerging Markets Equity podcast, Nick Robinson & Pruksa Iamthongthong sit down to discuss the Metaverse. They tackle the topic of what exactly this is and how it may play a part in shaping the investment landscape in the future. They delve into how this extension of the internet will further entwine our lives in the virtual world and the impact this will have on future generations. Plus, they address the implications this will have on NFT's, Cryptocurrency, Blockchain and the gaming industry in the Metaverse itself.

Transcript

Nick Robinson: Hello, everybody, and welcome to the abrdn Emerging Markets Equity Podcast. I'm Nick Robinson from the EM Equity team. In this podcast series we explore the factors that underpin our thinking on emerging markets, from key individuals to evolving trends. We seek to answer the five W's - Who, What, Where, When, and Why, that are shaping investment opportunities in the region.

So back in 1992, the first ever mention of the term ‘metaverse’ happened in Neil Stevenson’s science fiction novel Snow Crash. There he showed humans as avatars who are interacting with each other in a 3D virtual space, a metaphor for the real world. 

Last year, we saw a lot of hype over the idea of a metaverse. Mentions of metaverse or company earnings calls grew throughout the year, and really reached a peak, as Facebook signaled their ambitions in the metaverse by announcing their name change to Meta. Metaverse is attracting significant capital, Facebook disclosed they invested $10 billion into metaverse development in 2021 alone, it's likely to be a lot more than that this year. Microsoft announced their intention to buy gaming company Activision for nearly $70 billion to bolster their Metaverse position. And all this growth is happening remarkably quickly. Bloomberg intelligence estimates that the metaverse could be an $800 billion market opportunity, just by 2024. 

So, in today's episode, we're going to discuss the metaverse - both in terms of what it is and how it may impact the investment landscape in emerging markets. 

So, joining me today to tackle this subject is my colleague Pruksa Iamthongthong. Pruksa is a senior investment director on the Asian Equity team, and she's based in Singapore. Amongst her responsibilities, she covers the tech hardware companies and is also a frequent visitor to the metaverse - so she's incredibly well qualified to talk on this subject. So, Pruksa, welcome back to the podcast. How are you?

Pruksa: Hi, Nick glad to be back to talk about this exciting topic.

Nick: Great, thank you so much for joining. Perhaps it's a good place to start really on from first principles, and perhaps you could explain to us what the metaverse is in your view?

Pruksa: Yeah, that's a really broad question, because currently there is no uniform definition of ‘metaverse’, and it probably means quite different things to different people. 

So, to me, metaverse is an extension of the internet world. And if we call the Internet Web 2.0 – metaverse is a 3.0 version of it, where basically ones become a lot more connected, we become more immersive, and we have more ownership within this digital world.

And this might mean that you will have your own unique identities. So, if you think about your avatars in the digital world, you would have more ownership. And this could be things like the digital assets that you have, like owning a virtual land in the metaverse, you might have more voice on the governance structure of the digital world. And the last part would be the transferability to other digital worlds and into the real world. 

So, I think these are some of the key building blocks that are essential within the overall metaverse and I can say that you know, today they just are in various stages of development today. 

So given that we are still very early in that defining moment for metaverse - your metaverse experience might be very different depending on what you do. So, for example, if you are watching a concert in a game like Fortnite, you are already in some form of metaverse. If your kids are playing games on Roblox - I'm not sure your kids are playing that Nick - they will be in another form of metaverse, and if you are a Korean Pop fan, you will be attending a virtual fan signing session with a popular girl group then you are in a metaverse, so really different definitions.

Nick: Thanks for that. Yeah, I think I might have a couple of years before my kids get into Roblox but I'm bracing myself. So, I think I suppose that one of the defining features of the metaverse is it's a 3D immersive type experience. And as you point out, there's quite a few different metaverses. But one distinction that seems to be emerging between them is the level of centralization that these metaverses have. You have the quite centralised ones, presumably like the Meta - or formerly known as Facebook - metaverse is likely to be, whereas there are more decentralised ones which have more links to the blockchain such as Decentraland and Sandbox is another one I've heard of, I mean, how do you think about the level of centralization, and how do you think this is likely to impact development?

Pruksa: Yes, so I think the distinction between the two is extremely important because by nature, they are fundamentally different concepts. And decentralise metaverse, if it is indeed successful - we have to be mindful that this is actually a very new concept - will threaten the powerful platform companies that we have today. And I think, if you think about why is it that the growth of decentralised world is happening today and this is really because it is now technologically possible today. They are now enabled by blockchain, they are governed by Dao - Dao is a short form for Decentralised Autonomous Organisation. And how that helps you is that it makes governance accessible to everyone instead of decision making made by a few people who are at the top of the centralised world. 

And this is happening in a time where we are perhaps frustrated by the world of centralised platform control today. We all know that the world of internet 2.0 is cut out into a few companies. And I think the frustrations and experiences is building up. 

So, while this is a pretty long term development and long term threat to centralised platform business, I think the medium term benefit to consumers, are perhaps in the form of checks and balances that the rise of decentralised platform provides, ie. it deters platforms from profiting from consumers too much and pushes platforms to also offer greater value and convenience to consumers by innovating a lot more.

Nick: Thanks. Yeah, that's, that's really interesting. And I suppose that puts some context into why we're seeing such an awful lot of capital being spent by these kind of web 2.0 platforms in terms of developing their metaverse. 

When we think about metaverses, I mean, how, in reality, or in a future reality - how should we think about it in terms of how our lives may change on a day to day basis?

Pruksa: I think he will change quite a lot, and I think we are already experiencing it with, you know, the increase familiarity of the virtual world today. So, while we are pretty early days on this front, I think over the next 10 years, our lives could change quite significantly. And I think that pace of change will actually happen much faster in younger generations, you know, like your kids, Nick, because they are also going to be a lot more digital native than we are. 

And I think broadly, metaverse will change the way that very basic things that we do. It will change the way that we work, change the way that we play, it will change the way that we socialise. And this means that increasingly more time is likely to be spent in the digital world just like how we are spending a lot more time on our mobile and on the internet today versus 10 to 20 years ago. 

Nick: Yeah, I suspect if you added up over time that we now spend in virtual meetings or staring at a screen for work, we're probably spending most of our - or the majority of our day now - Monday to Friday. 

Puksa: Yes, that’s right. And you know, like what you say, we are already having an accelerated virtual working environment over Microsoft Teams because of COVID, and also over Zoom as well. So, this is very much all thanks to work from home environment, and increasingly going forward to a hybrid working environment. So, we don't think that this is going to go away. What this may change in the future is that this whole hybrid environment would extend further into virtual meeting room space with your own avatars, this is not unimaginable. So, Nick, I think very soon, you and I will be having our global emerging markets meetings with our avatars in a virtual meeting space created by Facebook or by Microsoft or any other platform – so, looking forward to that.

Nick: Yeah, I mean, that sounds fun. I guess if it was one of the big web 2.0 companies, we'd have to be a bit nervous about them taking our data and then front running the portfolios with it.

Pruksa: Yes, indeed. And I think that's, that's the other part where people would have to have a lot more scrutiny. And, and again, the regulations would need to catch up as well. 

And just moving on from work to play. I think we are also seeing early form of this in some form of virtual shopping malls. Just to share an experience. I visited one of the Korean metaverse platforms. And in there, there's a virtual shopping mall. And you can browse at some of the virtual products there as well. Within that, you can also choose to visit Sotheby's special art gallery. This was a visit that I made to Decentraland, so that's one there. You can also choose to attend virtual concerts. 

So, I think the point here is that increasingly, there should be a lot more content and activities within each platform, and that will drive more traffic and time spent into these such digital world.

And moving from play to the last part, which is socialise. This is pretty interesting I think. What we are seeing today is that people don't just go to the games platform to play games, they go there to hang out and to socialise as well. So, I'm not sure whether you heard of a virtual pub or a virtual bar, you can actually do just that in a virtual world - dress your best and you never have to physically leave the house as well.

Nick: Yes, that sounds like how chat rooms were a very early feature of the internet as well. In terms of thinking about companies, and I know you have many, many meetings with many companies around the world. What's your impression of how companies are approaching the metaverse? And is it a risk or opportunity for them? And are there types of companies that may be disrupted by this?

Pruksa: I think there will be both risks and opportunities and this really depends on how these companies view metaverse and how they are exploring this from the strategy point of view. But I think it's fair to say even though that's pretty early days, from our conversations, and from what we are seeing, companies are embracing metaverse pretty quickly and are making investments to be part of it, because they see this both as risks and opportunities - just like when you stated Nick, you see the likes of Facebook making huge investment as part of the metaverse.

And I think generally you can categorise companies into three main types. The first would be the likes of the creator companies. This could be existing companies that already have one foot in the digital world. And they are either trying to strengthen this foothold or they are trying to remain relevant. So, this will include the likes of gaming companies, social platform companies, Korean entertainment companies. And they're all investing in their own form of metaverse to make sure that their user base sticks with them, at least as the digital world evolves into the metaverse. 

The second type of companies would be the brand companies. And this could be companies that are extending their brand relevance from the physical world into the digital world today, not just to create a digital version of their product, but also more importantly, to forge that connection with the younger and digitally savvy consumers. So, this could mean things like brands buying virtual advertising space in one of the virtual buildings, they may be selling a virtual version of a pair of shoes that you buy along in the physical store so that you can dress up your avatar the same way. And I think today, the brand positioning is really about how to stay relevant and to maintain that engagement of the consumers. 

The third type of companies would be the content companies, this is pretty straightforward. This is about IP - intellectual property - and content extension. So, the key here is how do you extend movie content IP into music, into concerts, and into any other digital form to leverage on the content strength and create a more immersive experience with consumers within the digital world. So, these are the three types of companies. 

And if we were to move on to disruption - then it could be just to give you an example - but it basically could be companies that fail to recognise the following. The first is that they would fail to recognise the important rise of metaverse and therefore as a result fail to make early investment into them. This would be companies that fail to create a substantial enough digital presence, because they were complacent that the existing status quo of physical assets would be strong enough. And an example could be advertising companies or companies that make up money for advertising today because of their large traffic. But they may not have the same traffic as the world moves on into the metaverse and therefore, as a result, they lose the traffic advantage and subsequently dollars in the long run. 

On the other hand, it could be also the brand companies that we talked about just now, where you know, the brand equity is just not as strong in the digital world versus the physical world. And this they might make them lose the connection with consumers as especially when they get younger. It could be things like owners of physical assets, such as shopping malls, that they actually don't have a virtual presence. People will just have less time to physically visit a mall because they spend more time in the digital world. And the list goes on Nick.

Nick: Yeah, thanks. So, it caught my eye the other day on - I think it was on a Bloomberg headline - that a Gucci handbag or virtual Gucci handbag at least in Roblox, now costs more than the real thing. So, I thought that was quite interesting. What about on the hardware and software side? Which companies are supplying the pipes and shovels that actually enable the metaverse and how are they likely to benefit?

Pruksa: Yeah, this is a very important question as the world of metaverse needs to be enabled, and I think this is where Asia as the tech supply chain of the world comes in, and really stands to benefit. 

So, you can think of the technology enablers, such as semiconductor chips, and the companies that make them - this would be companies like TSMC in Taiwan. You can think of storage and processing needs in data centres as the world of metaverse has more data, so memory companies like Samsung, or data centre, companies would have to have that seamless, immersive and low latency experience. And this would have to be backed by a very powerful 5G network, just to make it a lot more smooth in terms of experience over the long run. 

And in order to get to a much better digital workspace and communication, it’s important that all these building blocks would have to be better. I think, today, they are getting there. But perhaps it's not enough. And that's why when you go into the virtual world, the experience is just still not as good. And this will still require a lot more investment. So, I think if you look in the tech hardware semi space, this is really an extension of the 5G structural growth cycle that we are in, and perhaps help to answer some of the questions behind you know, the question that we get asked a lot about – ‘what's next after 5G for further semiconductor companies’?

Nick: Thanks. And just drawing on a point you mentioned earlier about the Sotheby's Art Gallery. It kind of leads me to the question of art and other assets in the form of non-fungible tokens as a feature of a metaverse. And perhaps you could explain a little bit how blockchain technology could be important in the metaverse?

Pruksa: Yeah, if you recall what I shared earlier about the essential features of a metaverse, one of them would be the ownership and ownership of digital assets. 

Without going into too much technical details, essentially, what an NFT does is to enable the ownership of digital assets that is uniquely yours, and an NFT has made it possible. And that is backed by blockchain technology. This is important because with this, we are now able to have a proof of authenticity, you are able to collect assets like digital art, and you are also able to transfer your assets into other virtual worlds and with the real world. So, you can think about for example, after you buy a virtual land, you can look to sell it and get real money because virtual land is in fact, an NFT. In terms of the benefit to hardware companies, I think it's not that direct, but they ultimately strengthen the ecosystem and experience of the virtual world. Which then ultimately, this means that you need higher computing power at benefit to the tech enablers.

Nick: Yes, I mean, as much as it's easy I think to dismiss the NFT market as a bubble, you can understand that some of the same human instincts that make people want to own a $10,000 digital artwork to show off, as buy kind of expensive watches or handbags in the real world. 

Another thing I wanted to ask you about is ‘play to earn’ gaming. We've seen that really boom in popularity in some emerging market countries during the pandemic. Will the Metaverse become an increasing source of job opportunities in the future? And could that benefit kind of low cost labour, emerging market countries in particular?

Pruksa: Yeah, Nick, this is pretty interesting point, actually. And it is already happening, as you mentioned. So, during the pandemic, for example, we are actually seeing this trend popping up as a job in the likes of Philippines over here in Asia. 

So actually, what I did during my holiday in December, is that I went to give this a try. One of the games that's really popular on this front is called AXIE infinity, just to understand how it works. And I'm happy to share my key observations today as well, from my experience. 

So firstly, I actually think it's quite expensive to start play AXIE, you actually have to have three AXIEs, which are like three animals to form a team to play. And they're actually quite expensive if you want decent ones. So, your starting point will cost you about $500 to $1000 US dollars. There’s a way to get sponsorship, it’s called scholarship in the AXIE world. I was trying to look for someone to sponsor myself in the AXIE forum, but it was too competitive - so I end up footing the bill myself. 

Secondly, the second point I'll share is that it is actually pretty time consuming and quite hard to play to earn to make that incremental dollar that's worth your time. So in AXIE, again, you use your team to battle against others. And if you win, you actually get an in-game currency called Smooth Love Potion. And there are two ways to earn money here. Firstly, by selling Smooth Love Potion on the crypto exchange and Smooth Love Potion itself is a crypto. And the second way is to, you buy this Smooth Love Potion to actually breed more AXIEs to sell on the marketplace. Either way I can share with you that I thought the experience was rather challenging. It was quite a difficult process again, to make to make a lot of money. 

And lastly, I think we have to remember that you have to take crypto price risk as well. So given your income is tied to the price of the cryptocurrency, I am not too sure about the sustainability of income here over the long term. So, you probably make good money when the price is high. But you know, as we know, crypto - well, it's so volatile. So as crypto prices for which is in the situation that we are in today, you might actually not be making that much money, and it's not as attractive as an income generator. 

So, I think going through this experience that said, I think ‘play to earn’ will develop because we are still in the early stage of that and as it becomes more mature, we could see this as you know, emerging labour opportunities, but I think really the devil is in the detail as to the mechanics of each play to earn games.

Nick: Thanks, that's really interesting. Yeah, that does sound quite complicated, but probably shouldn't dismiss it. It sounds like one of those jobs that don't exist yet really, that my kids might end up having one day. 

So that feels like a good place to draw this podcast to a close. It's been great to get those insights from Pruksa - so thank you very much Pruksa, hugely appreciated. 

Pruksa: Thanks, Nick. 

Nick: And thank you everyone who took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for our next episode and tune in.