Market Perceptions Still an Issue as It’s One Step Forward, One Step Back for the Metaverse in February 2023

In February, Tencent Cloud announced a new product portfolio that the company has referred to as a “metaverse-in-a-box” to help customers primarily in Asia-Pacific launch metaverse initiatives. The new suite of services will combine Tencent’s strengths in media and its newer strategic ventures into Web3, as Tencent recently announced partnerships with Web3 and blockchain companies MultiversX, Ava Labs, Scroll, and Sui. These moves pushing deeper into the metaverse were countered by Tencent’s announced end to internal development of immersive Virtual Reality (VR) hardware.

Also in February, Microsoft reportedly shut down its recently launched (October 2022) “Industrial Metaverse Core Team,” which follows on the heels of the announced closure of AltSpaceVR (consumer targeted) and staff reductions within its broader immersive businesses. Microsoft will continue to support the industrial space through Azure and other core businesses, while maintaining work on Mesh for Teams and remaining business units within the immersive markets. 

Like Tencent Cloud’s news, Huawei Cloud announced the formation of the Metaverse & Web3.0 Alliance, which included launch partners Blockchain Solutions, Deepbrain Chain, Polygon, and Morpheus Labs. Economic challenges and uncertainties coupled with limited near-term growth prospects in immersive technology have pushed companies to rethink their investments and strategies, placing an emphasis on core businesses and opportunities that have stronger connections to these strengths over investing into new market ventures. This mix of announcements has generated a range of opinions and views within the tech communities and media, with some calling this a coming (or already here) “metaverse winter.”

It is quite remarkable that within the span of just over a year, the news cycle has seen a massive tech company change its name to reflect a strong future, large financial institutions forecasting trillions of dollars tied to the metaverse, and now talk of a metaverse “winter.” Meta’s financial woes, funding cuts, and staff reductions across the tech industry, which includes metaverse and immersive technologies, make for compelling arguments that the metaverse was more hype and virtual than reality. In fact, a recently-media referenced statement made in late 2022 by an individual who tracks the tech industry (and metaverse) said he anticipates the majority of metaverse projects in the business space to be closed by 2025. Viewpoints like this, however, hold the wrong perceptions of the metaverse.

Evaluating the statement, the claim that the majority of metaverse projects will be closed by 2025 sounds sensational and, given recent news, possibly even prescient, but neither takes are merited. According to the US Bureau of Labor Statistics (BLS), around 20% of new businesses fail in the first two years, 45% within the first five, and 65% within ten years—only around 25% of new businesses make it to fifteen years or beyond. To say the majority of projects/businesses will be gone by 2025, especially with a nascent market like the metaverse, is hardly going too far out on that proverbial limb. Even if the intent was to mean a far larger percentage will fail, then this speaks more to the perceptual problems facing the metaverse than an indictment against this future.

Many still view the metaverse through the lens (or lenses) of specific technologies or market trends. Extended Reality (XR), for example, is often viewed linked implicitly with the metaverse, with many pointing out how far away we are from everyone wearing VR Head Mounted Devices (HMDs) for work, entertainment, and communications. The transition from 2D to 3D interfaces, however, does not require specific immersive hardware, although devices like smart glasses will play a key role in greatly expanding market opportunities. Many naysayers also view limitations with today’s technologies and solutions as clear evidence that a metaverse future is not possible, but these types of viewpoints have perhaps the most egregious issues with perception.

The idea that the technologies we have today are it (e.g., nothing will replace smartphones), save for evolutionary upgrades, goes against historical precedence. The metaverse is just a moniker given to a longer-term future, a pragmatic way to codify a number of pre-existing technological and market trends that suggest this future is coming. The question we should be asking ourselves about the metaverse shouldn’t be “If it will arrive” but rather the 5 W’s and H: “Who? What? When? Where? Why? And how?”. Viewing the metaverse in this regard also frames some of news stories better.

Microsoft disbanding its industrial metaverse group while saying it remains committed to and believes in the industrial metaverse may seem contradictory, but the decision may be for pragmatic reasons rather than expectations for the metaverse. To start, the initial investment wasn’t large by Microsoft’s scale—the employee impact was reportedly around 100 individuals, which is relatively small for a company with over 200,000 employees and undergoing a staff reduction of 10,000. Further, it would likely take significantly more resources and investment to scale up its operations in this segment because the industrial metaverse is in a far more advanced stage than the consumer space and, therefore, already has an established competitive field. For Microsoft, a new entrant in the market, the expenditures to build (or buy into) the expertise and relationships likely outweighed the potential Return on Investment (ROI). In this case the optimal way forward was to continue supplying key infrastructure and resources to the market rather than forging a new competitive position.

Companies shifting resources from immersive hardware to Web3 and other software and services helps companies like cloud providers Tencent and Huawei to leverage their core competencies and to take advantage of larger opportunities within the shorter term. These are important tactical decisions needed to navigate the current economic waters and not indictments against a future metaverse or even immersive, which is why it’s one step forward and one step back, instead of a full retreat. 

New industry groups and standards bodies are working on creating the necessary foundation to build towards this metaverse future, also including definitions to help with misperceptions about the metaverse. All essential steps and efforts, but it also demonstrates just how nascent the market is in many respects. Companies need to maintain proper perceptions of and expectations for the metaverse when evaluating what the impact of the buildup to this future means to them and their respective plans. The future metaverse is a long-term play, which is why ABI Research forecasts that fall directly in line with the metaverse remain comparably conservative to many other figures put into the public domain. This does not mean ABI Research is not a firm believer in a metaverse future, but is maintaining a balancing act weighing the potential impacts and opportunities against limiting factors that will extend the timeline like ROI requirements, state of current technologies and infrastructure, and time for user behavior to change.

In some regards, the rapidity at which technology markets can move has gotten us accustomed to faster results. The rise and fall of 3D TVs, for example, is often used as a foil for both XR and metaverse, mirroring statements like “an industry looking for a problem.” While 3D TVs are less likely to make a comeback, the transition to 3D has started to bring in new glasses-free 3D displays (e.g., tablets) and other “holographic” viewers/displays, which will benefit those users who prefer to not or are unable to wear HMDs. Immersive and metaverse are still in the early years of technological development so patience is required before these markets see wider adoption among the mainstream audiences.

Referencing the Web3 news from Tencent and Huawei, however, does serve as a harbinger of things to come and at minimum will serve as a litmus test to see how these digital markets develop. Asia-Pacific has been a leading metaverse market on the consumer front, with South Korea in particular taking an early lead with metaverse platforms Ifland (SK Telecom) and Naver’s Zepeto growing global user bases. Web3 has already seen stronger support among Asian markets and further development through efforts from cloud providers could accelerate its adoption and influence Western markets.

Before this happens, it is important to keep in mind pre-existing trends and view those as stepping stones to a future metaverse rather than adverse to or contrary to those transformative forces. Ongoing changes with privacy and digital identity for example, are key market issues facing the digital advertising industry and these outcomes will certainly play an integral role in the buildup to a future metaverse. While the future is not written in stone, a constant (barring any catastrophic unforeseen event(s)) remains the continual march forward of technological advancements and which is why there is a high degree of confidence behind an eventual 2D to 3D transition; it’s just a matter of nailing down the 5 W’s (and 1H).