Venture capitalist Matthew Ball is the author of the upcoming book, The Metaverse: And How It Will Revolutionize Everything.
In this podcast, Motley Fool analyst Asit Sharma talks with him about:
- The technical challenges in bringing the metaverse to life.
- A murky future for all involved.
- Why Nike (NKE +1.37%) may have meaningful exposure to the metaverse.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 8, 2022.
Matthew Ball: [MUSIC] Cash, resources, and conviction are not sufficient to thrive in the metaverse. Of course, Microsoft was as convinced as anyone; in mobile and in the Internet. It didn't really help. They had all of the pieces. They put them together incorrectly. In fact, the number of thesis errors that they made, was actually quite something.
Chris Hill: I'm Chris Hill and that was Matthew Ball. From 2016 to 2018, he was the Head of Strategy at Amazon Studios. Today, he is the venture capitalist, rider, and author of the forthcoming book, The Metaverse and how it will revolutionize everything. Recently, he sat down with my colleague, Asit Sharma to talk about the technical challenges in bringing the metaverse to life, how gaming could change and one less obvious company with a lot of exposure to this new frontier but Asit began the conversation by trying to learn when we're going to get the metaverse we keep hearing about.
Asit Sharma: Do you feel, or do you believe that the rate of acceleration of interest in the metaverse, the rate of acceleration of capital put into this team is going to produce this common place bridge between digital and physical experiences in the near future or we still looking at 10-20 years of evolution before we start to take metaverse as second nature and how we live and work?
Matthew Ball: Certainly to argue two different things. One is that we need to truly depart from the idea that there is a before or after. If the metaverse is a successor state to today's mobile and cloud Internet era, we should identify exactly when that era began. We can start in 1973 with the first wireless cellphone call. I wouldn't start there but one could argue that the mobile era began there. We can start in 1991, that's when the first 2G network was launched. That was the first wireless digital network for data transmission.
The BlackBerry comes out in the late '90s, in 1999, we have the wireless application protocol, allowing anyone on a mobile device to access a primitive altered version of the web as we knew it in the '90s. Then of course we have the rise of consumer smartphones, BlackBerry Pearl in the 2000s, 2007, the iPhone 2008, the iPhone 3G, with the sufficient speeds to make most of the mobile Internet usable and the app store, which provides us with something to do. Mid-next decade, half of Americans have a smartphone. Few years later, half of the world over 13 has a smartphone.
When did the mobile Internet era begin is both a philosophical and unanswerable question but ultimately one of generation. You take a look at Roblox today, 75 percent of those, 9-12 use Roblox regularly in many developed markets. For them, they've already moved beyond the form of the Internet that you and I name. Much like in the '90s and then certainly the early 2010s, many people were in the mobile Internet era. Many companies were, but we wouldn't really say that society was at large. I see this as unfolding over the coming decades. Many people think the end of this decade is when you start to say, its advent is truly here but I think the lesson in the story that I just told you is, we can discount how much of the preparation needs to begin now.
Asit Sharma: You named a number of technological milestones are going back decades. For a lay person, what milestones still need to be achieved until we get to this state where the metaverse is no longer this conceptual thing that we're trying to explain to people but just a natural extension of our present approach to consciousness.
Matthew Ball: There really are a few different things that we can keep in mind. One is to recognize that the Internet is actually pretty outstripped buyer ambitions when it comes to the metaverse. Many of your readers may have heard the term latency. Latency is something that we don't think of very often but it's essentially the transit time in milliseconds that it takes a given package to go from one point to another point. We usually think of how long it takes a button to be pressed.
For context, if it takes Spotify longer than 200-250 milliseconds to pause when you hit the pause button, your brain starts to say it's not working. In an interactive environment, you're usually thinking about 40 milliseconds, 50 milliseconds, 70 seconds is when things really start to erode, but ideally 20 milliseconds. The Internet was not designed for that, were in fact up against the practicalities of the speed of light. I know it sounds insane, but to put this in perspective, it takes like 45 milliseconds to go from New York to Tokyo. Light of course, can go there efficiently and essentially without disturbance. What does this mean practically? Well, only 75 percent of Americans truly can participate in today's real-time environments. In the Middle East, fewer than one quarter of broadband homes can, and that's on a local basis, not an international basis. The extent to which infrastructure remains an impediment is hard to overestimate.
The other thing is the Internet, TCP/IP. The Internet protocol suite, actually does a bad job of managing because the Internet was developed to send asynchronous messages that were themselves static between one person and another, one lab sends it to one university. We're talking about a constant stream of live data to marry different parties who are collaborative. What that means is actually the Internet protocol suite does not manage for traffic very well. We're talking on one side of infrastructure, on another side, we're talking about protocols; private or public and then we can think of everything else, Computing devices. Obviously, we need the extraordinary improvements. Intel has had a thousand factor. Improvement is required. John Carmack has said that in 2000, if you asked him whether you could build the metaverse with a 100x compute, John Carmack said, consulting and former founding CTO of Oculus with a 100x compute, could you build it? He said, in 2000 he'd have said yes. Of course today we have 120x in average iPhone and we've got seven billion devices, not a billion. Computers required, but we can go on and on fundamental changes to app store policy, new platforms to make it easier for anyone to create. This is why we talked about it as an iterative process.
Asit Sharma: On one hand, we have the evolution of say content delivery networks or Edge Networks, which are part of the solution to this problem. On the other hand, we have companies like Roblox, which you talked about, which are more user-facing or building those worlds. I'm curious to know on the side of compute power, which you mentioned is another, what's that called it? A constraint, so much as an opportunity. But theoretical constraints, what role does say more slot or the belief that maybe that is not really a law, that theory isn't going to hold up? We see a lot of capital being poured into the extension of this by Intel, Nvidia, even Apple, so many companies. Do you feel that or believe that limitations on computing power will eventually put a hard stop onto the experiences that we can develop. Or this is something we can keep pushing beyond [inaudible].
Matthew Ball: It's great. Look, I would first disagree by saying that we are constrained by computing resources. I think what's important to recognize is many of the limitations that result from that aren't evident, which is to say, when we have more computing available, we tend to uncover problems that we didn't know about. And we tend to pursue more difficult problems, which is why computing remains scarce. There's never enough of it. Whether we're talking about a CPU or GPU. A good example would be to take a look at Battle Royale games.
Battle Royale games send roughly 100 players into a shared simulation. It's not new that game designers want to build Battle Royales, it's new that they can, they have the server power, broadband helps, of course. But then they have the widely deployed computing devices and iPad, frankly, mid-level laptop that can run those experiences. That led to the creation of Battle Royale's about six years ago. It's no mistake that many of the most popular games globally, there is about 450 million daily Battle Royale players, are new. We should recognize that when we have more compute available, new experiences are built, but we should not forget how constrained those are. I like to talk about the fact that it's incredible that we can get 100 players into a Battle Royale. But even that is a little bit of a cheat.
A Battle Royale takes place on an enormous map. Fortnite is two-and-a-half kilometers by two-and-a-half kilometers. What that means is if I'm playing, my computer actually doesn't really need to pay attention to most of the other players and doesn't even know they exist. They exist as a number in the match. I might see 20 at-once rarely, but it's really only processing 20 different people. When you take a look up and down the computing devices and platforms, you can see that difference. Call of Duty: Warzone only runs on gaming PCs and high-end consoles. It has just 150 people. Fortnite runs on most platforms, but far from all it has 100. When you play Free Fire, which comes from Garena, it's designed to run on low-end Androids and developing markets. You can have 50 people despite those limitations.
When you use an Oculus Rift or a metaquest, they have population, one, they're Battle Royale and it has 18 people. In fact, it has 18 people at half the resolution, half the frame rate as a result, it's roughly one-quarter of the pixels process per second. The graphics look closer to a PlayStation 3 title than a PlayStation 5 title. This limitation on compute really does change what you can do from which devices and certainly which new devices, AR and VR, we want. The primary reason why you can't use a HoloLens AR device or an Oculus for so long is both the fact that the battery can't process or can't power that computing device long enough. If you actually want to solve for some of the rendering potency, you need an enormous battery that's going to melt your face or break your neck. This is where you get into the more fueled ideas of do we need quantum computing? Alternatively, people talked about decentralized computing. The problem with Edge computing is Edge can give you more power.
But if you and I are playing a game against one another, ultimately, that doesn't solve for the fact that we need computers powerful and close to both of us, latency comes into play. But most importantly, people ask this question of decentralized compute, which is. Well, I don't think my neighbor's home right now. They probably have 10 devices in their home. We're well acquainted to the idea that two doors down in truth, there are solar panels on top of the house. They're leasing, supply, and capacity for compensation to the network, it might be powering my computer right now. But there is this question of not just do, we need more powerful processors, but do we need a better way to utilize processors?
Asit Sharma: Yeah, I really loved that last idea. A colleague of mine has a service at The Motley Fool Digital Explorers, and he's Bernd Schmid. He is very taken by the idea that money being poured into digital assets often times has a very real-world use case. Problems are being solved in this space which goes into this huge and I think, incoherent moniker of like crypto assets. There is a lot there that can help in terms of spreading out computing power. Between your first writings about the metaverse and this book, I'm curious as to any big aha moments that you had. Let me put it this way. In writing this book, what were the initial conceptions you had that turned out to be not wrong, but you had a very steep evolution between the way you first conceptualize this and again writing about it, to the time of now how you think about the metaverse, what has changed in your thinking about either what the metaverse is or we could also touch on topics of again, what is needed to realize the vision that you have of so many multiple worlds that are interconnected, not just a single entity that is called the metaverse, which I know some people like to think of. I also disagree with that vision.
Matthew Ball: I think there were a few primary themes that I've determined. One was, it was a lot of fun digging into the hardware challenges. You and I spoke about it a moment ago. But to some extent, AR and VR is a chartable problem. We know or we think we have a good sense of what minimum viable product looks like. We can start to understand all of the constituent parts around the interplay between battery life, sensors, resolution, computing, processing, power, price point. That was a lot of fun just digging in deeply because that actually is a bit of a solvable equation. The second thing is, I went deep into the history of what could you know and what couldn't you know.
I'm often asked the would be metaverse expert, though I would decline the term. So what does the metaverse look like in 2035 or 2030? I like to say, I don't know and that's important because first of all, confusion and uncertainty is a prerequisite for disruption. If we all knew, no one would be displaced. The other thing is, you can look back over time at TCP/IP, at the mobile Internet. There was no technical understanding or no high-level elements of more people with more devices and more places using the Internet more often. That told you about Instagram, of TikTok, of the impact of Robinhood and commission-free trading. It didn't really tell you what to build, when, why, how, and how it would be monetized as well.
So really unpacking that was fascinating because it allowed me to say, here's what I'm convinced of, here's what I think but I'm not certain about, and here are the things I would never speculate on. Because the third conclusion is really to understand that technological change of this nature is recursive. Someone produces an innovation. It leads to users, those users manifest new behaviors, that inspires a derivative innovation or technology that changes behaviors producing new use cases and this just continues to flow. It's one of the reasons why I would say one of the fourth biggest takeaways is cash, resources, and conviction are not sufficient to thrive in the metaverse. Of course, Microsoft was as convinced as anyone in mobile and in the internet. It didn't really help. They had all the pieces. They put them together incorrectly.
In fact, the number of thesis errors that they made, not execution errors, but thesis errors they made was actually quite something. That's a good parallel to Facebook right now. They have three billion users, two billion dials, billions a year in OCF, a founder with absolute conviction, an enormous headstart in VR, wide range of talented developers. But cash, resources, conviction not sufficient to thrive in this next era. Because we don't know exactly how it's going to play out.
Asit Sharma: You don't run, but you co-founded an ETF, which I mentioned at the outset. I'm not sure, the extent of your involvement in managing the portfolio.
Matthew Ball: No. We're the index provider.
Asit Sharma: Index provider. So my question just to begin is, when you thought through the themes that would underlie this ETF, did you find just a huge amount of companies that were in your selectable universe, was it something that after some time laying out your criteria, you realized wow, this service is going to have fewer stocks and companies than 100? Very curious about the size of the ETF and the companies that are indexed to.
Matthew Ball: Sure. Let me give you the macro perspective. I and my co-founders believed that the Metaverse is a multi-trillion dollar, multi-decade transformation. You will find Citibank, Morgan Stanley, Goldman Sachs of all estimated by 2030, it's roughly 8-13 trillion are actually using my methodology and altering the exact forecast. But so the prospective becomes, how do you gain appropriately diversified exposure to that macro level, an extraordinarily large investment thing? My perspective, is there's certainly an opportunity for picking.
The challenge with picking right now is that that future is relatively uncertain for the reasons that I mentioned, we all wish we could go to 1995 buy Apple, 2005, buy Netflix. Yet some people instead bet on Nokia or BlackBerry good for a short period, not good after or Samsung. Others bet on Time Warner, a fine return, but nothing offer generative. Having a well diversified, structured, thematic index would have provided extraordinary returns even if it fell a little bit short of Apple or Netflix.
You can take a look at social media, social networking, mobile Cloud, enterprise Cloud, thematic ETFs over the past 30 years, and the results are great. From my perspective when you talked about composition, because it's such a broad theme, I didn't see that I could actually develop it solely myself, and so I built the council. Six others, former executives at Amazon, at Nvidia, at Square, Spotify, Andreessen Horowitz, at New York Times. Very securities professionals, the former executive producer and lead game design lead for Red Dead Redemption 2 and Grand Theft Auto V. We produced this passive rules-based thematic index. We took a look at seven core profit pools, weighted them based on their projected and current share of the profit pools and then came out with the scoring mechanism for all companies.
We went through 3,000. Could we have provided some allocation to the hundreds? Certainly. But the goal here was to provide investors with as tight and exposure to the actual Metaverse team. Let me give you a good example. Many believe that Nike is going to be a large participant. From the Metaverse, they've got a good data C suite. We can understand how virtual existence has requirements for apparel, augmented reality for a fitness company. You wouldn't say that that's pure-play exposure, but you would say it's meaningful exposure. We just as easily put Adidas or Under Armour, but we came out with a methodology that tightens the selection down to between 30 and 70 companies on a relative basis. I think we're sitting at 42 right now.
Asit Sharma: That's so interesting. Did Nike make it into the index?
Matthew Ball: Nike did, but not at first. As I mentioned, we have a passive rules-based thematic index. The goal is not to pick. There are times in which i think x versus y is over undervalued, there are times in which I think that our allocation for a specific company is perhaps not ideal. But the goal is to have an ironclad experts criteria for qualification and waiting up and down and for rebalancing. Based on public disclosures, which is of course how we operate and the rules, but also what Nike wasn't doing, when we launched they were not included in, they are now.
Asit Sharma: Nike is one I've been following with some interest. Has something to do with some patents that they had. I think in advance of some of their competitors that play to strength I think in virtual worlds. I also interested in Nike, just because they had an understanding of this idea of scarcity, which is tied to the NFT world. We know NFTs will play a fun role in the Metaverse. Very forward-looking company in the way it approaches technology. They understood from, I want to say 1990s, how valuable single pair of shoes could be. They're thinking with the Air Jordan brand was far in advance. We have exchanges now in which sneakers or rare sneakers are traded. This is connected to the commercialization of the Metaverse as well. Thinking of Nike executives always impress me. They're not a technology company per se, well they are a physical technology company, but I'm interested to hear that even through your passive and rules based criteria the company made it in. We just have a few minutes left. I could go on for so long. This has been immensely fascinating. Let me ask you in terms of thinking about the Metaverse for a layperson. You personally, and I know you've very clearly stated, look, it's going to evolve, there's no point in trying to predict the endpoint of what it should look like, we don't know. But for you Matthew, what would be an ideal expression of the Metaverse for you, 10 years now, what would you like to see? What do you dream about sometimes or envision it becoming?
Matthew Ball: Well, let me hit a quick thing that I think often alludes people and also allows me to catch up on a question I didn't answer of yours, which is several years ago actually, the Chief Digital Officer of Nike left to become the President of Epic Games. A great example of a company that was not on many radars, but actually shows you the close cohesion between Nike strategic thinking. It's no mistake that the rest of the organization, even after Adam Sussman left, has been a pioneer. That allows me to get to this question is I think one of the things that's interesting is if we produced the Metaverse ETF two years ago or two and half years ago, two of the top four names would not be in there, and that is Unity and Roblox. We certainly expect that overtime the composition of this will fundamentally alter just like a mobile Internet ETF in 1996 and 2002 and 2005 would look different than it does today.
That's again why we have a passive thematic rules based index. I don't want to hypothesize specifically on companies or valuation or waiting, but there are some companies where people looked at large, 10-50 billion dollar companies, Epic, Niantic, Dapper Labs, OpenSea, that you can totally understand is being relevant to this theme could likely be public, but are not yet. When you ask, what's the ideal end-state? I would say we see an end state pretty similar to what we see today in the real-world. We often forget that even in this world of [inaudible] control, those companies have less than 13 percent of digital economy revenues on a gross basis. As a percentage of the global economy, they're small. In the United States, Amazon is the largest employer, Mcdonald's is quite close, but there's 33 million small to medium businesses in the United States. Those are the people who have more than half of jobs, more than half of GDP. My hope would be that we see similar decentralization in terms of rights of ownership of entrepreneurship and of profits.
Asit Sharma: Matthew Ball, this has been an amazing half hour. I look forward to reading your book when it's out this summer, and thank you so much for your time in joining us today. Thank you. [MUSIC]
Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, don't buy or sell stocks based solely on what your hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. [MUSIC]
