Morgan Stanley's In-Depth Analysis: Metaverse, Improvement or Revolution?

This article is from Wall Street Insights.

As Facebook rebrands itself as Meta, investors are increasingly curious about what the future metaverse will look like.

Morgan Stanley believes that while creation and evolution may take years, the metaverse is likely to become the next generation of social media, streaming, and gaming platforms.

Similar to these platforms, the metaverse is initially very likely to become an advertising and e-commerce platform for offline products.

However, the current strength of digital media and e-commerce products is unprecedented, coupled with various uncertainties, the market will not easily adopt the metaverse in the short term.

The addressable consumer spending market space is as high as $8.3 trillion

In the digital world, time is extremely valuable.

Morgan Stanley's analysis found that American daily active users spend between 6 to 39 days a year on social media, streaming, and gaming platforms.

Daily active users spend a total of 11 billion days a year on digital media, which is the time the metaverse aims to capture.

If we include monthly active users, the metaverse will need to capture even more time.

For comparison, Morgan Stanley also tracked the time Americans spend on other activities. The statistics show that Americans spend 14 billion days a year watching cable television and 35 billion days sleeping.

Morgan Stanley states that it often uses the framework of "Engagement + Innovation = Monetization" when analyzing consumer-based platforms, and this framework is applicable to the metaverse as well.

Currently leading social media platforms monetize user time at a rate of $0.04 to $0.13 per hour, therefore, when combined with innovation and spending, consumer time will hold significant value.

The institution predicts that the metaverse is still likely to become the next generation of social media, streaming, and gaming platforms. And similar to current digital platforms, the metaverse is initially very likely to become an advertising and e-commerce platform for offline products.

This also means that the addressable consumer spending market space (TAM) in the U.S. is as high as $8.3 trillion, covering areas such as real estate, core retail, automotive, and gaming.

Of this, $5.1 trillion comes from immersive experiences. Immersive experiences have a more direct connection to commerce and transactions, allowing for higher levels of profitability.

At the same time, Morgan Stanley sees more opportunities for immersive experiences and unlocking the metaverse, including in areas such as apparel, cosmetics, gaming, video streaming, automotive, real estate and home design, music, and education.

It is worth mentioning that this $8.3 trillion does not include new potential consumer spending items, such as Non-Fungible Tokens (NFTs), digital collectibles, or new creative subscriptions.

The bank expects that digital collectibles and NFTs will see growth as the next generation of the metaverse develops. However, it will take a longer time before virtual products completely replace physical ones (i.e., digital jewelry, digital sports cars, or digital appliances fully replacing their physical counterparts).

Furthermore, to monetize the addressable consumer spending, Morgan Stanley believes that any metaverse project must build transaction, commission systems, or highly targeted advertising products, and establish a delivery mechanism for physical products on the backend.

What is the future of digital payments?

Morgan Stanley believes that as online shopping increases, the metaverse could potentially increase the frequency of digital payments. However, the long-term outcome remains uncertain.

If consumers continue to predominantly use traditional currency, then metaverse gatekeepers (such as Facebook and Roblox) may compete with existing payment platforms. But given that existing payment networks offer relatively good consumer experiences, they may also need to seek partnerships.

That said, for cryptocurrencies to develop within the metaverse, they may need to adopt Facebook's Novi or Diem wallet services for monetization.

Additionally, the regulatory environment adds more uncertainty to these monetization opportunities.

Key barriers to metaverse adoption

1. Current digital media is too strong

In Morgan Stanley's view, current digital media and e-commerce products are unprecedentedly powerful and are continuously improving, the market will not quickly or easily adopt the metaverse. Therefore, the hardware and technology products of the metaverse must be better.

The institution believes that it is crucial for the metaverse to be "ten times better than the second-best product." However, as of now, various products (5G, cloud gaming, e-commerce, etc.) have not reached this high threshold.

Thus, any metaverse may need collaboration to drive market adoption or develop new "killer products" to promote widespread use.

2. Privacy, humanity, and regulatory issues pose risks

It is noteworthy that consumers are using social media more frequently, which again highlights the practicality of social media. However, Morgan Stanley acknowledges uncertainty about whether consumers will choose to share more detailed digital information, what they are doing, and who they are doing it with over the next decade. This is possible, but it must have some positive effects and be sufficient to offset the negative impacts it generates.

In terms of safety, while Facebook and YouTube have made significant progress in cleaning up their platforms, with the former spending over $13 billion since 2016, security risks still exist. Both have been criticized for leaking user data and child safety vulnerabilities.

Moreover, it remains uncertain whether the relevant regulatory environment will become stricter or more relaxed over the next decade.

Can Facebook's B2B metaverse succeed?

On October 28, Zuckerberg officially announced the rebranding of Facebook to Meta, marking the beginning of a new era for its metaverse. In Zuckerberg's vision, the metaverse will "reach a billion people and hundreds of billions of dollars in digital commerce."

Morgan Stanley is somewhat hesitant about whether Facebook's metaverse can succeed in B2B, even as digital B2B, communication, and productivity tools continue to improve.

On one hand, due to Meta facing numerous scandals related to data privacy breaches and the amplification of harmful content through algorithms, consumers and businesses may be reluctant to fully trust Facebook. On the other hand, Facebook is currently a social-based platform, lacking a professional background in enterprise tools.

In this context, how far are we from a safer and more widely accepted metaverse?