Disruption

Principles of Metaverse

12 Jul 2022 | 5 minutes read
Raymond Tong
Portfolio Manager
Introduction to the metaverse

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Introduction to the metaverse

The discovery and research of new disruptive thematics is central to our investment process within the Orca Global Disruption Fund. We’ve identified the metaverse as a future computing platform with the potential to reshape how we explore and engage with digital content.

We believe the metaverse has significant disruptive potential as our familiar physical “real-world” converges rapidly with an increasingly digital experience. We see emerging use cases for business and consumers to leverage new technology.

This article explores the concept of the metaverse, its key players and how the Fund is positioned to potentially benefit from its emergence.

So what exactly is the metaverse?

The term metaverse (and avatar) were popularised by science fiction author Neal Stephenson’s Snow Crash (1992), initially referring to a virtual reality (VR) based successor to the internet. In Stephenson’s novel people use personalised digital characters or avatars to explore online worlds.

While more than 30 years later, the final form of the metaverse is yet to be defined, a commonly held belief is that it could be the successor to mobile internet. Mark Zuckerberg believes the metaverse will be an “embodied internet that you’re inside of, rather than just looking at.”

Experiences will likely be much more immersive compared to our familiar usage of devices such as mobiles and tablets to explore and navigate digital content. Sharing and simultaneous interaction will also be core to next generation metaverse experiences, in contrast to modern internet where most content has already been created before it is consumed (e.g. YouTube, Instagram, TikTok) and is often viewed on an individual basis.

As people start to engage with virtual worlds, there will be opportunities to shop for digital and real-world goods, hang out with friends, play games and sports, and learn and educate e.g. learning about history not by reading about it in a book, but by being there in person in a photorealistic setting, similar to a video game.

People will work in close collaboration with colleagues from around the world through lifelike avatars. We’ve seen significant capital commitments from Facebook/Meta (spent >$10 billon in FY21), Microsoft via its $69bn acquisition of digital entertainment company Activision Blizzard (subject to regulatory approval), and other large tech companies including Apple and Alphabet committed to developing next generation VR/AR headsets to power metaverse experiences set for release in the coming years. In a recent interview with China Daily, Apple’s CEO Tim Cook commented on the future of augmented reality, stating “I couldn’t be more excited about the opportunities we’ve seen in this space, and sort of stay tuned and you’ll see what we have to offer.”

While full scale immersive consumer experiences often envisioned as the metaverse are likely some years away, investment and adoption of early use cases within enterprise are growing rapidly as companies leverage metaverse technology to drive operational efficiencies and productivity gains.


Real-world applications

Initial real-world examples of metaverse applications have begun emerging for enterprises and consumers, with examples including:

Consumer

  • Gaming and entertainment: Video games are increasingly seen as a gateway to the consumer metaverse with leading platforms including Roblox and Fortnite expanding immersive experiences available to their communities beyond core gaming. Virtual concerts have been held by artists inside Fortnite and Roblox featuring performances by artists including Travis Scott, Lil Nas X, Ariana Grande and Marshmallow. Media giant Disney also has metaverse ambitions, with CEO Bob Chapek describing it as a “third dimension of the canvas”1 for Disney creatives with strong interest in blending digital experiences with Disney’s IP and physical assets such as theme parks.
  • Retail: Major brands including Nike, Vans and Puma have created digital worlds for consumers to explore and engage with their products inside Roblox, while Adidas purchased digital land in Web3 gaming platform The Sandbox to build its own virtual world. In Dec-21, Nike acquired RTFKT, the leading creator of virtual sneakers in the metaverse. Nike CryptoKicks was subsequently launched in Apr-22 as a non- fungible token (NFT) collection on the Ethereum blockchain. Adidas has also released an NFT collection produced in partnership with Bored Ape Yacht Club, Punks Comics and crypto investor Gmoney, entitling holders to virtual wearables for use in online platforms and physical merchandise.

Enterprise

  • Digital Twins: Enable companies to render virtual representations of organisational workflows which can include physical assets, people and processes. The global market for digital twin platforms is projected to grow at a 39% CAGR between 2022-30 to reach $155bn2 underpinned by broad-based applications across multiple sectors spanning: manufacturing, aerospace, automotive, retail, real-estate, banking and finance, resources and healthcare.
  • Automotive: BMW uses digital twins to replicate entire factories to optimise production time and cost, with the company expecting digital twin technology to cut planning time by 25 per cent. BMW is also building a new plant in Hungary modelled entirely using Nvidia’s Omniverse platform and by 2023 is aiming to have a digital scan of all vehicle plants worldwide.
  • Resources: Newcrest has partnered with Microsoft and is building a full-scale digital twin of its Cadia gold mining operation in NSW capturing a complete set of operational data, allowing tactical and strategic decisions in real-time to improve performance.
  • Logistics: Amazon is using Nvidia’s Omniverse platform to create digital twins for warehouses – simulating complex buildings and enabling performance analysis and optimisation before construction. Omniverse is also used to help train autonomous robots to enhance sorting and picking abilities.
  • Manufacturing: Pepsi is using digital twins to help make their business more environmentally sustainable and efficient through optimising warehouse workflows and procedures.

Potential scope of opportunity

Early estimates peg the broader metaverse opportunity at $800 billion3 over the medium term with potential to grow into a multi- trillion-dollar industry4 over the longer term as new use cases emerge. Nvidia’s CEO Jensen Huang articulated his vision of the metaverse on the 2Q22 earnings call:

…the metaverse is going to be a new economy that is larger than our current economy. And we’ll have to enjoy a lot of our time in the future in Omniverse and the metaverse. And we’ll do a lot of our work there and we’ll have a lot of robots there doing a lot of work on our behalf. And we wake up in the morning as they show us results.

Richard Kerris (Nvidia VP Omniverse) also estimated the scope of opportunity for creators at the company’s 2022 GTC conference:

First, we estimate that there are 45 million designers, those designers that are creating in industries such as media and entertainment, architecture, engineering and construction, manufacturing and industrial design. Many of these are end user customers for our Pro Viz products already, and Omniverse Enterprise can help them modernize their existing workflows. And second, we have Omniverse opportunities for our digital twins with Omniverse… This will serve millions of factories, warehouses and fulfillment centers across the globe…Omniverse software and chips and systems equals a $300 billion market opportunity ...

While the buildout of the metaverse remains in the early stages and its ultimate form is not yet known, we expect many challenges will also need to be overcome along the way, including privacy, security, data, and technological infrastructure. Similar to our physical world, exploration and interactions in virtual worlds will need to be safe for participants.

Early examples of the metaverse such as Facebook’s Horizon platform have highlighted the need for robust safety protocols to moderate inappropriate activity. From a technological perspective there are also scaling challenges to enable large numbers of people to participate simultaneously in shared experiences which will require further innovation.

Who are the main participants?

It is not expected that the metaverse will be owned or controlled by a single or small number of participants but will rather be an integration of many immersive virtual worlds. We expect the metaverse will be populated by existing market leaders positioning themselves for the next generation of computing, alongside newer innovative market entrants more native to the metaverse environment with less exposure to legacy business that could be disrupted by this computing paradigm.

Examples of companies and projects with early involvement in enabling the metaverse build-out include:

  • Design and content development: e.g. Epic Games and Unity for real-time 3D game engines and Adobe’s Substance for 3D and augmented reality content
  • Hardware and infrastructure: e.g. Nvidia and AMD for GPU compute and development platforms
  • Payments and digital currencies: e.g. Fortnite’s V-Bucks, Roblox’s Robux, various cryptocurrencies (e.g. Ethereum, Solana)
  • Gaming and digital experiences e.g. Roblox, Meta, Disney and blockchain-based projects such as The Sandbox and Decentraland.
Introduction to the metaverse

Investing in the metaverse

How is the Disruption Fund currently positioned for opportunities

The Orca Disruption Fund has exposure to the metaverse thematic through long-term positions in companies that provide the platforms and infrastructure to build, rather than attempting to pick pure-play metaverse winners at an early stage. Some examples include:

  • Microsoft: Offers VR hardware leverage through Hololens products, industrial metavese exposure via Azure IoT and Azure digital-twins platforms and consumer exposure from Xbox gaming assets.
  • Tencent: The largest global gaming company, with minority stakes in metaverse development software like Epic Games (40 per cent owner) in addition to leading social platforms and digital payment capabilities
  • TSMC: Leading global semiconductor foundry and manufacturer of chips for advanced computing applications to power large scale platforms such as the metaverse
  • Nvidia: Global leader in GPUs supporting artificial intelligence and provider of Omniverse platform for designers and creators to collaborate in development of digital assets for virtual worlds
  • Apple: Dominant smartphone manufacturer, leader in augmented reality (>14,000 AR enabled apps in Apple App Stores), set to launch consumer focused immersive AR headset.

While we expect it will take several years for the metaverse to take shape – particularly given supporting infrastructure remains in development – we believe the next computing platform to succeed mobile has the potential to reshape the internet landscape and presents an interesting and dynamic area for investors to monitor.

In Summary

  • The metaverse represents a potential successor to mobile internet where people can share digital experiences which feel more immersive than our current internet
  • Estimates have pegged the metaverse as a multi-trillion-dollar opportunity over the long term
  • Innovation in hardware and software are providing the infrastructure and platforms to build out the metaverse
  • Metaverse examples for consumers include immersive gaming, attending digital concerts and the ability to purchase virtual wearables for avatars, while enterprise examples include the digital replica of physical assets as digital twins to help with realworld optimisation.
  • The Disruption Fund has exposure to the Metaverse through Microsoft, Apple, Tencent, TSMC and Nvidia.

Sources:

  1. CNBC Interview with Bob Chapek on Metaverse, 2022
  2. Digital Twin Market Size worth $155,839.4 Million by 2030, Grand View Research, 2022
  3. Metaverse May Elevate Gaming Growth to $800 Billion, Bloomberg Intelligence, 2021
  4. Bernstein Global Tech: Entering the metaverse, Bernstein, 2021


This document has been prepared and issued by Orca Funds Management Pty Limited (Investment Manager) (ACN 619 080 045, CAR No. 1255264), as investment manager for the Orca Global Disruption Fund (Fund) (ARSN 619 350 042). The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL 235150) is the Responsible Entity of the Fund. For further information on the Fund please refer to the PDS and Target Market Determination which is available at orcafunds.com.au. This document may contain general advice. Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs. This document may contain statements, opinions, projections, forecasts and other material (forward-looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. The Investment Manager and its advisers (including all of their respective directors, consultants and/or employees, related bodies corporate and the directors, shareholders, managers, employees or agents of them) (Parties) do not make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. Actual results, performance or achievements may vary materially from any projections and forward-looking statements and the assumptions on which those statements are based. Readers are cautioned not to place undue reliance on forward- looking statements and the Parties assume no obligation to update that information. The Parties give no warranty, representation or guarantee as to the accuracy, completeness or reliability of the information contained in this report. The Parties do not accept, except to the extent permitted by law, responsibility for any loss, claim, damages, costs or expenses arising out of, or in connection with, the information contained in this report. Any recipient of this report should independently satisfy themselves as to the accuracy of all information contained in this document.

This document is not intended to be a research report (as defined in ASIC Regulatory Guides 79 and 264). Unless otherwise indicated, all views expressed herein are the views of the author and may differ from or conflict with those of others within the group. The views expressed herein should be considered as part of a wider portfolio investment strategy applicable to the relevant fund or model portfolio and should not be considered in isolation or relied on to make an investment decision without seeking further information and/or advice from a financial adviser.

Orca Funds Management Pty Ltd is a wholely owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457), a signatory to the United Nations Principles for Responsible Investment (UNPRI).

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