This article is sourced from Tianfeng Securities, authored by Feng Cuiting and Wen Hao.

The Metaverse aims to create a virtual digital second world independent of the real world, allowing users to live freely with a digital identity. Its core elements include sustainability, real-time interaction, no entry restrictions (multi-terminal), economic functionality (possessing a self-contained economic system), connectivity (linking the real world through terminals), and creativity (PGC & UGC).

As the best carrier of the Metaverse, gaming has seen an increase in online activities driven by the pandemic in 2020, leading to a richer application of the Metaverse concept. For example, renowned singer Travis Scott held a virtual concert in "Fortnite," and the University of California, Berkeley hosted a graduation ceremony in "Minecraft." Domestic gaming companies are actively promoting Metaverse concept projects, such as Tencent's TiMi Studio aiming to create a next-generation game comparable to "Ready Player One," NetEase's "Egg Party" and Lilith's "Doomsday Dawn" focusing on social elements, and miHoYo collaborating with Ruijin Hospital to invest in brain science research.

The Metaverse concept stock Roblox went public on the New York Stock Exchange on March 10, 2021, and is a creative gaming community platform with an average daily active user count of 32.6 million. Roblox's business model is unique, combining gaming, development, and education. It provides games for players and also offers tools for players to create their own games for free, namely the developer editor. Its social attributes, user-generated content, real-time participation, and independent closed-loop economic system align closely with the Metaverse concept. In 2020, Roblox generated $924 million in revenue, an 80.39% year-on-year increase, with stable revenue growth and mobile game annual revenue exceeding $1 billion. The platform has nearly 8 million active developers, and the current valuation per user is approximately $236.

Tencent's CEO Ma Huateng mentioned in "Three Views" that Tencent will enter the era of the true internet, focusing on the true internet and digital twins. The concept of digital twins, parallel to the Metaverse, involves creating a 1:1 digital twin of a physical entity in the virtual world. In 2020, Tencent Cloud proposed CityBase, reflecting the digital twin of urban scale.

Tencent has already invested in key areas that make up the Metaverse, including AR, VR, music, and the internet: Epic's Unreal Engine; AR component and mirror world leader Snap; global music giant Spotify; free expression tool Bitmoji; camera Kit; social software Discord; and game creation community platform Roblox. In a new round of personnel adjustments, Tencent Interactive Entertainment (IEG) President Yao Xiaoguang took over the overall business of the PCG social platform, which includes QQ and QQ Space, confirming Tencent's intention to leverage its social media to strengthen the Metaverse ecosystem.

VR, AR, and AI, as the technological foundation of the Metaverse, are expected to experience rapid growth. The global market size of the virtual reality industry was approximately 90 billion yuan in 2020, with an expected average growth rate of about 54% from 2020 to 2024. Starting in 2021, the global shipment of virtual devices will accelerate, with an estimated 75 million units by 2024. As hardware scales up, the number of users will further increase, and the richness of content applications will help enhance user stickiness and promote healthy market development. Algorithms and data continuously improve VR content production, and VR technology will be closely linked to scenarios, with large-scale application of scenarios becoming the cornerstone of the entire VR industry's development.

As the VR industry chain gradually improves, the empowerment of the industry by VR will exhibit a powerful flywheel effect. Initially, this will manifest in the entertainment sector, represented by gaming, and in the long term, as progress matures, it will apply to diversified industries including AEC (Architecture, Engineering, Construction), manufacturing, telecommunications, infrastructure, and automotive. The AI industry, as the underlying support for the Metaverse and virtual reality, empowers industrial development on multiple levels, including algorithms and visuals. Besides Tencent, other companies are also making moves, such as Facebook launching the VR social platform Horizon and achieving synergy with its hardware Oculus, NVIDIA introducing the Metaverse concept creation platform Omniverse, and ByteDance investing in "domestic Roblox" Code Qian Kun, while domestic VR glasses manufacturer Pico is set to release high-quality new products in May.

1. Definition of the Metaverse

What is the Metaverse

The Metaverse originated from the hypothesis of American author Neal Stephenson: in the future, through devices and terminals, humans can connect to a computer-simulated virtual three-dimensional "reality," where all things in the real world are digitally replicated. People can do anything in the virtual world through digital avatars, and actions in the virtual world will also affect the real world.

From a practical perspective, the virtual spaces constructed by games may be the fastest entry point to the Metaverse. With the push from the pandemic, the boundaries between gaming and life are diminishing. For instance, famous American singer Travis Scott held a virtual concert in the game "Fortnite," with 12.3 million gamers becoming virtual concert attendees; the University of California, Berkeley recreated its campus in "Minecraft," allowing graduates to participate in the graduation ceremony as virtual avatars; and the top AI academic conference ACAI held a seminar in 2020 on Nintendo's "Animal Crossing," where speakers presented PPTs in the game.

Definition of the Metaverse

Meta in the computing field refers to "beyond," as in Metadata, while "verse" is an abbreviation of universe, meaning to explore the reconstruction of the virtual world beyond the real world. This includes all virtual worlds, AR, and the internet. The term Metaverse is used to describe a future internet iteration composed of perceptible virtual worlds linked by shared, 3D virtual spaces. The Metaverse can be roughly understood as a more immersive and participatory internet, with gaming being the best carrier of the Metaverse.

Tencent researchers believe the Metaverse has seven characteristics: real-time authenticity, sociality, flow, interoperability, platform nature, ownership of an economic system, and openness. The Metaverse is not equivalent to "virtual space," "virtual economy," or merely a type of game or UGC platform.

2. The First Metaverse Stock: Roblox

Roblox Metaverse, an immersive and liberated virtual world

"The Metaverse is a 3D virtual world that connects everyone together, where people have their own digital identities and can interact freely and create anything they want. Roblox is merely the 'shepherd' of users creating the Metaverse; we do not produce or control any content."

Roblox takes gaming as a path to pursue educational dreams

Founded in 2004, Roblox is an online game creation community company. It launched on iOS in 2011 and on Android in 2014. By 2019, Roblox's community player MAU exceeded 100 million, with millions of creators having used Roblox's tools to develop games. Meanwhile, Tencent and Roblox reached a partnership to jointly develop the Chinese market. On March 10, 2020, Roblox went public on the New York Stock Exchange.

3. Tencent's Path to the Metaverse: True Internet and Digital Twins

Tencent is committed to creating the era of the true internet, digital twins, and the Metaverse

Ma Huateng mentioned in Tencent's internal publication "Three Views": "An exciting opportunity is coming. After a decade of development in mobile internet, we are about to welcome the next wave of upgrades, which we call the true internet." "This is a process of qualitative change from quantitative change, meaning the integration of online and offline, and the fusion of physical and electronic methods. The doors between the virtual world and the real world have been opened, whether transitioning from virtual to real or from real to virtual, all aimed at helping users achieve a more authentic experience." This description aligns perfectly with the two emerging concepts of digital twins and the Metaverse.

Digital twins utilize physical models, sensor updates, operational history, and other data to integrate multi-disciplinary, multi-physical quantities, multi-scale, and multi-probability simulation processes, completing mapping in virtual space to reflect the entire lifecycle process of corresponding physical equipment. This involves creating a 1:1 "digital twin" of a physical entity in the virtual world. Practical applications include video-based social interactions, video conferencing, live streaming, etc. The video content and participants are real, while the space for live streaming and meetings is virtual, allowing participants to influence this virtual scene through interactions, rewards, and other means.

4. Outlook on the Metaverse: VR, AR, AI, and Other Major Players' Layouts

5G Cloud VR Cultivation Period, Virtual Reality Industry Enters Growth Phase

2020-2021 will be a critical window for virtual reality to accelerate into the fast lane of industrial development, with the global market currently in a partial immersion/growth cultivation period. The Metaverse concept relies on virtual reality hardware and content as its technological foundation, facilitating the coordinated development of both ends of the virtual reality industry.

Rapid Development of Virtual Reality Market Size, with AR and Content Applications as Core

The global virtual display market size is nearly 100 billion, with AR and content applications becoming the primary growth points. In 2020, the global virtual reality market size was approximately 90 billion yuan, with the VR market at 62 billion yuan and the AR market at 28 billion yuan. It is expected that from 2020 to 2024, the average annual growth rate of the virtual reality industry will be about 54%, with VR growing at about 45% and AR at about 66%. By 2024, both will have a share of 240 billion yuan.

Computing Power Enhancement Welcomes Rapid Development of AI

In the first half of 2020, the market size of AI R&D platforms in China reached 140 million USD, with a compound growth rate exceeding 30%. Among them, leading platforms like Alibaba Cloud and Baidu Brain had daily invocation counts exceeding trillions. The AI ecosystem is rapidly expanding. The iFlytek Open Platform has reached 1.756 million, supporting a cumulative total of 2.89 billion terminals. Tencent's AI Open Platform has 2 million customers, serving over 1.2 billion users globally. In terms of R&D, Google's TensorFlow and Facebook's PyTorch have occupied the mainstream market due to their first-mover advantage and backing from major companies. TensorFlow's industrial leadership has kept it at the top for a long time, with market attention exceeding three times that of the second place. PyTorch has emerged due to its ease of use, accounting for over 50% of top academic papers.

5. Risk Warning

The concept of the Metaverse is relatively advanced, and significant development time is still needed for technological support and AI R&D, with the ideal realization period remaining uncertain.

The supporting technologies for the Metaverse, virtual reality (VR) and augmented reality (AR), are continuously iterating on the hardware side but have a low overall penetration rate. The software application and content production sides are still relatively lacking, requiring time to reach maturity.

The virtual reality-related industry has legal regulatory blind spots, lacking a systematic management framework, which may limit development.

The catalytic effect of 5G on virtual reality scene applications is below expectations.

Intensified market competition has led to revenues falling short of expectations.

The rollout of related products has not met expectations.

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