With the metaverse in its early stages, organizations and people have the opportunity to shape the metaverse responsibly. In this episode of the At the Edge podcast, Matthew Ball, renowned metaverse expert and author, speaks with McKinsey’s Mina Alaghband to discuss what the metaverse can be at its best, how to ensure positive outcomes, and what worries him the most.
An edited transcript of the discussion follows. For more conversations on cutting-edge technology, follow the series on your preferred podcast platform.
I believe absolutely that the advent of graphics-based computing and 3-D environments is going to change many of the technologies, standards, conventions, and monetization models. It’s going to have profound generational change. And, most importantly, it’s going to reach many of the categories we’ve long hoped would be altered by mobile and the internet and yet haven’t been.
Mina Alaghband: That’s Matt Ball, foremost metaverse expert, investor, and writer. He joins me today.
This is the second episode of a three-part series on the metaverse. I’m Mina Alaghband. Welcome to At the Edge, a production of McKinsey’s Technology Council.
Matt, welcome to the podcast. I wanted to start by asking you a little bit about where the metaverse is heading, because funding and media and public interest in the metaverse have really exploded over the past year. And some listeners might be thinking, are Web3
and the metaverse really going to change business models, interpersonal relationships, and identity in the ways that you’ve described in some of your writings, or is this really just gaming 2.0?
Matt Ball: The raw technology required to produce what we would understand to be some sort of simulacrum of the metaverse—which is to say it passes a critical threshold of visual fidelity, of functionality, of the number of people who can participate—we recognize that as having changed over the past few years, and that’s a matter of broadband penetration, of latency, and of graphics processing units (GPUs).
On top of that, we see a number of different cultural events that are shown through behaviors in commerce and time. You go back seven years, and very little money was spent on in-game virtual goods—roughly about $5 billion in 2015. Last year, putting aside NFTs, we had about $60 billion or $70 billion spent on purely cosmetic, nonfunctional virtual goods. Fortnite has sold, in each of the past four years, more in virtual apparel than some luxury brands. Those are new cultural moments. We’re also seeing more recently an influx of traditional brands, including many of the biggest, most sacred brands, investing in these virtual spaces. And we’ve also seen a very large destigmatization of time spent in virtual worlds.
What does this mean collectively? It means that this idea that we’ve thought of for decades is now a little bit more tangible, even if in the virtual sense. There are hundreds of millions of people connecting to these environments every day. There are many of the most storied companies on earth building a presence, and we have commerce in the tens and soon to be hundreds of billions of dollars.
Mina Alaghband: As you look forward over the next 12 to 24 months, what are you expecting to see that will confirm to you that this isn’t sort of a hype cycle and that this is really a shift of the economy into the metaverse?
Matt Ball: We’re really going to see two waves. The first is that we’re going to see more brands, more investment, more M&A, and more users in all things 3-D and real-time rendered. These are all trends that have been going on for multiple decades, and there’s no reason to believe that time spent online, the number of smartphones in use, and the criticality of digital to our economy are going to reverse.
At the same time, we should expect some sort of backlash to the metaverse as a theme, as an investment case, and as a point of shareholder prioritization, because the narrative, at least in my perspective, has outstripped the products and the revenues that we see.
Companies of course need to be investing long before the revenue, the products, and the disruption are here. Never before have we so collectively said, “The metaverse is here; the products are here.” Bill Gates has said that he believes in the next two to three years that the majority of meetings will happen in the metaverse. The reality is that it’s going to take a decade or longer for that to happen. And so we’re going to have to go through that hump in the interim.
Mina Alaghband: What are the early use cases that you anticipate seeing over the next two or so years?
Matt Ball: What’s interesting to me about the metaverse as a transformative event for the global economy and the digital economy is that, in many cases, we see those first use cases attacking categories that have long avoided digital disruption. My hope is that the metaverse and VR (virtual reality) and AR (augmented reality) will finally start to show actual, tangible, measurable productivity improvements in education and healthcare.
Johns Hopkins recently performed its first pair of surgeries on live patients using augmented reality displays. The head of the neurosurgery and spinal department has said that it’s like using GPS for the first time. It’s not that it teaches you how to drive; it doesn’t drive the car for you, but you find that your ability to execute this task is much better than ever. Why does that matter as a use case? Well, not only is healthcare a costly industry, but like GPS and AR in surgery, it just needs to have a marginal impact on something of critical importance. It doesn’t need to perform the surgery; all we need is a meaningful increase to success rates.
Education is another good example. There are already a field of coursework and materials that are being produced that provide educators with a new way to express and participate in education in the classroom. I grew up building a volcano out of baking soda and vinegar and papier-mâché. Right now, students are able to immerse themselves at the microscopic level, agitate magma, experience virtually being the magma as it is ejected from that volcano into the atmosphere, and experience the impact of those physics not just on earth but on the oceans of Venus.
Mina Alaghband: Web2 is still full of problems that regulators have yet to solve, from radicalization and abuse, data rights, security, and so on. What should regulators be thinking about? What is the right regulatory framework, and how paranoid should regulators be about this?
Matt Ball: I have the following hope: that consumers are going to place a renewed focus on trust. We’re already seeing that in the Web3 movement, and we can already see this in some of the policy changes of Microsoft, Facebook, and others. But we’re also seeing that regulators are looking forward rather than just trying to correct the problems of the past.
If you take a look at what’s happening in the EU right now, the EU is going so far as to propose requirements for the standardization of electrical ports. We’re also seeing that it’s now starting to legislate access to drivers and APIs in hardware. That’s a relatively sophisticated approach. However, if you grew up as Gen Z, you just think of government having no control, and that’s actually a new problem. We are starting to see that the EU and others are starting to say that these are the standards that you must adhere to, here’s what the user rights need to be, and here’s what you can and cannot do.
Mina Alaghband: What do you think is the role of business leaders in driving a metaverse that takes into account stakeholder capitalism and consumer rights?
Matt Ball: The global economy is understood to benefit from global trade. So we know what the optimal structure in Web2 was—it was these varyingly vertical and horizontal software- and hardware-based platforms, which were largely built in isolation, on which users did not want to participate outside their system much. And yet, if we want to build a parallel plane of existence, you need something that looks a lot more like Roblox or Minecraft, which is millions of individual developers, millions of individual consumers, all interacting in some form of virtual cross-border trade.
The reason why I’m hopeful as to what the future looks like is that everyone is now saying, “We have to look at the economy of the metaverse.” That’s not about building the GDP of their individual product. They need developers to choose to reside in their experiences, they need developers to build in those experiences, and they need users to patronize and invest. And so we do have some expectation that this requires collaboration on a level similar to that of the WTO (World Trade Organization).
Mina Alaghband: There are two potential architectures in the metaverse—one that’s really centralized, centrally owned, and centrally curated with one entry point, and then there’s a more decentralized version that looks like an early version of the web and is much more user owned. Where are we headed between those two?
Matt Ball: I think it helps to separate two frequently conflated terms—“metaverse” and “Web3”—which, in my perspective, are distinct. Web3 is more of a question of database and systems architecture. That’s where we’re talking about a decentralized system. Why do these two terms get mixed together? Well, Web3, by definition, succeeds Web2. The metaverse, by definition, succeeds our current computing and networking paradigm. The fact that they both succeed what we experience as the internet today naturally intertwines the two.
It’s not a question of decentralization or centralization—neither side will “win.” It’s more a question of where along that spectrum are we? In any likely outcome of the metaverse, we’re likely to see a structure similar to that of what we see today: a roster of horizontally and vertically integrated platforms, which are either primarily software based or primarily hardware based and are likely to concentrate all of the things we consider valuable, such as data, social graphs, spend, advertising, and so on.
Many in the crypto community argue that if you do not have decentralization, then you cannot have property rights. We say in the real world that possession is nine-tenths of the law, but in a virtual world, if you can never take possession of a good in a virtual space, it stands to reason that you will spend less on it. So that’s a simple way of saying that under the Web3 architecture, consumers are likely to spend more. If developers can truly own their code, they’re likely to invest more. And if greater consumer spending and greater investment from developers are likely to produce more spending, then you’re likely to see a more successful metaverse under that sort of structure.
Mina Alaghband: Are we going to see a world where the biggest software companies today gain the same share in the metaverse, or do you see gaming companies taking a bigger share, or will there be new players who come in?
Matt Ball: This is a really important question. We have companies that lead in one era and yet are essentially eradicated in the next. There’s another category, which are companies that succeed in one era and then continue to succeed in the next. Facebook started in the PC and fixed-line internet era and, of course, grew even larger in the mobile era.
We have a third category, which are companies that start in one era and do thrive and grow in the next era due to growth in the overall digital economy but that find they’ve been largely displaced or supplanted in their core business.
Then there’s a fourth category, the brand-new companies that come in with a slightly different hypothesis, a different technology bet, or target different consumers and become as large or potentially larger as their predecessors.
It’s likely that we will see exactly this development play out over the next five, ten, 20 years. I think that’s how we should look at the metaverse. Four different categories of companies that depend on a wide range of bets, for which merely investing and believing and having the capability to survive are not sufficient.
Mina Alaghband: What makes you most excited about the prospect of the metaverse becoming mainstream?
Matt Ball: I believe absolutely that the advent of graphics-based computing and 3-D environments is going to change many of the technologies, standards, conventions, and monetization models. It’s going to have profound generational change. And, most importantly, it’s going to reach many of the categories we’ve long hoped would be altered by mobile and the internet and yet haven’t been. But it’s going to be fascinating to see exactly how that plays out. Right now it’s still hypothesis driven. As an investor, it produces opportunity. As a strategist, it’s a hard intellectual problem. And as someone who hopes for a better future, it gives me renewed faith.
Mina Alaghband: What gives you the most pause?
Matt Ball: A big problem is how we feel in the internet era. That is a question of abuse, harassment, radicalization, and misinformation. It’s actually kind of strange how far we are into this era and don’t have good answers.
I’ll give you a simple example. Thinking about these questions of radicalization, we saw ISIS very effectively use social media in the past decade to radicalize and recruit insurgents to various countries around the world where they would be trained. Well, in a decentralized future, in a 3-D simulation, those training grounds become a lot more profound. They don’t require travel, and they actually provide a superior education environment.
I don’t think we’re very far in solving those problems. And blockchain is unlikely to solve them as well. It’s going to get a lot harder and scarier, frankly.
Mina Alaghband: What is one practical thing that business executives who are really trying to understand the metaverse and its implications can do to get a better grasp on it?
Matt Ball: These virtual spaces are where new insurgent brands will use the generational difference in users, the reluctance of today’s giants to move into that space, and the general confusion as to how best to use it in order to build their brand, to build their reach, to reach a new generation of customers with brand-new products.
How do today’s business executives defend against that? The simple answer is you need to understand the space and you need to be investing in it. No one knew exactly how social media would play out in 2008. There was actually nothing you could really do to intellectualize an answer. You had to test in it. You had to play in it. You had to build. The challenge that we have in the metaverse is that the skill set is actually far more difficult. We know that it’s important for brands, as an example, to tell a story in advertising, especially in social advertising, and yet telling a story in a 30-second advertisement or with a YouTuber is much easier than building an immersive environment. It’s much easier than building virtual goods that are fun to use.
And so I actually see the biggest challenge as being going from communicating a message to telling a brand story to needing to create something that someone chooses to engage with on an ongoing basis. The only way to get good at that is to explore, to understand the dynamics, and to test.
Mina Alaghband: What was your path to the metaverse?
Matt Ball: So I’ve always been a gamer and a sci-fi addict, but I’ve always been really fascinated with what’s next. While I was at Amazon, it was clear that gaming was going to be the next frontier. And then very quickly moving to gaming, you started to realize that gaming was no longer just gaming. And so I just followed those threads, and that has led us to this next internet.
Mina Alaghband: It was great chatting. Thanks, Matt.
Matt Ball: Thank you.
At the Edge is a production of McKinsey’s Technology Council. It is hosted by Mina Alaghband. Contact us at McKinsey_Technology_Council@mckinsey.com.
Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.