Don't be too surprised if you find yourself or a friend spending a lot of money in the metaverse in the near future.
The metaverse could fuel $1 trillion in commerce by 2025, according to Accenture, a research firm. Even if that number proves to be overly optimistic, there's a lot of interest in metaverse applications beyond gaming, according to Accenture's research. Meanwhile, IDC sees the adoption of virtual reality (VR) and augmented reality (AR) headsets growing substantially over the next few years with nearly 84 million new devices expected to be sold over the next four years.
Meta Platforms (META +2.41%) is sitting in the driver's seat, with its Oculus headsets accounting for nearly 85% of AR/VR device sales in 2022. If the metaverse does truly turn into a $1 trillion commerce opportunity, it could be a big payday for Meta.
Owning the platform
The goal for Meta isn't just to sell an expensive consumer device; it's to own the platform people use. Becoming a platform owner is extremely lucrative and comes with a lot of power. Just ask Apple (AAPL 0.85%).
Apple's control of the iOS ecosystem has come with a lot of benefits. The App Store is particularly profitable, as it takes a 15% to 30% cut of all app sales, in-app purchases, and subscriptions sold in apps. From 2008 through 2021, Apple says it paid out $260 billion total to app developers, which means it's collected tens of billions in revenue itself.
Overall, the App Store is responsible for hundreds of billions in commerce. The most recent update was $643 billion in 2020, according to an independent study cited by Apple. That number has likely grown over the last two years, possibly nearing $1 trillion at this point based on its growth rate.
While it took 15 years for a trillion-dollar ecosystem to grow on Apple's devices, a couple of factors could propel the metaverse to reach that number a lot faster.
First, consider that Apple is only a small piece of total mobile commerce -- the study doesn't account for Android devices or commerce on the mobile web.
Moreover, the kinds of experiences on VR lend themselves to commerce a lot more. Immersive media, fitness programs, travel experiences, and retail are all big areas of interest for consumers. Those generate a lot of in-app sales compared to categories like social media, news, and utilities that often find themselves at the top of mobile app stores.
If Meta can replicate the success of Apple with an app store, it could generate $10 billion to $25 billion in high-margin revenue per year.
NASDAQ: META
Key Data Points
The advertising advantage
If consumers are spending a lot of money on a platform, that opens up a massive advertising opportunity. And if there's one thing Meta is good at, it's advertising.
Apple was slow to start capturing the advertising opportunity on iOS. After a false start, it's now set to rake in over $10 billion in ad revenue across its various services by next year.
Considering the advertising acumen of Meta, which generates over $100 billion in ad revenue per year, it could capitalize on the expected rise in metaverse spending. What's more, it has the potential to advertise metaverse applications within Facebook and Instagram and provide superior measurement capabilities compared to competitors as a virtue of owning the platform.
As such, the advertising opportunity on the metaverse could be in the same range as the app store opportunity.
Worth the investment?
Meta continues to plow money into its metaverse hardware and software, but should you put your money into Meta stock?
As the adoption of devices grows over the next few years, we could see several breakout applications that significantly increase engagement with AR and VR. That tipping point is when controlling the platform that 80%-plus of devices run on will show its value, and it has the potential to realize the revenue outlined above.
That said, there's no guarantee wide consumer adoption ever materializes as Meta and research firms like Accenture and IDC expect. Still, the core family of apps business provides a massive cash cow that continues to build on Meta's network advantages, and it's investing in superior ad technology to maintain its lead as a top destination for digital advertising spend. And at Meta's current stock price, the shares look like a bargain with the potential for a massive metaverse business on top.
