Zhongxin Jingwei September 23 Title: "Cheng Shi: A Comprehensive Analysis of Meta-Universe Investment"
Author Cheng Shi (Chief Economist, ICBC International)
The future is not yet here, but investment has no intention of waiting. Although whether the metacosm can represent the next generation of the Internet is still controversial in the industry, it has become a hot spot in the financial market. It is worth noting that in the constituent stocks of the Metacostem Index of Chinese A-shares, games and consumer electronics account for half of the country, while the Us Metaverse ETF (Roundhill Ball Metaverse ETF, a VR and AR-themed fund) takes computing power, cloud computing and game platforms as the core of investment. In our view, the above differentiation is not entirely based on the limitations of China's large Internet companies not being listed on A-shares, but more reflects the significant differences in the understanding of the metacosm by Chinese and American investors. Chinese investors are lagging behind the "immersion" of the metacosm and hope to promote the direct consumer-facing business of the metacosm as soon as possible; while THE US investors bet on the long-term "systematization", believing that the construction of open underlying facilities will naturally bring about the explosion of applications. The difference between the basic investment logic of the two will be reflected in the investment performance as the order of the outbreak point, the length of the investment return period and the frequency of position adjustment. In addition, we find that current investors tend to focus on the phased development of technology and relatively underestimate the importance of the legal system that runs through the entire cycle of metaversonic construction. Metacosmity is a virtual parallel space-time that intersects with the real world, how to achieve it technically is important, but the constraints of ethics are another key variable that affects the development process, so we recommend that investors pay close attention to the trend of Internet supervision, and continue to hold large technology companies with diversified investment in the early stage of metacosm construction, while not neglecting the early deployment in network security, privacy computing, blockchain and other fields.
There are significant differences in chinese and American investors' understanding of the composition of the metacosm, with China emphasizing "immersive applications" and the United States emphasizing "functional platforms." Our analysis of Wind's latest A-share meta-universe index and the constituent stocks of the US Roundhill Ball Metaverse ETF found that hash rate and application software are the areas where Chinese and American investors reach a high consensus, but in addition, there are significant differences in the focus of Chinese and American investors in the layout of the metacosm (as shown in Figure 1). According to our collation, in the A-share meta-universe index, gaming and consumer electronics (including but not limited to AR or VR) account for up to 24% and 19% respectively, which is a well-deserved investment focus, while in the Roundhill Ball Metaverse ETF, both account for only 5% and 9%. Compared with specific metaverse concept games, the US metaverseal ETF is more enthusiastic about investing in game platforms that support game development, accounting for 19%, while Chinese A-shares currently lack mature such targets. In addition, the A-share meta-universe index accounts for only 4% of cloud computing companies, while the LAYOUT OF US ETFs in cloud computing is about 23%.
Figure 1 Differences in investors' understanding of the metacosmonics between China and the United States (Source: ICBC International, Wind, Roundhill Investment)
While the fact that China's large tech companies are not listed on A-shares may be part of the reason for the difference, the Hong Kong stock market, which theoretically has more investment targets, has not seen an explosion of the meta-universe concept. Therefore, we believe that the above compositional differences reflect more of the differences in the understanding of the metacosm by Chinese and American investors. According to the official statement of Roblox (referring to a multiplayer online game creation platform in the United States), metaverse products should have eight elements: identity, friends, immersion, low latency, diversification, anywhere, economic system, and civilization. Chinese investors are lagging behind in the metacosm's "immersion", betting on the actual increase in consumer investment in the pursuit of immersive experiences, games and consumer electronics are directly for consumers, games are super digital scenes that enhance identity and use stickiness, and consumer electronics are hardware carriers that enhance immersion. U.S. investors, on the other hand, tend to think that the metacosm is a functionally complete open economy, and as long as the underlying facilities are built, the endogenous economic cycle will spontaneously open. Chinese investors are more concerned about the possibility of short-term metacosmity landing, while American investors are more focused on the long-term basic layout. Based on this, we can also judge that the application scenario of the Chinese metacosm will land faster and the outbreak period will be higher, but with the change of technology and model, it may require frequent position changes; while US investors focus on deploying metacosmic infrastructure and functional platforms, and the return on investment cycle is relatively long.
The construction of the metacosm is not only a technical problem, but also a social problem. In our view, the current layout of Chinese and American investors in the metacosm is not yet complete (as shown in Figure 2). The metaverse is not just a more immersive mobile Internet replica, but a parallel virtual space-time that intersects with the real world, how to achieve it technically is one aspect, and the constraints of morality and ethics are another key variable that affects the development process.
Figure 2 The metaversic layout of china and the United States in the secondary market is lacking (Source: ICBC International)
From a technical point of view, metacostem investment mainly follows the two directions of "from virtual to real" and "from real to virtual". From virtual to real, the corresponding is the extension from the digital world to the physical world, through immersive sensory impact, including but not limited to games, videos and live broadcasts, etc., to attract a large number of consumers to join with the sense of identity, and stimulate the interactive potential of virtual experience and the real world. Pokemon go, an augmented reality game released by Nintendo, has shown a combination of virtual and real gameplay, such as guiding players to specific locations with the help of mission mode, or linking up with brands to issue tickets to limited-edition merchandise. Following this direction, the areas worth investing in are mainly ways to enhance the digital experience, that is, A-share hot-button games, AR or VR.
From real to virtual, it points to the process of reproducing from the physical world to the digital world. In the era of mobile Internet, text, pictures and videos are presented in 2D. In order to simulate the real world as much as possible, the metaverse needs to make a more realistic virtual scene through lidar, 3D modeling, etc., highly restore the physical rules of the real world, and the process also includes the virtualization of people (digital people). The investment areas in this direction are mainly the basic engine and the digital avatar, and this part is the focus of the US metaverseal ETF.
From a moral point of view, metacosmic investment needs to unfold in two dimensions. The first is to make a connection that promotes goodness. Rational people's goal in economic activities is to maximize their own interests, so at the beginning of the establishment of the metacosm, the sustainable operation of the economy and the continuous enrichment of the ecology are inseparable from the effective economic incentive mechanism. In the era of mobile Internet, information asymmetry and the continuous reduction of transaction costs have made value creation feasible for individuals and opened up a new creator economic model. However, due to the fact that Internet middlemen have captured excess value by using their market position, the enthusiasm of individuals to release value in all aspects has decreased. For example, epic games, a game development company, recently accused Apple of collecting a 30% "Apple tax" by monopolizing game app stores, which inhibited the innovation motivation of game developers. In addition to hoping for forced government intervention, we can also change this situation through technology, with the help of digital currency and blockchain incentive mechanism to achieve complete capture and transmission of value, so that the platform can truly return revenue control to developers.
The second is to curb the interaction of evil. The virtual space of traditional games is created by centralized game companies, and "one-click restart" blurs the boundaries of the right to life, while virtual property does not really belong to individuals in the true sense, and game companies have absolute disposal rights over personal virtual property. Thus, under the premise of being completely independent of reality, the violation of the basic rights of others is usually unrestricted. But as the metaverse connects the physical world with the virtual world, and NFTs (non-homogeneous tokens) mark digital goods as privately owned, we need to re-examine the boundaries of virtual crime. Obviously, we can't tolerate the collection of NFT artworks in the virtual world being robbed (hacked), nor can we accept that what we do is constantly being monitored (privacy violations). Therefore, cybersecurity and privacy computing are integral parts of the metaverse and should even precede the expression of technology. We found that A-share investors have focused on the topic of cybersecurity, which has not yet been included in the Roundhill Ball Metaverse ETF in the United States.
Three possible phases of the metacosm's evolution. According to the experts we interviewed, it will take at least 10 years to achieve breakthroughs in underlying technologies such as computing power similar to oasis in Ready Player One, based on the existing level of human technology. But that doesn't mean the substantial push of the metaverse will face a decade-long hiatus. The Metacosm is exciting because it allows us to see the use of these cutting-edge hardware and software technologies and explore the many possibilities for technology to change the world. Therefore, it is necessary to look at the evolution trend of the metaverse in a phased geographical manner, and the return on investment and the return on investment cycle of different technologies will also show phased differences.
Based on our current understanding, the evolution of the metaverse may go through the following three stages. However, it should be emphasized that there is still great uncertainty about the evolution of the metacosm stage and the survival of the metacosm concept itself, and we recommend that investors pay close attention to the evolution of basic science and underlying technologies and the development trend of Internet regulation, and adjust investment decisions in a timely manner.
The first stage (1-5 years): the combination of virtual and real. In the early stages of the metaverse, the production process and demand structure of the existing physical world have not changed, and the business model of online and offline integration will continue to accelerate its evolution in the form of immersive experience. Taking the purchase of clothes as an example, in the early days, we obtained flat information by browsing graphic evaluations on the e-commerce platform, and buyers' shows and seller shows became a topic of ridicule; now short videos and live streams with goods have become a trend, and the three-dimensional interactive presentation of the effect of clothes on different models has reduced the bias of information to a certain extent; in the future, under the blessing of AR or VR technology, we are expected to directly see the visual effects of clothes on their own bodies, so as to make more reasonable purchase decisions. On the surface, immersion is a form of rich sensory experience, and from the kernel analysis, immersive experience actually adheres to similar attributes to blockchain, that is, fully obtain as much real and useful information as possible, so as to promote the interaction between virtual experience and the real world. It can be seen that the key areas of investment at this stage lie in the tools of immersive experience and O2O leaders with brand cooperation capabilities, and the leading Internet enterprises with diversified businesses are still the main beneficiaries. As AR or VR enters the commercial stage, the popularity of consumer-grade products will also bring a wide range of investment opportunities to the entire industry chain.
The second stage (5-20 years): virtual reality is born. Digital technologies will not only make the virtual world more realistic, but will also transform the production process of the physical world. According to data from the Mob Research Institute, as of December 2020, due to the impact of the epidemic, the average person used a mobile phone per day for 5.72 hours a year, excluding sleep time (assuming 8 hours) accounted for about 36% of the total day time. We predict that in the second stage, people's proportion of time in the virtual space is expected to rise to 60%, on the one hand, artificial intelligence, big data, industrial intelligence and other advanced technologies have greatly improved production efficiency, the real world labor demand sharply reduced; on the other hand, the connotation of the virtual world continues to enrich, not only entertainment, our work life is also gradually migrating to the metaverse. Related businesses such as artificial intelligence, bionic humans, and basic engines will officially enter the stage of commercial change.
The third stage (more than 20 years): virtual is real. The ultimate form of the metaverse is human immortality, that is, human beings use the interactive technology of brain-computer interfaces to upload the entire brain to virtual space, completely freed from the shackles of the physical shell. At that time, the proportion of human time in virtual space may be close to 100%, and the physiological needs of human beings will continue to decrease, replaced by complete spiritual consciousness. In this state, the current physical world's production of food, clothing, housing and transportation may be completely meaningless, and the metaverse will not even need to simulate reality in the virtual world, but will directly provide sensory stimulation with corresponding effects to human neurons, but this will also face moral and ethical retrial. In the process of "decarbonization into silicon", human beings may eventually be able to overcome the fear of their own existence under technological breakthroughs and evolve into higher-dimensional life forms. (Zhongxin Jingwei APP)
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