Metaverse Article II:
It’s the holiday season. So as investors, we’re naturally thinking about the American consumer. The holiday season is home to a huge chunk of consumer spending and is a great barometer of the broad health of the American consumer. Said another way, we’re thinking about what people spent money buying, and how they went about the purchases.
On that note – holiday sales were up significantly in 2021. Retail data came in ahead of expectations – the American consumer is healthy, they’re spending money, and they love to give gifts at this time of year. They’re also increasingly shopping for those gifts through digital mediums and purchasing digital gifts. We expect this trend to continue, especially with the expansion of the metaverse and digitization more broadly. Younger generations are also significantly more comfortable with digital spending; digital spend should increase as Millennial earnings power increases and wealth transfers to Millennials start to accelerate.
History of Digitization:
Over the past two decades we’ve transitioned from shopping in the stores, to shopping online, to shopping on our phones on the go. Logistics networks have scaled to get packages to doorsteps from warehouses in days or even hours. The shopping mall experience has become an in home experience, and the in home experience is increasingly becoming an online or digitized experience. Not only are we shopping for physical goods online, we’re also now starting to spend more of our walletshare on digital goods – or forget even digital goods – just digital leases or subscriptions.
For example, look at the shift in video and audio. Twenty years ago we spent time at Blockbuster picking out movies. We purchased DVD’s for the house, and when a new album came out, you had to go buy the record or the CD. Then the disruption started. You could buy books on Amazon instead of going to the store and you could buy songs for your iPod on iTunes, a digital download.
Today, things have changed even further. You don’t actually buy movies or songs anymore – you don’t even have ownership. Instead, you have a digital subscription to listen to as many songs as you want from across the music universe using Spotify or Apple Music.
The same patterns has been repeated across different consumer categories – physical purchases became digital downloads, and in some cases digital downloads have become streaming access or membership access. It’s happened across music, entertainment, gaming, etc. The same theme is apparent in the sharing economy with AirBNB
The Future of Consumption:
Going forward, we expect continued sharing, more shopping from home, and increased spend within digital environments. The first two are fairly straightforward – sharing economies make sense for limited use items like cars – you would normally drive your car an hour or two a day and let it sit idle more than 90% of the time – why own that when you could share it. Same thing for shopping from home – the convenience factor trumps just about anything that the physical experience can offer.
But spending within digital environments, a shift of consumption from physical goods to digital goods, we think there’s incredible opportunity in that space. The power of the American Consumer will shift from buying physical items to buying goods in the Metaverse and other digital spaces – that’s an investment opportunity we want to be a part of.
In order to invest though we have to understand a few things. First, why are they spending money in the Metaverse. Second, what will people spend their money on. Third and finally, how will technology shifts change shopping experiences across platforms.
Consumption in the Metaverse is all about expression and network effects. Unlike the individually oriented fads of the past, the Tamagotchi’s or the Webkinz, the new era of Meta-expression is based on posturing for your peers (look at the success of Instragram or Tik Tok influencers!)
People can use the Metaverse to find like minded people or explore a different kind of lifestyle than they’d explore in the real world. They can meet and explore in digital spaces, engage in events, and express their creative flare.
As the digital world becomes an increasingly large part of our lives, the amount spent on expression in these digital spaces should correspondingly increase. The companies who stand to excel in the Metaverse are those who understand how people want to express themselves and what they’re willing to pay for it.
There are a lot of different kinds of digital spending people can engage in. Digital expression can take a lot of forms and the crossover between digital and physical expression will blur a lot over the next several years. There are a few ways in which this might occur.
One path is the dual sale/hybrid version of consumption. Physical sales will increasingly tie to a corresponding digital product. A new pair of Nike sneakers for example might not only be a shoe in your closet, but might also come with an Non Fungible Token (NFT) for a unique pair of Nikes in selected digital metaverses. If they’re a particularly collectable pair of Nikes, the digital token could also serve as a guarantor of authenticity and make the ownership rights of the collectible item much more transparent. This kind of dual platforming not only makes it easier to collect items, but also makes it easier to transport self expression from the physical world into the Metaverse.
Another path for self expression within the metaverse is through the purchase of purely digital assets. Right now these are taking a variety of forms – NFTs, access to events, or rights to different goods within environments – but all of these methods are going towards the same place – more time in the Metaverse.
Art collections that are being sold digitally are essentially acknowledging that in the future the way art is viewed will be digital, rather than in person. Physically traveling to an Art Museum might be cool, but why not visit an art museum in the Metaverse and view a broad variety of different art forms from across the globe? A decade ago this wouldn’t have been practical – the load times would have been too long, the resolution of your screen wouldn’t have been sufficient to view it, but in the future you’ll be able to throw on some VR goggles and dive into art collections in sumptuous detail. New art creations can be sold, traded, and displayed all within the metaverse and a physical copy of the work might not even exist.
You can take the same experience we just described for art and visiting a museum and apply it to sporting events, performances, and shows of all different varieties. You can also take the collector/ownership model from the virtual art gallery and apply it to any number of collectible items, from fine art to trading cards to sports reels to status items or add-ons for specific platforms.
Furthermore, platform specific digital goods will become increasingly valuable as people spend more time expressing themselves on those platforms. Ownership of different items represent certain tastes or lay claim to a certain status.
Luxury goods makers like LMVH are acutely aware of the potential new market. Just as people purchase high end handbags and name brands in the physical world to claim status, so too will people slowly define status items in the digital world. Luxury brands are jumping at the new virtual platforms in an effort to establish themselves. Just as there are particular items or decorative skins that drive value in particular video games – so too will there be indicators of particular value in the different multiverses.
Video game makers like Activision have been tuned into these habits for a long time – new skins, new items, new maps or terrains, have all driven incremental revenue for a while. Expand the circumstances from a specific game environment to an open world environment where status is on wider display and the variety of items people purchase will increase.
Technology driven changes to the consumer experience aren’t limited to the metaverse itself. Enhancements to how we shop online for physical goods will also be a big part of the changes we see over the next decade. Instead of scrolling through page after page of goods, consumers will be able to experience 3D virtualizations and engage with products in a different way. Virtualized shopping means stores on platforms like Shopify or Etsy get to add more customization and flare, and then the goods themselves get to be more customized or specialized. Digitalization and customization go hand in hand.
Beyond shopping, virtualization extends to a lot of other utilizations which we will cover in more detail in future articles. Think about apartment hunting, home buying, and design work. Thinking about a new addition to your house or getting some landscaping done? See what it will look like, walk through it, see it from every angle before you sign the contract. The opportunities are endless!