Motley Fool Hidden Gems Investing - Metaverse: Unlimited Potential, Very Real Constraints

Episode Date: May 8, 2022

The future of the metaverse is murky, even if its present technical challenges are clear. But there may be a few trillion reasons why investors should keep their eyes on this new frontier. Venture capitalist Matthew Ball is author of the upcoming book, “The Metaverse: And How It Will Revolutionize Everything.” Asit Sharma talks with him about: - The technical challenges in bringing the metaverse to life - A murky future for all involved - Why Nike may have meaningful exposure to the metaverse To learn more, click here - https://www.fool.com/investing/stock-market/market-sectors/information-technology/metaverse-stocks/what-is-the-metaverse/ Stocks mentioned: RBLX, FB, NKE, U Host: Asit Sharma Guest: Matthew Ball Producer: Ricky Mulvey Engineers: Dan Boyd, Brandon Gentry Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Cash, resources, and conviction are not sufficient to thrive in the metaverse. Of course, Microsoft was as convinced of as anyone in mobile and in the internet. It didn't really help. They had all the pieces. They put them together incorrectly. And in fact, the number of thesis errors that they made was actually quite something.

i'm chris hill and that was matthew ball from 2016 to 2018 he was the head of strategy at amazon studios today he's a venture capitalist writer and author of the forthcoming book the metaverse and how it will revolutionize everything recently he sat down with my colleague asit sharma to talk about the technical challenges in bringing the metaverse to life, how gaming could change, and one less obvious company with a lot of exposure to this new frontier. But Asa began the conversation by trying to learn when we're going to get the metaverse we keep hearing about. Do you feel or do you believe that the rate of acceleration of interest in the metaverse,

the rate of acceleration of capital put into this theme is going to produce this commonplace bridge between digital and physical experiences in the near future? Or are we still looking at 10 to 20 years of evolution before we start to take the metaverse as a second nature in how we live and work? So I like to argue two different things. One is that we need to truly depart from the idea that there's a before or after. If the metaverse is a successor state to today's mobile and cloud internet era, we should identify exactly when that era began. We can start in 1973 with the first wireless cell phone call. I wouldn't start there, but one could argue that the mobile era began there. We can start in 1991. That's when the first 2G network was launched.

That was the first wireless digital network for data transmission. The BlackBerry comes out in the late 90s. In 1999, we have the wireless application protocol, allowing anyone on a mobile device to access a primitive, altered version of the web as we knew it in the 90s. Then, of course, we have the rise of consumer smartphones, the BlackBerry Pearl in the 2000s, 2007, the iPhone, 2008, the iPhone 3G, with the sufficient speeds to make most of the mobile internet usable, and the App Store, which provides us with something to do. Mid-next decade, half of Americans have a smartphone. A few years later, half of the world, over 13, has a smartphone. When did the mobile internet era begin is both a philosophical and unanswerable question,

but ultimately one of generation. You take a look at Roblox today, 75% of those 9 to 12 use Roblox regularly in many developed markets. For them, they've already moved beyond the form of the internet that you and I main. Much like in the 90s and then certainly the early 2010s, many people were in the mobile internet era. Many companies were, but we wouldn't really say that society was at large. And so I see this as unfolding over the coming decades. Many people think the end of this decade is when you start to say it's advent is truly here. But I think the lesson in the story that I just told you is we can discount how much of the preparation needs to begin now. You named a number of technological milestones going back decades. For a layperson,

what milestones still need to be achieved until we get to, again, this state where the metaverse is no longer a conceptual thing that we're trying to explain to people, but just a natural extension of our present approach to consciousness? So there really are a few different things that we can keep in mind. One is to recognize that the internet is actually pretty outstripped by our ambitions when it comes to the metaverse. And so many of your readers may have heard the term latency. Latency is something that we don't think of very often, but it's essentially the transit time in milliseconds that it takes a given packet to go from one point to another point. We usually think of how long it takes a button to be pressed. So for context, if it takes Spotify longer than 200

or 250 milliseconds to pause when you hit the pause button, your brain starts to say it's not working. But in an interactive environment, you're usually thinking about 40 milliseconds, 50 milliseconds, 70 seconds is when things really start to erode, but ideally 20 milliseconds. And yet the internet was not designed for that. We're in fact up against the practicalities of the speed of light. I know it sounds insane, but to put this in perspective, it takes light 45 milliseconds to go from New York to Tokyo. And light, of course, can go there efficiently and essentially without disturbance. And so what does this mean practically? Well, only 75% of Americans truly can participate in today's real-time environments. In the Middle East, fewer than

one quarter of broadband homes can, and that's on a local basis, not an international basis. The extent to which infrastructure remains an impediment is hard to overestimate. The other thing is the Internet, TCPIP, the Internet Protocol Suite, actually does a bad job of managing this because the Internet was developed to send asynchronous messages that were themselves static between one person and another. One lab sends it to one university. We're talking about a constant stream of live data to myriad different parties who are collaborating. And what that means is actually the Internet Protocol Suite does not manage for traffic very well. So we're talking on one side of infrastructure. On another side, we're talking about protocols, private or public. And then we can think of everything else. Computing devices, obviously, we need extraordinary improvements. Intel has said a thousand factor improvement is required. John Carmack has said that in 2000, if you asked him whether you could build the metaverse with 100x compute, John Carmack's the consulting and former founding CTO of Oculus, with 100x compute, could you build it? he said in 2000, he'd have said yes. And of course, today we have 120X in the average iPhone,

and we've got 7 billion devices, not a billion. And so compute is required, but we can go on and on. Fundamental changes to app store policy, new platforms to make it easier for anyone to create. This is why we talk about it as an iterative process. Right. On one hand, we have the evolution of, say, content delivery networks or edge networks, which are part of the solution to this problem on the other hand we have companies like roblox which you you talk about um which are more user facing or or building those worlds i'm curious to know on the side of compute power which you mentioned is another let's not call it a constraint so much as an opportunity but theoretical constraints what role does say moore's law um or or the belief that maybe that which is

not really a law. That theory isn't going to hold up. We see a lot of capital being poured into the extension of this by Intel, NVIDIA, even Apple, so many companies. Do you feel that or believe that limitations on computing power will eventually put a hard stop onto the experiences that we can develop, or this is something we can keep pushing the envelope on? So it's great. Look, I would first disagree by saying that we are constrained by computing resources. I think what's important to recognize is many of the limitations that result from that aren't evident, which is to say, when we have more computing available, we tend to uncover problems that we didn't know about, and we tend to pursue more difficult problems, which is why computing

remains scarce. There's never enough of it, whether we're talking about a CPU or GPU. you. A good example would be to take a look at Battle Royale games. Battle Royale games send roughly 100 players into a shared simulation. It's not new that game designers want to build Battle Royales. It's new that they can. They have the server power, broadband helps, of course, but then they have the widely deployed computing devices and iPad, frankly, mid-level laptop that can run those experiences. That led to the creation of Battle Royales about six years ago, and it's no mistake that many of the most popular games globally, there's about 450 million daily Battle Royale players, are new. And so we should recognize that when we have more compute available,

new experiences are built, but we should not forget how constrained those are. I like to talk about the fact that it's incredible that we can get 100 players into a Battle Royale, but even that is a little bit of a cheat. A battle royale takes place on an enormous map. Fortnite says two and a half kilometers by two and a half kilometers. What that means is if I'm playing, my computer actually doesn't really need to pay attention to most of the other players. It doesn't even know they exist. They exist as a number in the match. I might see 20 at once, rarely, but it's really only processing 20 different people. And when you take a look up and down the computing devices and platforms, you can see that difference. Warzone runs only on, or Call of Duty Warzone, only runs

on gaming PCs and high-end consoles. It has 150 people. Fortnite runs on most platforms, but far from all, it has 100. When you play Free Fire, which comes from Garena, it's designed to run on low-end androids in developing markets. You can have 50 people despite those limitations. And when you use an Oculus Rift or a MetaQuest, they have Population 1, their battle royale, and it has 18 people. And in fact, it has 18 people at half the resolution, half the frame rate. As a result, it's roughly one quarter of the pixels processed per second. And the graphics look closer to a PlayStation 3 title than a PlayStation 5 title. And so this limitation on compute really does change what you can do from which devices and certainly which new devices,

AR and VR we want, the primary reason why you can't use a HoloLens AR device or an Oculus for so long is both the fact that the battery can't process or can't power that computing device long enough. And if you actually want to solve for some of the rendering potency, you need an enormous battery that's going to melt your face or break your neck. And so this is where you get into the more field ideas of do we need quantum computing? Alternatively, people talk about decentralized computing. The problem with edge computing is edge can give you more power, but if you and I are playing a game against one another, ultimately that doesn't solve for the fact that we need computers powerful and close to both of us. Latency comes into play. But most importantly,

people ask this question of decentralized compute, which is, look, I don't think my neighbor's home right now. They probably have 10 devices in their home. We're kind of well acquainted to the idea that two doors down, in truth, there are solar panels on top of the house. They're leasing supply and capacity for compensation to the network. It might be powering my computer right now. But there's this question of not just do we need more powerful processors, but do we need a better way to utilize processors? Yeah, I really love that last idea. A colleague of mine has a service at the Motley Fool Digital Explorers. And he's Baron Schmidt. He's very taken by the idea that money being poured into digital assets oftentimes has a very real-world use case

and problems are being solved in this space, which goes under this huge and, I think, incoherent moniker of crypto assets. There's a lot there that can help in terms of spreading out computing power. Between your first writings about the metaverse and this book, I'm curious as to any big aha moments that you had. Let me put it this way. In writing this book, what were the initial conceptions you had that turned out to be not wrong, but you had a very steep evolution between the way you first conceptualized this and began writing about it to the time of now, how you think about the metaverse. What has changed in your thinking about either what

the metaverse is. Or we could also touch on topics of, again, what is needed to realize the vision that you have of so many multiple worlds that are interconnected, not just a single entity that is called the metaverse, which I know some people like to think of. I also disagree with that vision. I think there were a few primary themes that I determined. One was a lot of fun digging into the hardware challenges. You and I spoke about it a moment ago. But to some extent, AR and VR is a uncharitable problem. We know or we think we have a good sense of what minimum viable product looks like. And we can start to understand all the constituent parts around the interplay between battery life, sensors, resolution, computing, processing power, price point. So that was a lot

of fun just digging in deeply because that actually is a bit of a solvable equation. The second thing is I went deep into the history of what could you know and what couldn't you know. I'm often asked as the would-be metaverse expert, though I would decline the term. Okay, so, you know, big shot, what does the metaverse look like in 2035 or 2030? And I like to say, I don't know. And that's important because, first of all, confusion and uncertainty is a prerequisite for disruption. If we all knew, no one would be displaced. The other thing is you can look back over time at TCP IP, at the mobile Internet,

and there was no technical understanding or no high-level elements of more people with more devices in more places using the internet more often that told you about Instagram, of TikTok, of the impact of Robinhood and commission-free trading. It didn't really tell you what to build, when, why, how, or how it would be monetized as well. And so really unpacking that was fascinating because it allowed me to say, here's what I'm convinced of, here's what I think but I'm not certain about. And here are the things I would never speculate on. Because the third conclusion is really to understand that technological change of this nature is recursive. Someone produces an innovation. It leads to users. Those users manifest new behaviors that inspires a derivative

innovation or technology that changes behaviors, producing new use cases. And this just continues to flow. And it's one of the reasons why I would say one of the fourth biggest takeaways is the Cash, resources, and conviction are not sufficient to thrive in the metaverse. Of course, Microsoft was as convinced as anyone in mobile and in the internet. It didn't really help. They had all the pieces. They put them together incorrectly. And in fact, the number of thesis errors that they made, not execution errors,

but thesis errors they made was actually quite something. That's a good parallel to Facebook right now. They have 3 billion users, 2 billion DAOs, billions a year in OCF, a founder with absolute conviction, an enormous head start in VR, wide range of talented developers, but cash, resources, conviction, not sufficient to thrive in this next era because we don't know exactly how it's going to play out. You don't run, but you co-founded an ETF, which I mentioned at the outset. I'm not sure the extent of your involvement in managing the portfolio.

No, we're the index provider. Index provider. So, my question just to begin is, when you thought through the themes that would underlie this ETF, did you find just a huge amount of companies that were in your selectable universe? Was it something that after some time laying out your criteria, you realized, as, wow, this service is going to have fewer stocks and companies than hundreds. Very curious about the size of the ETF and the companies that are indexed, too. Sure. Well, let me give you the macro perspective. I and my co-founders believe that the metaverse is a multi-trillion dollar, multi-degraded transformation. You'll find Citibank, Morgan Stanley, Goldman Sachs have

all estimated by 2030, it's roughly 8 to 13 trillion. They're actually using my methodology and altering the exact forecast. But so the perspective becomes, how do you gain appropriate diversified exposure to that macro level and extraordinarily large investment theme? My perspective is there's certainly an opportunity for picking. The challenge with picking right now is that that future is relatively uncertain for the reasons that I mentioned. We all wish we could go to 1995 by Apple, 2005 by Netflix. And yet some people instead bet on Nokia or BlackBerry, good for a short period, not good after, or Samsung. Others bet on Time Warner, a fine return, but nothing alpha generative. And so having a well-diversified structured thematic index would

have provided extraordinary returns, even if it fell a little bit short of Apple or Netflix. You can take a look at social media, social networking, mobile, cloud, enterprise, cloud, thematic ETFs over the past 30 years, and the results are great. From my perspective, when you talk about composition, because it's such a broad theme, I didn't see that I could actually develop it solely myself. And so I built a council of six others, former executives at Amazon, at NVIDIA, at Square, Spotify, Andreessen Horowitz, at New York Times, various securities professionals, the former executive producer and lead game design lead for Red Dead Redemption 2 and Grand Theft Auto 5. And we produced this passive rules-based thematic index. We took a look at seven core profit pools, weighted them based on their projected and current share of the profit pools, and then came out with a scoring mechanism for all companies.

We went through 3,000. Could we have provided some sort of allocation to the hundreds? Certainly. But the goal here was to provide investors with as tight an exposure to the actual metaverse theme. Let me give you a good example. Many believe that Nike is going to be a large participant from the metaverse. They've got a good D2C suite. We can understand how virtual existence has requirements for apparel, augmented reality for a fitness company. You wouldn't say that that's pure play exposure, but you would say it's meaningful exposure. We just as easily put Adidas or Under Armour, but we came out with a methodology that tightens the selection down to between 30 and 70 companies on a relative basis. And so I think we're sitting at 42 right now. That's so interesting. So, did Nike make it into the index?

Nike did, but not at first. As I mentioned, we have a passive rules-based thematic index. The goal is not to pick. There are times in which I think X versus Y is over-undervalued. There are times in which I think that our allocation for a specific company is perhaps not ideal. But the goal is to have an ironclad expert criteria for qualification and weighting up and down and for rebalancing. And so based on public disclosures, which is of course how we operate and the rules, but also what Nike was and wasn't doing when we launched, they were not included and they are now. Nike is one I've been following with some interest, has something to do with some patents that they had, I think in advance of some of their competitors

that play to strength, I think, in virtual worlds. I'm also interested in Nike just because they had an innate understanding of this idea of scarcity, which is tied to the NFT world. And we know NFTs will play a fun role in the metaverse. A very forward-looking company in the way it approaches technology. They understood from, I think, in the 19, I want to say 1990s, how valuable a single pair of shoes could be. And they're thinking with, I think, the Air Jordan brand was far in advance. We have exchanges now in which sneakers are, rare sneakers are traded.

And this is connected to sort of the commercialization of the metaverse as well. So the thinking of Nike executives has always impressed me. they're not a technology company per se well they are a technology company they're a physical technology company but I'm interested to hear that even through your passive and rules-based criterion the company made it in let me ask you about we just have a few minutes left I could go on for so long this has been immensely fascinating let me ask you in terms of thinking about the metaverse for a layperson. You personally, and I know you've very clearly stated, look,

it's going to evolve. There's no point in trying to predict the end point of what it should look like. We don't know. But for you, Matthew, what would be an ideal expression of the metaverse for you 10 years from now? What would you like to see? What do you sort of dream about sometimes or envision it becoming? Well, let me hit a quick thing that I think often eludes people and also answer allows me to catch up on a question I didn't answer of yours, which is several years ago, actually, the chief digital officer of Nike left to become the president of Epic Games, a great example of a company that was not on many radars, but actually shows you the close cohesion between Nike's strategic thinking. And it's no mistake that the rest of the organization,

even after Adam Sussman left, has been a pioneer. That allows me to get to this question is I think one of the things that's interesting is if we produced the Metaverse ETF two years ago or two and a half years ago, two of the top four names would not be in there. And that was Unity and Roblox. And so we certainly expect that over time, the composition of this will fundamentally alter just like a mobile internet ETF in 1996 and 2002 and 2005 would look different than it does today. That's, again, why we have a passive thematic rules-based index. I don't want to hypothesize specifically on companies or valuation or weighting, but there are some companies where people look at large, you know, $10 billion to $50 billion companies, Epic, Niantic, Dapper Labs,

OpenSea, that you totally understand as being relevant to this theme could likely be public, but are not yet. When you ask what's the ideal end state, I would say we see an end state pretty similar to what we see today in the real world. We often forget that even in this world of FANG or GAFAM control, those companies have less than 13% of digital economy revenues on a gross basis. As a percentage of the global economy, they're small. In the United States, Amazon is the largest employer. McDonald's is quite close. But there's 33 million small to medium businesses in the United States. Those are the people who have more than half of jobs, more than half of GDP. My hope would be that we see similar decentralization in terms of rights, of

ownership, of entrepreneurship, and of profits. Matthew Ball, this has been an amazing half hour. I look forward to reading your book when it's out this summer. And thank you so much for your time and joining us today. Thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.