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Marty Flanagan: 30 years ago, in the novel Snow Crash, science fiction writer, Neal Stephenson, described a virtual reality version of the worldwide web where people use avatars to engage with software and with each other. This was basically a depiction of a would be successor to the internet even though the internet was still very much in its infancy at the time. Today, science fiction has become science fact. The metaverse is taking shape, and it's happening at an increasing speed. I'm here today with some of my Invesco colleagues from around the world to discuss why this could be a weapon of mass disruption. A game changing innovation that will impact multiple aspects of all of our lives.
Joining me in our New York studio is Donie Lochan, our global Head of Technology. Anna Paglia, our Global Head of ETF and Indexed Strategies. I'm also happy to be joined by Henning Stein, our Global Head of Thought Leadership and Market Strategy, joining from Switzerland, and James McDermottroe, a Deputy Fund Manager at our Henley Investment Center in the UK, and Giuliano D'Acunti, our Country Head in Italy. But it only seems right that a discussion about the metaverse should take place in the metaverse. So, let's dive into this virtual world, and please join me there now.
Thanks for joining me, everyone. And, Donie, before we really get into what the metaverse is all about, can you explain what we're seeing here and maybe give us a quick expert tour?
Donie Lochan: Sure. Will do, Marty. So, folks, see where we are right now. This is called a space. It's a workspace that you create. And you can create various different kinds of spaces. If you see the one we're in right now, you see the stores, you see some of the branding, et cetera. Let's quickly jump and show you some of the other spaces and what you could potentially use them for.
So, this space, you can see, is a virtual exhibit hall. So, if you can look and see the blue spots at the bottom, you can click any of those and move around. So, you could imagine if you were doing a client event and you had different booths for the clients or maybe an internal corporate event, and you can see all the different kinds of branding that you can do and you can basically go to the different places and interact. Let's go to another place which is maybe more of an intimate setting around maybe conversation.
And this one we called a sunken lounge. If you think about potentially maybe a smaller group, either a team or maybe a client, and you wanted a more intimate setting for a conversation. If you can see on the boards, you see we have media boards where you can show content, et cetera. You have the tables there. It acts as just a different way to do collaboration more in an intimate setting in the virtual world. So, hopefully, that's given a little flavor of the kind of spaces that one can create. With that, let's go to my main hall where we'll begin our panel discussion.
Marty Flanagan: Thank you, Donie. That was really amazing. Well, I've been in the metaverse a handful of times. Henning, I understand that you're pretty well traveled in the metaverse, is that right?
Henning Stein: Yes, Marty, actually, I used an augmented reality headset maybe for the first time around a year and a half ago, and I was actually visiting a friend in Germany and we played these old Commodore 64 games, Paperboy, Winter Games, Marble Madness. And then my friend suddenly said, "Henning, I need to show you something, put on this Oculus headset." And one minute I was meditating by virtual fireside, the next was fishing in a virtual lake, and then I was peeping out of a virtual helicopter. And that's not an average day for me in the real world. I like meditating, I do that in the morning, evening.
And now I have this metaverse app called TRIPP, I do this with that. Fishing and military assaults are not really my thing, but I was really astonished by what was possible. And so, I went back to Zurich, I started to research a little bit about the total addressable market behind this, and then I wrote up an article about augmented reality and its investment potential. And then a few months later, someone else started talking about the metaverse was Mark Zuckerberg. And I'm not claiming that he read all my articles, but I felt pretty proud in that moment. And now we have everything from big tech basically to some of the world's most innovative startups working flat out to realize the metaverse stream in full.
Marty Flanagan: Henning, that was great. You thanks very much. So, Donie, I have a question for you. Do you think the journey to a fully fledged metaverse really only just started or can we trace it back to Stephenson and his book, Snow Crash?
Donie Lochan: That's a good question, Marty. It certainly has hit another gear in the last year or so, but there's been significant milestones actually over quite a lengthy period. Gaming and entertainment is really where it started, and it's probably the most mature right now. Probably the most important trail blazer is a game called Second Life, which was actually launched over 20 years ago. Second Life helped pioneer ideas that are quite common today in the metaverse, which is things like buying virtual land and using platform as a way to build basically anything one can imagine. Fortnite followed a few years later, that provided us probably with an even better idea of what the look and the feel of a fully functioning metaverse could look like.
They've now matured and that platform actually held its first virtual concert in 2020, which again showed how a metaverse style environment could be used beyond gaming. I think today, I've lost count, there's probably about 10 different virtual metaverse concerts that have happened with the likes of Justin Bieber and others. I think one of the key milestones that has been an enabler has been the launch of both Bitcoin and the blockchain technology in 2009, and then the help of another crypto currency that's pretty prevalent in the metaverse, which is ETHA, which is around 2015. So, these blockchain technologies really set the underpin of the ownership of digital assets in the metaverse and will be vital to investments.
Marty Flanagan: Yeah, thank you, Donie. And talking about investments, James, can I get your perspective here? Where do you think we are on this metaverse journey?
James McDermott...: Importantly, despite these and other developments, we still don't have consensus on how the metaverse concept should be defined. This is no great surprise since the metaverse is still a work in progress, but I think we can agree on a few essential basics. First, we can assume we're talking about a shared virtual world that's accessed by the internet and that generates user presence. Second, we can assume it's likely to involve extending our senses of sight, sound, and touch by blending the physical and the digital. Third, we can assume it's going to be built around fully immersive 3D environments that will be able to use avatars to explore. Zuckerberg has spoken about an embodied internet. I think that's probably the neatest summary of where the journey is heading.
Marty Flanagan: Thank you, James. Let's turn to what we think are going to be the metaverse growth drivers. And I think we can all recognize and realize that, that tremendous advancement in technology, as Donie was talking about, is really a major driver which will probably rapidly advance the technology, but it's important to understand what the other factors might be fueling this metaverse journey. And, Henning, can I start with you and get your thoughts?
Henning Stein: Yeah, I think a general reassessment of really how we interact is playing a part. So, lockdowns, you had the pandemic of course with all the restrictions and I think that has sort of accelerated this. I think many people are now more willing to actually connect virtually, and that underlines the general appeal, the applicability, if you will, of the metaverse concept. Another big driver is demographics, or particularly, if you look, the metaverse clearly appeals to the world's biggest demographic cohort generation zoom, and the zoomers, they were born between actually the late nineties and the early 2010.
They represent the most, let's say, tech driven demographics, and research really shows most zoomers, they would happily visit a virtual game environment without even playing the game. They just want to be there. And so, we have the relentless advance of tech, we have a significant accelerant of tech, and we have an unprecedented appetite for tech. So, you put these things together, it's a very powerful combination and one that's really helping bring us closer and closer to a fully fledged metaverse.
Marty Flanagan: Thank you, Henning. Really helpful and very thoughtful. And let's now turn to really Genesis trends in thematic investing. So, when we talk about forces and trends that are likely to reshape our lives as investors, we often think about thematic investing. Thematic investing is basically about structural shifts that bring about long lasting change on a massive scale. So, the question is, do we think the metaverse will have that effect? And so, Giuliano, can I get your thoughts, with thematic investing on our minds, how do you think that metaverse is going to stack up against previous game changing innovations?
Giuliano D'Acun...: Yeah, the metaverse already birthed many of the hallmarks of what we might call a genesis trend of, if you prefer, a big bang trend. This phenomena is caused when the growth of a technology of a broader mark becomes sufficient to trigger a substantial, lasting shift. And that's what the metaverse market is already on course to achieve, and it has been tipped to grow very quickly during the next few years. Let me provide an example, some example. It was valued at 48 billion dollars in 2020, it's suspected to eat more than 208 billion by 2025, and approximately 850 billion dollars by 2028. In other words, we are talking about a market that's set to grow from less than 50 billion to nearly one trillion in less than a decade.
Marty Flanagan: Giuliano, thank you. It looks like there's quite an opportunity here. And now, one thing to think about, we all know that the past isn't necessarily a guide to the future, but we also know history may not repeat itself, but it tends to rhyme every once in a while. And so, Anna, if someone's thinking about investing in the metaverse, figuring it's a new Genesis trend, are there any lessons from history to draw here?
Anna Paglia: Absolutely, Marty, there are. You mentioned the most obvious right at the start, the internet, which has transformed almost every aspect of our everyday life. Another example is the smartphone. 15 years ago, when the iPhone kicked off the smartphone era, Apple share price was about $3. Early this year, Apple share price was about $160, why? Because the smartphone, like the internet, is now at the heart of our daily lives. And this is only a smart part of the story because let's not forget Apple was already a household name when the iPhone made this debut.
What's less appreciated though is that other businesses involved in the smartphone rise enjoyed growth that was even more spectacular. And I'll give you two examples, Innox Corp, a South Korean manufacturer of semiconductors and China's Sanan Optoelectronics, which makes LEDs, both companies have generated investment returns of around 20000%, far in excess of apples returns since the iPhone was unveiled. And they have done this not by designing a marketing of smartphones, but by making the components that allow smartphone to function. So, the point here, Marty, really is not just the high profile architects of a Genesis trend that are likely to do well over the long term, the many enablers of a Genesis trend are also likely to prosper and they might even enjoy the greatest long term growth of all.
Marty Flanagan: Well, it looks like there's quite an opportunity here, and obviously the pace is clearly picking up in this development. Let's build on that notion of architects and enablers because I think it's really a key to understanding the likely scale of this disruption. Henning, James, can you talk us through some of the enabling technology to show the metaverse's likely impact on multiple sectors?
Henning Stein: Yeah, sure, Marty. So, going back to my own formative metaverse experience, an obvious starting point is augmented reality and of course virtual reality. This is really central to creating truly immersive platforms that then transform how we interact also with product, services, organizations, and of course with each other. So, augmented reality, AR, that's already being used in various mainstream digital product and services. Just look at Snapchat or look at Pokemon. We also have cryptocurrency, we have blockchain. Donie mentioned this I think earlier in this discussion in terms of milestones, blockchain in particular, is likely to be really vital in ensuring the metaverse transforms not only how we interact but also how we transact. And it'll also underpin innovations. Think about non-fungible tokens, right? It's already accounting for billions of dollars worth of transactions.
Marty Flanagan: Thank you, Henning. And, James, how about yourself? Any thoughts?
James McDermott...: Yeah, sure. Another big enabler is artificial intelligence. Mark Zuckerberg described this as the most important foundational technology of our time. AI will provide the scaffolding needed to create virtual environments and sophisticated forms of metaverse user engagement. Meta, previously Facebook, is really throwing its weight behind this. Again though, let's not rule out lesser known players. The metaverse will also need new levels of wireless broadband connectivity, that means 5G technology and beyond. And it will need computer hardware, the basic building blocks of any digital system. Huge demands are going to be made of this market. The metaverse will need processes, it'll need semiconductors, it'll need supplies, motherboards, and even ventilation fans. So, here again, it would be wrong to presume a single company could dominate. Many market leaders and players are going to emerge.
Marty Flanagan: Yeah. Thank you, James. It looks like any of these technologies, the demand on underlying infrastructure is foundational. So, a lot to do here. And let's turn to what sectors might benefit from this development as you were talking about James, and what do we think the sectors that will benefit, and will the metaverse live up to its... The notion that it is a weapon of mass disruption as we look to the future? And maybe, Giuliano, can you start and give us your thoughts please?
Giuliano D'Acun...: Yeah, this is happening already, and it's most obvious in the sector that is done so much to develop the metaverse story, so far, gaming. Various platform in this space are incorporating technologies such as AR, VR, AI to announce that all important sense of immersion. Epic Games, which developed Fortnite, completed a two billion dollars round of funding earlier this year to support its metaverse efforts.
Another platform, Roblox, went public in 2021, and just months later, announced plans to build a metaverse around its user community. Nike launched Nikeland on Roblox last November, and this allow participants to play digital sports by using special sensors in smartphones. And there is also Unity, which is a leading designer of cutting edge game engines. And it says it want to be the 3D operating system of the world. So, we can think of Unity as the Shopify of gaming, and its business model relies on the user creating content and then monetizing their work. So, Unity has also shown how gaming platforms can branch out. Disney used it for 2018 Digital remake of The Lion King, for example.
James McDermott...: Social media is another sector that will benefit, especially given Zuckerberg's decision to rebrand Facebook as Meta. Meta spent at least 10 billion dollars in 2021 alone on Facebook reality labs whose metaverse division works on AR and VR projects. Most people still view the company as a social media giant, but Zuckerberg has said he wants it to be seen as a metaverse business. E-learning is one of the sectors that really flourished during the pandemic and the metaverse is likely to strengthen it even further. This is another transformation that's already underway. For example, avatars are now used in online science courses in South Korea.
Anna Paglia: And let's not forget what we are doing right now. The metaverse is going to radically redefine how we think about video conferencing. It's not so long since a software like Teams and Zoom appeared, but we are already seeing that they just scratch the surface of what's possible. The entertainment industry is also ripe for disruption. The metaverse could mean no traveling, no queuing, and perfect views of every show. To some extent again, the future is already here. Ariana Grande is one of the stars whose avatars have performed on the Fortnite platform. E-commerce will also undergo radical upheaval, for example, in the metaverse, we are able to try products before we buy them. Some companies are already developing branded items for avatars. Believe it or not, a virtual Gucci bag has sold for more than a real one, and I should know that. The metaverse is likely to accelerate the evolution of telehealth by making remote patient-doctor interactions more personal.
Donie Lochan: I would say all the markets we just mentioned are expected to grow significantly as the metaverse takes shape, but there are plenty others, like real estate with companies like Decentraland, and the figures speak for themselves. The entertainment market is expected to be worth $447 billion by 2025. E-Commerce is more than 20 trillion. So, we can truly think of the metaverse as a weapon of mass disruption, and that means investment opportunities across the board.
Marty Flanagan: The opportunities do surely seem endless here, but I think we all know with opportunity you need to assess risk. So, let's talk about the key risks around the metaverse from an investment perspective. One of the risks a lot of investors talk about is concentration risk within a portfolio, and that's having excessive concentration in technology, stocks maybe around the metaverse could be one. We also need to think about the timelines here because the total addressable market for the metaverse will likely take a bit of time to develop and might take longer than is expected. No one can dispute that the journey is well underway. And I think many of the sub themes that we've talked about here are performing largely as predicted, but we've also said nobody can say with confidence how long it's going to take before we have a fully formed, fully functional metaverse. But there's a lot of dollars, a lot of smart people and a lot of energy behind the notion of developing the metaverse.
Donie Lochan: That's correct, Marty. There's certainly a lot of branching out yet to come, at least for the time being. Most metaverse's experiences, as you've heard, are really focused on gaming centric loyalty and entertainment like the concerts that Anna mentioned. More generally, of course, there's the risk that we always have to attach to the next big thing, the possibility of more hype than substance. I think it's fair to say we all spend a lot of time looking for the next big thing, and it's also fair to say that many times we end up disappointed. You know how the story goes, the next best thing... Big thing, sorry, generates excitement, builds everyone's expectations, and then quietly fades away. As for someone who works deeply in technology, though, I don't think the metaverse will follow that pattern. This doesn't strike me as a flash in the pan.
Henning Stein: Yeah, good point, Donie. And maybe the biggest threat is what's now the pacing problem, right? This is what happens when innovation leaves regulation behind. And it's a problem that has arguably existed for centuries, but it has probably never been as pressing or as prevalent as it is right now. And the issue is essentially this, you have, on one side, technology, it changes exponentially, but then you have social, you have economic, you have legal system, culture, right? It takes time. And these things, they tend to only change incrementally. We saw this during the early years of the internet, in fact, and we are seeing it again now with the rise of concepts like crypto, like tokenization, AI.
And there is this risk, sort of a lack of meaningful frameworks, if you will, producing that free for all. So, we really need regulators to come in, policy makers to play their part. But this isn't a problem specific to the metaverse, the issues arising from this pacing problem, they apply in two dimensional things just as much as they apply in 3D. And many regulators, legislative efforts actually related to the internet are now underway. And for example, there's this raft of antitrust legislation in the US, and these should affect the matter soon. So, there's little chance of ending up as a fully digitized version of the Wild West. And I think one point I would make about this is, whatever regulation, whatever legislation emerges shouldn't stifle further innovation in this space.
Anna Paglia: And you mention timelines, Marty, and it's true, no one can say for sure how long it might take to realize the metaverse full potential. For example, experts say that computing capabilities will need to increase by several orders of magnitude to deliver a truly immersive experience. But I think we can all agree, the technological base is here, so are the conditions for a broader adoption around the wider appetite for change. We spoke earlier about thematic investing and how it's becoming more and more important to a long-term outlook. Let's quickly revisit that. Thematic investing isn't about where the market might be next quarter. It's not really even about where the market might be next year. Thematic investing is about the long term. It's really about where the market is likely to be in 5, 10, 20, or maybe even 50 years time.
Henning Stein: Oh, I totally agree with Anna. This is about understanding which of today's emerging innovation could become central to our lives over time. It's about asking ourself which companies, sector or industries might have vanished and which might have taken their place. As I said earlier, the metaverse already birthed many hallmarks of Genesis trend. That means it ticks these boxes. Without any doubt, it's a long term play.
Donie Lochan: And that's what we all like. Innovation with real, long-term impact. In the meantime though, I think it's now time to head back to the real world.
Marty Flanagan: Thank you, Donie, Henning, James, Giuliano, Anna, for joining me in the metaverse. It's been great to talk about it while actually experiencing it.