It’s hard to escape the AI headlines. The last time I remember this kind of excitement for a tech theme was in 1995 when talk of the internet’s potential was emerging. Anticipation and hype around the internet grew over the following five years, peaking in 2000. From an investor hype perspective, I believe AI is at the same place that the internet was in 1995. We’re starting to see share prices of companies like Nvidia and Microsoft move higher on AI’s potential, but the euphoria has not spread across the market as we saw 25 years ago. One of my favorite examples of internet euphoria was K-tel International, a thinly traded music distribution company whose shares in 1998 rose from $3 to $34 on the news that they were going to be selling records online. One comforting thought: many investors who witnessed the insanity of the dot.com bubble are still investors today, which makes it less likely Wall Street sees an AI bubble in the next five years.

While the metaverse won’t be as big of an investment opportunity as the internet was or AI will likely become, it will likely be as big of an opportunity as social or the cloud. The core question around the potential of the metaverse is simple: if you believe the smartphone will be the consumer computing device for the next thirty years, then there is no need for the metaverse. If you believe hardware advancements will give way to new experiences that consumers prefer over their phones, then the metaverse is the logical successor to the smartphone.

I see VR as a segment of the metaverse, and TikTok’s attention is now shifting to VR and the metaverse. The WSJ recently reported that TikTok parent ByteDance is offering some VR developers $15k to $25k to build a VR title that runs on ByteDance’s Pico headsets. The Journal reported that the Pico app store has 300 apps, below the 500 apps in Meta’s Quest Store. Separately, Meta’s App Lab, which is a marketplace for Quest apps not yet approved by the company, has about 1,700 apps. As a point of reference, those numbers are minuscule compared to Apple’s App Store, which has about 1.7m apps.

While the lack of compelling VR apps is evidence that developers have not bought into the potential of the metaverse, that will likely change slowly over the next decade as headset hardware improvements and price reductions (typically $400-$500 today) lead to an increase in unit sales. Headset makers have not found the winning formula for headset sales, as evidenced by Meta’s slowing headset sales this year. While the company does not report Quest headset sales, we can back into the number by looking at Meta’s Reality Lab’s results. I estimate 90% of reality labs sales are Quest hardware, which means Meta sold about 6.5m units in 2022, down about 5% from 2021. As a point of comparison, I believe Apple sold about 250m iPhones in FY22. The headset numbers are small today, which is one of the reasons why I believe it will take a decade for the metaverse to take hold.

Outside of the investment ByteDance is making with developers, in 2021 the company bought Pico, a VR headset maker. The headset is sold in Asia and Europe for about $475, which compares to Quest 2 at $400. Pico’s core market is and likely will remain China, which means its success will in part be governed by Chinese leadership which has set time limits for teen video game play. Some version of those laws will likely be a part of China’s approach to the metaverse.

TikTok is a master of building addictive and viral entertainment products. Goldman Sachs recently estimated it took TikTok 9 months to reach 100m MAUs, compared to Instagram at 2 years and six months and Facebook at more than 6 years. While TikTok does not report user metrics, I believe in 2022 MAUs grew by 32% y/y ending the year at just under 1.1B. That 32% growth is faster than Meta’s (Facebook at the time) 20% growth rate when they hit the 1.0B MAU number back in 2013. In December, Meta had 3B reported MAUs, which grew at 2%.

One recent example of an addictive, more immersive entertainment experience that is helping TikTok continue its fast pace of growth is sludge content. Sludge content uses split screens to combine unrelated video footage. While it’s hard for me to watch, ask any teenager and they will likely rave about their sludge feed.

Source: TikTok

We think it’s likely that Apple previews its mixed reality headset sometime in 2023 with initial sales in 2024 at a starting price of ~$3k, targeted at developers. Based on conversations with people close to the topic, we believe Apple currently has an MR headset that is near ready for launch, but is considering waiting until 2024 or 2025 given the metaverse is still five-plus years away from gaining momentum. While showing the headset this year and launching it next year is a different product release approach for Apple, I believe it’s the right approach given the importance of getting developers engaged with the company’s new hardware.

One fun dynamic about Apple entering the headset space: it’s unlikely they will use the word “metaverse” in pitching the product to developers and ultimately consumers. Apple sees the wearable future as a combination of mixed and augmented reality, with less emphasis on the virtual reality opportunity. In the end, I see it as semantics, with all three of those technologies delivering more immersive experiences which is a core tenant of the metaverse.

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