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On April 28th, 2022, we listed the Global X Metaverse ETF (VR) on Nasdaq. VR is designed to provide exposure to companies that are positioned to benefit from the development and commercialization of the metaverse. The metaverse is a set of virtual, three dimensional (3D), real-time rendered spaces and simulations that can be experienced simultaneously by users regardless of the users’ physical location.

On Meta Platform’s Q4 2021 earnings call, CEO Mark Zuckerberg and others mentioned the metaverse 11 different times.1 Microsoft mentioned the metaverse seven times on its call and Nvidia did so five times.2 But they’re not the only ones. In the last six months, companies around the world have mentioned the word “metaverse” more than 240 times during their earnings calls.3 Why are so many companies enamored with this term? It’s because many expect the metaverse to emerge as the next evolution of the internet, presenting today’s leading platforms and tech giants a trillion-dollar opportunity.4

But what is the metaverse? Why is it the likely successor to today’s internet? And which segments are best positioned to benefit from this evolution? In this piece, we explore these questions and more as we discuss how the metaverse could reshape the future of how we experience the digital world.

In today’s internet, digital platforms typically help facilitate physical-world experiences. We buy goods on Amazon that are shipped to our home, we share pictures on Instagram of our latest dinner out, and we buy tickets online to a concert at Madison Square Garden that we attend with friends.

In the metaverse, digital platforms facilitate largely digital-world experiences. By jumping into an immersive experience using a VR headset, we will be able to work, play video games, buy digital items, socialize with friends, and consume media. The metaverse is not a technology per se, but a vision of a new way of engaging with our world. Succinctly, Meta Platforms’ Zuckerberg describes the metaverse as a virtual environment where you can be present with other people in digital spaces.5

Broadly, we identify six main characteristics that define a metaverse:

The metaverse is not some futuristic idea; early versions already exist. Epic Games’ Fortnite has hosted virtual concerts with Ariana Grande and Travis Scott, where users attended as their digital avatars. The success of events like these has been staggering, drawing millions of fans and far outnumbering in-person shows.

In August 2021, Meta Platforms took a major step towards a metaverse when it unveiled “Horizon Workrooms,” a virtual meeting space where co-workers can interact with each other in the form of their digital avatars.8 Entering the workroom requires an Oculus VR headset and downloading the free app. These examples offer small glimpses of what a full metaverse could ultimately look like.

As companies invest further in building metaverse-related initiatives, it’s important to remember that what we call “the metaverse” isn’t necessarily a centralized monopoly. Metaverse development may yield more centralized and distinct experiences currently, but it’s working towards an end-state that is fully decentralized. And unlike in Ready Player One, which depicts a metaverse where the real world is left behind for one infinite virtual world, in our world, several metaverses are likely to emerge.

Today, companies offer their metaverse experiences primarily through closed architecture systems, which means that their software and/or hardware is not compatible with other platforms. Different platforms are often designed for different primary use cases, such as gaming, working, shopping, or socializing. Eventually, we expect the most successful metaverse platforms to evolve toward a more open architecture that allows many, if not all, users, developers, and companies to participate on equal terms.

An example of a truly open metaverse would be a decentralized virtual reality platform powered by blockchain technology. Such a concept already exists with Decentraland, Somnium Space, Sandbox, and others, which are built on the Ethereum blockchain. Unlike other virtual worlds and social networks, no single agent has the power to modify the rules of these virtual worlds’ software, land, or the economics of its currency. Community members can create, experience, and monetize content and applications. In some instances, community members can buy, develop, and sell land, which, like in the real world, is finite, making it more valuable.

When inside the most popular metaverse platforms, we expect users to find functioning economies where they can spend or earn currency. Many will view the metaverse as a space for entertainment and leisure, using the digital space to meet with friends, shop, and/or consume media. These types of platforms will likely benefit from network effects: the more users start to participate in the metaverse, the richer the digital experiences become, and the more these users start to attract their family, friends, and acquaintances to the platforms. But the metaverse isn’t all play. For developers and creators initially, and others eventually, the metaverse will be their place of work, where they participate in the business of these virtual worlds.

For users to participate, they will simply need an entry point, whether it’s a VR set, smartphone, or computer, and an internet connection. But the next generation of hardware could include haptic body suits, omnidirectional treadmills, and brain sensing wearables, making the virtual world even more realistic.

Evidence suggests that the metaverse could create wide-ranging revenue opportunities across multiple verticals, particularly for those companies involved in building virtual reality, augmented reality, and mixed reality hardware and software, semiconductors, as well as creator platforms and economies. The opportunity could potentially exceed $1 trillion, when including advertising, social commerce, digital events, hardware, creating and developing content, and more.9 Below, we define the metaverse’s most prominent verticals and some of companies leading the way in them.

One example of a VR set is Meta Platforms’ Oculus Quest. We estimate combined sales of over 10 million Oculus Quest 1 and 2 devices since their launches back in 2019 and 2020, respectively.10 These sales totals are notable, as Meta Platforms believes reaching a sustainable and profitable ecosystem for developers requires precisely 10 million devices.11 App development in the VR ecosystem is well behind other type of devices, such as smartphones, resulting in a lack of quality content currently. As the number of VR users grows, likely too will the incentives for developers to support the space.

Unity Technologies and Epic Unreal Engine (40% owned by Tencent) offer a case study of how creator platforms bring content to the market. The two companies control approximately two-thirds of the game and virtual world engine market for mobile devices.12 The out-of-the-box solutions that they provide serve as building blocks for the virtual world’s development. Among their main attributes, their solutions help lower the total cost and time it takes to bring a video game to the market.

For example, in 2021, Unity Technologies spent $696 million in research and development (R&D), a cost that the company spread across 1,052 developers who generated over $100,000 in sales during the year.13 These developers simply focus on the creative aspect of the game, not the time-consuming engine-building and maintenance. Business models in this segment can vary. Unity charges a monthly subscription, while Epic charges a 5% fee on sales.14

Coinbase is an example of a company that operates within this segment. Coinbase not only facilitates access to thousands of cryptocurrencies, but it is also making inroads in the NFT ecosystem. Since announcing its NFT marketplace in October 2021, more than 2.5 million users have registered on the company’s waiting list to join the platform.15 The company wants to capitalize on a market that has historically garnered over $50 billion in trading volume.16 The NFTs are important for the metaverse’s development because they can be used to purchase virtual land plots, spaces, and avatars, among other items.

Within this segment, semiconductors are getting ready for a world beyond smartphones. Semiconductors are the foundational element to VR, AR, and MR fulfilling their promise, given the massive computing power they require. Companies such as Nvidia, Samsung Electronics, and TSMC are integral to this space. For example, TSMC is in line to manufacture custom 4nm and 5nm chips for Apple’s VR and AR ambitions.17

Like the internet once was, the metaverse is in its early days. But the metaverse’s foundational infrastructure is in place and companies are increasingly vocal about their participation in its advancement, both in word and capital commitment. As each piece is built and accessibility increases, we expect consumer appetite for this next iteration of the internet to increase. Important to the development of a thriving metaverse will be recognition that the metaverse is an immersive, real-time persistent economy. The metaverse will be as much a place of economic development as it will be a place for leisure and entertainment. It will take several years for fully formed, immersive metaverse experiences to become ubiquitous, but we believe that earlier stage investment opportunities are emerging already.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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