The Metaverse in Review

Announcer:

Today, on Building the Open Metaverse.

Matthew Ball:

I think the thing that inspires so many in the community is to say that if one of the brilliant things about the internet was that it operated as a de facto public good, un-owned by anyone, the protocol sat outside of a company, the problem was it didn't go far enough.

Announcer:

Welcome to Building the Open Metaverse, where technology experts discuss how the community is building the open metaverse together, hosted by Patrick Cozzi from Cesium and Marc Petit from Epic Games.

Marc Petit:

Hello, my name is Marc Petit from Epic, and my co host is Patrick Cozzi from Cesium. Patrick, how are you?

Patrick Cozzi:

Hey Marc, I'm doing great. We just got back from the I/ITSEC Conference, and we just had our annual holiday party. Both those events start to signal the start of the holidays. But before we do that, we have a lot to talk about today.

Marc Petit:

Yeah, and today what we want to do is close season three of our podcast and close the year. We thought we would invite one of our favorite guests, whom we have had twice already on the show, to get his perspective on where we are with the metaverse at the end of 2022. We're super happy to welcome Matthew Ball to our podcast. Hello Matthew, and welcome back.

Matthew Ball:

Hey guys, I'm so very excited to be here with you.

Marc Petit:

Yeah, we kicked off with you in the first episode, so you are very important to us. First, I think we need to introduce you. You're the CEO of Epyllion companies, and you are the author who came out with this book, The Metaverse, earlier this year. Of course, if you haven't read it, we think it's already a reference piece on the metaverse, so please pick it up because I think you've done an excellent job of going against the hype and asking the right questions, and setting the foundation for the metaverse. So, thank you for that.

So let's dive in. First, go back a little bit about the book; what compelled you to write such a piece?

Matthew Ball:

It's a great question. I started writing about the metaverse at the end of 2018. I was familiar with it for truly decades, but the honest answer is I was spending a lot of time on the Roblox platform, I was playing a ton of Fortnite, and I started to get this sense that this long-considered fantastical idea was actually not just becoming a practical business opportunity, but indeed unfolding around us.

That led me on this path of inquiry. I started writing and testing out theses, and I was learning more and more by having conversations with individuals at Epic, Cesium, and others. Over the ensuing three years, I started writing more and more, and I became increasingly convinced that it was imminent, that it was being built and that it was of profound consequence.

At the time, the term had not been used publicly really at all. Zuckerberg had never used the term in public. Satya Nadella hadn't; Tencent hadn't unveiled its hyper digital reality strategy. I thought that encapsulating everything that I had learned, everything I had seen in private research labs, and the conversations with entrepreneurs who had truly spent decades fighting to build this thing would be of value to builders, to governments, to individuals trying to get ready. And I thought it would be an extraordinary personal challenge as well, not the least of which was because shifting from a blog to the published word meant I could no longer patch it as I went.

Then, of course, the term metaverse in 2021 exploded. Then I had my book come out in 2022; that was fortuitous, but it started as a much smaller, more personal ambition early in '21.

Marc Petit:

So when you launched the book, were there any big surprises, big aha moments from that?

Matthew Ball:

Yes. Look, a lot of it was good fortune that I think was years of preparation, but the launch was a lot bigger than I expected. It hit the national bestseller list in four different countries: the US, the UK, Canada, and China. The general press coverage was much higher than I would've anticipated. And then, most importantly, the breadth of the readership was wider than I expected; hitting industries that historically were not interested in GPUs, in concurrency on a server, on asset pipelines, but were now really excited about the opportunity.

One of the funnier parts that I got is I had one really significant email from a top exec at a very large tech company who's like, "I read the book, and I've come away convinced you don't believe the metaverse is possible." And that was because of the number of different technology challenges that I had outlined in the book. So, hearing the responses was pretty illuminating as well.

Marc Petit:

It's been already, what, six months?

Matthew Ball:

Yeah.

Marc Petit:

Which is an enormous amount of time at the metaverse speed. Are there any sections of the book that you think have not aged well or that you look back and say things are very different now than what they were six months ago?

Matthew Ball:

Yes and no. I had to lock the book in January and February, so it was already about five months quote, unquote behind daily news. In fact, I had to wrest control back from my publisher because a few days after I submitted the final draft, Microsoft announced that it was acquiring Activision Blizzard, the largest big tech acquisition in history. And in the last of a three-sentence opening paragraph explaining the acquisition, Satya Nadella said that it was to provide the building blocks for the metaverse.

So as I locked the book, I was very familiar with how the world would progress. But I also didn't write it to be a specific point in time. I was very focused on theses and beliefs and the multi-decade transformation. It was not designed to be super current. So I think it's held up really well. The major things that I think are relevant are we have more evidence of the difficulties in XR hardware, especially as the Quest Pro has come out at a very high price point and still falling short of what many consider to be MinSpec.

There was a lot of debate at the time as to the relevance of blockchain in Web3. At the time, the combined value of the crypto ecosystem was over three trillion. It's now at about 600 billion and rife with systemic risk, fraud, and collapses that certainly throw water on some of those theses and is relevant.

Then we just have this broader cooling of the market overall. The United States has encountered its first annual decline in gaming revenue in nearly 20 years. Gaming is not the metaverse. The metaverse does not require gaming per se, but it's relevant context, and it sits within a broader sell-down of most tech companies that has brought into scrutiny whether or not hype for the metaverse outpaced the practical reality of when the products would be in market. I think that's helpful color.

Patrick Cozzi:

Matthew, you touched on a lot of things we want to go into more detail on this podcast, but first, I wanted to jump in with a couple personal thank yous. The Cesium team and myself, we're big fans of all your writing, your blog, your article, and your book. We want to do a big thank you for the signed copy of Time Magazine that I'm showing up for the folks watching us on video.

Also, thank you for sending us the big poster of the signed Time Magazine. That is proudly in our boardroom. It is only one of two things on the wall in our boardroom. Then we also have a signed copy of your book prominently displayed in our library. So we appreciate everything you're doing to help educate the community.

You recently mentioned the breadth of readers. I wanted to share a story with you. I've been with my girlfriend for almost nine years, and her background is in social work, and I've learned that I've done a terrible job explaining what I do in 3D graphics and what the metaverse is because she's read your book, and she understands the metaverse maybe better than me in many areas. So great job with the accessibility of your book.

Matthew Ball:

Well, thank you. That's incredibly kind. The truth of the matter is, and this is probably the area that is hardest for me to confront when Marc says, "Would you change the book?” or “What would you update?" Which is every month, as I go through more of these conversations, talking to more people from a different background, I get better at describing it. It kind of pains me to be better than ever at explaining this topic months after I release the book that hits so many people.

But I like to joke that, but sincerely, Snow Crash had a single author. The metaverse comes from a single person. I hope deeply that the metaverse has billions of co-authors and that my ability to articulate, contribute, advance in any way, shape, and form, which I think is really marginal compared to the work that you guys have done, is itself a reflection of the number of different conversations and inputs I've had. Three years ago, I could never have pulled off any of this, and most of what I wrote was a reflection of conversations with others. Some were expert, others were novice and curious.

Patrick Cozzi:

Interesting. You've done a great job pulling it together and sharing it. So thank you once again. I did want to dive in a little bit because, in your book, you really get into the necessary infrastructure, technology, and business alignment to build the metaverse. I thought just the way you broke down network and computing, engines, interoperability, hardware, and payment rails was just right on point. As you and our listeners know, Marc and I are really excited about all the developments around metaverse standards in order to facilitate interoperability. I was wondering, just as you reflect back on 2022, what developments are you most excited about?

Matthew Ball:

One of the primary questions that I receive, which I'm sure you both do all the time, is, "Okay, so if the metaverse isn't here, when will it be?" And that's always a philosophical question. When do you want to say mobile was here? When do you want to say that the internet was here? I always try to remind people, it's a question of when is what here for whom, why, and how.

The answer is mobile is here, but it's not fully developed. It hasn't ended. That's not how technology works. But to the extent in which we can say the metaverse is not yet here and it will be, I think that the answer is standards, in the same way that you can say that the proto versions of the internet were early mainframes that were isolated on a local or wide area network. Eventually, we had the standards for true global internetworking that was predicated upon the standards that would support the coherent, consistent, comprehensive exchange of information through, and this is the operative word, autonomous systems, and networks.

When I take a look at 2022, there are a bunch of notable hallmarks: the amount of investment that went into startups in the metaverse space, the learnings we had with crypto, the learnings that we have with XR, the general market understanding of this theme, the general appreciation for the criticality of how the metaverse is designed. But I think that the single largest leap was that you can start to see that path towards achieving standards; achieving not just the technical standards, the technical conventions, but actual exchange between parties that many believed would never cooperate.

You see that with the standards forum, but I think one of the most thrilling things that Meta has contributed thus far is actually just showing that you can get Teams, you can get Zoom, and you can get the Oculus platform to say, "Let's open up an exchange. Let's exchange avatars. Let's exchange video conferencing. Let's interoperate our productivity software while still providing data and privacy rights to the individual platform connecting in." That's the big achievement. It also makes me very hopeful that this is not a pipe dream, and to the extent, it's technologically realizable, we may actually be happy about the way in which it manifests.

Patrick Cozzi:

Very well said. I'm excited for the progress that we've made in standards, and I think we have a lot more to go, but it's looking good. Is there any one or two areas of investment that you think are critical as you look toward the next year or two?

Matthew Ball:

The fun thing about this topic is I think, for the amateur observer, they interpret it as being very singular. They say it's a video game, or they say it's VR hardware, and of course, we recognize that we're really talking about an ecosystem. Not only are we talking about an ecosystem, that is to say, multiple different parts contributing to one another, but each of the things that we even distill at that single or double click level is so many other things.

I'll use an example. Even when you're talking about VR as a part of the metaverse, we're not talking about VR; that’s not where it ends. We're talking about optics, we're talking about battery, we're talking about chipsets, we're talking about network fidelity, we're talking about the standards which support the transmission of data. I have a difficult time actually prioritizing, per se, which is more or less essential than another. I'm a little bit more focused on what I think are the primary holdbacks for which one right now I think is regulation on the app store level.

Marc Petit:

So, Matthew, your background is in finance and the stock market. You worked in a venture capital firm. I'm curious to have your opinion on what's happening, especially these days at the end of 2022 in the stock market. It looks like a lot of stocks are being punished for using the word metaverse, whether it's Unity, Roblox, and Meta, of course. Does it tell us something about the public perception of the metaverse? How do we explain that? Because investors are supposed to be long-term investors. How do we explain that change of mind of the street towards those stocks?

Matthew Ball:

I think that there are a few different things that we can put in. First is to recognize that yes, many of the quote-unquote metaverse-oriented stocks are being hammered, but it sits far beyond that. Microsoft is down 30%. Satya Nadella has said that it's an important part of their future. Amazon has never explicitly said that the metaverse is central to their future, but they've lost a trillion dollars in market cap. Shopify, Zoom, Peloton, all down by 75% or more. Evan Spiegel, I think, believes in the metaverse, but he doesn't like to use the term because he's one of those that distinguishes between augmented reality and screen-based 3D as being separate versions of a similar idea. But Snapchat is down 90%, the NASDAQ's down 30%.

The truth of the matter is anytime we're talking about a capital-intensive, farther-away opportunity with risk. Right? Because, it's not just that it's far away and it's capital intensive, but you don't know that those who are investing in it are going to be the likely winners. You're going to see disproportionate sell-offs and economic pressure. So if you say that tech overall is down 30%, it's sensible that those that are focused on a long-term, speculative, uncertain future are going to see a greater selloff.

When it comes to Meta specifically, there are a bunch of different non-metaverse specific tensions. First and foremost, we know from their public statements that the total impact of Apple's ATT privacy changes will exceed 10 or 12 billion in cash flows, in 2022 alone. The entirety of Meta's metaverse investment, in other words, has lost its funding, purely because of App Store policy changes.

The primary competitive challenge for Facebook remains TikTok, and overall, they're a business for which 90% of revenues depend on ad spend, most of which are oriented towards consumer products, all of which are being hammered by recessionary concerns and general macroeconomic headwinds. And so, I wouldn't fully allocate the pressures that Meta is facing as being metaverse-related.

At the same time, we've seen very specific tactical issues on Facebook's side that are worthy of investor scrutiny. If you can believe it, they spent $42 billion on share buybacks this year. The average price of the share they bought back was 3x its current price. In other words, you can fairly say, that even if the 12 billion that they spent on metaverse was clumsy or poorly allocated, they literally shredded nearly $30 billion on out-of-the-money share buybacks.

Then, there are broader questions as to whether or not the strategy and the tactics of their metaverse ambition are going to pan out. So, I think, in general, we're just seeing the complexity of the metaverse as a theme. It's timing and mixed with a bunch of macroeconomic and company-specific issues.

Marc Petit:

We had Mike Abrash on the podcast, and I think the problems he's trying to solve are very complex. You talked about optics, and I think a lot of their spend will go towards solving those hard problems and not putting all their money into legless avatars, like Facebook Horizon. I mean, it's a caricature, their investment there. They're really taking the long-term route, and Reality Labs is an interesting endeavor. I mean, they're trying to solve some of the hardest problems that have to be solved.

Matthew Ball:

Oh, totally. I mean, one of the ways that I have found it's... We've all seen it... Why do the avatars lack legs? Why are the graphics so poor? Why do they look like a Wii? One of the ways that I found it's really easy to articulate the difficulty of this challenge, is to put it in contrast to the most powerful graphics computing device that the average person owns.

Let's say a PlayStation 5. The PS5 weighs nine pounds. Despite that, it doesn't need a battery, because it has constant access to the electrical grid. The PlayStation 5 weighs nine pounds, and it doesn't need to bring its own screen; it connects to a screen. It also doesn't need sensors to capture your movement. It doesn't need to contend with suboptimal lighting conditions. That is to say, you never use your PlayStation out in the middle of a soccer field. And, it doesn't need to connect to a mobile network.

When you say we want to ask it to do far more things, while also bringing its own screen, while also bringing its own battery, without breaking your neck in weight or melting your face, and then to solve some of the most complex problems, which is diagnosing the environment and intuiting the positioning of your limbs, that is an extraordinarily hard problem. Meta is not alone in underestimating its difficulty.

Google Glass launched nearly a decade ago. I've seen quotes from Tim Sweeney around 2015, 2016, expecting it to become one of the great new computing platforms within that decade. The first HoloLens device came out in 2016. Magic Leap, of course, accumulated billions of dollars in valuation.

This is a hard problem, and yet most people, while they underestimated its timeline to achievability, believe in how valuable it will be when it works. The bull case here is Meta is essentially alone in trying to solve these problems. At the same time, there was this interesting conversation, the DealBook live conference where Reed Hastings, the Founder, and CEO of Netflix, who used to be on the Facebook board, was asked what he thought of Meta's investments. And he said something to the effect of, we should all be thanking Mark for the innovations that he's financing. But he doubts they're going to be good for shareholders. He's saying Mark may actually be financing the future that someone else will capitalize upon.

Marc Petit:

Now, I'm going to put you on the spot. Was it two years ago you created that metaverse tracking stock?

Matthew Ball:

We created an index about 18 months ago. It launched in June of 2021.

Marc Petit:

So, you have a prediction for next year?

Matthew Ball:

No. I don't think I could legally give one, but I don't have one. To give context, I collected a group of people, ex-Oculus, Grand Theft Auto, Amazon, Nvidia, Square Enix, Spotify, Andreessen Horowitz, New York Times, and others. We produced this index that basically had a methodology, through which you could assess, through public equities, the growth of the metaverse. We have allocations to computing and networking infrastructure, to content-related services, to virtual platforms, to the standards operators, both common and de facto. Right? Unity's not a common standard, but it effectively is from a deployment basis.

Our thesis was that, if you wanted to invest in the metaverse as a theme, in the '90s, you could have picked Apple. You might alternatively have picked Research In Motion or Samsung, or Nokia. And the returns from doing one versus another were extraordinarily different; but if you had a well-constructed basket of each of those companies, that evolved over time to reflect those companies which soared and fell, that IPO'd and were acquired, the returns would be significant. That's consistent with mobile, with social networking, with internet, with cloud, and so forth.

The market in 2022 has not been kind. What the market in 2023 has in store is unclear, but we have always said this is a multi-decade, multi-trillion-dollar transformation. So, that's where our time horizon sits. We've actually been very fortunate; even though the market has slowed down quite a bit this year, we've had about 40 million in outflows. As a percentage of total assets, that's about 5%. So, 95% of those who have invested alongside have said, "We wish it would always go up instead of down, but we believe in the theme, and we believe in the methodology," so they're alongside.

Patrick Cozzi:

Another area that's been hit is crypto, especially with the fraud and bankruptcy of several large players. Matthew, we wanted to know, do you think Web3 will ever come back to where it was? And if so, any predictions on winners and losers?

Matthew Ball:

"Will it ever come back to where it was?", is an interesting question. I mentioned earlier that at its peak, it was a little bit over $3 trillion in market value. Now, I think every reasonable person could say that there was no demonstrated value, demonstrated value in terms of revenue that was being created, a new cost that was being taken out of a system, or brand-new things that were possible, that got anywhere close to three trillion in value. Now, at the same time, you need not demonstrate that full value to be valued at that same amount. Right?

The value of something is the present value of its future cash flows. Your rental unit does not need to generate $2 million per annum to be worth $2 million. And yet, the disconnect between the proven and even likely value in that three trillion was extraordinary. What's happened in the interim is a crash that most people believed was inevitable. But, we've had a bunch of really important signature incidences, not just compression, not just the deflation in the NFT ecosystem, not just a reduction in speculation, not just uncertain regulatory impacts.

We have seen some use cases such as Helium, which were often touted as the singular best examples of the technology, be shown to have less evidence of product market fit than some were led to believe. Specifically, they had claimed customers that turned out to have never been customers or done a beta test years earlier. They listed as having been a supplier to a number of municipal governments, and use cases that made sense, turned out not to be true.

We have also seen instances of systemic risk that actually show that even if this is a system which sits outside of the purview of governments and the Federal Reserve, that the impacts of this technologically-tethered system can often be worse, and they're harder to correct. Then, we've seen a number of other depository institutions, which with the lack of regulatory oversight, have proven to be fraudulent to the tune of billions of dollars of consumer deposits lost.

If you said it had never proven hundreds of billions of dollars of value, at least of all trillions of dollars. And, if anything, we have seen that some of the shiniest examples have proven to be negligent at best and nefarious at worst; it’s going to take a long time to rebuild. There's no way around that. There's still optimism there. You'll find that this year, probably 25 or 28 billion in venture capital and private equity will be invested into this space. Last year, it was about 25 billion as well. Over the past seven years, there will be nearly 80 or 90 billion.

Venture capital and private equity is still sitting on an estimated 60 to 120 billion that will be invested in startups in this space. I'm a deep believer in human ingenuity. You have a lot of people sitting on a lot of capital, with brilliant engineers who are really excited about what they can build on this technology. Where does that lead is hard to know. But look, the gap is rough, and the track record is rougher.

Marc Petit:

What's interesting to me is that some of the concepts that the Web3, the crypto companies, stand for are good. I mean, this notion of abstracting the ownership of digital goods from a platform is a great idea, I think. It's solid value for consumers, your smart contract, and giving secondary value to artists when there is further usage of the art. Are they good? But the blockchain is fundamentally, as you said, designed to escape regulation, and there is a fundamental issue right there. Have you come across alternative technologies to implement those good values, that abstraction of ownership, or that secondary, those smart contracts approach?

Matthew Ball:

One of the things that's interesting here is, we're seeing, especially as the enthusiasm for crypto has subsided, you're seeing that those who believe deeply in quote-unquote, Web3 principles, or decentralization become more vocal. Tim Berners-Lee, I'm sure you've seen, who continues to say Web3 and Web 3.0 are different. He distinguishes it by saying Web3 is the crypto-based decentralized internet, and Web 3.0 is re-architecting the internet as we know it around decentralization, but not using blockchain technology.

There are a bunch of different proposals out there to support that. And there have been for decades. They are certainly maturing. I would say that one of the great contributions of crypto is it has elevated the public understanding of decentralization, the criticality of decentralization. And, it is earning many of those companies that believe in the values, but use alternatives, that's making it easier for them to raise capital.

I think the thing that inspires so many in the community is to say that if one of the brilliant things about the internet was that it operated as a de facto public good, un-owned by anyone, the protocol sat outside of a company, the problem was it didn't go far enough. This is the Tim Berners-Lee perspective. We have an IP address, for example, but your IP address is not used as your personal identity. Your login sits at the application layer. You have an identifier for your device, but you yourself sit at the application. Your social graph sits at the application. Your content is stored on your device, and then a server owned by another company. And so, lots are trying to say, how do we reimagine the internet to develop protocols that sit within the internet protocol suite or broadly adopted suites that store things that today sit at the application layer?

IPFS, a decentralized file system, is the dominant way in which NFTs are minted right now but does not require the blockchain. There are a whole bunch of these different technical solutions which are emerging. It's not hard to imagine how cramming more into TCP/IP or an equivalent out of the application layer would produce a healthier, more competitive internet.

Marc Petit:

Absolutely. These are fascinating thoughts. I mean, we're hopeful that the adoption of real-time 3D as a medium will generate a rethinking of the platforms and, therefore, of the foundation of the internet, as you discuss. As we see in the Metaverse Standards Forum, we're a very plumbing level and trying to align polygons and materials and very basic physics. It's going to be a long road, but we can talk a little bit about the bigger guys. Who would be a thrust behind that effort, in your opinion, for a vector of change at that level?

We haven't heard much from Amazon, for example, in the metaverse. I mean, they never talk about it. Do you foresee some of those big companies being capable of driving major change, or it has to come from the bottom up?

Matthew Ball:

It's a good question. Amazon is a fascinating question here. After Meta had changed its name, you'll find that Amazon was rewriting truly hundreds and then thousands of different job descriptions to focus on the metaverse theme; their advanced graphics division and parts of the graphics-based computing division of AWS are talking about the theme, but they haven't come out overtly to say what they think about it and how they're going to contribute and participate in the ecosystem.

I haven't seen Andy Jassy talk about it, for example, and you'll see that the head of the devices and games businesses said that they don't believe in the theme. So you can tell that this is an organization that has differences of opinion, which is very Amazonian, but no concentrated strategy, again, very Amazonian.

When it comes to who's going to build it, look, I do think that if you take a look at Microsoft and Meta, two of course contributors to the Metaverse Standards Forum who do not operate the dominant operating systems of 2022, they are working hard. They're trying to be good contributors. They are opening up. Microsoft has made a public commitment in a letter dedicated to regulators to essentially unbundle the entirety of their hardware ecosystem, including the Xbox platform.

You can now cloud stream using GeForce or previously Stadia to the browser on the Xbox device without using the Xbox Live identity system, without using the Xbox payment service, while taking advantage of all of the local hardware, primarily being a controller. You're seeing with Meta, pretty permissive policies when it comes to who owns which account and which service and software.

I don't think it's a coincidence that the company which was most displaced on the operating system layer now believes in openness, having been closed for about a decade and a half in the '90s and 2000s. I don't think it's a coincidence that the one member of the Big Five tech companies without an operating system also believes that we need to unbundle the operating system.

If that's their motivation for creating an open, interoperable metaverse, that's great. More people to the cause. At the end of the day, however, I think it's primarily upstarts that are going to be the advocates for change, building the standards that can move faster. They have more to win, more to gain, and they're scrappier.

Patrick Cozzi:

Yeah, that's interesting. I guess lots of different motivations can still motivate the idea for an open and interoperable metaverse. So, Matthew, you're speaking about Microsoft, and I loved your story at the start of the podcast and how you're able to tweak your book before it hit the press. Now that we went through most of 2022, could you tell us how you think Microsoft and Activision Blizzard deal could impact things?

Matthew Ball:

I think that public declaration is really interesting because it tells you something about how significant Microsoft considers the metaverse to be. Frankly, when it comes to the relevance of Activision Blizzard, its IP, its tech, its engine, is for the metaverse; I struggle to actually see what that means on a practical basis. We are talking about thousands of developers who are experts at designing virtual worlds, who are experts at network operating centers for virtual existence, who know how to monetize these spaces, who know how to fight against the limitations of the internet, the limitations of a local device, but that's still a step or two away from the metaverse itself. So, that's actually less clear to me.

Patrick Cozzi:

Got you. So what about Google? I don't think we spoke much about Google. How do you see their position in the metaverse?

Matthew Ball:

I mean, there are some obvious examples. Of course, there are more Android users than users of any other operating system globally. They have a system that is frankly still limited, but designed to actually directly compensate more contributors in the value chain: mobile networks as well as the handset manufacturers, some of their content partners, even some of the fixed line operators. That's a good system. And, of course, they operate what is, in theory, an open-source platform. But I don't think that they have a clear strategy, or at least I don't see one yet.

I do think that it's notable that earlier this year, Clay Bavor, the VP or SVP in charge of AR, VR, and holography, was reorged to be a direct report to Sundar. He was also given all of their special projects division and has clearly been empowered to invest in hardware. You can see that within Google, even though there's not a formal declaration to build up the metaverse, there's not a formal strategy, the number of products that they have is still one to two clicks away from what we think of the metaverse to be.

And, of course, they've struggled with both game engines and game development as well as Stadia. It's clear that they're focused here. I think as much as individuals focus on Google Glass as a failed product or their early endeavors with VR, they actually never shut down those programs. They have been quietly, if modestly, at work building AR and VR hardware.

They've released another two different editions of Google Glass. They've released four different total public prototypes in virtual reality, and this year they're starting the commercial deployment of Project Starline, their volumetric video holography display. But again, we're talking about a company that has many assets, has a bunch of special projects, is clearly prioritizing the area, but doesn't seem to have a clear strategy or even a specific product for the metaverse as yet.

Marc Petit:

One of the big assets of Google is the Chrome web browser, and it feels to me that we're not seeing any... As 3D becomes communatized; we've got hardware. We run a very powerful device... We haven't seen web 3D or 3D in the browser grow and shine the way we would expect it to, and case in point, it's still very complex to develop for those browsers.

Who would have an interest to see browser-based 3D? You'd think Google would have a strong interest. They don't own any graphics platform anyway, and with the dominance in the operating system world, leaning on the web could be a valuable strategy for them. I'm always not surprised, but I wonder why we're not seeing more from the browsers. I think its development is slow. There could be security reasons, but I suspect there is a lack of motivation from the people who do browsers.

Matthew Ball:

I think it's a good question. There's probably a few different answers that we could intuit. First and foremost, it's important to recognize that Google's interest in Chrome-based experiences in computing actually seems to have declined more recently, exacerbated by pandemic tensions. I think they've announced that they've basically canceled the Pixelbook. They're still doing some of their devices, but they're no longer issuing new additions.

That's fascinating because at the start of the pandemic, as a number of children were being homeschooled, but even in the years that proceeded, a lot of parents were really excited about the fact that they could purchase a $200 or $250 PC, effectively, that if their kid lost or damaged was not the end of the world like a MacBook was, and was lightweight, they could pick it up, go into the classroom, run nearly anything that was designed without actually having to manage the installation, the login, the credentialing system, and the security was just considered superior. You weren't going to have malware and spyware.

But it seems like that hasn't endured; partly because iPads have become incredibly cheap. If you can believe that the lowest-end iPad is now $250. The first iPhone was $500, and we've had nearly 80% cost inflation ever since. Really the price of an entry-level iOS device is down 75%, and that has just crammed a lot of room out for the Pixelbook.

When you say that the signature product is no longer growing, and then you would say that to some extent, web-based computing is in tension with their absolute global dominance on the Android operating system layer, it kind of makes sense that Google hasn't leaned in as they might have, especially when you consider that the monetization differential between building out Chrome and Chromium and others was only widening. The Android ecosystem has become more lucrative over time.

Then the third reason, the first being Pixelbook, the second being the overall monetization. The third is, look, the iOS challenge is real. The fact that you can't have the Chrome engine on an iOS device. iOS is 90% of teens. It's 66% of American smartphone owners. It's 75% of global App store revenue or mobile gaming revenue. It's hard to imagine what you're going to start to build there that can't be blocked. And I think that those are all relevant challenges. When you're saying who would have the most to gain, honestly, the answer's probably Unity. I'm surprised that they haven't leaned in more.

Marc Petit:

It's kind of a connected topic to the App Store and the controversy over the App Store fees. Do you think Apple and Google can hold onto their 30% in 2023?

Matthew Ball:

I do. And there are a few different ways in which you can look at this. Number one is if you take a look at the cash flow that Apple is generating on a monthly basis just from games, it's about $5 to $6 billion. That's incredible because it literally means that when people say how are they fighting the tide, right? Why are they fighting Dutch regulators on a specific category when they're getting fined weekly or biweekly? The answer is you can calculate how much money they get from every additional day that they drag it out, and it's to the tune of tens and hundreds of millions of dollars not in revenue, in cash flow. The incentives there are extraordinary.

The second thing that's so relevant there is to recognize the number of different levers that they have to maintain that fee. We've seen this in the Netherlands, we've seen this in South Korea, we've seen this with India, now we've seen it with Japan, which is when forced to open up their payment systems, they then come up with a new App Store charge, which is equivalent to the old 30% fee, less the payment processing fee of 2% to 3.5%.

The challenge with that is while most governments around the world are finding the bundling of payments with identity, with software distribution, with operating system, with hardware to be anti-competitive, it takes Apple a few minutes to change the policy, to shift the primary point of taxation. Whereas it takes governments at minimum months, but more typically two to three years to come out with a policy for that. When you take a look at the government response around the world to Apple's maneuvers, no one's tripped.

The Dutch have said very clearly, the fact that you are willing to pay a five or $10 million fine every two weeks is proof that you have a monopoly because most businesses would be crippled by that. The fact that you can have the exact same revenue, even as we try to open up a given layer of competition within minutes, is proof of the monopoly allegations that led to the legislation to begin with.

But that starts the legislative process all over again. Look, I'm optimistic that it's a matter of time. I'm pessimistic as to how quickly it's going to be. Even when you take a look at the Epic versus Apple trial here, it typically takes 9, 10, 11 months to get a new finding, and we've still got one to two more different appeals processes that could occur. When you take a look in the EU, which seems likely to crack down first and most, it took about two years for the Digital Markets Act to be agreed upon, for it to then be proposed, and then for it to be rolled out. And that sucks, but certainly, heat is picking up.

Marc Petit:

Talking about the devil. We don't know much about Apple’s strategy. They never use metaverse, more augmented reality. What are the odds that they can actually further their monopoly in the domain of real-time 3D and the metaverse? Are we seeing evidence of a revolutionary product and tangible reason why they could have a leg up on their competition?

Matthew Ball:

I think so. One of the things that's really interesting is when you take a look at Apple when they came out with the iPhone, most of the iPhone was using components that they were licensing from third parties, that they did not create. And they were producing a device at really minuscule scale, which meant that it was fairly expensive on a per component basis, and struggling with just general supply chain challenges, just how good can it be because you're not developing it internally, and so forth.

The Apple that might produce an XR or AR, or VR device is very different actually than the Apple that we saw in 2006. They are producing billions of their own computing chips or SoCs every year. Their supply chain has tuned up. Almost all of the high-value parts are now internally designed, whereas they used to use Broadcom and Wolf and Qualcomm, and so forth, Gorilla Glass. And so, if anyone can crack the XR device, it does seem likely to be them. They have the brand, the manufacturing, the computing expertise, the supply chain, and most importantly, the scale to pull this off.

One of the reasons why the Oculus devices are so expensive is because almost all of the production supply that Meta has to tune up for those devices is only for those devices, which are running in the millions of units per year. They're not just saying, "Let's print out some custom versions of the A15. And so, that's the hardware question. Can they produce something incredible that's new?

The second question is just can they extend their "monopoly?" This kind of gets to why the App store thing is so important. When Apple started to surge in the early 2000s, the primary point that people would make is, their brand is extraordinary, their industrial design is extraordinary, but they cut above through the brilliant integration of hardware and software, most notably, the operating system.

The Apple bundle in 2022 is not hardware and operating system. It's hardware and operating system. It's first-party software, it's third-party software distribution, third-party software standards, it's payments, it's API policies, and it's identity, it's data privacy, and more. That is so powerful. It's why when we talk about, can you unbundle payments, the question isn't can you unbundle payments? It's can you unbundle each of those things so that any individual action can't be immediately compensated for elsewhere?

The result of that is irrespective of whether or not they have the best XR hardware, irrespective of whether or not XR is ready in 2023 or 2028, the inevitable, inexorable beneficiary of the metaverse, and by the metaverse, I mean any incremental time online inside virtual worlds socializing, spending money, doing anything, goes to Apple.

It's hard to see failing regulatory intervention or a brilliant product that comes out of nowhere despite the aforementioned manufacturing challenges. It's hard to see how that stops. That, to me, is actually one of the most powerful arguments, which is, the world, whether that's Epic or Roblox or Cesium or Meta, are investing tens of billions of dollars to try and build this great new thing. And if they can pull it off, the primary profit beneficiary will be Apple. It's a good thesis for the stock. It's not the most bold thesis for the economy.

Marc Petit:

Yeah. It'll be a segue into my last pointed question. I think it was in the book, you made the case about Roblox and how much money they are actually feeding to Apple. The other thing you call out about Roblox, which I think is a fascinating company, is their commitment to R&D investment. They've got their Q3 results out. There they got hammered because of cost. You had high expectation, given the high level of R&D investment, have you seen, again, tangible outcomes from that investment from Roblox and the maturity of that platform?

Matthew Ball:

Well, so the most important thing to do when evaluating Roblox's productivity is to take a look at the engagement figures first and foremost. Every single quarter and nearly every single month, they hit new highs in engagement hours and in users. They're now sitting at 59.9 million daily active users. Their monthly active users exceeds a quarter of a billion people. They're now sitting at a peak of about 4.5-4.7 billion hours of monthly engagement. The Roblox stock is way down, and their bookings are down, but that stands in clear contrast to other supposed pandemic darlings: Zoom down 90%, Shopify down 60%. I'm trying to think of which other; Peloton down 95%.

You can see that the Roblox platform is becoming better, more remunerative for independent developers with developer exchange fees going up, more popular, more used, and, more importantly, more global. The specific returns from that R&D investment are more diffuse.

We're seeing the deployment of their immersive advertising platform. That's going to be fascinating, partly because in order to be profitable, they need to figure out a way to generate more revenue per minute of use. Unless you can get users to spend 30% more per hour, that's going to be challenging. But if they can monetize through ads, that starts to go away. Crucially, you don't have to pay an App Store fee yet for advertising.

But we can't see on the R&D side yet. But it's extraordinary. This year they will probably spend $6 or $700 million in R&D. The five-year cost to produce Red Dead Redemption 2 was about $250 million. The entire Sony interactive entertainment budget is $1.2 billion, and that spends all of their first-party systems and engines and software, their network operating centers, as well as their investments in future hardware, both on the VR and PlayStation 6 side. That gives you a sense of the scale that they're investing.

Patrick Cozzi:

I have to ask, what book are you working on next?

Matthew Ball:

I'm not working on another book right now. I'm writing two blog posts. One is actually about the state of the entertainment ecosystem in 2023, a reflection of what's happening to the major gaming companies after this downturn, the alterations in the streaming wars, the growing ambitions of Disney as Disney Plus expands. Then, I'm constantly tempted to ask this question that gets to the top of this conversation. Everyone conflates the metaverse with Meta. And I have never written about Meta in the context of the metaverse because I don't want to perpetuate that. But I think given some of the topics that we discuss today, there actually are a bunch of learnings to be had there. So, I'm thinking of exploring some of that.

I will tell you, coming to individual stats, one thing that I think is remarkable that I learned very recently; it’s something I would put in my book if I wrote it today. Since 2016, Meta has acquired 6% of submarine cable infrastructure for the internet backhaul globally. By the end of '24, they will own or partially own 13% of global internet backhaul infrastructure. In the African continent, they will own and co-operate 47 different country connects, and an estimated 25-40% of all fiber optic cabling in the continent.

This starts to explain where the money is going, certainly. It starts to tell you a little bit about how far out they are thinking, and what are the tensions between short-term performance and long-term. But it kind of gets to some of the standards questions. We've often asked this question of what standards for TCP/IP and traffic routing, I talk a lot about the border gateway protocol, need to be updated?

And the challenge with many of these standards... Gosh, Patrick, you asked such a simple question, and I'm running. But we talk about border gateway protocol, and how do you get that updated to support real-time traffic? The problem with some of these standards groups is if you take a look at updating BGP, how do you update BGP? Everyone has to get into a room, everyone has to agree, then hundreds of carriers around the world have to adopt it. Dozens of different modem manufacturers have to adopt it, handset manufacturers have to adopt it, and moreover.

What I think is happening with Meta in Africa is they're starting to say, well, if we have 20-40% of fiber, we can start to deploy our own protocols in the region. Then, service and application providers who want to work with us, build on top of us, connect into our systems, adopt our proprietary protocols.

That's one of the ways in which the standards process begins, right? You have some of the most populous countries on earth that are running on these metaverse-oriented standards that were not built in cooperation, but through the scale of the investment at the baseline infrastructure layer, then deployed against that infrastructure for strategic purposes, end up becoming mandatory standards beyond that. I'm thinking about writing about that theme.

Patrick Cozzi:

Matthew, I think both of those blogs would be fantastic, so we look forward to reading them.

Matthew, I believe this is your third time on our podcast. So you know how we like to finish up the episode, which is with a shout-out to a person or an organization or even more than one.

Matthew Ball:

Well, I would shout out my partner, Elise, who, this year, I have been so incredibly busy, the book was so much more than I anticipated. I had originally thought that when the book was done in January, February, it would be mostly done. The marketing, the touring, the follow-on work, the press events were extremely intensive, and she was incredible, just so supportive. It would not have been possible without her. She was so understanding.

Marc Petit:

Thank you so much, Matthew Ball. The book was fantastic, I think. I can't recommend it enough because it gets you to think about all the complexity of the metaverse, and I think, for me, it's a positive. I think it lists all the problems we have to solve, and we will solve them and get to the metaverse.

This is the end of Season Three. You were with us at the first-ever episode of this podcast. We're so happy to have you. We are trying to professionalize this podcast. We're trying to be better. We have a little bit of an improved social presence. We created a Twitter account, believe it or not, and a LinkedIn page so that people can find us and talk to us more easily.

For Season Four, we plan on bringing more interesting speakers, because I think that's our secret sauce, is just get the right people behind a microphone. And so, in Season Four in 2023, we'll do more of that, and we'll try to have more conversations and more interaction with the people who listen to this podcast. We have some numbers, we don't want to share them because we don't understand what they mean, but they're pretty good, too. We're very, very happy with that.

I want to thank everybody who's listening and supporting us. Have a fantastic end of year. Keep on listening to the podcast, keep on telling us what you think. And we will see you for Season Four in 2023. Matthew Ball, thank you very much again. You've been a fantastic guest.

Matthew Ball:

Thank you, guys. I love listening, and looking forward to the next season.

Marc Petit:

Patrick, happy holidays.

Patrick Cozzi:

Yes, happy holidays to everyone.

Marc Petit:

Thank you, everyone. We'll be back in 2023.