Title: "Microsoft's Metaverse Layout: Understand Microsoft's Metaverse Development Plan in One Article"

Author: Chenglin Pua (Malaysia)

On November 2, 2021, Microsoft's annual technology conference Ignite 2021 opened online. The conference introduced Microsoft's innovative technologies, applications, and industry scenarios developed in the fields of the metaverse, artificial intelligence, cloud computing and big data, hybrid work, digital transformation, and digital security.

Microsoft Ignite 2021

Notably, Microsoft officially announced its entry into the metaverse. Microsoft's CEO Satya Nadella stated at the Ignite online conference that Microsoft will explore metaverse technology and join this digital world alongside a number of other major brands and companies. This follows Facebook's (now renamed Meta) announcement that it will transform into a metaverse company over the next 5-10 years, marking another tech giant's foray into the metaverse.

Nadella shared: "As the digital world and the physical world merge, we are creating a whole new metaverse. In a sense, the metaverse allows us to embed computing into the real world and embed the real world into computing, bringing a real sense of presence to any digital space. Most importantly, we can bring our humanity with us and choose how we want to experience this world and who we want to interact with."

Frank X. Shaw, Microsoft's Vice President of Corporate Communications, also wrote in an article on the official website that Microsoft will power the metaverse. Frank believes that digital technology has been at the forefront of every industry for the past 18 months, and it is now more necessary than ever. The metaverse is a "persistent digital world that connects with many aspects of the physical world, including people, places, and things." Microsoft is now powering the metaverse in a manner similar to how it discussed the internet and websites in the 1990s.

Frank wrote: "The metaverse will be a shared experience that supports both the real world and the digital world. As businesses accelerate their digital transformation, the metaverse can help people gather in digital environments, using virtual avatars/embodiments to make meetings more comfortable and facilitate creative collaboration from around the world."

Microsoft's Metaverse Development Plan: Two New Initiatives to Develop the Metaverse

The first initiative is called "Dynamics 365 Connected Spaces," which provides a new perspective to help managers gain insights into how customers move and interact in retail stores, how employees operate in factory workshops, and how to optimize health and safety management in hybrid work environments. People will be able to interact in any space, such as retail stores and factory workshops, through AI-driven models and observational data.

The second initiative is called "Mesh for Microsoft Teams," which will add a mixed reality feature called Mesh on top of Microsoft's existing Teams functionality (online meetings), allowing people in different locations to collaborate using productivity tools in Teams, hold meetings, send messages, process shared documents, and share holographic experiences. This feature will also allow people to use personalized 3D avatars, experiencing an immersive space.

The beta version of the first initiative will be launched in early December, while the second product will be released in the first half of 2022.

The first product allows users to visit virtual reality stores and scenes. Nadella mentioned in an interview with Bloomberg that they have already used this product to visit COVID-19 wards in hospitals, Toyota factories, and the International Space Station.

The second product is primarily aimed at general users, with the virtual experience collaboration platform Mesh directly integrated into the existing Microsoft Teams product to enhance users' virtual experience. Microsoft stated that this is just part of it, and the ultimate goal of the second initiative is to combine the company's mixed reality and HoloLens with meeting and video call functions, allowing anyone to participate.

Hardware Layout

In an interview with Bloomberg TV, Nadella stated that the company's video game device Xbox (Microsoft's gaming device, similar to Sony's PS5) will focus on integrating the metaverse into games on their devices in the future.

In fact, in addition to gaming devices, Microsoft has also developed AR/VR-related devices called HoloLens, which has now evolved to its second generation. HoloLens is a pair of mixed reality smart glasses developed and manufactured by Microsoft.

HoloLens was initially shipped on March 30, 2016, aimed at developers in the United States and Canada, with a price tag of $3,000. Since then, companies like Samsung and Asus have proposed to collaborate with Microsoft to produce mixed reality products related to HoloLens. On October 12, 2016, Microsoft announced that HoloLens would be available for purchase globally.

HoloLens 2 was launched on February 24, 2019, at the Mobile World Congress (MWC) in Barcelona, Spain, with a pre-sale price of $3,500.

Microsoft HoloLens Device

However, compared to virtual reality products on the market, the downside of Microsoft's HoloLens is its high price. For example, Meta's latest Oculus Quest 2, launched in 2020, is priced at only $299, less than one-tenth of Microsoft's HoloLens. The Oculus Quest 2 has a resolution of 1832×1920 per eye (roughly equivalent to 4K high quality), giving it a significant advantage in terms of cost-effectiveness. The Oculus Quest 2 has also been rated as the most recommended virtual reality device by authoritative review sites abroad.

Microsoft needs to improve the cost-effectiveness of its products to secure a place in the virtual reality product market. Additionally, there are rumors that Apple is actively researching virtual reality devices, expected to launch in 2022. Apple's expertise in combining hardware and software will undoubtedly make it a formidable competitor in this field.

Market Share of Virtual Reality Devices, Source: Counterpoint's Global Virtual Reality Device Report

Enhancing Social Experience

Microsoft Teams will introduce new 3D avatars/embodiments to promote the development of the metaverse environment. Users will not need to wear VR headsets to use them. These avatars can represent users in 2D and 3D meetings, and if they do not want to turn on their webcams, they can choose animated versions of virtual avatars/embodiments.

Jared Spataro, Vice President of Microsoft Teams, stated: "Today, people face a dilemma when attending digital meetings; they must choose whether to turn on their camera or not. Turning on the camera means you are front and center, and people will see every move you make. Turning off the camera means you almost don't make any social gestures, making it hard to convey that you are fully engaged in the meeting."

This also leads us to question whether colleagues who turn off their video and stay muted are genuinely participating in the meeting. Microsoft's Human Factors Lab has simulated these situations, finding that this can lead to feelings of mental fatigue and increased pressure. They also discovered that when you have an avatar or embodiment, 70% of meeting participants feel that person is present. Kipman said: "Choosing Microsoft's 3D avatars will allow you to project your own body language, mapping your actions through the webcam or other means, without necessarily needing to turn on the camera and create pressure."

These virtual embodiments or avatars can mimic facial expressions. Kipman stated: "You need to be able to present yourself in a genuine way, which includes frowning and expressing anger. As a form of business and emotional construction, it is important that the embodiment represents you as realistically as possible."

Microsoft will use artificial intelligence (AI) to listen to users' voices and then animate the users' avatars/embodiments. If switching to a more immersive 3D meeting scenario, these animations will also include raising your avatar's hand when you click the raise hand option or creating animated emojis around your avatar. Immersive spaces are where Microsoft believes this Mesh integration will be most useful, especially in building the metaverse.

Participation of Virtual Embodiments and Avatars

Microsoft stated that Teams is expected to start using these virtual embodiments or avatars in the first half of 2022. Microsoft's goal is for users to be able to enter immersive virtual spaces by the middle of next year. The metaverse vision previously announced by Meta bears some similarities to the platform demonstrated by Microsoft. Users can create their own 3D brand spaces on both platforms, with avatars that are both cute and cartoonish.

In addition to the addition of 3D avatars, Microsoft has also increased support for translation and transcription. Users can meet with colleagues from around the world in virtual Teams spaces, reducing language barriers. Users will also be able to share Microsoft Office files in virtual spaces, allowing them to create value in the virtual environment.

It is evident that Microsoft is actively enhancing the experience of the metaverse. Currently, the experience is a drawback of the metaverse, and improving it will help increase people's willingness to participate in the metaverse. Microsoft believes that in social interactions, presence, conversation, eye contact, and reactions will be crucial; enhancing the social experience can add many advantages to Microsoft's metaverse.

Unlimited Possibilities of the Metaverse

Microsoft believes that the metaverse is "the pinnacle of intelligent cloud and intelligent edge," and its essence lies in building a digital world that maintains a persistent and stable connection with the real world. The metaverse will allow elements such as people, objects, and places in the physical world to share experiences with the digital world. For example, during the accelerated digital transformation of enterprises, the metaverse can enable people to meet in digital environments, using digital avatars and more creative collaboration methods to facilitate communication from all corners of the world.

The definition of the metaverse and its contents vary among stakeholders, but it is undeniable that competition is becoming increasingly fierce due to its infinite possibilities. In fact, just days after Facebook rebranded as Meta, Microsoft pushed to establish a metaverse within Teams.

The "All in" metaverse company Meta's CEO Mark Zuckerberg addressed a question about revenue opportunities in the metaverse during the Q2 2021 earnings call. He said: "I believe digital products and creators will be very powerful, as people express themselves through their avatars, digital clothing, digital products, and the applications they own, moving from one place to another. Business will be an important part of the metaverse, and you will be able to sell both physical and digital products simultaneously."

The monetization capability of the metaverse lies in building a marketplace from which a certain percentage of commission can be extracted. Humans can experience things in a mature metaverse that they can do in the real world; things that cannot be experienced in the real world can also be realized or experienced in the metaverse. Following this logic, the economy of a mature metaverse could surpass that of the real world. This offers limitless imagination.

A Growing Market

On November 1, 2021, Microsoft announced its latest quarterly earnings report. The report showed that for the three months ending September 30, 2021, Microsoft's revenue reached $45.32 billion, a year-on-year increase of 22%; net profit was $20.51 billion, a year-on-year increase of 48%. Among them, gaming revenue increased by $501 million compared to the same period last year, with a growth rate of about 16%.

Driven by the new generation of consoles Xbox Series X/S, Microsoft's Xbox hardware revenue increased by 166% year-on-year. Revenue growth from Xbox-related content and services was relatively slow, increasing by only about 2% compared to the same period last year. Microsoft explained in the earnings report that this was mainly due to "strong performance last year," and the growth of the Xbox Game Pass subscription service and first-party games was somewhat offset by a decline in revenue from third-party games.

Last year, driven by the pandemic, the "stay-at-home economy" gaming industry experienced a surge. Previous Microsoft earnings reports showed that as of June 30, 2021, the number of Xbox Game Pass subscribers grew by 37%, but did not meet Microsoft's previous target (48%). Although it did not reach Microsoft's expectations, it still demonstrated the rapid growth of the gaming industry.

Microsoft's Gaming Business Continues to Grow

The metaverse combines social and gaming attributes. The gaming market remains a rapidly growing sector. A report by Newzoo on the gaming industry indicates that by 2022, consumer spending on gaming will grow to $196 billion, with a compound annual growth rate of +9.0% from 2018 to 2022.

Rapid Growth of the Gaming Market, Source: Newzoo Report

The metaverse's ability to combine gaming and social interaction has led major companies to be extremely optimistic about its future and to begin laying the groundwork for the enormous market that will emerge. Bloomberg Industry Research predicts that the metaverse will reach an $800 billion market size by 2024, while PwC estimates that the metaverse market size will reach $1.5 trillion by 2030. The enormous industry potential is prompting Microsoft to want a piece of this big pie.