Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast, With the World of Emerging Tech Lives. I'm your host, Eric Hanselman, Chief Analyst for Technology, Media and Telecom at S&P Global Market Intelligence. And today, we're going to be discussing the Metaverse and actually digging into some of our research activities around that wild and buzzy topic with analysts Ian Hughes and Neil Barbour. Welcome to you both to the broadcast.

Ian Hughes

Thanks very much. Good to be back.

Neil Barbour

Good to be back, Eric.

Eric Hanselman

And great to have you back on. We've talked a lot about the metaverse in so many different aspects. Couple of episodes ago, we were talking about Mobile World Congress and a lot of the metaverse activity there.

But the 2 of you are part of our metaverse team that's researching. What really are the deeper aspects of metaverse? What are the pieces that are interesting and useful about it? And really how it's becoming an industry into and of itself? I guess I wanted to start with just really talking about the research activities, coverage, what you've been digging into.

Ian Hughes

Yes, sure. We've comment this from 2 slightly different perspectives and different experiences because our underlying products [ aren't ] from the 451 side and hails the Kagan side, but we're definitely kind of working and gelling as a team across TMT for this. And one of the things that we're diving into at the moment is trying to get some proper survey data.

So we're just currently fielding a global survey and that's in 2 parts. So one part is a B2B type survey that's talking to industrial companies and general enterprise as well and seeing what enterprises are trying to do for their customers. So that's kind of a little bit B2C.

But then we've also got a separate consumer survey. So it's what the people expect to be gaining from this and consumer land. So that very much fits in the same sort of vein as our Voice of the Enterprise surveys and our vertical surveys that we tend to have in 451 product. And in that, we're not just saying, have you heard of the metaverse or do you like the metaverse, both kind of...

Eric Hanselman

How could you spell it?

Ian Hughes

Yes. Yes. Those sort of things. It's diving into use cases and expected use cases and what are companies currently doing at the moment, what do they expect to be doing? Because one of the things that we need to get to as well as the financial data that we'll talk about later, but it's the impact on infrastructure. Because obviously, a lot of our clients are interested in where is the compute resource going to be? What's the network impact bandwidth storage?

Eric Hanselman

What's behind it? And what do you need to support it to actually create a real or sufficiently real metaverse experience.

Ian Hughes

Absolutely.

Eric Hanselman

And the larger question of who's going to actually build that out. Yes. Demand on the one side, but yes, we have to have supporting infrastructure to be able to make all this work.

Ian Hughes

Absolutely. And there's not one infrastructure either because each type of application and each use case may well be built out in a different way. So some things may be more reliant on cloud streaming, using the same approach as cloud gaming. Others may be better suited to be more local peer-to-peer application that occasionally calls back home to keep the persistent state of something.

And all these patterns exist already and all these infrastructures exist and many of them exist in the game environments. But also there's the traditional web environments as well. And not everything is going to necessarily need ultra-high-res ray-traced imagery because you just need to do something quickly and simply on simple devices, but other things are going to need that level.

And so trying to find out what people's expectations and what they're doing and where they fit and what they're up to at the moment, helps inform those potential architectures because we can say fairly well when something is likely to be one of these particular architecture patterns.

And if that's a particular use case that's really, really popular, then that's going to be the major impact on the infrastructure. So we're looking for that kind of level of detail as well as our regular updates on various companies, what they're doing and where things are fitting in the events and all these things that we generally generate report content on.

Eric Hanselman

Well, you raised an interesting point because when we start thinking about that supporting infrastructure, I mean, this is something that we've been looking at from an edge computing perspective for at least a couple of years on. And a lot of that expectation that there will be applications that drive the need for localized compute.

But it's important to understand that so much of the architecture of those environments really influences where that computational work needs to get done, how much data you need to move between both the end user and the various computational components of it. And we're into that intermediate stage, which there are an awful lot of moving parts that bolt together in a number of different ways and architectures that are still shaking out.

Ian Hughes

Yes. And this is very much in the same vein because it's similar stuff as the industrial IoT evolution from what's done in the cloud, and what's done on the edge and where things are on it. That's turning into a proper distributed computing challenge, which is what you just described there. But it's not one or the other. It's not all on the cloud or all on the server. It's everywhere in between from edge to cloud and different things sometimes need to be local and need to be ultra-low latency quick answer to a question that you need.

And then other things, you need the scale of cloud to try and work out what's going on across so much bigger area. And that is the world that metaverse is evolving into anyway. So that's how compute has moved on hasn't it, from basic stuff, and we had kind of basic clients server architectures 34 years ago and then a shift to, is it network computing? And then we end up in the app culture and smartphones doing everything. And now everything's back on the cloud again because of AI and ChatGPT and stuff.

Eric Hanselman

It's that the pendulum swings out, the pendulum swings back. And you had mentioned cloud-based gaming. That shift to, does more of the computational work get done closer or in the core of the environment versus the end device. Yes, it's all of the above.

Ian Hughes

And Neil and I were talking the other day about it some statements that have been made about being able to run AIs in games for the nonplayer characters on the device as opposed to everything being off in the cloud and yet the whole kind of cloud gaming thing, which is saying, well, you don't need things, you don't need high-end device to do anything. And so we're in that state of flux there. In just the gaming industry as a just -- because it's a huge industry.

But all those architectures and those approaches and particularly, the dropping AI into everything is going to impact everything else, which includes the Metaverse, which is the natural evolution of those environments.

Eric Hanselman

It's easy to minimize the impact of the metaverse, but in fact, the gaming industry is already a massive consumer of infrastructure and network capacity and all of the associated resources that are needed to run it. And that's the proving ground for everything that we're going to need to do as Metaverse capabilities continue to grow and expand.

So one of the other things you're looking at is really the evolution of what that market looks like and the market players that are there as well. What are some of the details of what you're looking at in those areas?

Neil Barbour

The top line of our research approach to covering the metaverse, when the rubber hits the road is to try to separate the signal from the noise. So the metaverse incorporates a lot of different technologies, 3 virtual worlds. It can touch on AI, it can touch on NFTs.

But where we were focused on looking at where these markets are making money is directly where those feed into a 3D virtual world with a high degree of user interaction, the ability to take a consistent user profile across different worlds for the purposes of socializing gaming, et cetera. So our Metaverse revenue tracker or forecast is a bit more modest than some -- you'll see from other market observers or perhaps companies that are more interested in making the market seem very robust.

So when we sort of look at exactly where those opportunities are, we come up with a market that's driving $50 billion in revenue over the next 5 years or $50 billion in annual revenue by 2027. A lot of those opportunities are coming in gaming, particularly right now, but we're also seeing commercial software and services, which is where you see digital twins and other digital transformation technologies start to come along and give gaming and run for its money.

And the 2 will grow in tandem, the technologies that are helping to shape 3D virtual world building for gaming are going to help those that are shaping 3D virtual environments for digital twins and factories. In many cases, those tool sets are very similar. So you'll see those grow together.

And then we sort of see hardware as a consistently large pool in that revenue space. And then toward the end of the forecast is where we start to see the on-ramp for the mass market opportunities around advertising, around e-commerce, some of the revenue streams that we would classically think as standing up a lot of big media properties.

Eric Hanselman

Well, I think that's the challenge that we always face in modeling these environments, which is that challenge to rope in a very large part of the market. But of course, the reality is it's really a much more focused chunk of all of those constituencies that are really going to make up, the real core revenue pieces that really define what is that market.

And I think so often in a buzzy topic like this, there's that temptation to simply tag everything possibly be involved. But there's always that aspect of ensuring that you can narrow that down to what are those, the realistic expectations about who really is part of that market and where they fit and how they're actually contributing. And to your point, being able to map those into the technologies and the end revenue-generating processes that are actually going to build that market itself.

Neil Barbour

Yes. And to put a finer point on it in terms of what the gaming opportunity looks like and how advertising revenue plays a role. You can look at Roblox as sort of a microcosm of what the metaverse might be in 5, 10, 15 years. Of course, Roblox is a very simplistic looking game. It's targeted mostly toward children and teenagers. But the way they approach slowly feeding in, we're going to do more with in-game purchases. We're going to do more by allowing users to create more worlds.

And now their next venture, as that phase of growth is sort of slowing down and the revenue growth is slowing down accordingly, they're going to try to pull in advertising into this space. And it's going to be an interesting experiment to watch play out over the next year.

Classically, gamers or people in game environments have been resistant to being fed advertising. Traditionally, that has been a notion of well, I already paid for this product. I shouldn't be served advertising while I'm inside of it. Now that, that dynamic has sort of rolled off with the advent of free-to-play, will the attitudes be a little different as they roll that in. So I think that's the segment you have to watch.

Will the metaverse be able to change what has become a very entrenched consumer behavior in-game purchases, which drives something along the lines of $130 billion to $150 billion in annual global revenue to the next phase where people don't necessarily need to make those in-game purchases to drive revenue for the developers and publishers where you can have advertising going on or you can drive a certain e-commerce, Amazon-like e-commerce opportunities inside those virtual worlds.

Eric Hanselman

We've seen the same transitions across media in various forms. I mean, streaming media most recently, fast approaches. Advertising has become that expectation of an additional revenue stream and gaming, I presume, is going to be no different.

Neil Barbour

I think Fast is such a great corollary here as well, where some of the content might not resonate with everyone. There's sort of a flywheel serpentine built dynamic going on, where if the advertising comes, then maybe they can stand to build up better content, then that can pull in more robust advertiser group and so on. It's a virtuous cycle.

Eric Hanselman

And just the quick aside for listeners who don't know, a free ad-supported television for Fast which has had that whole ecosystem growth in the same way. So yes, interesting that there are parallels there.

Ian Hughes

One of the things, particularly with virtual goods and it's almost every physical gadgets there -- some of the advertising is people taking those goods with them, whereas our kind of traditional web advertising, you get banner ad that kind of mix what you need or something pops up somewhere on a website. So here, look at this.

When you are engaging with something and you say, well, I quite like that jacket. I'm going to put that [wear META ] and it's a branded jacket like the Tommy Hilfiger one, that was doing the rounds in Metaverse Fashion week. People are then taking that with them to other places. As you get more and more interoperability, you get to take things with you wherever you need to go. So you address the path for where you're going, where you take the particular advice or the car or the thing of the plane or whatever it is, the hairstyle, any of those things.

And so that's more of an approach that and -- as Neil said, gamers don't want to be advertised to because they have already engaged with the game and bought it or doing something with it. But then to show your colors and go somewhere else, that then becomes the choice of who can you get to influence them, who can you get to take your brand around with them. And that's much more like when you sell T-shirts and when you sell sneakers in the high street.

Eric Hanselman

And that indirect advertising that then spills across from the virtual environments into the real.

Ian Hughes

Absolutely.

Eric Hanselman

Well, it's already a Couture presence in virtual world. So hey, we're heading down that road.

Ian Hughes

Absolutely. And that's where, again, it blends with the particularly large industry of sports and base the whole media cycle and circus around sports anyway. And a whole set of products and people choosing to show their support for a particular team in buying a new shirt every 6 months or whatever those things are. That's one of the reasons the sports companies are interested in what's going to be going on in the metaverse as well because there's clearly that link.

And if you buy a digital Jersey and get send a physical one or you buy a physical one and you go digital versions carry on. Why wouldn't you? That sort of it seems a natural thing in fandom to be able to do that?

Eric Hanselman

Well, and we've already got the sports retailers tied into team identities. So that pairing has already happened and that step into virtual is just one more piece of it.

Neil Barbour

Yes. I think that's a good point. There's a lot of road left to run on end game purchases as well. Sort of the [ Roblox ] standing in the way there is the interoperability piece. A lot of the items that you can buy tied to certain brands. They won't carry with you to other virtual experiences.

For example, if you were to buy something into Decentraland, it wouldn't work in the Sandbox. It wouldn't work in Second Life, et cetera, or more like Roblox. You would have to buy that piece of clothing individually at each of those virtual ecosystems.

If the consumer could be assured that they're buying something a little not quite tangible, but more robust item that can work across those experiences, perhaps that item grows more value. Does that happen through NFT gaming? Not necessarily. There are other ways to make that happen. NFT gaming is right now on the vanguard of sort of that interoperability play. But that's sort of the missing piece, too, in terms of assuring the end-game items really resonate with consumers.

Eric Hanselman

To get to a point at which you've got portability, which is that ultimate goal, let's say -- and to your point, if you're going to dress up, you want to make sure as you go from environment, sphere, realm, back and forth to each that you're able to carry that. But I guess that's something where maybe NFTs have a role to play in being that interchange mechanism as opposed to being the value trading piece that comes from the NFT gaming environment.

Ian Hughes

Understanding ownership and whether you're entitled to use something. And if it's appropriate for a particular space is part of that challenge. But one of the things for people to hook on to here is that there, we're talking about jackets and guns and games and the things that we want to take around as consumers. The pieces we've talked about before in the industrial side of the metaverse, needs that interoperability even more, because if you are building a virtual factory to check out a design of something and you can't bring in the particular high-end robot model that's fully simulated into your environment because you're on the wrong platform. That's of no use.

So the industrial driver is saying, well, we need all this stuff to be interoperable because we've got different physics models and we've got different types of application. We've got many providers of equipment. And just as you build an actual factory, don't say, well, I can't put this robot arm in because you'll see your company in case it won't fit, but you can't say it worked because, I mean, in the wrong environment. So that can't be the mirror. You need that interoperability across multiple digital simulation platforms and digital twin platform.

Eric Hanselman

We're getting back into all of the Windows versus Mac.

Ian Hughes

Yes.

Eric Hanselman

Kinds of debates. And yet here, we've got something in which there is significant value and a much more sophisticated problem than just simply looking at your in-game, clothing, weapons, paraphernalia, you actually have to have the ability to be able to have the full digital twin, all of the simulation aspects of it, and the behavioral properties and such that are able to work across multiple environments.

Ian Hughes

Yes. And the standards that are going to form have to form and they're slowly forming in that industrial space will help hopefully inform the more consumer-based gaming space. So it's this wonderful loop, isn't it?

Neil Barbour

Right. Like we were saying earlier, the underlying software, whether it be NVIDIA Omniverse or Unreal or what have you, they're powering the digital twins as well as they're powering the game. So as that back-end technology starts to work in with one another more seamlessly, that will benefit the consumer and that, again, be a virtuous cycle.

Eric Hanselman

Now one of the other things that you're also working on, how has the funding side of things been shaking out?

Neil Barbour

Yes. If you look at Metaverse investment from capital markets, debt markets, buyback shelf offerings, and M&A and take it all the way back to 2000, 2010, you definitely don't see a lot of activity going on around 2005, 2006, you see companies like Roblox and Second Life start to emerge. And they stand up and then it goes away for a little bit.

And then right around when that as you would expect, release Oculus, people start to get excited about this idea of 3D virtual worlds doing a lot more than what they were doing come online. And then the investment ramps up through the pandemic as work from home and gaming in general drives more revenue, people start to see the opportunities there. And then like many of those segments, it starts to fall off as people sort of resumed their daily sched...

Ian Hughes

People went back to work.

Neil Barbour

People went back to work...

Ian Hughes

What happened.

Neil Barbour

There was a credit crunch, there's macroeconomic headwinds and so forth. But we have curated a list of 200 some-odd companies that we see as specifically contributing to building pieces of the metaverse as it fits into our definition. Again, this is in the vein of separating the signal from the noise.

And Ian and I have talked to these companies at trade shows. We've demoed their products. We've read a lot of their publicly filed documents. We really tried to know these companies before we've included them on this list.

And so we're tracking those companies and adding more to it as time goes on to see where the bets are being placed with segments, subsegments of the metaverse are driving the most interest from investors. And just an example, in the most recent quarter, we've seen a couple of APAC companies that are developing midrange, stand-alone, VR headsets attract a lot of attention thinking of Pimax and Accu.

And they are trying to tail on to some of the success that ByteDance has had with their Pico 4 stand-alone headset, which is a competitor to the Oculus Quest 2. So those are the biggest movers this quarter, and you can see that sort of taking root, the consumer side, VR starting to get excited, which will eventually fuel some excitement inside of the commercial applications for similar headsets, which Quest 2 kind of turned into the Quest Pro. So you see that cycle taking place. Those are the kind of insights you can take away from looking at how the investment is flowing into these certain subsegments?

Eric Hanselman

No. It sounds like it's a set of signals that's indicating that this is really becoming a much more mature market.

Neil Barbour

Right. And I would note that from a top line perspective, you can see some of the valuations of these investments start to decline, although the number of investments are staying relatively steady. So as a potential metaverse winter approaches "where companies retrench into core operations" and put some of these speculative investments on the back burner, those technologies and approaches will continue to simmer even if people aren't looking at them. And I think that's what you can expect going forward is that some of these smaller projects are still being -- continued to be worked on, even if some of the larger blockbuster investments are maybe going to be put aside.

Eric Hanselman

Well, not dissimilar to the rest of the funding and M&A marketplace. We are certainly moving through an environment in which there is more caution, people are pulling back a little bit, as listeners certainly heard from Brendan Daly, there are some fairly dour predictions, but Melissa and Sarah was -- I think a couple of episodes ago was at least cluing us in that maybe there is some sunshine out there. But we've just got to wait a little bit to spring to really get into full bloom for funding and M&A.

Ian Hughes

It's kind of interesting watching the media frenzy around things. And we have [ Rose ] getting sent link saying, look, metaverse is dead. It's not. It's been bubbling along for a long while. And yes, there's a bloom of interest in certain things.

And now everyone is looking at ChatGPT and just saying, oh, AI is everything. But all these things converge and all these things are about advancing how we interact online and the things that we do. And it only takes something like Microsoft finally turning on their mesh-enabled teams for everyone, and there's some things out in preview that makes corporates aren't going to have running yet because, obviously, they have to wait for it to be the proper version.

But if we can just turn the Teams meeting into a virtual meeting, people will try it. I mean that's a huge threat to all the other companies that are trying to do office-based interaction applications because then it's just central and core to the thing that lots of corporates are already using. And that changes the nature of the conversation because then people can experience and understand it.

And rather than just saying, I don't like the metaverse, I don't believe in the metaverse or metaverse is dead, then it's -- oh look, there's a different way to interact. Does it work for me, and they can explore it and have a go. And if it doesn't work, that's fine, and that's part of our job is to try and see what works and what doesn't work, which is why we go off to experience these things as well because it's much feeling about what that's going to be because it's a human interaction platform than it is just pointing fingers and saying, well, that's not happening. It's dead, it's gone.

Eric Hanselman

It's -- again, one of these cycles of which any particular new technology gets very buzzy and then it gets less buzzy, disappears from the headlines, people think, oh, well, that's yesterday's news. But in fact, it's just that process of mainstreaming the technology. So interesting to hear where this is all going. Well, thank you both for all the perspectives. We look forward to hearing more and getting some of the results of the studies that are in process. But thank you for being on the podcast.

Ian Hughes

Thank you very much.

Neil Barbour

Great. Thank you, Eric.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks to our audience for staying with us. And thanks to our production team, including Caroline Wright, Ethan Zimman and Syed Wajih Abbas on the marketing events teams. And our studio team, [ Kyle Canullosi ], [ Derek Brown ] and Darren Rose.

I hope you'll join us for our next episode where we're going to be talking about the fundamentals of artificial intelligence going from one buzzy topic to another, but really taking a step back to look at some of the mechanics and the basics and what really fuels a lot of the reality of where AI is today. I hope you'll join us then because there is always something Next in Tech.