Web 3.0 – Are you ready Player One?
Wandering around Nikeland on my newly-acquired Roblox account, looking for some virtual sneakers… all in the name of deep-dive research! If you have no idea what that first sentence means, you are not alone. Roblox is a trailblazer for the ‘newly’ coined Metaverse, which is the main example of where ‘Web 3.0’ will take us.
The terms ‘Metaverse’ and ‘Web 3.0’ have become popular buzzwords but are poorly defined and are widely misused in the popular press.
The term ‘Metaverse’ was first used in Neal Stephenson’s science fiction novel ‘Snow Crash’ in 1992, where it was described as a virtual reality-based next generation Internet. It resembled a massive multiplayer online game populated with user-controlled avatars. The common elements of the original novel still play an important role however: a logical successor to the current Internet, a virtual 3D world on top of or extending the physical world that may be accessed by using augmented or virtual reality headsets.
This of course leaves plenty of room for interpretation and strongly reminds us of the early days of the World Wide Web.
LAYERS OF THE METAVERSE
We have identified five ‘layers’ of the Metaverse and give examples of potential stocks that might benefit.
1) Networks and data centres
By definition, the Internet needs a well-functioning network, but we have seen the demands for a) bandwidth/speed, b) low latency and c) reliability, increase significantly and the wish list for the Metaverse will see these demands grow exponentially. Moving to a virtual reality world, i.e., creating 3D images in real-time, is a whole new level of demand for bandwidth and low latency. Whilst it doesn’t matter if an email arrives 50 milliseconds later, the demands of realistic 3D virtual worlds are multiples higher.
Meanwhile, data centres are essential in that they connect, store and compute data that travels over networks. The demand for high-end computing in virtual worlds will simply mean more ‘local’ computer facilities to support and relieve the computational efforts that will be necessary on a device (e.g., Oculus headset) level. An Edge data centre will be nothing like a traditional large-scale data centre and can be anything from a small facility at a mobile tower or indeed an autonomous car.
It is unlikely in our view that the traditional telcos will benefit from these tailwinds, given their horrendous track record over the last three decades to do exactly that with the developments in Web 1.0 and 2.0, itself a function of a competitive industry and need to regularly bid for spectrum in this environment. More likely, the true beneficiaries are the tower and data centre companies and potentially some of the network equipment companies.
One of the best examples is American Tower, the world’s largest owner/operator of wireless communication infrastructure. With its global presence it is uniquely positioned to benefit from the demand of increased network traffic driven by the Metaverse.
2) Semiconductors
Semiconductors are the new oil, critical in nearly every technological development that we have seen in the last 50 years or so. Semiconductors play an important role in every step of the way, from the GPUs (graphics processing unit) accelerators in datacenters, CPUs (central processing unit) in notebooks and PCs to the specialised Qualcomm processor in your Oculus headset. Given the immense compute complexity in 3D virtual reality, the developments in the Metaverse are closely linked to the cutting edge of semiconductor development.
Nvidia is the market leader in GPUs (graphical processor units). Where GPUs were once limited to the gaming market and Nvidia and AMD were the dominant duopoly, the use case for GPUs has widened to data centres, autonomous cars, and other processing intensive tasks. The Metaverse is the ultimate end market for Nvidia, as it is both a very large total addressable market in addition to being a use case where GPUs will likely dominate in both data centres as well as in hardware.
3) Hardware
While the form factors that end users will need to participate in the Metaverse are still unknown, it is clear that there will be demand for user friendliness and significant local processing power. One of the debates is whether augmented reality (AR), virtual reality (VR) or a combination of both will dominate. While AR is relatively ‘processing power light’, so it can be implemented in a smartphone form, it is hardly the Metaverse experience that most people would envision so it is therefore very likely that VR will play a dominant role but the current VR form is a clunky headset.
Early leaders in this field are: Meta (Facebook) that bought Oculus in 2014, Alphabet that launched Google Glass in 2014 and Microsoft.
We believe that the current situation is comparable to the early days of the ‘smartphone’ where Nokia, Ericsson and Blackberry dominated until the Apple iPhone was launched in 2007. It is therefore much harder to find early beneficiaries in the hardware space in our view, especially given the fact that the current market (which will include Apple shortly as they enter the AR/VR market) is dominated by the tech giants whose stocks are driven by other more material factors than the small dent that these devices are currently making.
4) Software
The developments in software are at a similar preliminary stage making it relatively hard to find early winners. Looking at the software drivers of Web 1.0 and Web 2.0, it also took years to come to common standards. In Web 1.0 the tools to access (PCs and notebooks) had decades in the making and when webpages and the browser started to go mainstream in the 1990’s, the market had mostly settled on WinTel (the combination of Microsoft Windows and Intel processors).
The developments of Web 2.0 were a bit more complicated as the main access point, the smartphone, had a bit of a false start. The early ‘smartphones’ pre-2007 used either BlackBerry OS (mainly limited to enterprise usage) or WAP (wireless application protocol) used by then market leaders Nokia and Ericsson. Everything changed with the launch of the Apple iPhone in 2007 (or really the second-generation iPhone 3G in 2008) that deeply integrated an operating system (IOS) with great hardware. The rest of the market then rallied around Android, developed by Google as an alternative operating system, and the global smartphone market since then has been split between just these two platforms.
The Metaverse, as the main early manifestation of Web 3.0, has not seen any convergence on platform level yet as most of the early examples are company specific and not widely used.
Roblox is an online game platform and allows users to develop their own games using the Lua programming language. It is very popular with young children, and it is estimated that more than half of all children under 16 in the US are active players on the platform. Roblox had its IPO in March 2021, is expected to generate about US$3bn of revenues this year and has a market cap of US$60bn.
5) Payments and Databases
The rise of e-commerce has not been met with more efficient payment ‘rails’, as most of the offline structures have simply been copied online. Moving into a Web 3.0 world where unlimited micropayments play an important role, there has been a big debate about better payment infrastructure.
The ideas behind the Metaverse are usually based on forms of virtual payments, which can remain virtual or be transacted into ‘real’ currency and often are in the form of micro-payments. The move to ecommerce in Web 1.0 has seen many of the existing ‘rails’, i.e., banking networks or Visa/Mastercard, remain highly relevant in the online world.
While this current infrastructure is efficient and safe, it is also expensive (typically between 2%-3% of the transaction value), which makes it less than ideal for the Metaverse. One of the most fundamental technologies that will likely play a role is Blockchain and while cryptocurrencies have been heralded as the solution, its limited acceptance and especially the volatility of the price of the currency itself make it far from ideal. In our view it is very unlikely that the existing players will be replaced, and they are more likely to become part of the solution instead of the problem.
One of the companies well positioned to benefit is PayPal which has been a pioneer in online transactions. Not only did they make online transactions safe and convenient, but also developed new concepts like peer-to-peer payments through Venmo. Its tight partnership with Visa shows that they have a foot in both camps and are ready for any direction that Web 3.0 will go into.
CONCLUSION
The move to Web 3.0 and the development of the Metaverse will take many years to complete and will be an evolution not a revolution. For us, it is however clear that this Web 3.0 direction is inevitable and will have a profound impact on many industries, companies, and us as potential users. The challenge for us as investors is to separate hype from reality and not fall into the same trap of 20 years ago during the dotcom bubble.
Theo Maas is global equities portfolio manager at Northcape Capital and for the Warakirri Ethical Global Equities fund.
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