Matthew Ball - A Manual to The Metaverse - [Invest Like the Best, EP.286]

My guest today is Matthew Ball. Matt is an investor, the former head of strategy at Amazon studios, and one of the brightest minds in the media industry. Through his essays and now his book, which launches today, Matt has established himself as the foremost authority on the Metaverse, which has stormed into the public eye since I first had him on the show two years ago. The Metaverse is the focus of our discussion and I hope you enjoy this encyclopedic tour through all of its details as much as I did. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick. ----- Today's episode is brought to you by Brex. Brex is the integrated financial platform trusted by the world's most innovative entrepreneurs and fastest-growing companies. With Brex, you can move money fast for instant impact with high-limit corporate cards, payments, venture debt, and spend management software all in one place. Ready to accelerate your business? Learn more at brex.com/best. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:02:37] - [First question] - Which most represents the Metaverse: Minecraft, Ready Player One, Fortnite, or Facebook’s Horizon [00:05:58] - Facebook trying to own the concept of the Metaverse by changing their name [00:09:22] - Defining what the Metaverse is and a good working definition of it [00:11:33] - The state of the engines behind 3D output and the history of them [00:16:32] - The role IP played in bootstrapping the first Metaverses [00:18:32] - Where the ability to create digital environments will lead, and what Unreal 7 could look like compared to Unreal 5 today [00:21:03] - Natural limits of the Metaverse compared to real-world experiences [00:24:16] - Other sensory inputs that will need to be improved for digital immersion [00:26:59] - Why the initial excitement of trying something like Oculus wears off over time, both for casual gamers and those excited about this new frontier [00:31:40] - Changes in technology and new projects that have him most excited that will empower the digital infrastructure for Metaverses [00:37:14] - What interoperability means and why it has its own chapter in his book [00:31:52] - How Roblox connects with Fortnite and how far down we need to go to build a bridge between digital worlds [00:46:13] - What will drive commerce in the Metaverse and the possibility for a singular currency standard [00:51:35] - Considering the demand for the Metaverse and whether or not it will be a constraint on adoption and success [00:57:37] - What the modern equivalent of a lemonade stand will be in the Metaverse [00:59:58] - The lower adoption rates for more participatory media consumption[01:03:19] - Potential pitfalls and the dark side of the metaverse [01:06:14] - Who the categorical winners of the Metaverse might be [01:14:15] - The top things he would suggest exploring to best understand the Metaverse

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  updating models, Canalyst is now used by over 400 institutions, including the largest money managers globally and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, Canalyst's clients are able to ramp up faster, update models instantly and incorporate the highest quality fundamental data into any workflow. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. Today's episode is sponsored by Brex, the integrated financial platform trusted by the world's most innovative entrepreneurs and fastest-growing companies.

• 1:23Patrick O'Shaughnessy?

  With Brex, you can move money fast for instant impact with high-limit corporate cards, payments, venture debt and spend management software all in one place. Ready to accelerate your business? Learn more at brex.com/best. That's B-R-E-X.com/best. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

• 2:09Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:34Patrick O'Shaughnessy?

  My guest today is Matthew Ball. Matt is an investor, the former head of strategy at Amazon Studios, and one of the brightest minds in the media industry. Through his essays and now his book, which launches today, Matt has established himself as the foremost authority on the metaverse, which has stormed into the public eye since I first had him on the show two years ago. The metaverse is the focus of our discussion, and I hope you enjoy this encyclopedic tour through all of its details as much as I did.

• 3:02Patrick O'Shaughnessy?

  Well, round two is here. We get to talk about one of the most interesting topics in the world, especially because of how much insane detail there is under the topic of the metaverse, much of it contained in your awesome new book that I just finished a couple of days ago. I think a fun place to begin, picking up on our last conversation, is with a couple analogy questions, specifically around things that already exist that people will be familiar with, and the degree to which you think they represent something like the metaverse. I want to start here as an anchor point, rather than go deep into the infrastructure right from the beginning. And so I'd love you to stack rank these four big ideas, and you tell me which you think from most to least represents metaverse elements, those four being Minecraft, Ready Player One, Fortnite, and Facebook's Horizon.

• 3:47Speaker 02

  So let me swerve quickly. I would say that the closest representation that we have comes from one platform that you didn't list, and then another perspective on one that you did. Roblox, for all of its focus on children, they have 55 million daily active users, about 45% of them are under 13, 85% of them are under 25. Lacks many of the things that we expect from the metaverse, certainly enterprise applications, certainly a degree of criticality in the modern economy at large. But we're talking about a platform that has hundreds of millions of monthly users, billions of hours of engagement, in excess of 75 million different virtual worlds, each of which is tightly integrated with one another.

• 4:31Speaker 02

  Consistent communications, hierarchy in access, the same avatar and identity system, same currency, import-export of objects, a single path of discovery. We're talking about a parallel plane of existence that is simultaneously enormous and highly diverse, but also cohesive. The second closest would be to take a look at the Epic Games ecosystem. We can really take a look at two different aspects of that on the consumer-facing side. One is Fortnite, which is for the most part a battle royale, but they also have Fortnite Creative Mode, which is their Roblox platform. What's fascinating about that latter platform, which by the way, they say is nearly half

• 5:14Speaker 02

  of all engagement time today, is that later this year, they're planning to bring Unreal-based editing. So this is going to fundamentally overhaul how you can tool, author, modify. You have the consumer-facing, low- or no-code platform that children could use, but then you can tap into the million-plus expert developers, who can supplement that with their professional capabilities. On top of that, you have the broader Unreal ecosystem, and this is where we start to talk about interoperability at large, the application of consistent backends, common file formats, consistent communication suites, that spans 75% of next-generation games, numerous different automotive platforms,

• 5:56Speaker 02

  an increasingly large footprint in architecture, engineering, and construction, or the ACE field. To focus on Fortnite, to focus even on Fortnite Creative Mode, is too small. What makes this opportunity and this ecosystem so much larger than Roblox is that it's already deployed widely, in many different use cases. The connective tissue isn't yet in place, but when we're talking about the closest template to the metaverse in the future, that ecosystem looks prime.

• 6:24Patrick O'Shaughnessy?

  You didn't say Facebook Horizons, but the time it made its announcement, its name change, it was one of the largest companies in the world by market cap, tons of free cash flow, tons of ability to invest, tons of demonstrated will to invest, huge amount of CapEx going into this with obviously one of the most interesting entrepreneurs in the world behind it. What do you make of their foray into trying to own this concept, literally by changing their name to it? And why wasn't it in your top two?

• 6:49Speaker 02

  First and foremost, one of the interesting evolutions in Mark's perspective has actually been publicly revealed on the record. Let's start a decade ago or so. There's a lot of focus on the metaverse as a term today, but it's clear that Mark has been running towards this for quite some time. Their second most expensive acquisition, actually third after WhatsApp and Instagram, was for Oculus nearly a decade ago. Another billion or $2 billion acquisition was that of Control Labs, an electromyography interface and hardware company. It actually picks up electro-skeletal muscle signals so that you can reproduce movements in virtual space. We know in 2015, he was looking to acquire Unity, the most widely deployed game

• 7:34Speaker 02

  engine globally. And so this is something that he's clearly been interested in for quite some time. We also know from leaks in 2018 that there were internal memos saying that the metaverse was, quote, "theirs to lose." What has changed over the past four years is not just more investment, more aggression, a philosophical realignment of the business, but they are a lot more focused on the interoperable metaverse. And I actually think that that's sincere. We see this in their App Store policies, they support sideloading, third-party identities. They're the only major console platform to use third-party or open rendering APIs, OpenXR, WebXR, all of the consoles reject them. And so we see an evolution of what they're trying to do.

• 8:17Speaker 02

  And how they're trying to participate in the world that is different. But for all of that lineage, you're right to say that they are not top one or top two. Horizon Worlds is their effort to build a Roblox or Fortnite Creative Mode or Minecraft, what I call an integrated virtual world platform. It's not very popular today. Now, they say that by the end of the year, they will launch a web browser-based version, bringing instantaneous access to billions on the planet. Right now, the biggest impediment for any event in Roblox or Minecraft or Fortnite is that if you don't already have the 50 or 60 gigabyte installer on a device, you don't currently use it, there's a lot of friction. My mother's not going to instantly download it to participate in the Malcolm Gladwell event.

• 9:01Speaker 02

  But when it's browser-based, when it's easy to use, when your entire social graph is there, there's some potential there. But this platform remains relatively monotonous. When you're talking about the billions that they are spending per annum, Horizon Worlds is a part of that. When you take a look at the full stack, they are of course investing billions in hardware design, AR and VR. We know that that's also moving into semis. We know that they're also investing in their own operating system. And then on top of that, we have the investments in content, Beat Saber, Population One, their battle royale, as well as into Horizon Worlds and many other pet projects around wearables and so forth. Horizon Worlds seems like one of the biggest opportunities.

• 9:44Speaker 02

  It has not historically been their focus, at least as related to the metaverse.

• 9:48Patrick O'Shaughnessy?

  Can you just define what you mean by the metaverse? And what you think a good working definition is that allows us to test things to say, is this this thing that everyone's excited about or is it not? It seems obvious from our many conversations that the trend has been towards more digital engagement and participation and that somehow people think of the metaverse as like the natural endpoint of this, where there's more sensory immersion in some virtual world, there's more navigability, there's less walled gardens. How do you define the metaverse in its simplest definition so that we can all work off the same idea?

• 10:22Speaker 02

  A live 3D version of the internet as we know it today is the best and simplest way to think about this. Why? Because it not only explains how it's a little bit different visually, experientially, it keys into some of what you've just mentioned, which is how it might be more intuitive. Of course, we didn't evolve for thousands of years to tap glass to interact with 2D interfaces, static information. We explore, we immerse in 3D. It's a much better interface for many tasks, far from all, but many tasks. But most importantly, we take for granted the interoperability of the internet and how important that is to everything we do and create. We don't think about this question of the New York Times can't link to Washington Post.

• 11:05Speaker 02

  We don't even think about the idea that you can't link directly to the specific piece of content on the Washington Post. We don't concern ourselves with, darn, I took a photo on my iPhone that I stored to iCloud and the file format therefore doesn't work on Facebook. You can take a photo, upload it to Facebook, right click, save as, put it onto Snapchat, screenshot it on Snapchat, upload it to TikTok. And so we have this vast network that manages hierarchy, communications, reference, the transference of data across different autonomous systems, coherently, safely, consistently, and then file formats and conventions that run universally. We have a lot of 3D stuff today. There's a tremendous amount of time being spent in 3D platforms.

• 11:46Speaker 02

  What we don't have is a scalable network that actually interconnects. And as we've learned from the global economy, world trade, as we've learned with the internet at large, the utility that comes from that is extraordinary.

• 11:59Patrick O'Shaughnessy?

  Can you say a few words about the state of the engines behind three-dimensional creativity or three-dimensional output? You already mentioned Unity and you already mentioned Unreal being the two dominant engines that people might be familiar with, but maybe paint a more vivid picture of the history here. And if 3D is literally in the definition of metaverse, it stands to reason that the engine that produces and allows people to produce beautiful 3D outputs is really, really important or central. Can you give us the details on the state of the world today as it relates to 3D engines?

• 12:32Speaker 02

  Sure, I love this question. And let me actually start answering it by talking about the state of the world decades ago. I like to position the metaverse as a fourth era of computing and networking. The first was the mainframe era began in the 1950s for the most part, ran until the late 1970s. Let's keep in mind, mainframes still exist. It's actually a bigger business than ever. But it was largely superseded in the late 1970s, early 1980s by the advent of the personal computer, Apple, Microsoft, and TCP/IP, the Internet. By the mid 2000s, we hit the mobile and cloud era. And now we're starting to talk about the next era in the metaverse. What's fascinating about the metaverse in contrast to the preceding three waves is where it seems to be starting.

• 13:16Speaker 02

  Seems to be starting, as you've identified, in gaming, consumer leisure, in a small segment in consumer leisure. People like to talk about gaming being larger than film. It's a bit of a misconception. They're talking about the theatrical box office. That's about $40 billion. But of course, the video industry is over $600 billion, gaming still around $200. When you take a look at those prior waves, mainframes started with mega enterprises. The Internet began with government. Most of the early adopters were again, large corporations. Mobile began with enterprise and government as well. Each of these waves either never came to consumer leisure, as was the case in mainframes, or came there last.

• 13:56Speaker 02

  YouTube, 2005, Netflix, 2007, streaming wars, 2019. Consumer leisure tends to be last. So why is it that the metaverse seems to be starting in the other direction? The answer relates to constraints. Constraints always define a technology from inception to its termination. The constraints for computing and networking in those prior waves was often processing power, broadband speeds, bandwidth, et cetera. And the result was, you couldn't do much live. You couldn't share a photo with your grandmother. You couldn't stream video. But certainly, you could send a BlackBerry message in the early mobile era. You could send an unstructured data file or CSV if you were a banker or accountant.

• 14:39Speaker 02

  And so we needed substantial improvements in bandwidth and processing power for these new technologies to have consumer applicability. But the constraints that affected simulation, real-time rendered simulation, game engines, was fidelity. It didn't have the bandwidth or the processing power to do a rich simulation. And what that meant is the government had very little use for it. You couldn't actually do a military simulation with fake fire, but it was fine for Pong. It was fine for Space Invaders, Legend of Zelda. And so we've spent decades with the primary area of development of game engines, of real-time rendering in GPU chips, coming from consumer leisure. What has happened in the past few years is we have reached a point where the maturing and sophistication

• 15:24Speaker 02

  of these game engines, coupled with the wide deployment of powerful processors, means that that applicability has expanded. Automotive companies, as I mentioned, are using Unreal so that you can help drive your car. You can use LiDAR to scan the environment around you in your Range Rover, understand how to navigate, and then actually pre-drive your vehicle. You can live simulate a building. And what has happened is the companies that happen to have that expertise come from gaming. Nvidia's Jensen Huang, of course Nvidia is now the seventh largest company globally, known to many investors for several years, but largely under the radar compared to most other top 10 companies, was founded in the early 1990s, not long after Snow Crash was published.

• 16:08Speaker 02

  And Jensen has said they never wanted to be a video game company, but focusing on gaming was the best strategic choice they've ever made because it had three unique attributes. It was large, it was fast-changing, and it was technologically intensive. Many industries like pharmaceuticals have two of those attributes, but they don't change that quickly. And so the mixture of the intensity of these problems, the rapid improvements per Moore's Law, has meant that almost all of these expertise sit here. Lastly, when you take a look at what this means for the metaverse today, Microsoft's Activision Blizzard acquisition, the largest big tech acquisition in history, 75 billion in enterprise value. Satya's press release, the final line of the very first paragraph says, "It provides the building

• 16:53Speaker 02

  blocks for the metaverse, the foundations for the metaverse." And a lot of that comes down to game engines.

• 16:58Patrick O'Shaughnessy?

  If you think about the role of IP in the bootstrapping of the first metaverses, what comes to mind? I remember from our first conversation going really deep on Disney and Marvel and the incredible gravity and momentum that great IP universes allow for. And that very often, technology supports IP and not the other way around, that ultimately IP is the thing people show up for. They want to do something, or want to watch something, they want to be immersed in something. Activision Blizzard maybe is a good example here, but what is the role of existing or new IP as it relates to speeding up this change?

• 17:34Speaker 02

  As with anything that we want to do, any place that we want to go, there's a reason why Disneyland is more fun than Six Flags is. If there's a place that we want to go, especially in a consumer leisure environment, it stands to reason that we want to go to the places filled with the stories and characters that we love. This has classically been Horizon World's fundamental problem. It's technically more robust than it is popular. It has better distribution than many other platforms. It doesn't have content, partly because it doesn't have as many developers. But in particular, the other platforms have been populated by produced and UGC IP for years now. If we're to go to a fantastical place, want that to be the place populated with the things we love.

• 18:19Speaker 02

  This isn't new. Of course, medieval gardens are adorned with gargoyles and giant statues of lions because it provides immersion. We don't just want to walk down hedgerows, we want to feel like we're in the place we imagine. This is why many come to the inevitable conclusion that another medium for entertainment, or another technological wave which has IP in it, is naturally going to advantage those that have the most resonant IP today. Disney does not have a gaming business. I think that remains a problem, mostly because they don't have the capabilities for it. Whether or not they publish their own titles is a different question. But we're going to want to live in Disney IP.

• 18:58Patrick O'Shaughnessy?

  I want to close out the concept of the power that these engines allow for, especially for those that haven't seen demonstrations of Unreal Engine 5. I encourage people to Google that and watch them. It's shocking how realistic some of these renderings look. Looks like a perfect facsimile of the real world. Walk us through where that goes from here. It's hard to imagine Unreal Engine 5 getting much better. But you mentioned Moore's Law. All of these things are riding improvement curves that are pretty nuts. If you compare Unreal Engines, the first one through the fifth one, it's pretty wild. What does like the seventh one mean or look like? Where is this all going?

• 19:31Speaker 02

  A few things that are important. First, we can see a lot of the improvements on Unreal visually, but most of what's happening in the background is more important. So for example, I talked about the utility of gaming engines, or what you should think of 3D simulation engines, as evolving over time. One of the changes has been the investment, which is not widely deployed, in deterministic physics. Most game engines don't do deterministic physics. They're non-deterministic because a probabilistic outcome is sufficient. You and I see a grenade fly. It's not that important when it comes to scarce computational resources that we experience the exact same explosion visually and in impact to the environment.

• 20:14Speaker 02

  But as these engines look beyond leisure, it's increasingly important for them to solve it. When you think of game engines, it's actually not a very helpful term. It's really a software framework. It manages rendering and logic, but it's also the toolkit to create and design games. And it has an increasingly wide set of services, and essentially checkbox functionality that supplements that. That can be AI or memory management, occlusion, which defines when you do and don't render objects. If you can't see it, it shouldn't be loaded, so to speak. We're seeing it move into more services for live communications, real-time translation. All of this comes to more than just physics, more than just fidelity.

• 20:56Speaker 02

  It is based on the belief that the most important thing to do for creators, for the metaverse at large, is to make it easier, cheaper, and faster to build better and more monetizable experiences. The real advances, in other words, for UE5, ease of use and the number of additional things you no longer need. Light management, occlusion software, it's all baked in. Just like for Unity, their ad network, which is effectively part of their engine now, makes everything much, much easier.

• 21:29Patrick O'Shaughnessy?

  If we think about the natural limits of the metaverse in our lifetime, in the next 60, 70 years, what do you think the limits are? I just got back from a trip to the Smoky Mountains in Tennessee, and it's so hard to imagine some of the visceral joys of a beautiful place like that ever being purely digital. But maybe I'm wrong. What do you think the natural limits to the concept of the metaverse are?

• 21:51Speaker 02

  I think there are many natural limits. We can see this with some of the present day constraints on computational power or networking. I love to use this point that comes from John Carmack. He was the founder of id Software, which made Doom, and then the CTO of Oculus remains the consulting CTO of Oculus. He makes this point that if you asked him in 2000, and by the way, John believes that building the metaverse is a moral imperative. He says that tongue in cheek, but he does believe it. If you asked him in 2000, "Could you build the metaverse with 100x the computing power that we have today?" Today being 2000. He said he would have said yes. And yet, it's been 22 years. We have roughly 100 to 120 times the computing power in the device that sits within inches of nearly every person on Earth.

• 22:34Speaker 02

  And of course, that means we have roughly 10 times as many of those devices. And he admits that we're still far from being able to build it without significant trade-offs. We're actually testing the speed of light in many of the use cases that we would want to deploy. Comes down to the fundamental Sun Microsystems adage. The computer is the network. You can solve for computational needs on both sides, the client side or the server, but there's the speed of light to manage in between. The reason why I say this is a lot of the metaverse is achievable, but for many of those experiences, we need fundamental advances in battery life and computation. Many metaverse researchers believe that we need quantum computing to pull most of this off.

• 23:16Speaker 02

  But when you're talking about what is it that we're going to replace? That is a more important question. We've all seen the funny Iceland video where they basically say, "Don't go to the metaverse, just hike Iceland." I think it's funny, it's cute, there's a valid point in there. But at the end of the day, I don't believe that anyone is going to skip going to a baseball game, not go to a bar with their friends, not hike Iceland because of the metaverse. I think where that time is most likely to come from is the largest use of time today, which is TV. 300 million Americans watch five and a half hours per day of television. Not video, I'm not including TikTok or YouTube. When you take a look at the average American, they're awake for 14 and a half hours.

• 23:59Speaker 02

  I know that surprises probably almost all of your listeners. But when you're talking about five and a half hours per day, when you're awake for 14 and a half hours, much of that is work, the other use is necessity. It's essentially all that we do when we have free time. And I think that that's where metaverse time is likely to come from. Portions of that, by the way, are skewed by the elderly, those that are 55, 65 up. 65 up is seven and a half hours of video per day. They can't go to Iceland. None of us hope to retire to watch seven and a half hours of video per day. It's just we don't really have many alternatives. Those people are going to want to hike a virtual Iceland, certainly. And those people are going to be excited to be able to do so with their friends.

• 24:41Patrick O'Shaughnessy?

  What other sensory things do we need to think about here? We've talked a lot about the visual and the 3D rendering. What about audio? What about haptic touch? What about smell? Where do these things start to figure in, maybe from most interesting to least in your mind?

• 24:55Speaker 02

  At a baseline level, the more sensory inputs we have in there are important for immersion, for usability, certainly. Multi-touch was one of the most important innovations of the mobile era. And we should think about many of these other inputs as being similarly important. But there's also another element, which is just this cognitive brain registry issue. For example, a lot of people make fun of the fact that Horizon Worlds, your characters don't have legs. That's not really a stylistic preference. The challenge is, of course, it's very hard to know what your legs are doing. Are you sitting or standing? Are you differently abled or not? These are questions that most devices can't currently tell you right away.

• 25:38Speaker 02

  Most VR software shows your hands and the first segment of your arms, but not the upper bicep, tricep area. And that's because it's easy to know where your wrist is and your hand is with external tracking cameras. But are your elbows tucked in or tucked out? Unclear. The reason why I say this is, software can try to guess the answer, but when it guesses wrong, we have a lot of mental rejection. You think that you have control of this virtual simulacra of yourself, but it's not you. So many of these other devices are as much about improving what we can do in these spaces, while also essentially doing a better job of mapping our brain. When you're talking about these devices, we see electromyography, I spoke about this earlier.

• 26:21Speaker 02

  This is just a device you wear on a limb, fairly lightweight, that uses electrical signals to reproduce your fingers in extraordinary detail in virtual space, irrespective of whether or not there's a tracking camera in front of them, irrespective of whether or not the view is obscure. Really important for bringing more detail into these environments. We also talk about external tracking cameras. You might have something in your living room that's capturing you from another angle. One of the most fun things you can do in Beat Saber, that's a title on Oculus, it's essentially Lightsabers meets Guitar Hero, is you can actually use your iPhone, place it, say, 20 feet behind you,

• 27:02Speaker 02

  and then it scans you, and therefore, when you're wearing your Oculus headset, you're essentially John Malkovich of yourself. You see yourself in second person in a VR environment, watching yourself as you're immersed in that world. And that provides some frill fun in Beat Saber, but it's essential to new capabilities of what we're going to do, when, where, why, and how in 3D virtual space.

• 27:25Patrick O'Shaughnessy?

  As I think about my own usage of Oculus, and I'm a person that wants all this stuff to happen. The idea of the Ready Player One haptic suit and omnidirectional treadmill and everything that goes into it, this full immersive experience, just sounds fun. I was a video game junkie as a kid, spent countless hours in some of these virtual worlds. I'm inclined to want to do it and be an early adopter of the technologies. I think I had one of the first Oculus's. And when I put it on, what stands out is the Star Wars game. I'm forgetting the name of it, but really being blown away looking around like this is wild. And obviously, it's only going to get more and more perfectly rendered. I had the problem of getting a headache or a stomach ache when I moved artificially, which I want to hear about what you think about that. But at the same time, as blown away as I was, I really haven't spent much time with the Oculus on.

• 28:10Patrick O'Shaughnessy?

  And I'm curious if my experience as someone prone to want this to happen, who tried it, but really didn't last, is that indicative of the broader experience so far with Oculus? What do you think the reasons for something like that might be?

• 28:22Speaker 02

  I want to hit a few different points here because I think we're really talking about the suitability of alternatives, the challenges with the current technology, and then the likely progression of said technology. Neal Stephenson, who of course coined the term metaverse, so he didn't originate the idea, that spans nearly a century, has talked about the fact that yes, his conception of the metaverse was primarily an AR and VR experience. And he highlights the fact that that was a reasonable, if not the best hypothesis at the time, especially in the science fiction framework. But he's highlighted that technology is path dependent. What we found out in the decades since is that actually hundreds of millions can adequately navigate 3D space with WASD on their keyboard, forward, left, right, and back.

• 29:07Speaker 02

  Billions can navigate 3D space and choose to do so on a monthly basis using a touchscreen. He says that he no longer considers that essential. It may be the best, most popular, preferred way eventually, but it's not a requirement. And if you see Tim Sweeney at Epic, shows very little interest, at least today, in those new devices. The second part is talking about the experiences that you've mentioned. We have a good sense of what is likely to be required for min-spec, for mainstream adoption of VR hardware. And I go into this a lot in my book. We tend to think, for example, that we need a refresh rate of 120 Hz on a VR headset. That's 120 frames per second. We probably need an 8K display.

• 29:51Speaker 02

  And I'm going to put aside other concerns for now, like battery life, the weight of the device, the heat generated by the device, the number of additional sensors and tracking cameras we need, which constrain all available resources. But just 120 Hz and 8K display. Right now, the top-of-the-line devices typically do 90 Hz in 4K. So we need a roughly 3X increase in the number of rendered pixels per second, just to hit min-spec where people aren't suffering from nausea. You then layer in, these devices have essentially late PS3, early PS4 graphics. Their computational load is much lower. Call of Duty: Warzone is limited to PC and gaming consoles only, but in exchange, the graphics are great, you can have 150 users.

• 30:36Speaker 02

  Fortnite plays on most devices, but as a result, you can only have 100 users. Free Fire from Garana is designed to work on all low-end Androids, and as a result, it only has 50 players. Population 1 on the Oculus, their Battle Royale, has only 18 players. So now we have a device that has half the resolution we want, 2/3 of the frame rate that we want. It has PS3, PS4 graphics, and you can only have 18 other users. And then again, it probably has 1/8 the sensors that we want, 1/3 the battery life. It's probably 25% too heavy. There's a lot that we need to solve for these, just to become min-spec for nausea and usage.

• 31:19Speaker 02

  And then on top of that, of course, we need these devices to be more than min-spec. They need to feel better. The rejection of senses, which is unique to VR. You can multitask on your PlayStation. You know whether or not your house is on fire, your kids are upset, your dog is getting into trouble. Probably raises that above min-spec. We're getting there. We've roughly doubled resolution density. We've doubled processing power since 2017. And so those who say, "We've been here before, people don't like VR", don't appreciate the headway that we've made in these devices. But it's a lot like GPUs. It's easier to go from a 3 to a 3.4 than it is to go from a 3.6 to a 3.8. And we saw this recently as Meta kicked out their releases for AR devices, again, for the third time this decade.

• 32:04Speaker 02

  This is a hard tech problem.

• 32:06Patrick O'Shaughnessy?

  If we step back and think about the base metal, the fiber, the actual physical stuff, technology behind the metaverse that's making it possible, what changes in technology or projects have you most excited or interested, understanding that the stuff serves as the plumbing and most people will never actually see this stuff, but without it, there's no way the futuristic version of the metaverse comes to be. What has you excited in that?

• 32:31Speaker 02

  So this is a fun one. I mentioned earlier on microsystems, the computer is the network, and that's right. But basically, what we need to solve for is more computing power, and that needs to be at one or both ends of a connection, as in at the server or at the client-side device. One of the things that's interesting about that is that there are differences of opinion as to how best to solve it. There is, of course, the cloud-centric approach. This is what we see in cloud gaming, which says it's kind of insane that we have constraints in computational power in real-time rendering, and we would say consumer devices replaced every two to three years in a small form factor should have to do that work. Let's instead do the power plant model. Let's consolidate as much

• 33:15Speaker 02

  as possible, distribute it out to endpoints, and use industrial-grade equipment that needs to be less worried about size and form factor, heat generation, and so forth. The interesting thing about that model is it makes a lot of sense until it doesn't. So for example, you can precisely split electricity. You can't really do that with rendering. There's no efficient way thus far to split a GPU to support multiple instances of compute, which is to say, if you only need 80% of the power on one GPU, you can't really loan out the other 20%. In addition, we face the networking problem, which is

• 33:55Speaker 02

  we don't struggle to get electricity from the local power plant to you when it's needed, and we certainly don't have constant effective brownouts that say, Patrick, you can get 80% of what you need, and you can get the remaining 20% with 90% packet delivery success and within two minutes of when you require it. We have all of these technical barriers. This leads to another perspective, and this is what's advocated by Tim Sweeney, though of course he focuses on client-side rendering, where he says efforts to improve performance on the wrong side of the latency wall are doomed to fail. Because while networks are improving, processing power is improving faster.

• 34:38Speaker 02

  And what he's saying is the network challenge is getting better. We're overcoming it. We're laying more fiber, more directly with greater intelligence. We have more edge servers, but the thing in your pocket is getting better faster. And so his bet is actually more on Moore's Law than it is on the network. The reason for that is connected to why many think that local devices are inefficient. We replace them all the time. We don't replace infrastructure that quickly. And when we do replace that infrastructure, it's typically highly inefficient. We don't lay cable as the crow flies.

• 35:15Speaker 02

  We have to manage for extant infrastructure, for parks, for global boundaries, and more. So it actually turns out that it's very hard to make substantial improvements to network infrastructure. It's very expensive to do so, very slow to do so. And by the way, we have one other element, which is as critical as improving networking speed is, we kind of have a lowest common denominator approach. And this is based upon network effects of all social services. Yes, having more performant experiences is great. It advantages most use cases. But if Metcalfe's Law means that services get better as more people use it,

• 35:55Speaker 02

  i.e. the underlying product isn't changed, but its utility to the user is because other users are using it, then it makes more sense to build to the lowest acceptable network quality than it does to say, "Let's cut off 30% of users so that we can have a better experience." Really, we need all networks to improve. Watching this trade-off is fun. Matthew Prince at CloudFlare has actually rejected the idea that edge is the primary solution to real-time rendering and processing. And he makes the point that edge is mostly important for data custody and regulatory compliance, that we're going to need to store more of our information, especially our personal information in the metaverse, within national boundaries.

• 36:39Speaker 02

  It's not actually about co-opting the local device. It's about making sure that we're storing it in the right jurisdiction. The shorter or pithier answer to your question is, we're watching all of these different theses. How important is edge? How important is the local device? How important is cloud? And ultimately, it's a question of trade-offs rather than which wins. But the ultimate hope, the fantasy, is decentralized computing. Not necessarily in the blockchain sense, but the idea that we actually have abundant computing resources that are often dormant. Tesla talks about the idea that you should be able to lend out your unused Tesla in a world of automated vehicles. Well, I've got three consoles in my living room right now. None of them are in use.

• 37:23Speaker 02

  Is there a system where their power can be lent out to someone in my building when I'm not using them, thus obviating the network problem while intensifying their computational capacity at no cost to myself? There's some who believe that that's got to be the answer.

• 37:39Patrick O'Shaughnessy?

  This idea of everything talking to everything brings up one of the most interesting topics in all of this, which is the word interoperability. This word has gone from no one ever saying it to everyone saying it in five years, both because of the metaverse and this next era of computing, but also because of blockchains. Interoperability means a lot, is critical. No one really knows what the hell they're talking about, it seems like, when they bring it up. But it brings to mind things like standards and protocols. Again, the boring base layer stuff that makes the modern world possible, whether it's VSO or TCP/IP or SMTP, it's some of these things you and I have talked about before. Can you talk about why interoperability gets its own chapter in your book? Why this is such a key, critical concept?

• 38:22Patrick O'Shaughnessy?

  And who might actually sponsor or start these things? Because many times in history, they're not for profit. It's a protocol. So walk us through this concept, because it seems like it's at the bottom of everything.

• 38:32Speaker 02

  The fundamental premise of interoperability is a little bit foreign to the average person because we take for granted how interoperable online existence is today. You have a common identity, at least in some way, shape, or form, that you can take into multiple different avenues. Your content, the content that you create, is inherently interoperable because the file formats are relatively standard and embraced everywhere. PNG runs everywhere, JPEG runs everywhere. Every unit of content we create today essentially runs everywhere else. Your text, your audio file, your video, not just an image, can be uploaded to every different environment.

• 39:12Speaker 02

  And in fact, the World Wide Web itself works because of elements of TCP/IP, but also other consortiums and working groups of feathers that maintain a cohesive hierarchy, or IP address, the domain registrar system. This is important not just for the continuity of the web, the cohesion of your personal experience, the persistence of things done online, but they're also important for competition. If you don't like your web hosting company, you can just move your information to another. You can change domain all the time. And so we should think of interoperability as important to content creation, as important to user rights, as important to the actual thriving economy of the internet.

• 39:56Speaker 02

  And you're right to talk about the ways in which those are not managed by a central for-profit body. But ultimately, we can reduce it to a simple idea. It's expanding the network effects of everything that you do online. But that doesn't exist in the virtual world. Roblox individual worlds can identify one another, but they have no ability to understand, least of all even identify, another virtual world, be it in Fortnite, an educational forum, a training sample. Communicating from one live services suite to another doesn't really exist either. There's no consistent way to store information, and least of all, the ability to take a 3D

• 40:38Speaker 02

  object, whether it's created for industrial purposes, for simulation, Northrop Grumman wants to test an engine and then see how it performs in a specific environment, they don't really have a cohesive way to take that object from one simulation to another. And so this question about interoperability is really about expanding the utility, practical applicability of everything in the metaverse. And I'll drop this down to a simpler example. The world economy, of course, runs on standards, de facto and otherwise. And it's essential to reducing the friction to all transactions, to increasing the utility of all investments and purchases. What are those standards? USD is one, English is another, the metric system is a third, the intermodal shipping container.

• 41:23Speaker 02

  You'll note, of course, that there are often many other standards. We also use the euro, we also use German. There are multiple different types of shipping containers, not all intermodal. Metric and imperial sit side by side, often in the same country, often within the same business. And so we shouldn't think of interoperability from a panacea perspective. And this is one of the flaws. I'm often asked, can we ever have interoperability? Yes, we'll never have it perfectly, never have it exhaustively. The world doesn't work that way. The internet doesn't work that way. We still have private networks, offline networks. We still have paid and proprietary protocols. You often need an installer to access experience A or B, and there are often paywalls.

• 42:04Speaker 02

  But making it so that every 3D object, every experience, more purchases, can move, can endure, have utility beyond that first creation, is going to be key to actually building up this economy.

• 42:18Patrick O'Shaughnessy?

  Help me understand how we can bridge that gap of something I build, own, earn, achieve in some place that I want to bring to some place else. Like if I think about games, and maybe that's the wrong way to think about it. The object I win and spend hours looking for in Diablo is really not relevant in Fortnite, is really not relevant in Sims. It seems like even though there are all these great worlds, the idea of bringing stuff between them is hard to imagine because the worlds themselves are so different. So how do you think this happens? Like, how does Roblox get connected to Fortnite? How far down do we have to go to build the bridge?

• 42:56Speaker 02

  One of the challenges with interoperability discussions is that we often focus on the easiest to understand, but arguably the least useful example. And that is taking your peely banana skin from Fortnite and bringing it into Call of Duty. There are so many problems with that. The engines, of course, are different. And I just want to highlight how different these engines often are. Unity and Unreal actually have different coordinate systems for X, Y, Z. They store information in Y and Z differently. Now, that's easy for a computer to manage. You just have a translator. It works the same way that English to German does. You say, "Let's swap Y and Z." But if they have fundamental disagreements on coordinates, you can imagine how sophisticated some of the disagreements are.

• 43:40Speaker 02

  That naturally leads game designers in particular to say, "Why does that matter?" Putting aside the economic considerations, do you want to be a peely in Call of Duty? Is it cohesive with the aesthetic? Does it fit in a door frame? Frankly, the peely file format might be stored in a way that makes it three stories tall in Call of Duty. When you look at my metaverse definition, I talk about the continuity of data from 3D objects to entitlements, payments, communications, history. The object itself, the avatar, is probably the least important element of that. We're a little bit more concerned with when you do an educational exercise in school.

• 44:22Speaker 02

  3D simulation in school is probably one of the most important innovations that we can see. We've learned that distance education is terrible. We have long expected the advent of the Internet and digital devices to see productivity improvements in education. Haven't happened. We know that multiple choice is terrible, that playing a YouTube video is terrible, that Zoom school is terrible. But the ability to make real the magic school bus is intuitive. I grew up making volcanoes out of paper mache, baking soda, and vinegar. Now you can start to do that in realistic simulations where you are personally agitating the magma, being ejected into the atmosphere, and seeing the time-lapse implications on the environment. Building a Rube Goldberg machine to learn physics rather than just watching a video

• 45:07Speaker 02

  of a NASA commander drop a feather and hammer on the moon, you can take that Rube Goldberg machine to the moon, to Mars and Venus. But of course, we believe that some form of interoperability or continuity of what you've done and what that information is and who you are is essential. We're not going to have the same school pack for chemistry as for English. And so it's not as important that I take my banana skin from A to B. It's more important that I can consistently manage my profile. But all of this requires formats, more importantly, conventions, a whole bunch of other buzzwords, frameworks of frameworks, systems of systems. But how does it emerge?

• 45:50Speaker 02

  It emerges in a well-known way, the same way that USD and English did. It's often network effects reiterated the incentives of changing systems, but again, never perfectly. Last week, we had the establishment by the Kronos Foundation, the Metaverse Standards Forum, 28 companies, many notable omissions, Apple, Google, many other content providers. But Epic and Meta and so forth, Qualcomm, all saying, let's start to standardize our roadmap. We have to understand what we can build towards for the collective utility. That's the easiest step. No one has to make a sacrifice to their tech roadmap. No one has to pick a standard they didn't like. But that formation period has already begun.

• 46:31Speaker 02

  And even Roblox has started talking extensively about their need for their developer economy to start to figure this out.

• 46:38Patrick O'Shaughnessy?

  Payments is something you mentioned there that I think is unbelievably interesting alongside identity, the thing that does move around everywhere with everyone. It's their identity and their ability to spend. What is the story with payments in the metaverse? Is it going to be a US dollar stablecoin? Is it going to be Ethereum? Ethereum is so fascinating because it's a payment rail that allows you to move more money faster anytime than anything we've ever seen. And we saw that with some of the crazy NFT purchases. What will drive commerce and value? And what will be that standard in your estimation? What needs to be built to make payments as a core primitive possible in the metaverse?

• 47:15Speaker 02

  I think we have to start from a fundamental premise that is the importance of efficient, low-cost, ubiquitous, standardized payment rails to the success of any economy. Fluid mobility of capital, easy transactions, those are important, obviously. And by the way, it's worth rattling off some of the forecasts. Obviously, the forecasts are difficult. Many are doing top-down, some are doing bottoms-up. But McKinsey puts the metaverse at 5 trillion by the end of the decade. Citibank up to 13 trillion by the end of the decade. Goldman Sachs and Morgan Stanley 8 trillion by the end of the decade. KPMG has said they think those forecasts are all modest, that it's going to be blown out. The efficacy of the underlying payment service is key, but the biggest challenge is the

• 47:58Speaker 02

  way in which the metaverse isn't just something you go out and access. It may be a persistent, ubiquitous virtual simulation, but you need a way to access it. And right now, all of the major platforms are contending with one another to be that primary payment gateway. They want to effectively take a fee on all economic activity in the virtual world, and that's a great business, of course. They should, it makes sense for them to do so. Putting aside the fundamental question of USD or USDC or Ethereum, we're starting to see this play out. Who is going to be the payment processor for this extraordinary virtual economy? Six days before Epic sued Apple, but of course, we know they were long planning it,

• 48:41Speaker 02

  Tim tweeted out that Apple had outlawed the metaverse. This was based on multiple different ideas. First and foremost, he's saying that Apple's take rate, or 30%, is so significantly constraining developer profits that it makes it impractical for most people to build in the metaverse. Also made the argument that Apple was stymieing certain technologies which were likely to be essential to the metaverse. And then, thirdly, that Apple was affecting all other peripherals that need to use your iPhone as an edge computer, edge server, in order to be effective. One of the ways to solve for the difficulty of having high-powered AR devices is to, instead

• 49:22Speaker 02

  of reduplicating the GPU or SoC, it's to put a lightweight thing in the thing you wear on your face and then ride off the super powerful thing in your pocket. But of course, Apple gate keeps which APIs and programs you can access so that you can divert it to their App Store. In other instances, there are widely deployed interoperable standards that Apple cripples. There are good arguments and skeptical arguments for that, but one would be OpenGL or WebGL, which are common standards for API collections for rendering that allow for sophisticated browser-based graphics, which means a game can run anywhere on any device consistently in cross-platform, but it's not really possible on the iPhone.

• 50:05Speaker 02

  The reason why I do this long tangent is if payment rails are critical to the success of all economy, if the payment rails are operated by the hardware provider and the hardware providers are fighting hard to make sure that they take a cut on the entire metaverse, then this whole question is held up. When you talk about cryptocurrencies, we can see the best example of that. You can buy cryptocurrency in Robinhood. What you can't do is buy a non-fungible token. So you can buy a fungible token like Ether. You can't buy a non-fungible token. Why? Because those are used for game-like purchases, an in-game or virtual currency. There's no technical reason why Apple prohibits one versus another, but of course, there's a commercial one as relates to their App Store business.

• 50:50Speaker 02

  But then we can actually test that theory. You and I can, of course, fractionalize an NFT into a million different fungible ownership stakes in that NFT, but that's block two. I'm not saying that this is the right way or the wrong way, but to some extent, this question of what's the economy going to look like, what's the payment service? It's still at the mercy of the platforms that be and the regulators that may or may not change them. And it also explains the question we started, which is why is Facebook spending billions on their own platform? And the answer is they, perhaps more than any, have felt the repercussions of trying to build a virtual or even digital business on someone else's. The app tracking and transparency impact took 10 billion out of operating cash flow in 2022. It's just a single year.

• 51:35Speaker 02

  Their cloud gaming business is just not allowed on iPhones. And their creator program basically doesn't work because the cut that they have to pay to the mobile App Store exceeds the net cut that's going to go to them and nearly matches that which would go to the creator. This is one of the fundamental premises. It's why Tim would say Apple has outlawed the metaverse and why Tim would go to such lengths to convince regulators something has to be done.

• 52:01Patrick O'Shaughnessy?

  If you think about all of this, so much of the infrastructure and everything we've talked about is related to the supply side, our ability to deliver this concept to billions of people at once. We haven't talked a ton about the demand side. And I had a fascinating conversation with the founder of Second Life and Bill Gurley about what if there's just not enough demand for this? What if we're assuming that everyone's going to want to be in this metaverse, but when we show up with it as a solution, the demand's not there and it's a solution in search of a problem? What do you make of that criticism? That perhaps the demand is a lot smaller for this kind of thing relative to the normal world, the normal verse, and that that will ultimately be a constraint on its growth?

• 52:44Speaker 02

  We shouldn't think of the metaverse as a replacement to the internet or today's devices. I often use the phrase quasi-successor, and that's because it won't actually succeed everything technologically, and it won't replace everything that we do today. Think about mobile. Mobile's still TCP IP for the most part. We recognize its devices, its use cases. Many of the company's business models is different, but we're still running on TCP IP. Most traffic now originates and terminates at a mobile device, but all of the transmission is over fixed line infrastructure. Many of us still use non-mobile devices. My PC is most of my time online. To believe in the metaverse doesn't mean that we have to believe we'll do everything all the time in it. It's very likely that we continue

• 53:26Speaker 02

  to send text messages and send emails, often do video calls the same way that we do it today. But when you're talking about the demand for it, there are two other answers. Number one is generational. At its peak, usually dated around 2005, 2006, Second Life had a few million monthly active users. It's quite possible that this very moment, Roblox has more concurrent users than Second Life did at its peak in a month. There's roughly five to six million peak CCUs in a day. It has 55 million DAUs, 250 million MAUs. Not only are we seeing nonlinear increases each decade, but we see this fundamentally on a generational basis.

• 54:10Speaker 02

  Seventy-five percent of children in most Western markets, the US, UK, New Zealand, Canada, use Roblox on a regular basis between the ages of nine and twelve. And that's before talking about Minecraft and other platforms. I like to point to the advent of Roblox in contrast to its popularity. When you take a look at Roblox, company founded in two thousand and four, released its first product in two thousand and six. It wasn't really until two thousand and sixteen that the platform started to take off. By two thousand and eighteen, it's one of the most popular experiences globally. By two thousand and twenty, it's doing two billion hours per month pre-pandemic. It's now at four and a half billion hours per month. The rise of Roblox in two thousand and sixteen coincides exactly

• 54:54Speaker 02

  with a point in time in which the iPad-native generation, infants we used to laugh at because they would pick up a Time Magazine, pinch to Zoom, double tap, swipe, only to realize it doesn't work. That's just when they became Roblox users. And when they became able to use Roblox, their behaviors were entirely different and they've endured. Gen Y games more than X, Gen Z more than Y, Gen A more than Z. Nearly everyone born today is a gamer. That's a hundred and forty million new gamers per year. I don't worry about that generational transition. It's clear and we've seen it multiple times with the early web, with the browser-based homepage, with social,

• 55:36Speaker 02

  and then with more immersive forms of social, Instagram, Snapchat, TikTok. The second and final answer is to recognize that we're kind of starting from this perspective of the metaverse as consumer leisure. We get so anchored around Ready Player One, jumping off to school or for some virtual coins while wearing a Captain America avatar. We are already seeing cities invest heavily in operating real-time persistent virtual simulations, airports doing the same thing. It's this industrial application, this simulation of us when we don't even know it, whether it's an Amazon Go retail store

• 56:17Speaker 02

  or just when we're being managed as flow of traffic in an airport when they need to gate change. That's most of the way in which we're going to interact. And then when you take a look at these new devices, again, I'm not going to conflate this exactly with the metaverse. Last fall, Johns Hopkins performed its first ever live patient surgery using an XR device. The head of the spinal surgery department, the person who performed the surgery, has said that it was like driving a car with GPS for the first time. And I love this analogy because we often think of the metaverse or metaverse-like devices as substitutes. I'm going to use my Oculus instead of my PlayStation. I'm going to use my Oculus instead of watching TV. But you don't drive GPS instead of a car.

• 57:01Speaker 02

  You drive your car with GPS and you evaluate its efficacy based on outcomes such as getting there faster, better, safer, more easily. And that's the same with patient outcomes. That's the same with how you will learn in school through 3D simulation. That's the big thing that's exciting here. And it doesn't really require you to believe in how many people want to gamify their existence. You just have to believe in the utility of 3D simulation, the importance of graphics-based computing, and a recognition that in many instances, the most important things we own, real estate, so the largest asset class, the most important things we do, healthcare, are actually barely online, barely intelligent.

• 57:44Speaker 02

  The world's largest and most important software development platform is the world itself. We have almost no collaboration with data, least of all in real time. And when we do, it's basic. What's average foot traffic outside a store? Not what's the simulated impact of the society around us.

• 58:02Patrick O'Shaughnessy?

  Blake Robbins, who's now at Benchmark, and I've talked a lot about various aspects of this, asked an interesting question the other day, which is, what is the modern equivalent of a lemonade stand for kids? Like the first business that they have. And maybe it's Roblox, maybe it's already happening. But as you think about the metaverse, how do you think about meta businesses? I think that's the term you use in the book. Small businesses that get started in a persistent digital world like this and what they might look like. Consumer leisure is where it's starting. Things tend towards economy, toward business, toward small business. Like what will be the lemonade stands of the metaverse in your opinion?

• 58:38Speaker 02

  This is a really fun one. I love this chart because it has existed for decades. And this is taking a look at the spend of allowance in the United States. And if you go back even to 2019, and I've just pulled up the chart. Number one is books, then it's gifts, candy, Roblox comes in number four, and then Legos number five. When you get to the second quarter of 2020, let's keep in mind, we are in the pandemic. But let's put in contrast what the other things were. Gifts, books, magazine, candy, those aren't pre-pandemic but not post-pandemic uses of spend. But by the second quarter of the pandemic, number one was Roblox, number two was Fortnite, number three was Lego, number four was Minecraft. We see this in spend certainly.

• 59:23Speaker 02

  But the answer of what the first business is, is creating an object in Roblox, throwing it up on the marketplace, creating a world. And we see a form of this at large. Kids who buy sneakers and then try to flip them. I actually had a BlackBerry flipping business in the early 2000s and late 1990s that transitioned into an iPhone business. I would buy them on Craigslist or in bulk import them and then flip them through a marketplace. We actually live in a pretty marketplace and capitalist organized society. The idea that the thing that you're good at, in my case, it was consumer tech and trends, should, for many, translate into monetizable skills. So the idea that kids love creating things in these virtual environments

• 1:00:08Speaker 02

  and then love to sell them, that they would demonstrate their success based on the success of those creations financially, is intuitive. It's consistent with sneaker buying, with fractionalized sneakers, trading cards, and more.

• 1:00:24Patrick O'Shaughnessy?

  It seems like so much of this is going to be eating more and more of our time. You mentioned television and the crazy hours in the day that we spend on that. And that could all go into this new world. Some key feature of this is that it seems more active, like the participation in it is much more active than sitting on the couch. You're doing more stuff, you're responding to more things. Makes me think of Marshall McLennan's work on hot and cold media. How do you think that figures into this? Do you think that one of the reasons people watch TV is because it's so passive? And will the metaverse just have the Travis Scott concerts and then, isn't that participatory? Do I have this idea right that it feels like this would be something you participate in more than just observe?

• 1:01:03Speaker 02

  Let's start with your observation on why television is popular. I think this is an underestimated thing. We think of the bundle in terms of multiple different competitors. We rarely think about the bundle of many different content types, but more importantly, bundles of different functions and bundles of different consumption. Sometimes you watch TV to be entertained, other times to be informed, other times to culturally participate. Sometimes it's to practice or participate in some form of local tribalism, sports most obviously. But it's also a bundle of different types of engagement. There's lean in, as I like to call it. That's 9:00 PM, you're watching Game of Thrones, the lights are off, the kids are asleep, your phone is put on silent. There's lean back, that might be watching a comedy.

• 1:01:49Speaker 02

  And then there's disengaged, it's passive. It's doing homework while the office is on in the background. You're ironing, you're doing laundry, you're watching your kids. That's a huge part of why we have five and a half hours per day. Certainly gaming is getting there at large. Twitch brings a lot of that. There are many people who no longer play AAA games. They participate in them by watching someone else do it. There are many different content formats that are coming into play. In July, one of my portfolio companies, GenVid, is releasing The Walking Dead: The Last Mile, co-created and written by Robert Kirkman, who created The Walking Dead. And it is a persistent, multi-week simulation that's canonical to The Walking Dead universe.

• 1:02:31Speaker 02

  You can put your own avatar into the world, control the community, vote on what they do, help them, but you don't steer. You don't actually control a character. You're participating with others, you're participating as a specific person in the field, but you're not hands-on controller. You're not certainly doing that 24 hours per day. And so we see diversification. But for all of TV's advantages in formats, even if they're getting whittled away, 65% of time watching television is still done solitary on the couch. That's still in excess of two and a half hours per day. That is the specific time that gaming is most likely to come after, that the metaverse is most likely to come after,

• 1:03:14Speaker 02

  and frankly, which is most easily observed in younger demographics. I play Fortnite with a squad of 10 others. We have a great time. I have this element of, yeah, it's 9:00 PM on a Tuesday. And I'm excited to watch the latest episode of a show, but that actually, for me, much like millions of others, means choosing to do something for myself and missing out on shared activity. It might actually be easier. I might be exhausted, but the social lift that comes from that experience is hard to skip.

• 1:03:45Patrick O'Shaughnessy?

  Do you think there's a dark side that's worth discussing to all this as someone that's just got done with Jonathan Haidt's new work on the terror of social media for young people specifically, and it's starting to seem like maybe this is our cigarettes or something where certain aspects of social accelerate or magnify the worst in us and lead to some terrifying things, especially for young people. The metaverse seems like a deeper version of all that, like everything gets sped up to the speed of thought because there's no limits on what's possible communication wise or what have you. How do you think about all of that? There's so much exciting here. Like any technology, it's sort of amoral and can be used for bad, too. What are your thoughts on the dark side of the metaverse?

• 1:04:25Speaker 02

  I want to bubble this up a little bit. We're 15 years or so into the mobile, cloud, social era of computing and networking, and there are many big problems that we have encountered and which we're still struggling to solve. Data rights, data security, data literacy, platform power, platform regulation, abuse, harassment, toxicity, happiness, the role of algorithms in our life, misinformation, radicalization. That's a long list. And the metaverse is going to make all of those more challenging. Why? Because it means more society is going to be online for more and more important purposes. You're right. I agree with you. The technology is amoral, but that means that those aforementioned

• 1:05:09Speaker 02

  challenges don't get easier. They get harder. The implications of getting them wrong increases. Radicalization is scary in 2D social. It's terrifying in 3D space and decentralization makes that more terrifying still. There are some lessons we have learned over the past 15 years, certainly, but some of them won't reapply to 3D space for that reason. At the same time, I'm optimistic for a few different reasons. First and foremost, we have learned what to do, at least as the platform shifts. And that is to say, we're more cognizant of these problems as a platform shift occurs. Number two, the very reason why all of the largest companies on earth,

• 1:05:49Speaker 02

  seven of the 11 largest, GAFM, plus Nvidia and Tencent are gearing up for this new wave. Why? Because they know what happens when a platform shift occurs. It's likely that some rise or fall, business models change, philosophies change. And what that means is that we, and by we, I mean consumers, users, developers, content creators, actually have incredible agency affecting who is going to lead and how they lead. Really hard intra-cycle, we've encountered this. That's one of the reasons why regulation has challenged, but much easier on a new cycle. But you think that we can reset a lot of this. In a simple sense, very few people knew the term disruption. Very few people thought about it.

• 1:06:33Speaker 02

  That has become mainstream. We're all smarter as to what happens and we're starting to get to that frontier.

• 1:06:40Patrick O'Shaughnessy?

  If you think about the companies behind all this, we've mentioned a bunch of their names. I don't even necessarily mean specific companies, but you can answer it that way, too. Who do you think of as the categorical winners and losers, assuming much of what you've talked about today comes to pass, that in 10 years' time or 20 years' time, there is tons of participation and immersion in the metaverse, as you've described it. What kinds of companies will do well? What kinds of companies will do poorly? For whom is this a disruptive force that is going to come out of left field and really impair their business, generally the winners and losers from this trend?

• 1:07:16Speaker 02

  Let me start philosophically. If we look over the preceding three eras, we can identify and learn many things. For example, they have led to such fundamental changes in who accesses computing and networking resources, where, when, why and how. And that leads to fundamental change in even the most stagnant of industries. We had the rise of new communications suites such as Skype disrupting legacy telephony services in the 90s. We also had the advent of PayPal around that same era, a new payment network. You fast forward to the start of the mobile era, and you see that happen again. Venmo isn't just PayPal. Shopify, not just PayPal.

• 1:08:00Speaker 02

  Stripe, not just a mobile form of PayPal. Communications are actually more clear. WeChat doesn't try to talk to traditional PSTN, nor does Slack, nor does Facebook Messenger or WhatsApp, but they function on a mobile-first experience. You take a look at Twilio. Twilio does talk to PSTN, like Skype, but it does so for fundamentally different reasons. And of course Slack is based on integration into enterprise and productivity APIs. And then, of course, we can take a look at the operating system layer. You see the advent of iOS and Android, built around fundamental different premises, and in some instances, different degrees of vertical integration than Windows did. This template says that in most categories, we see displacement,

• 1:08:44Speaker 02

  or at least the emergence of new players that do different things. And in this proto-metaverse era, one can argue we see that today. In payment services, we see Coinbase, MetaMask, FTX. In communications, we see Discord, gaming services such as PlayFap or GameSpark, Epic Online Services. And on the operating system, you may see Unreal, Roblox, or Unity. Yes, they run on iOS and Android, but they do disintermediate the platforms from both the developer, who now creates in Roblox, and the user, who now experiences in Roblox. What does that mean for this era? I like to think about five different types of corporate fortunes. Some giants will die. We've seen this clearly. Blockbuster America online. Category two are the companies that languish,

• 1:09:28Speaker 02

  but survive and end up far surpassed. Yahoo, of course, still exists. Nobody pays much heed. Skype still exists, but it's so insignificant to Microsoft that it doesn't even use the name with its Teams platform, which of course functions on different premises. Other companies will adapt and grow because of growth in the digital economy. Facebook, not of the mobile era, but much larger as a result of it. Disney, even older still, but is bigger and reaches more customers more frequently. Category four is the interesting one. It's companies that are displaced, but nevertheless grow because of such extraordinary growth in the digital economy, or I should say displaced in their core business.

• 1:10:10Speaker 02

  IBM and Microsoft more valuable over this last decade than at the peak of their power when it came to operating systems and consumer hardware because they've gone horizontal and the digital TAM has grown so extraordinary. And then we have this fifth category, the most fun one, which is the new companies that emerge. Google, this last wave, Unity, TikTok, as we start to hit into this new era. Those are the five core archetypes that I look like in this next wave. But what's fascinating here is understanding that we're still at the thesis driven era. The best practices don't exist and the theses really matter. A lot of people like to make fun of Steve Ballmer in January of 2007 when he's asked about the iPhone.

• 1:10:53Speaker 02

  He laughs and says $500 without a keyboard. And of course, it is funny. But we often forget, and the clips often remove the part where he says, it may do well and good and it looks like a good device, but his point is that they believe their strategy is right. And they had five different bets. They believed that the smartphone was going to be the secondary computing device, not the primary. They believed that it was going to be business led, not consumer led. They believed that it had to have a keyboard rather than the space was best reallocated. They believed that it was going to be best priced at the $200 to $500 price point, not $500 and above.

• 1:11:34Speaker 02

  And they believed that the monetization model was OS licensing, not app stores or hardware. Microsoft probably would have a mobile phone division, which they deprecated in 2017 finally, if they got two or three of those wrong. It was the number that they got wrong that led to displacement in that category, shifting it to a horizontal company. Facebook wasn't displaced in its core market in the mobile era, unlike Microsoft, but we kind of forget how close they were. I love when people bring up Facebook's pivot to mobile because it's one of the most rapid at-scale pivots that we've seen. In four quarters in 2012, they went from 4%

• 1:12:16Speaker 02

  mobile revenue to 23%. Huge shift. I write about this in my book. It's because they were backed up. They were a launch app on the App Store in 2008, but their app was HTML5. It was a thin client that basically loaded a web browser, and it was terrible. Mark was a big advocate for HTML5. While the App Store came out in 2008, the "There's an App for That" campaign came out in 2009. In 2010, Sesame Street parodied that campaign. It was still another two years until Facebook actually built a native app for iOS. Within one month, they doubled engagement time in the app. Imagine any business that could

• 1:12:57Speaker 02

  do as simple a change as just go from HTML5 to native code on iOS to double their most important metric. That pivot was actually a reflection of errors in thesis for years. Mark called it, at TechCrunch, "The greatest strategic mistake the company made." And the company at that point was eight years old. They got out of that. They made the change in time. But let's also remember, when WhatsApp was founded in 2009, the premise was native app messaging. Facebook had 350 million users as a head start. By the end of 2014, when they acquired WhatsApp, WhatsApp had 200 million more mobile users, and they

• 1:13:39Speaker 02

  spent $20 billion acquiring them. Instagram created as a native app image service, something, again, that Facebook didn't do, and Facebook bought the company. That success, the fact that Facebook was in that third category, came from not the right thesis originally, but a quick shift after, and an expensive one. And now we look at the world where acquisitions are less likely. They do have Oculus from nearly a decade ago, $2 billion, twice what they spent on Instagram. But the doors are fewer. I get excited as a public markets investor, taking a look at these Theseeds bets. And we're still at that stage. What is the right bet? We don't know.

• 1:14:21Speaker 02

  Microsoft is focused on enterprise AR at the $3,500 price point. We know that Facebook is focused on consumer AR at a much lower price point. We're seeing this exact same case play out. Different UI design principles, different focus audiences, different devices, different price points. That's fun.

• 1:14:41Patrick O'Shaughnessy?

  If people want to just go experience some of what is currently available that relates to our conversation today. It could be a game, it could be a device. What would be the top couple of things that you think are most fun, interesting, useful? To understand the current state of the world's technology as it relates to the metaverse?

• 1:14:59Speaker 02

  I love Epic's Matrix Awakens demo. And what they've done is you can download this on next generation consoles and I believe on PC. This enormous procedurally generated city from the Matrix. And the visuals are terrific. But what's amazing about it is what you can customize. You can change the time of day instantly and dynamically. As in, you want to go from 2:00 PM to 3:00 PM, you shift by minutes. And you can see how it affects the refraction of every light grid. You can change the density of peoples that change the density of cars. There's something like 63,000 cars you can just drive up to and you can damage them naturally.

• 1:15:40Speaker 02

  But more importantly, you can play in the settings to take a look at how many triangles there are. How many different identifiable items there are. As you can see, when you move closer to the world, how its visual fidelity increases. What you're seeing is basically an extraordinarily complex living city that is made out of software and therefore, and I'd steal this term from your interview with the Planet Labs founder, entirely legible to software. There's nothing in it that can't be modified and crucially modified in real time. And that's what's key. If you play around with this, you fly, you take a look at the time of day, the style, the aesthetics.

• 1:16:23Speaker 02

  And you start to think about what does that feel like when it's being used to run infrastructure? The Hong Kong International Airport didn't use Unity because it's better at architectural rendering. Obviously, that's going to be an Autodesk product. But it's much better at simulation. If you want to make live decisions, what happens when there's a fire, a terrorist attack, a backup on the runway, a flood, you now have real simulation. We're used to a world where you want to shift a plane from one gate to another based on how close that gate is. But now, if you actually have a real-time simulation, you understand, actually, it's better for everyone if we move from gate 82 to gate 61 because of the risk of an accident, because of the flow of people,

• 1:17:07Speaker 02

  because we can simulate the impact. And frankly, we might want to optimize for commerce in the airport. Nvidia's new headquarters was designed with a dynamic understanding of exactly how every light particle at every day of the year, with density in every individual room, would be affected. So you design for a more environmental, while also a more enjoyable building based on the fact that the entire thing can be simulated in real time. When you start to play in the Matrix demo, you start to understand what that is. Because it's not a game. It's not a trivial thing. It's a complex ecosystem. One of my favorite examples to talk about

• 1:17:50Speaker 02

  is Tampa's Water Street development program. This is essentially what happens when you take that Nvidia example and say, "Let's apply it to the world's development platform." This is a multi-billion-dollar waterfront redevelopment. Supporting it, the development partner, created an 11-foot-in-diameter 3D-printed scale model with a network of different projection cameras so that you could see the city live. Where is traffic? What's the temperature? What's the flow? But they also did the design in Unreal. And that presented all of these additional opportunities. You could, for example, see how changing Building Four from 11 to 17 stories would affect congestion and traffic times throughout the entire city.

• 1:18:35Speaker 02

  You could understand what happens when you shift the car park from the north to the south entrance, whether or not you need another emergency medical services depot closer to that building because of the implications that were made. You can understand how those buildings are going to affect light in a local park, the temperature of that park at certain times of year. And of course, you could have individuals go into the 11th floor and see their view and frankly, see how their view would be affected by the other buildings that they designed. The deployment of this technology, which was for toyetic purposes, has matured to a point in which we can deploy in our entire world for better investment, for better real-time decision-making.

• 1:19:20Speaker 02

  And when you jump into Matrix and start to ask this question, what if it's used in the world around us? For me at least, it was instantaneous.

• 1:19:28Patrick O'Shaughnessy?

  It's two amazing examples. The first one's so fun. I've done that demo and it's wild. And then, of course, you realize it's just a point in time and it's all gonna keep getting better. And the second one, and the utility, if you will, of that example is so damn interesting. I'm so thankful for the time today and for the book. If anyone's read Matt's essays on this topic on the website over the years, it's yet deeper explorations of all the key ideas that make up the Metaverse. And obviously, it's the definitive piece of content if you want to learn about this topic. But I just love talking to you. You're so encyclopedic in your awareness of all the little tiny details about what's going on. And this is an incredibly exciting trend that I hope to continue to watch with you. So, thank you so much for doing this for a second time and thanks so much for your time today.

• 1:20:11Speaker 02

  Thank you. It was a real pleasure.

• 1:20:14Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

• 1:20:34Patrick O'Shaughnessy?

  You