Part 1: The Metaverse, How We Got Here

Introduction

What is the Metaverse?

That is the question that has been front of mind for tech executives, Fortune 500 CEOs and governments alike since October 2021, the date when Facebook rebranded to Meta and the concept of Metaverse was thrusted into public consciousness for the first time.

Nearly overnight, Google search hits for “Metaverse” increased by 2,000%. Shortly after, tech leaders sprung into action, with each jockeying to best position themselves as Metaverse leaders. And while we are years away from witnessing a fully developed Metaverse, substantial capital has already been invested to realize its potential. In 2022, Microsoft announced its $69 billion acquisition of Activision Blizzard, a leading gaming company with Metaverse use cases; the South Korean government announced plans to invest over $200 million into its domestic Metaverse ecosystem; and gaming leaders like Epic and Niantic have raised billions to transform their proto-Metaverse gaming platforms into more immersive and scalable experiences.

The Metaverse has attracted such vast attention for the following reason: its potential is massive. Citi promotes the Metaverse as a $13 trillion opportunity, justified by its potential for large-scale disruption across industries. The size of their estimate doesn’t stand in isolation either, with Goldman pegging its potential at $8 trillion, Morgan Stanley at $8 trillion, and McKinsey at $5 trillion.

This series will add context behind the billions of investment dollars and trillions of market size estimates that surround the Metaverse today. To do so, we break down this series into 5 parts:

How we got here: From Neal Stephenson’s 1992 sci-fi novel Snow Crash to Facebook’s rebrand, a look at how the Metaverse came out of nowhere for some, yet for others it was decades in the making.

What it is not: Debunking the headline-catching oversimplifications and oversights.

What it is: A deconstruction of the Metaverse from a conceptual and technical point of view.

Why now: Placing the rise of the Metaverse in context of macro tech and consumer shifts.

How big can this become: A breakdown of the Metaverse’s potential and why some put it at a $10 trillion opportunity.

Part 1 | How We Got Here

Historical Context

The Metaverse is a novel concept to many, but its conceptual roots date back to the early 90s in Neal Stephenson’s 1992 sci-fi novel Snow Crash. In his book, Stephenson used the term “Metaverse” to depict a 3D photo-real virtual world, in which humans, represented by programmable avatars, interact with one another to escape a dystopian future. At the time of publication, the hardware and software required to build a contemporary Metaverse were decades away; despite this, Snow Crash illustrates a concept similar to how parts of the Metaverse are developing today, with a collaborative, immersive virtual world navigated by avatars representing our unique digital identities.

The first signs of the Metaverse outside of science fiction came with the launch of Second Life by Linden Lab in 2003. Second Life is a PC-based platform where users create an avatar and maintain a “second life” in an online virtual world. In the platform, users can explore different worlds, go to parties or even have a job. The platform never achieved mass scale, topping out at around 1 million monthly active users in 2007 and hovering around 500,000 users for the better part of the last decade (they are still active today). Second Life struggled to take off because of its complexity, steep learning curve, restriction to PC devices, and frequent platform failures. It didn’t fail because there was a lack of demand for people wanting to immerse themselves in an online world; instead, those people flocked to the digital platforms that aligned better with existing technology capabilities like Facebook, Instagram and Twitter.

One important learning from Second Life is it provides an early example of what a functioning Metaverse economy could look like. Second Life has maintained a vibrant in-platform economy for almost two decades, with 345 million transactions in 2021 alone carried out in their currency of Linden Dollars (L$). The virtual platform maintains a robust $650 mn GDP, which is impressive for a proto-Metaverse built 20 years ago with technology decades behind where we are today.

The Metaverse reaches one of its most complete fictional expressions in Ready Player One. Published in 2011 by Ernest Cline, is a science fiction novel that takes place in OASIS, an expansive virtual reality world where the characters spend the majority of their time in search of a hidden digital Easter egg. Ready Player One was adapted into a film by Steven Spielberg in 2018, with OASIS portrayed as something not dissimilar to the virtual platform Meta is building today.

The notion of a Metaverse has been in the works for the better part of the last three decades, but there is an important distinction between its fictional precedent and where the Metaverse is headed today. In the examples above, the Metaverse is portrayed as something people use to escape a dystopian real world, where your virtual life and virtual identity are distinctly separate from the real world. Today, its purpose is different, with the Metaverse promising to seamlessly connect users’ physical and digital lives through AR, VR, MR and other emerging technologies. The Metaverse today is not a place to escape to, but rather a way to make peoples’ digital (and physical) lives even richer and more authentic.

The October ’21 Drop

Early Metaverse concepts like Snow Crash and Second Life were limited in scale to a niche group of sci-fi readers and gamers. In October 2021, Facebook’s rebrand to Meta changed that by thrusting the Metaverse into public consciousness for the first time. Millions of everyday internet users were introduced to the concept overnight, with Google search hits for “Metaverse” jumping 2,000%.

Despite what the Google search interest data suggests, the Metaverse didn’t come out of nowhere for Meta. In fact, the rebrand had been nearly a decade in the making.

• March 2014: Facebook announced its acquisition of the trendy VR startup Oculus in March of 2014 for ~$2 billion. With a hat tip to their future Metaverse strategy, Zuckerberg said at the time: “Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow.” Over the next two years, they would invest $250 million into VR content and education.
• March 2016: Now under the Facebook umbrella, Oculus released its first consumer headset — Oculus Rift — in March 2016 at a price tag of $599.
• May 2019: In May 2019, Oculus debuted what would become their most popular headset — Quest — for $399, a 33% price drop from the Oculus Rift. Meta has since also released the Quest 2 at a starting price of $299, the lowest price in the competitive landscape.
• Feb 2020: By early 2020, Facebook had over 3,000 active job listings for AR/VR engineers — 3x the number at Apple, Amazon, Microsoft or Google.
• July 2021: Gearing up for their rebrand, in Summer 2021 Facebook announced an executive team created to work on Metaverse products, led by Instagram VP Vishal Shah. The announcement came just days after Zuckerberg outlined his vision for the Metaverse in an interview with Casey Newton.
• Aug 2021: Shortly after forming their Metaverse executive team, Facebook launched Horizon Workrooms for VR remote collaboration, an important milestone in the development of non-gaming Metaverse use-cases.
• Oct 18, 2021: Just 10 days before the rebrand, Facebook announced its intention to hire 10,000 AR/VR engineers in Europe; this came as little surprise, as the Nordics host a strong AR/VR technical talent pool with alumni of nearby giants like Nokia and Ubisoft.
• Oct 28, 2021: The big drop. On October 28, 2021, Facebook rebranded their name and altered their core identity with its public commitment to the Metaverse.

Big Tech’s Immersion

Facebook’s public pivot towards the Metaverse has reverbated throughout the tech community, with incumbents across the ecosystem taking steps to position themselves as Metaverse builders and leaders. Below, we outline how select tech giants are defining and executing their own Metaverse strategies.

1. Microsoft
   Microsoft has been one of the more active players in the Metaverse for the last several years. Their approach has involved both acquisitions and in-house development. They acquired AltspaceVR, a social virtual reality platform, in 2017 after the company raised $15 million from VCs. More recently, they announced a blockbuster deal to acquire gaming giant Activision Blizzard for $68.7 billion in January 2022; this deal is still under regulatory antitrust scrutiny, however, with analysts split on whether the acquisition will go through. In-house, Microsoft has also been active. Their cloud computing arm, Azure, launched a digital twins product in 2018 that uses IoT spatial intelligence to create models of physical environments. Today, they are leveraging this technology for emerging industrial metaverse use cases. More recently, they rolled out Mesh for Microsoft Teams, a competitor to Meta’s Horizon Workrooms, to add immersive collaboration features to their existing work solutions.
2. Nvidia
   Nvidia has also been active in the Metaverse, with a focus on enterprise use cases. Their efforts have been centered around Omniverse, which is their Metaverse platform enabling 3D collaboration and simulation. Omniverse is already used by companies like BMW, Ericsson and Siemens Energy to leverage virtual replicas (aka digital twins) to augment their existing workflows. Their CEO, Jensen Huang, is a strong believer in the potential of the Metaverse: “The economy of the virtual world will be much, much bigger than the economy of the physical world.”
3. Apple
   Apple has yet to outline a clear strategy for the Metaverse, but this is likely intentional as they work towards debuting their highly anticipated AR/VR headset. Given their tradition of consumer hardware dominance, we can expect Apple to be a major player in driving Metaverse hardware adoption for consumers around the world. While not publicly acknowledged, Apple has also recently trademarked ‘realityOS,’ which Apple analysts expect to be the operating system designed for their upcoming AR/VR devices. Plus, they are already supporting the creation of digital content for their future Metaverse hardware with a comprehensive suite of AR creation tools for developers, including the ARKit 6 (SDK for creating AR apps) and RealityKit (APIs for rendering 3D assets in AR).
4. Niantic Labs
   Niantic Labs is behind the PokemonGo mobile game, which drove AR adoption for millions of smartphone users for the first time. Their CEO John Hanke has centered the company’s focus on what he calls the ‘real-world Metaverse,’ which aims to enhance the physical world through augmented reality. As part of this mission, they launched Lightship — and AR Developer Kit (ARDK) — to help developers bring AR experiences into the real world. Hanke has spoken critically of a VR-based fully immersive Metaverse, calling it a “dystopian nightmare” in several interviews.

The Metaverse has been developing ‘in stealth’ for decades. Today, big tech companies around the world are positioning themselves for a Metaverse future, despite the uncertainty around what exactly that means. By the end of this report, we aim to provide definition and guiding principles for understanding the Metaverse. First, however, we want to be clear about what it’s not.

Check back in next Tuesday (August 9th), when we will answer that question.

Should you have any questions or would like to discuss more, please don’t hesitate to contact Aaron Farr (aaron@agyaventures.com).