“Surrender to the truth as quickly as you can.” - Eliezer Yudkwsky
Some time ago I joined a discussion with the modern metaverse concept father, the great Matthew Ball. Gavin Baker commented how a recent survey showed that despite 17% of teenagers owning VR headsets, only 5% use them daily. Ball deleted the tweet, but he replied something in the terms that the technology still isn’t ready yet and we still have a long way until broad adoption.
I replied back with two tweets. I think I was a bit rude to Ball1, but the points remain.
The bull’s argument is basically: when the technology is ready, people will use it. But because the technology isn’t ready, people aren’t using it (or at least not using it that much, with only 5% of the VR owners using it daily).
When bulls like Matt and Mark say: “The technology isn’t ready. Virtual reality is inevitable, but people want great graphics and realism, particularly for social and collaboration tools, so we actually need 10 more years.” Once it was Iribe saying that back when Meta was called Oculus, but today is Mark. 10 years have passed, do you trust?2 It seems like a moving pole to me.
What I want to seek in these posts here is whether I can find enough evidence that humans actually want virtual reality in a significant and revolutionary way. Of course, this is will be a theme for years, so subscribe for more posts. Although I am a skeptical ex-ante, I seek to change my mind if there’s evidence. And in advance, this presentation gives a bit of data to change my mind, but not by much.
This post will be structured into topics with comments for each of them.
Adoption
Boz gave us some interesting stats on adoption:
1 in 3 apps in the Quest Store are making revenue in the millions
33 titles have made more than $10 million in gross revenue, up from just 22 this February
The number of apps making over $5 million has doubled since last year
When the Quest 2 first launched, the vast majority of time spent in VR was spent alone. Today, the majority of time spent is in multiplayer apps and the most popular apps on Quest are social
First of all, there is significant momentum on the platform, and kudos to Boz&Co for that.
Second, the cynical in me can’t stop from pointing out that 3 out of 4 stats are cummulative revenue-based, and are kind of the same stat: people are actually making money in VR, come make an app!
Of course, this is a developer conference, but I must assume that Meta knows that much more than only developers are watching the main keynote (just like WWDC isn’t just a developer conference). What’s more is that many apps, notably Beat Saber, charge in the old buy-the-game instead of some sort of recurring revenue model. I can’t tell that I am counting on some dozens of dollars, but I don’t play either Beat Saber nor Eleven Table Tennis for a while. So revenue isn’t that good of a proxy of usage like it would be for a subscription service. A key innovation that Facebook introduced was measuring Monthly Active Users (instead of registered users, like some earlier competitors did), and because I don’t think Zuckerberg became more stupid over time, I guess that they are disclosing these numbers because they aren’t actually proud of their engagement numbers.
I guess that’s ok. If you want to be in the business of making Quest games, I think you’d be ok only if the money, regardless of how much people play. Just beware that more important than making a game people will play, make a game people will buy.
The fourth measure gives some amount of evidence that VR is inherently social, as Zuckerberg likes to say and therefore I must say that it moves my view on VR a bit. That said, it’s also important to notice that when Quest 2 launched, there weren’t many people with Quest 2 headsets for you to play with, so that is kinda bad for the multiplayer VR gaming experience.
So to summarize. While this shows that people are spending on VR, it’s hard to know how engaged they are. And engagement is the Key Performance Indicator.
To disrupt the PC market
“But for virtual reality to really reach its full potential, we need to get to the point where the 200 million people who buy new PCs each year for work can do some or all of their work even better in the metaverse.” - Mark Zuckerberg
This year, we saw a subtle change to the narrative. We’re no longer creating the next computing platform, but a computing platform to disrupt the PC industry.
I guess I first heard it in the Joe Rogan interview and I am happy Mark is now framing this way. Not only helps to frame that Meta isn’t disrupting the mobile industry (that most folks will be correctly skeptical), but the old personal computer one. Lots of good arguments to be made: Arm, bigger screens, cloud streaming (Xbox Cloud Gaming, Windows 365, collaboration as the main feature…). I think is Qualcomm’s Cristiano who loves to say how the main use-case for the laptop is collaboration (more on Qualcomm later).
That makes sense, right? All F500 CEOs of distributed companies like Julie will buy dozens of thousands of handsets for their employees instead of those old Thinkpads. Perhaps they don’t look at the bill and buy the expensive version and leave some gross profit for Meta. Seems like a business case to me, one better than selling consumer electronics at a loss and trying to make it up in the store fees.
As someone who lost some amount of money in Microsoft shares this week because of the weakness of the PC market, I must confess that I got cold feet: am I losing something on the Microsoft story?
Luckily, some minutes later the unique and the best Satya Nadella appeared on the screen to announce Microsoft was ready to embrace, and extend, and extinguish Quest 2. They are making it easier for Teams meetings to happen on VR (what kind of CIO will allow another meeting app when 76% of them are saying they plan to consolidate on Teams?).
More importantly, they are bringing their modern operating systems for the platform so that you don’t forget Redmond: Active Directory, Office, Intune, Teams, and Windows 365. So even in the stretched scenario where people discover that 90% of the apps they are using on Windows today are just Javascript and they can use it on Meta headset, Microsoft will make sure they continue to use Microsoft apps and Windows 365.
Lastly, it seems that they gave up on HoloLens, right? Of course, this isn’t their first partnership, many years ago Nadella brought Microsoft to the Oculus Rift, but it seems like we won’t see a consumer-ready HoloLens for a very long time. Good luck to the Defense Department.3
Enterprise
The Quest Pro (notice the name: Pro) and the Accenture commentary shows that Meta is finally ready to start where they should have started from the beginning: the enterprise.
CEOs like Julie Sweet are ready to spend millions of dollars on headsets for their workforce. What Julie likely discovered too is that CEOs are ready to pay consultants to build virtual workplaces for their companies so their workforce is properly trained and whatever statistic Accenture or McKinsey are able to bring.
Think about it. You’re the CEO of a boring company and you need to show your board you’re a forward-thinking CEO to your board. Imagine showing them that your company is ready for the metaverse, that you are already having processes happening in virtual reality, and that you’re welcoming your new employees in the metaverse.4
It’s easy to see how Meta and Accenture are able to both sell headsets and consulting fees to enterprises with margins that can fund the further development of their virtual reality endeavors.
I am not here to say that I don’t believe in collaboration in VR. Just that these vanity considerations play in Meta’s favor and they are right in pursuing those. After your employer buys you a headset, you can play Supernatural during your leisure time and maybe the VR infection can spread.
Avatars
Here’s a game plan for you to create a Metaverse:
Invest a lot of money into AI and other technologies required to make better avatars
Signal that you’re spending even more in creating better avatars in the future
Create avatar-hardware integrations
Make SDKs so that developers would rather choose to use your avatars than create them
Profit
This is something that wasn’t clear to me, but by owning both the hardware and the avatars, Meta can be entrenched into many many games in the future, particularly guaranteeing that when the Apple VR comes in, VRChat&Co will simply release there and they will lose their entire investment.
It’s still to prove how much adoption there will be and how much people value their avatars, but it has great business wisdom here. Kudos to them.
It’s similar to how they used login with Facebook to get entrenched everywhere on the internet. You offer a feature for free, but you make it harder for everyone to compete and you get more data.
Photorealistic avatars
The photorealistic avatars segment has some important points Meta makes:
Skepticals: if you think that the digital experience needs to be exactly like the real one, we’re working on it
Investors: this is how we’re spending your R&D dollars. Isn’t this way more interesting than any dynamic island that Apple is creating these days?
Developers: look what you will get one day if you adopt our avatar SDK!
There’s the argument that for VR to be adopted, it has to be realistic and therefore, go beyond the uncanny valley. Some CEOs won’t hear the Accenture pitch unless they aren’t using cartoonish avatars.
I don’t think that photorealism will be that consequential. It seems like exaggerated skeuomorphism to aspire for that or to think that people will wait for that. I’m not here to say that companies should not go for better graphics, they definitely should. But like I don’t think any gamer in the 90s would say “I think I would really like to play video games, but I’ll wait until Red Dead Redemption 2 instead of playing Doom.” Gamers play and consumers consume. If it’s past a minimal threshold, you will see strong signs of adoption.
Qualcomm
If there’s a company I think will profit from VR, that company is Qualcomm. Selling chips similar to those they sell Samsung for nice ASPs is good business and Mark said this is just the first one of many products they plan to sell with Qualcomm.
Although I am biased, I think that’s the right move. Creating silicon themselves is too hard, they don’t have the skill and those R&D dollars will be better spent creating differentiation elsewhere (or in highly accretive buybacks!). Because Meta neither owns the operating system nor the engines, it’s hard for me to see how they differentiate with silicon, at least from day one.
Although both IBM and Apple made their own silicon during their heyday, Microsoft didn’t, although they had a great partner in Intel. I think that Qualcomm can be Meta’s Intel. Qualcomm has no business in the PC space, so they have nothing to fear, they are the best in low-power high-performance computing, and have all the wireless they will need for both VR and AR.
Yes, partnering with Qualcomm means Qualcomm will sell SoCs to Snap, ByteDance, HTC, and God knows who else. But Meta shall not fear.
Meta’s main risk isn’t that VR will be a commodity market where they will hold no differentiation and therefore they need to make their own silicon. Meta’s main risk is that VR doesn’t materialize as a market big enough to support its current costs.
One more year that it takes for VR to get to 200M shipments, it’s $10B more in investments and the present value of the cash flows decreases by nearly 10%. Even if they enable competition later, Meta is fighting hard in the application layer, so I don’t get to bad it can become.
So I think it’s a good move. Maybe they are creating a monster at Qualcomm. Maybe Qualcomm will enable formidable competitors in the future. But it seems like a risk worth taking versus losing both money and hype today.
Conclusion
Although I think Meta is doing the right strategic moves and they released marginally good data, I continue skeptical that Reality Labs has a positive net present value nor that virtual reality will change everything, as Ball’s book title says. It will certainly exist, and have its niche and it’s great for the world that Meta is making these investments. It’s hard not to feel excited about it.
I plan to read Ball’s book soon and write a review, and maybe work trying to create falsifiable statements in seek of further knowledge into the subject.
Disclosure: I own shares in Microsoft, Accenture, and Qualcomm.
Other random thoughts
They didn’t mention NFT once. We’re healing.
They didn’t mention crypto once. We’re healing.
Portal continues to be a random thing. I’d kill it.
They spent a small portion in both gaming and fitness. Although earlier I said the enterprise should be the focus, they should balance it with the risk of losing the two markets they had success
Ray-Ban stories seem like a much better product than Google Glass. What were they thinking?
I roll my eyes every time I see avatar stores. Yes, I bought a significant amount of money in skins in League of Legends during my teenage years, but you get to earn this right. They seem to be trying to sell a non-rival good too early without earning the right to do it.
Nice that they leave CTRL+Labs stuff to the end. Nice hype.
MetaCritic Capital is my first real experience using the internet and interacting with people anonymously. It’s a constant challenge to me not to abuse this power. Back in April, I had couple hundred followers and was just 2 months into it, so it was even less polite. Sorry to Ball and all that were offended!
In The History of the Future, Blake Harris tells how Iribe himself had a hard time pitching VR to the gaming industry because those who were being pitched already had their fair share of displacement with virtual reality back in the 90s. If nuclear fusion is always 20 years into the future, virtual reality seems to be always 10 years into the future.
Sony is launching its headset. For some reason, the Xbox platform doesn’t seem to have a VR platform around it and they actually are bringing Xbox cloud to the Quest 2. Also, despite now being booked in More Personal Computing, the HoloLens is in the subsegment of Hardware, together with the Surface and random stuff like their mouses, not in the gaming segment, where Xbox hardware is booked. So I don’t think the HoloLens is going to be consumer-ready anytime soon. Seems like a mistake to leave both Sony and Meta to fight, but maybe it’s not worth it? Or is Microsoft addicted to margins and recurring revenue?
Free alpha. Wealth management in the Metaverse. Coming to you at your nearest Credit Suisse branch. I am sure you’ll impress some of your customers and show how forward-looking you are.