The Metaverse – Enterprise only

Expectations and sentiment continue to worsen.

• The reduction in PlayStation VR2 volumes for 2023 does not come as a huge surprise as the Metaverse is very far from being ready for the consumer meaning that all the action, for now, will be in the enterprise.
• What started as an invitation-only event rapidly became all-welcome as demand for the PlayStation VR2 has greatly underwhelmed.
• Sony was originally hoping to ship 2m PS VR2 units at $550 each by the end of March 2023 but this has now been cut to 1m.
• Given the current environment and the price of the device, I suspect that even 1m is optimistic.
• This is because when Meta Platforms decided that it had to reduce losses and reduced the hardware subsidy on the Meta Quest 2 by increasing the price by $100 to $399, shipments fell off a cliff causing Reality Labs Q3 2022 revenue to decline by 51% YoY.
• Sony is pushing a product that requires a PlayStation, is tethered and costs 37% more but somehow it expects to outsell the Meta Quest 2.
• The market has already indicated that untethered is where the future lies and at its peak, the Meta Quest 2 was shipping 1m units per quarter.
• I suspect that only pent-up demand will allow Sony to make that target and once the device hits general availability, volumes will collapse to much less than 100,000 per quarter.
• There are two main reasons why this has been a predictable disappointment.
  • First, user experience: which remains way below what one would require for a digital ecosystem to hit the mass market.
  • This device is tethered with a cable meaning that the fitness/activity use case which is popular in the Quest 2 does not apply.
  • Beyond that, Metaverse devices all suffer from substantial limitations to the user experience meaning that there is no way that they will replace other digital device usage anytime soon.
  • Second, economy: Samsung has just warned of another year where smartphone shipments decline as consumers tighten their belts and hold onto their devices for longer.
  • The Metaverse is a tiny niche which is nice to have and given how much the technology needs to improve, is an easy purchase to defer.
  • Hence, in this environment and with the high prices being charged, I suspect that overall volumes are going to miss expectations significantly.
• This does not impact RFM’s scenario for the take-off of the Metaverse meaningfully as its forecasts are calling for the first usable device in 2025 / 2026 with meaningful volumes beginning in 2028 / 2029 (see here).
• What is happening at the moment is pretty much irrelevant to this thesis as what we are seeing is great volatility on very low volumes in an industry that is not even close to hitting commercial viability yet.
• The one exception remains the enterprise.
• This is because, in consumer, the user pays to have the experience meaning that it has to be good or the consumer will not pay for it.
• By contrast, in the enterprise, the user is paid to have the experience and so as long as there is a productivity benefit, one can get away with a substandard user experience.
• This is why all of the AR companies have long made the pivot to the enterprise which is where they will remain for some years to come.
• Use cases such as digital twins for factories and large pieces of infrastructure, education, medicine and remote assistance are all good use cases for the Metaverse in the enterprise.
• Furthermore, the enterprise does not require interoperability or many of the other criteria that RFM has laid down as milestones towards take-off meaning that it can be a reality now (see here).
• This is why I continue to expect that most of the activity will be in the enterprise Metaverse while consumer will continue to languish as a niche destination to play certain games or watch 3D content.
• This serves as another reason why Apple will not release a Metaverse device before 2025 / 2027 despite the feverish speculation although it will have to address this segment at some point.
• This is a sector best avoided for the moment as sentiment continues to sour and there are no real ways to invest in the Metaverse directly outside of highly risky start-ups.