Why Wall Street thinks the metaverse will be worth trillions

The project was based on a program he had created back in the 1980s, a two-dimensional simulator called Interactive Physics. His former company, Knowledge Revolution, licensed it to school districts around the country, where students could use it to simulate science experiments. But the addictive part was building and modeling digital objects—houses, cars, whatever. What’s more, users could take their simulated cars, for example, and crash them into something, and inspect the damage. That’s when a light bulb went off. Users “wanted to go into the worlds they were making,” Baszucki would later recall. Not only that, users wanted their own avatars and the ability to chat with their friends, also represented as avatars. Baszucki and Erik Cassel, a software engineer with whom he worked at Knowledge Revolution, set off to build that world. 

Years later at the science fair, a crowd of kids formed around the screen of their early prototype. One by one, they used the simulator to build, play, and interact—and build, play and interact some more. This huddle of excited preteens would serve as a kind of early focus group for what would eventually become Roblox, an immersive virtual world of gamers with a following that has spread far beyond young STEM nerds.

Baszucki founded Roblox, based in San Mateo, Calif., in 2004, and took it public last March. The direct listing was one of 2021’s biggest IPOs, valuing Roblox at $41 billion and trampolining the Canadian-born, Minnesota-raised Baszucki onto the billionaires list. The event also captured the frantic attention of Silicon Valley, Wall Street, and crypto moguls for a whole different reason: Roblox was what you might call the first-ever metaverse IPO.

There may be many more to come. Over the ensuing 10 months, the metaverse buzz has become a roar. Facebook founder Mark Zuckerberg renamed his world-devouring, obscenely profitable company after the phenomenon and committed billions of dollars to building out turf there. Microsoft dropped almost $70 billion on an acquisition to expand its virtual foothold. Goldman Sachs’ Eric Sheridan recently called the metaverse an “$8 trillion market opportunity”—or about the size of the GDPs of Germany and Japan combined.

All this hype orbits a concept whose definition is hard to pin down. The idea of a metaverse, coined by a science fiction writer in the pre-web 1990s, refers to an immersive 3D world. Today’s metaverse tech builds on the most addictive and alluring aspects of social networking (chatting), mobile gaming (pay-and-play-as-you-go gamification), and Hollywood blockbuster cinematography (imagined worlds that feel almost real). At its best, it’s a vibrant way to tell stories, build (literally, build) new communities, and transact.

Some see these immersive 3D worlds as the future of gaming. Others believe the true metaverse, which could be years away, will transform how we live and work. Big Tech and big investors are asking themselves whether this is a moment like 2007 was for social media and the mobile web, a tectonic shift in tech that they can’t afford to miss—even if they struggle to describe, specifically, what they could be missing. 

Baszucki doesn’t much care for the M-word, even if he runs the planet’s most popular one. He prefers to call Roblox a “human co-experience platform.” But he’s not immune to the zeitgeist. “I almost feel this is a category that is inexorable, just like the telegraph was inexorable, or the telephone, or now these video calls,” Baszucki told Fortune during a recent Zoom call. “And as the technology gets better, as there’s more bandwidth, as devices get better, this is inevitably going to happen.”

His own company shows why that’s an enticing prospect. Nearly 50 million users a month pop in and out of 3D digital “experiences” built by Roblox users. With the world stuck at home, Roblox use soared. It finished 2020 as the second-most-popular app on the planet by time spent, according to recently released Goldman Sachs research, beating TikTok, Instagram, and even Zoom. (Topping the list: Fortnite, the battle-royal game that is also hailed as a metaverse trailblazer.) In any one of 24 million virtual Roblox settings, users might come together to solve a murder mystery with their cyber-sleuth friends or plot a bank heist. They might also slip on a pair of virtual Nike sneakers to hop from cloud to cloud in search of a gold coin that can be redeemed for virtual Nike product.

The social component, talking trash or complimenting a virtual friend’s new outfit, makes it fun and fuels its growth. There’s a charming element to Roblox, where the core demo is kids ages 9 to 13. More established players have been known to throw virtual get-well-soon parties for young gamers who have fallen ill. They’ll also often buy “noobs” customized clothes for their Lego-like avatars. After all, accumulating wealth, and looking good doing it, is key to thriving in the metaverse.

Roblox has never had a profitable year, and its stock has seesawed since its IPO, but until recently its market cap was running neck and neck with gaming giant Activision Blizzard. Then, on Jan. 18, Microsoft swooped in with one of the richest cash offers in the history of M&A—$68.7 billion for Activision, maker of the runaway hits World of Warcraft and Candy Crush. That same morning, the über–tech bull Daniel Ives of Wedbush Securities pronounced that the deal signaled Microsoft was entering a “metaverse arms race.”

Microsoft painted it in similar terms. Gaming, explained CEO Satya Nadella, “will play a key role in the development of metaverse platforms.” The $2 trillion tech giant, which also owns the classic virtual-world builder game Minecraft, sees metaverse opportunities eventually raining on various business units from the cloud to its HoloLens mixed-reality headsets (which run $3,500 a pop).

Roblox is more of a gaming pure play, but it’s monetizing the metaverse to a growing degree. In November, revenues topped $180 million for the month—nearly doubling year over year—as die-hard gamers splashed out on Robux to kit out their avatars. In 2019, the company turned over its marketplace to the community to design features like skins, or different appearances for an avatar, down to body parts and accessories. Since then, some users have turned their digital design obsession into nine-figure businesses, the company reported at its investor day in November. Baszucki is also proud of a free Lil Nas X concert, which Roblox hosted at the end of 2020; 36.9 million visits—not quite Super Bowl halftime show numbers, but enough to sell the likes of Justin Bieber and DJ David Guetta on the promise of connecting with fans in these virtual venues. “This is bigger than play. This gets into learning, and working,” says Baszucki, whose own avatar goes by the name “builderman.”

$68.7 billion

WHAT MICROSOFT OFFERED FOR ACTIVISION BLIZZARD. One analyst described the acquisition as a sign of a “metaverse arms race.”

The Wall Street bull case for the metaverse is an expansive one. It’s a bright new marketplace for retailers and consumer brands to reach a global customer base. It’s a domain where entertainers can sell out performances, COVID or not. The tech creates a way to bring in specialists to remotely troubleshoot glitches in big industrial equipment, or to onboard new hires. And it’s a place where white-collar information workers can gather to brainstorm and pitch big ideas, including—who knows?—the next new metaverse stock.

The recurring analogy is that we’re right back in early 2007, mock turtleneck and all. “When Steve Jobs put up the first iPhone, no one had any concept of how disruptive that would be. And so, is this that? I don’t think we know yet, but we certainly see that it’s possible,” says Katie Koch, cohead of fundamental equity at Goldman Sachs Asset Management. Brook Dane, portfolio manager of Goldman’s new Future Tech Leaders Equity ETF, tells Fortune in the same conversation, “From an investor standpoint, you always want to be on the right side of secular change and disruption. We think this has the potential to be another one of those moments.” Combined, the Goldman duo manage about $125 billion in investors’ money.

In September, Goldman launched the future-tech ETF—think of it as a competitor to Cathie Wood’s ARK Innovation fund—to give investors further exposure to promising growth stocks. One of its top holdings is data-center hardware specialist Marvell Technology, a stock widely tipped as a hot metaverse play. The stock has limped out of the gates in 2022, down 19%. The ETF, too, is deep in the red for the year (as is Wood’s fund). With tech stocks in general being clobbered by the prospect of rising rates, early metaverse investors’ faith could be sorely tested.

2021 was like a sci-fi paperback you devour in one go. In the past year, we’ve had Delta, Omicron, Deltacron, ghost flights, quarantine hotels, mRNA jabs, mRNA boosters, booster mandates, a lumber-crude-and-coffee super-cycle, stonks, stimmies, and chip shortages, not to mention a run on crappy houses in the suburbs and even crappier used cars. Kudos then to Silicon Valley for distracting us from this madness with a new word, and new world. 

The metaverse—the idea, anyhow—has been floating around tech circles since Mark Zuckerberg was in grade school. In his 1992 science fiction novel Snow Crash, Neal Stephenson conjured up a kind of live-in internet technology that pervades the book’s dystopian, anarcho-capitalist world. He called it the “metaverse,” and it was essentially corporate-run. The conceit evoked a dark, dismal future. Still, the idea of creating a more immersive internet experience kindled the imaginations of Silicon Valley’s biggest thinkers, including influential venture capitalist Matthew Ball. Ball has challenged Big Tech in recent years to develop the tools to let humanity build an always-on digital existence, open to all. “In its full vision, the metaverse becomes the gateway to most digital experiences, a key component of all physical ones, and the next great labor platform,” he wrote in a January 2020 manifesto. A few weeks later the World Health Organization declared COVID-19 a pandemic, forever scrambling the line between our digital and physical worlds.

COVID, it would turn out, was a great accelerator for the metaverse vision. Closures and lockdowns forced most of us to Zoom into an existence of digitally distanced work, schooling, and socializing. At the same time, the tech around us continued to get a little bit better, faster, cheaper: the AR/VR headsets; the compute power of mobile phones, laptops, and gaming consoles; the chipsets; the nearly ubiquitous cloud; 5G and fiber-to-the-home. 

“Technology is improving so fast. We no longer have to wait 10, 20 years” for incremental advancements, says Haim Israel, BofA Securities head of global thematic research. But, he predicts, 5G isn’t going to cut it to make the metaverse truly universal. We’ll need 6G, eventually. While we’re at it, AR/VR mixed-reality headsets still get lousy reviews for messing with users’ vision and the occasional electric shock.

A few one-star reviews aren’t holding back Big Tech, though. 

Last October, at Facebook’s annual developer conference for all things virtual reality, Zuckerberg announced a name change for the social media giant—to Meta Platforms. It wasn’t just a rebrand, Zuckerberg declared, but “the next chapter for the internet.” He promised a world of floating holograms teleporting into virtual gatherings. MetaZuck’s own performance was, meh, a bit stiff, but the avatar coworkers he introduced looked like they could really liven up a weekly all-hands. 

More important, investors were impressed, not least because the idea of Web3—a kind of successor to the mobile internet—was finally coming into focus. Soon-to-be-named Meta shares jumped as much as 10% in the weeks that followed, though they’ve since fallen back. Undeterred, fund managers continue to launch metaverse-themed ETFs to meet investor demand. Business media, meanwhile, pronounced the metaverse as “winning” Christmas, as consumers splurged on virtual- and augmented-reality gear. The Oculus app—needed to interface with Meta’s Oculus VR headsets—topped the downloads charts on Christmas morning.

$129 billion

2021 REVENUE FROM VIRTUAL GAMES AND PLATFORMS. Most of that revenue came from in-game microtransactions, according to research firm L’Atelier BNP Paribas.

The metaverse taking off could become one of the most capital-intensive pivots ever seen in Big Tech. According to BofA Securities analysts Justin Post and Joanna Zhao, Facebook’s metaverse investment “could easily reach $50bn+ before reaching breakeven.” Billions in capital expenditures will lift other corners of the tech sphere as contenders of all stripes plow huge sums into new data centers equipped with A.I.-blazing chipsets. Plus, it would trigger a new explosion in VR apps and libraries of new VR content. All eyes are on Meta’s Oculus VR business, a unit it bought in 2014 for $2 billion. Meta is determined to vanquish Apple and Google in the VR app store space. But growth beyond the gamer demo is still elusive, according to eMarketer. 

The big dollar signs so far come from gaming. As L’Atelier BNP Paribas, the French banking giant’s forecasting and research firm, points out, revenue from virtual multiplayer games and virtual simulation platforms was expected to reach $129 billion in 2021, far outpacing the pre-COVID global box office. The lion’s share of that revenue comes from in-game microtransactions—your avatar needs the latest gear! E-commerce, advertising, and non-fungible digital assets are also gaining ground. 

Many metaverse platforms are built around NFTs and cryptocurrency, and with the boom in those assets, a wheeler-dealer class has emerged—a far cry from those kids throwing get-well parties for their Roblox buddies. “There’s a lot of ambiguous and questionable transactions that happen, and trades that happen where you have to query the validity of some of the values,” observes John Egan, a former fintech investor who’s now CEO of L’Atelier. Exhibit A: The gaudy land grabs in upstart metaverse worlds like the Sandbox and Decentraland. Speculators there and elsewhere have rushed to buy virgin plots, paying for them with extremely volatile in-house cryptocurrencies, the values of which plunged even further than Bitcoin and Ether in the first weeks of 2022. Some players contend it’s a property developers’ dream, an opportunity to pick up the virtual equivalent of Monopoly’s Boardwalk and Park Place on the cheap. Others question whether there’s any intrinsic value to the assets—like Dogecoin, but with a deed.

2021 was a watershed year for the metaverse. In the private capital markets, more than $10 billion was raised across 612 deals, Goldman reports, to feed a new crop of unicorn hopefuls. Even with all that money flowing around, the big “What exactly is the metaverse?” question still hangs over the sector, generating all manner of confusion and disagreement. Who will regulate it? Will users’ data be protected? Will today’s tech live up to the hype? And then there’s the thorniest of questions: Will this virtual land rush be nothing more than a series of walled-garden metaverses dominated by a few Big Tech gatekeepers—today’s corporate-controlled internet, on steroids? (Snow Crash alarmists shudder at the thought.) Or will there be room for “open” metaverses—there are hundreds of them in development—built on the blockchain and fully interoperable so that people’s avatars can hop from world to world? (Open-source innovators want what’s behind that curtain.) 

While these debates simmer, a parade of consumer brands—from Disney to Nike to Gucci to the National Football League and Chipotle—have set up a presence on Roblox in the past year. It’s unclear if the ventures will ever have an impact on the brands’ bottom line, but their pivots generated more metaverse buzz. Chipotle leveraged the move for marketing purposes, giving Roblox users a coupon to claim a free burrito for Halloween. Gucci developed a pop-up shop, Gucci Garden, where it sold for about 500 Robux ($5) limited-edition virtual versions of its Queen Bee Dionysus handbag. This being 2021, a bidding war broke out, and at least one of the pixelated bags sold for $4,115; the real-life one sells for $3,400.

Nike hasn’t sold anything yet on Roblox, but in December it acquired RTFKT (pronounced “artifact”), a collective of digital designers best known for “metaverse-ready sneakers and collectibles,” for an undisclosed sum. Wall Street branded the move a winner. Investment banking giant Guggenheim Securities named Nike its “best idea” of 2022, saying it was intrigued by its metaverse strategy, even if the athletic-wear giant has revealed precious little about that strategy to investors. (As of the Jan. 21 close, Nike’s share price was down 11.3% in 2022.)

Baszucki, for one, thinks these are early days. Just as he sees Roblox usage going beyond teens and preteens, he predicts more companies catching the metaverse wave. “We saw in the last year, a lot of discussion: What’s the future of the metaverse? What’s it going to look like? How are people going to work, play, learn, connect together on top of it?” Baszucki says, adding he’s thrilled to see it “enter the public dialogue in a big way.”

A lot of investors share that enthusiasm. But unlike Baszucki, they’ll need a lot more growth from this virtual plane of existence before it makes them rich.

The metaverse for beginners

It’s the talk of Silicon Valley, but most Americans over age 18 haven’t spent time in the metaverse. Here’s a quick introduction from two who have.—Marco Quiroz-Gutierrez and Felicia Hou

What’s the metaverse, exactly?

It’s a catchall term for the growing number of platforms on the internet that have built immersive, interactive worlds, some of which incorporate NFTs and cryptocurrencies. Several are platforms for gaming; some are digital meeting spaces; some include virtual entertainment and businesses; and some offer all of the above.

What tech do I need to get there?

Some beginner-friendly metaverse platforms, like Roblox, can be accessed through your smartphone. But to get a more immersive experience, you’ll likely need a desktop or laptop computer with a good GPU, or graphics processing unit. (Windows PCs tend to perform better than Macs.) A gaming console like Microsoft’s Xbox can also be a good entry point. 

Virtual reality (VR) headsets and augmented-reality (AR) glasses are already widely used in some gaming environments. And Meta, formerly Facebook, is integrating its Oculus VR headsets into its plans. But for now, most metaverse environments don’t require them. 

What can I do in the metaverse?

On most platforms, you’re represented by an avatar, and you see and hear and sometimes even feel the same things it does. Some popular activities involve playing and designing games, building 3D virtual environments and visiting those others have built, viewing digital art, and attending virtual concerts. You can also hang out and chat with other avatars. And on many platforms, your avatar can buy things: Game players can purchase weapons and special powers, for example, while others can buy customized clothes and accessories. Some speculators are doing a brisk trade flipping virtual “real estate” on platforms like Decentraland and the Sandbox.

How do I pay for things?

On Roblox, game platforms like Fortnite, and many other company-run platforms, you can pay with credit cards or a PayPal account. Other platforms are blockchain-based, and there you often need crypto to transact.

Why does business want to be here?

Consumer brands think the metaverse can be a branding and marketing tool and a place for e-commerce. Gaming and entertainment companies hope to reach bigger audiences. And all kinds of companies hope the metaverse will enable their employees to interact, problem-solve, train each other, design and repair things, and generally connect in ways that are more engaging than yet another videoconference call. 

A version of this article appears in the February/March issue of Fortune with the headline, “Why Wall Street loves the metaverse.”

Correction and update: This post has been updated to correct the title of the Blizzard video game, World of Warcraft.