Katy Ansel:

Hi, I'm Katy Ansel, an associate on the Internet Equity Research team, and I'm excited to have Doug here with me today, Head of the Internet Equity Research Group here at J.P. Morgan. We're excited to kind of dive into Web 3.0 and the Metaverse. Just to kick things off, there's a lot of discussion industry-wide on these topics. Feels like it's kind of everywhere. So in your view, when did this height in conversation really begin to pick up? Why is it so important and what are some of the key drivers there?

Doug Anmuth:

Yes. So we really view Web3 and Metaverse as kind of the next chapter of the internet. I think for Web3, this conversation has been building, certainly for a number of years around, blockchain and crypto, NFTs as well. Metaverse, I think really kind of came more into the mainstream last year, really, and partly fueled by Facebook and its pivot, really making the shift to the Metaverse a huge priority for the company. And so much so that they changed their name, of course, to Meta. So in terms of why it's happening, you're definitely seeing on the Web3 side a push to more privacy-focused decentralization across this next phase of the internet. I would say security being a big part of it as well. For the Metaverse, you now have just much better VR technology, much more immersive experiences that are taking place. And I think also that that similar kind of decentralization type of push to move away from something which is kind of just controlled by a few larger companies, for example.

Katy Ansel:

Right. Makes a lot of sense. So how do you think about sizing the impact of these transformations across sectors?

Doug Anmuth:

Yeah, so I think between Web3 and Metaverse, you could have really enormous transformational impact here. The question is when and what the timing is, and it's certainly over the next several years or possibly decades in terms of how this plays out. I think for Metaverse, you have early applications that are strongest in things like gaming, which really takes up a lot of the conversation right now, but I think you'll see more. There is certainly more in terms of virtual fitness, education, work place type of applications, for example, still very early. But Meta, for example, believes that Metaverse will reach more than 1,000,000,000 users and support really hundreds of billions of dollars of e-commerce activity over time. Epic Games believes this is a multitrillion dollar opportunity over time. So pretty transformational impact, and I think you see that with Web3 as well in terms of blockchain technology and the ability for crypto, for example, to be integrated into platforms more cleanly as a form of payment. So it's a massive opportunity and it will take a long time to build as well.

Katy Ansel:

So I guess just taking a step back, what are some of the key characteristics of Web3 point out? Can you walk us through the internet's evolution? Where are we today and what comes next?

Doug Anmuth:

Yeah. So I think to understand kind of Web3 and how we get there, it's helpful to look back at previous versions and existing versions of the internet. I think, you know Web 1.0, certainly more desktop driven, more basic e-commerce dedicated infrastructure. So that was really followed by Web 2.0, a mobile-first type of internet cloud based, more driven by social platforms and user-generated content. And I think now with Web3, you're going to see something that's really AI-driven, decentralized at the core, which is I know a word that we're using frequently, but it is really the kind of the tenet to these massive changes, and then something that uses edge computing infrastructure much more. So Web3, you can think about as much more user centric, focused on privacy and confidentiality and security plays a big role, much better interoperability, and better ability for data to move easily and all of that kind of supported by by blockchain.

Katy Ansel:

Right, yeah. I want to go back to a topic you mentioned just now: the decentralization of architecture. It's a topic we've been talking about for a while; it was a key component in our 2022 internet outlook. I think a big focus for the next several years. Can you elaborate on what that means exactly and why it's so important?

Doug Anmuth:

Yeah, absolutely. So we mentioned it many times and we will going forward, but it really-- decentralization, you can kind of think about it is without a middle man or controlling party, basically. I think it makes it easier for the flow of data without losing kind of ownership control basically or giving up privacy or a reliance on kind of a controlling party or a middleman. It will help funds move easier across the internet. And then it also removes the potential for censorship as well, and that's certainly been in focus over the last couple of years.

Katy Ansel:

Yeah, definitely. So I guess, as you think more broadly, what are some of the key investments you need across the industry and what are you seeing in terms of just the pace and scale of these investments?

Doug Anmuth:

Yes, in terms of investments, I would say it's still early in a lot of respects. But the dollars are becoming very significant. You know, probably the ones we can pin down most clearly toward Metaverse and this concept, really including virtual reality as well. Or really Facebook, or Meta, spend $10 billion last year, what we think could be up to as much as $15 billion this year. And we think that's about VR hardware through Oculus, of course. More product in content development also potentially really building out an operating system for the Metaverse. I think more broadly, there are clearly a number of companies that are focused on hardware, and we see that beyond Meta, in terms of Sony, Apple, potentially Google as well. 5G networks will certainly play a role here as well. And I think cloud, you're really seeing a tremendous amount of capex going into the public clouds right now. And of course, a lot of that is for current business. But I think it's also for development of a more metaverse-driven and Web3 world down the line. And I would also say you're seeing a lot of activity in kind of the developer and creator economy, just ways that more content will get created for the Metaverse, essentially.

Katy Ansel:

So for 2022, I think we're focused on four key areas: there is crypto, blockchain, NFT economy, and 5G network, which I believe you talked about a little bit just now. But why these in particular and what are your expectations on the impact that could have this year?

Doug Anmuth:

Yeah. So I think for ‘22, I would say another kind of another like building block type of year for crypto. Again goes back to that theme of decentralization. But look, becoming more mainstream, I think you're starting to see more companies, businesses start to accept Bitcoin, for example, in this form of payment. You're seeing more activity on a country-by-country basis in terms of adoption. I think on blockchain, we have a pretty significant change with Ethereum from proof of work to proof of stake in ‘22, and that should help build momentum around blockchain. NFT economy, we're already seeing quite a bit in terms of companies like Nike and others who are-- there's a lot of consumer driven companies who are very active in terms of issuing NFTs and getting involved essentially in this concept of digital collectibles. And then 5G networks, which has been going, but will just see greater roll out, increasing connectivity overall during ‘22. So again, another another year in terms of what should be a multi-year type of transition in our view.

Katy Ansel:

Right, yeah, it's definitely a lot kind of going on there. So as you think about the metaverse more broadly, you helped demystify it. What is it exactly? What are some of the key characteristics and how developed is it?

Doug Anmuth:

Yeah. So I think it's it's something that probably you have a lot of different definitions out there in terms of what the metaverse will become. You know, I think about it as in a way, this next chapter of the internet and a very immersive experience where you're in this virtual interconnected environment. We're kind of bridging physical and digital worlds...something that where you can have a feeling of presence with someone who-- even someone who's thousands of miles away, essentially through this technology. And really ability to do all the things that you do offline, but do them in a virtual environment. So, and that could mean many years out kind of teleporting in, for example, into different activities or meetings as a hologram, for example, your virtual self.

Katy Ansel:

Right. Yeah. So this concept of virtual social interaction isn't new. We've seen video games offer immersive experiences. But what is new is, I guess, kind of how people tap into it through their augmented reality or virtual reality headset, for example. And so I guess just looking at VR hardware specifically, what are you seeing in shipping volume growth over the past couple of years and how are you thinking about that going forward?

Doug Anmuth:

Yes. So in terms of VR shipment growth, I would say it's been... probably-- I mean a few years ago it was a little bit slower perhaps than expected. I think probably a technology which, similar to things we've seen in the past, where it takes maybe a little bit longer to ramp up and then when it does, the numbers are ultimately bigger than what you would expect. There is some debate about this concept of the metaverse and whether it will need to be done fully through VR or whether you'll need a headset or not. You can certainly still have immersive virtual-type experiences even without it. But we are seeing a significant step up in VR unit sales, I think we did see that in 2021. Certainly. I think there are probably third party estimates, which would suggest around 10 million units sales last year, for example. So it is a pretty significant number, and that's almost a doubling from the prior year.

Katy Ansel:

So pretty much a big trajectory if you look ahead as well.

Doug Anmuth:

Yes, I think the numbers get very big as you go kind of three, four years out. And more content gets built more with more developers, more product. You basically give consumers more reason to buy VR headsets essentially, and their technology continues to improve, and prices come down.

Katy Ansel:

Right, yeah. So I guess just lastly, I think you've touched on this a little bit earlier, but I kind of want to dove in deeper. And how do you think about the overall metaverse market? Is it more of a winner takes all market? Or do you think there's room for multiple players?

Doug Anmuth:

So I think there's multiple players, clearly. I do you think there's going to be a race to scale. So there's somewhat of a race to 1,000,000,000 or billions of users. In terms of really using the metaverse, so it will it will certainly be competitive. Facebook is clearly try-- pivoting, shifting their name to Meta, trying to define what the metaverse will look like. But you have gaming companies like Roblox that are clearly already very involved in virtual worlds and Epic Games with Fortnite, Microsoft with Minecraft for example. Other companies, Apple and Google will certainly be focused on doing VR. NVIDIA, Snap, semi companies and probably a host of others that we're not mentioning here that will play a big role in the development over time. So it is definitely multiple multiple companies, but a race toward scale.

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