The Metaverse – The halo effect

Meta is back on top as Apple reignites interest.

• Meta has correctly positioned the Quest 3 for the market that is available today, but it has been greatly helped by Apple giving the market legitimacy and Pico bowing out.
• It looks as if Q4 23 saw a good recovery for VR and AR with a big bounce YoY in shipments although overall, 2023 was a year where shipments fell by more than 20%.
• I suspect that a lot of this was due to an increase in confidence in the Metaverse spurred by the launch of the Apple Vision Pro combined with the release of the greatly improved Meta Quest 3.
• This was evident in Meta’s Q4 23 results where Reality Labs grew revenues by 47% YoY where Q4 made up 56% of the whole year’s revenue.
• Critically it also looks like the Chinese have gotten into difficulty as its main Metaverse contender, the Pico cancelled its latest device which ensured that its older offering became uncompetitive, and its market share fell.
• This is a result of being owned by ByteDance which has been traumatised by the fate of the rest of the large Chinese technology companies and appears to have turned its attention towards efficiency and profitability rather than investing for growth (see here).
• As far as I can see, this is the only reason for not going ahead with the Pico 5 as the device had gained a lot of share and was popular with developers as it gives far more access to the hardware than Meta does.
• Either way, Meta has benefitted significantly from both Apple and ByteDance where I suspect that its share is now well above 50% as opposed to just over 30% 12 months ago.
• Meta remains the dominant force in the fledgling Metaverse as:
  • First, value: The fact that it offers half of the Apple Vision Pro experience but does so at 1/5^th of the price means that its value proposition is superior to Apple’s for most potential users.
  • Second, games: Thanks to Meta’s head start and it’s very high share of the installed base means that anyone who develops an app or service in the Metaverse will do so on Meta first.
  • Games are by far the dominant use case for the Metaverse at the moment with Media Consumption coming in a distant second, and in games, volume is everything.
  • The Apple Vision Pro may offer an amazing experience, but a developer is going to make more money by developing for Meta than it is for Apple as evidenced by Google and Netflix’s decision not to support the Vision Pro.
• Consequently, I think that Apple is going to make only the smallest of ripples in the overall market, but it has rendered the segment legitimacy and created a quality bar that the others need to aspire to.
• In that regard, Apple has galvanised the market.
• Hence, Meta remains in a very strong position, but I am not convinced that one quarter is enough evidence that the Metaverse is taking off.
• Instead, I think it is a normalisation of a niche market that still has a lot to prove before it has any hope of challenging the smartphone.
• Consequently, 2024 is likely to see a bounce off the 2024 lows but in Q4 24 I would expect to see growth stall as a result of the difficult YoY comparison.
• The Metaverse remains uninvestable at the moment as all of the cited players currently earn most of their revenues doing something else which is unlikely to change any time soon.
• I am keeping an eye on Roblox and Unity as potential plays for the Metaverse, but both of them remain too expensive and their shares look set to stagnate or decline for a while yet.