$MSFT | Microsoft and the Metaverse – Stratechery

It’s certainly the question of the season: what is the Metaverse? I detailed the origin of the term in August; that, though, was about Neal Stephenson’s vision and how it might apply to the future. For the purpose of this Article I am going to focus on my personal definition of the Metaverse, how I think it will come to market, and explain why I think Microsoft is so well placed for this opportunity.

Here is the punchline: the Metaverse already exists, it just happens to be called the Internet. Consider the seven qualities Matthew Ball used to define the Metaverse; the Internet satisfies all of them:

  • The Internet is persistent
  • The Internet is synchronous and live
  • The Internet has no cap to concurrent users, while also providing each user with an individual sense of “presence”
  • The Internet has a fully functioning economy
  • The Internet is an experience that spans both the digital and physical worlds, private and public networks/experiences, and open and closed platforms
  • The Internet offers unprecedented (although not perfect) interoperability of data, digital items/assets, content, etc.
  • The Internet is populated by “content” and “experiences” created and operated by an incredibly wide range of contributors

I really don’t see anyone creating some sort of grand nirvana that beats what we currently have on any of these metrics. The entire reason the Internet is as open and interoperable as it is is because it was built in a world without commercial imperative or political oversight; all future efforts will be led by companies seeking profits and regulated by governments seeking control, both of which result in centralization and lock-in. Crypto pushes in the opposite direction, but it is a product of the Internet that relies on many of the qualities in Ball’s list, not a replacement.

What makes “The Metaverse” unique, then, is that it is the Internet best experienced in virtual reality. This, though, will take time; I expect that the first virtual reality experiences will be individual metaverses, tied together by the Internet as we experience it today.

Mobile and the Physical World

Forecasts, particularly those that extend multiple years into the future, are always a dangerous enterprise; look no further than January 2020, when I argued in The End of the Beginning that mobile + cloud represented the culmination of the last fifty years in tech history:

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The idea behind this article is right there in the title: “The End of the Beginning”. Tech innovation wasn’t over, it was only beginning, but everything in the future would happen on top of the current paradigm.

Then COVID happened, and now I’m not so sure if that’s the entirety of the story.

Implicit in the assumption that mobile + cloud is the endpoint is the preeminence of the physical world. After all, what makes the phone the ultimate expression of a “personal computer” is that it is with us everywhere, from home to work to every moment in-between. That is what allows for continuous computing everywhere.

At the same time, for well over a year a huge portion of people’s lives was primarily digital. The primary way to connect with friends and family was via video calls or social networking; the primary means of entertainment was streaming or gaming; for white collar workers their jobs were online as well. This certainly wasn’t ideal: the first thing people want to do as the world opens up is see their friends and family in person, go to a movie or see a football game as a collective, or take a trip. Work, though, has been a bit slower to come back: even if the office is open, many meetings are still online given that some of the team may be working remote — for many companies, permanently.

This last case presents a scenario where the physical is not pre-eminent; an Internet connection is. In this online-only world a phone is certainly essential as a means to stay connected while moving around; it is not, though, the best way to be online. Virtual reality could be.

Work in VR

There have been two conventional pieces of wisdom about virtual reality that I used to agree with, but now I think both were off-base.

The first one is that virtual reality’s first and most important market will be gaming. The reasoning is obvious: gamers already buy dedicated equipment, and gaming is an immersive activity that could justify the hassle of putting on and taking off a headset. One problem, though, is that gamers buying dedicated equipment are going to care the most about performance, and VR quality is still behind; the bigger problem, though, is that there simply isn’t a big enough market of people with headsets to justify investment from game makers. This is the chicken-and-egg problem that bedevils all new platforms: if you don’t have users you won’t have developers, but if you don’t have developers you won’t have users.

The second assumption is that augmented reality would be a larger and more compelling market than virtual reality, just like the phone is a larger and more compelling market than games (excluding mobile games, of course). This is because the phone is with you all of the time — an accompaniment to your daily life — whereas more immersive experiences like console games are a destination: because they require your full attention, they have access to less of your time.

However, this is why I discussed the COVID-accelerated devaluation of the physical: for decades work was a physical destination; now it is a virtual one. While it used to be that the knowledge worker day was broken up between solitary work on a computer and in-person meetings, over the last two years in-person meetings were transformed into a link on a calendar invite that opened a video-conferencing call. This is the demotion of the physical I referred to above:

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Meanwhile, new products like Facebook’s Horizon Workrooms and Microsoft’s Mesh for Microsoft Teams make it possible to hold meetings in virtual reality. While I have not used Microsoft’s offering, one of the things I found compelling about Horizon Workrooms was how it managed mixed reality: not only could you bring your computer into the virtual environment (via a daemon running on your computer that projected the screen into your virtual reality headset), meeting participants without virtual headsets simply appeared on video screens, no different than workers calling in to an in-person meeting in the physical world:

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I am very impressed — and my opinion is colored — by the experience of Horizon Workrooms. I now understand what CEO Mark Zuckerberg means when he talks about “presence”; there really is a tangible sense of being in the same room as everyone else, and not only in terms of focused discussion: something that is surprisingly familiar is noticing the person next to you not at all paying attention and instead doing email on their computer.

At the same time, it’s not an experience that you would want to use all of the time. For one, the tech isn’t quite good enough; the Quest 2, while a big leap in terms of a standalone device, is still too low resolution and has too limited of battery life to wear for long, and a good number of people still get dizzy after prolonged usage. The bigger problem, though, is that putting on the headset for a call is a bit of a pain; you have to unplug the headset, turn it on, log in, find the Horizon Workrooms app, and join the meeting, and while this only takes a couple of minutes, it’s just so much easier to click that link on your calendar and join a video call.

What, though, if you already had the headset on?

Think again over the last couple of years: most of those people working from home were hunched over a laptop screen; ideally one was able to connect an external monitor, but even that is relatively limited in size and resolution. A future VR headset, though, could contain as many monitors as you could possibly want — or your entire field of view could be one massive monitor. Moreover, the fact that a headset shifts your senses out of your physical environment is actually an advantage if said physical environment has nothing to do with your work.

In this world joining a meeting does not entail shifting your context from a computer to a headset, but simply clicking a button or entering a virtual door; now all of the advantages of virtual reality — the sense of presence in particular — comes for free. What will seem anachronistic is using a traditional laptop or desktop computer; those, like a headset, keep you stationary, without any of the benefits of virtual reality (of course not everyone will necessarily use a fully contained headset like an Oculus; those with high computing needs would use a headset tethered to their computer).

PCs and the Enterprise Market

Here is the most important thing: if virtual reality really is better for work, then that solves the chicken-and-egg problem.

Implicit in assuming that augmented reality is more important than virtual reality is assuming that this new way of accessing the Internet will develop like mobile did. Smartphone makers like Apple, though, had a huge advantage: people already had and wanted mobile phones; selling a device that you were going to carry anyway, but which happened to be infinitely more capable for only a few hundred more dollars, was a recipe for success in the consumer market.

PCs, though, didn’t have that advantage: the vast majority of the consumer market had no knowledge of or interest in computers; rather, most people encountered computers for the first time at work. Employers bought their employees computers because computers made them more productive; then, once consumers were used to using computers at work, an ever increasing number of them wanted to buy a computer for their home as well. And, as the number of home computers increased, so did the market opportunity for developers of non-work applications like games.

I suspect that this is the path that virtual reality will take. Like PCs, the first major use case will be knowledge workers using devices bought for them by their employer, eager to increase collaboration in a remote work world, and as quality increases, offer a superior working environment. Some number of those employees will be interested in using virtual reality for non-work activities as well, increasing the market for non-work applications.

All of these work applications will, to be clear, still be accessible via regular computers, phones, etc. None of them, though, will be dependent on any one of those devices. Rather these applications will be Internet-first, and thus by definition, Metaverse-first.

Microsoft’s Opportunity

This means that the company that is, in my opinion, the most well-placed to capitalize on the Metaverse opportunity is Microsoft. Satya Nadella brought about The End of Windows as the linchpin of Microsoft’s strategy, but that doesn’t mean that Microsoft abandoned the idea of owning the core application around which a workplace is organized; their online-first device-agnostic cloud operating system is Teams.

It is a mistake to think of Teams as simply Microsoft’s rip-off of Slack; while any demo from a Microsoft presentation is obviously an idealized scenario, this snippet from last week’s Microsoft Ignite keynote shows how much more ambitious Microsoft’s vision is:

Microsoft can accomplish this vision with Teams in large part because Microsoft makes so many of the component pieces; this gives the company a powerful selling proposition to businesses around the world whose focus is on their actual business, not on being systems integrators. So many Silicon Valley enterprise companies miss this critical point: they obsess over the user experience of their individual application, without considering how that app fits in the context of a company for whom their app is a means to an end.

This integration, though, also means that Microsoft has a big head start when it comes to the Metaverse: if the initial experience of the Metaverse is as an individual self-contained metaverse with its own data and applications, then Teams is already there. In other words, not only is enterprise the most obvious channel for virtual reality from a hardware perspective, but Teams is the most obvious manifestation of virtual reality’s potential from a software perspective (this promotional video is from the Mess for Microsoft Teams webpage):

What is not integrated is the hardware; Microsoft sells a number of third party VR headsets on said webpage, all of which have to be connected to a Windows computer. Microsoft’s success will require creating an opportunity for OEMs similar to the opportunity that was created by the PC. At the same time, this solution is also an advantageous one for the long-term Metaverse-as-Internet vision: Windows is the most open of the consumer platforms, and that applies to Microsoft’s current implementation of VR. The company would do well to hold onto this approach.

Meta’s Challenge

Meta née Facebook is integrated in a different direction: Meta is spending billions of dollars on not just software but also hardware, and while Workrooms is obviously an enterprise application, Meta has to date been very much a consumer company (Workplace notwithstanding). The analogy to the PC era, then, is Apple and the Mac, and that is a reason to be a bit bearish relative to Microsoft.

Meta, however, has a big advantage that the original Mac did not: the Internet already exists. This is where Workroom’s integration of your computer into virtual reality is particularly clever: when I am using my computer in virtual reality, I have access to all of my applications, data, etc.; perhaps that, along with Workroom’s meeting capabilities, will be sufficient.

Meta, though, should shoot for something more. First off, if I am right, and the enterprise is the first big market for VR, then some of that billions of dollars should go towards building an enterprise go-to-market team that can compete with Microsoft. Second, there remains a huge opportunity long squandered by Google: to be the enterprise platform that competes with Microsoft’s integrated offering by effectively tying together best-of-breed independent SaaS offerings into a cohesive whole.

This is, to be honest, probably unrealistic; Meta is starting from scratch in the enterprise space, without any of the identity and email capabilities that Google possesses, much less Microsoft. More importantly, it’s just very difficult seeing the company having the culture to pull off being an enterprise platform. That, though, places that much more burden on Meta making the best hardware, and keeping its integrated operating system truly open. To that end, it is worth noting that Meta is focused on its headsets being standalone, while Microsoft is still tied to Windows; this gives Meta more freedom-of-movement in terms of working with all of the platforms that already exist.

What is clear, though, is that Facebook needed to change its name: no one wants to use a consumer social network for work. And, as I noted in the context of the name change, Meta is still founder-driven. That may give an execution and vision advantage that other companies can’t match. Again, though, that could mean too much focus on a consumer market that might take longer than Meta hopes to be convinced of why exactly they should buy a VR headset.

Apple and AR

Apple seems like it should be a strong competitor. The company is clearly the most advanced as far as hardware goes, particularly when it comes to powerful-yet-power-efficient chips, which is a big advantage in a power constrained environment. Moreover, Apple can leverage the fact it controls the phone, just as it does with the Apple Watch.

However, I am bearish on Apple’s prospects in this space for three reasons:

  • First, rumors suggest that Apple is focusing on augmented reality, not virtual reality; as I detailed above, though, I think that virtual reality will be the larger market, at least at first.
  • Second, Apple’s iPhone-centricity could be a liability, much as Microsoft’s Windows-centricity was a liability once mobile came along. It is very hard to fully embrace a new paradigm if the biggest part of your businesses is rooted in another; indeed, the fact that Apple is focused on augmented reality reflects an assumption that the world will continue to be one in which the physical has preeminence over the virtual.
  • Third, because both virtual reality and augmented reality will be new-to-the-world interfaces, the importance of developers will likely be more important than in the case of the phone. People bought iPhones first, and developers followed; Apple may have trouble if the chicken-and-egg problem runs in the opposite direction.

Apple Watch is the counter to all of these objections: it’s a device for the physical world, it benefits from the iPhone, and Apple delivered the core customer propositions — notifications and fitness — on its own. Perhaps a better way to state my position is that Apple is likely well placed for augmented reality, but not virtual reality, but I have changed my mind about which is more important.

The Field

It’s hard to see any other hardware-based startups emerging as VR platforms; I think the best opportunity for a startup is riding on Microsoft’s coattails and offering an alternative operating system for the hardware that is produced for Windows. Valve is obviously already doing this with Steam, but there may be a place for a more general purpose alternative, probably based on Android (which, I suppose, Google could build, but the company seems awfully content these days).

Snap and Niantic, meanwhile, are focused on augmented reality, but will be handicapped by the inability to effectively offload compute onto the phone in the same way Apple will be able to, and again, the trick will be getting consumers to care.

Roblox, meanwhile, is arguably the Teams of the consumer space: it is a 2D-metaverse that is device-agnostic; the company is working to keep people connected even when they aren’t playing games, including buying Discord competitor Guilded. Discord, meanwhile, is a bit of a metaverse in its own right, with more connections to external applications; this could be a candidate for the aforementioned company that rides on the Microsoft ecosystem’s coattails.

Again, though, none of this is so different from the world as it exists today, because the Internet already exists (and yes, that includes crypto). That is one of the things I still stand by from The End of the Beginning: technology doesn’t move in step changes, but rather evolves on a spectrum towards more continuous computing. Name changes, whether that be from Facebook to Meta or from Internet to Metaverse, are a marker of that evolution, not a punctuated equilibrium.