Microsoft (MSFT) and the Metaverse

The announcement by Facebook, Inc. (FB)—sorry, Meta Platforms, Inc.—that it was becoming a metaverse company generated considerable attention and publicity last week. But the social media behemoth is actually the second technology giant to latch onto the concept. Microsoft Corporation (MSFT) was the first tech conglomerate to tease the idea of an alternate universe as a business opportunity earlier this year. Not many may know this, but Microsoft already has a first-mover advantage in creating metaverses and the potential to generate substantial profits from such technologies.

What Is the Metaverse? 

The word Metaverse was first coined by Neal Stephenson in his 1992 novel Snowcrash. He used it to describe a computer-generated universe that the protagonist of his novel draws with his eyes. This alternate three-dimensional universe was a counterpoint to reality and had its own ecosystem. Stephenson's concept of the Metaverse was relatively simple in its execution. The idea has evolved in myriad ways since then and encompasses multiple technologies and concepts. Meta CEO Mark Zuckerberg described it as "the next generation of the internet" and said it would take many companies to build it.

During its BUILD conference earlier this year, Microsoft CEO Satya Nadella described an "enterprise metaverse" made up of digital twins, simulated environments, and mixed reality. "With the Metaverse, the entire world becomes your app canvas," Nadella said.

The CEO further elaborated on this description in an interview with the Harvard Business Review. According to Nadella, the enterprise metaverse is about embedding the real world in computing and digitizing space through interaction between avatars. He explained, " … video transcending to 2D avatars and immersive 3D … is the practical way to think about avatars."

Why Is Microsoft Interested in the Metaverse? 

While the word sounds appropriately fancy, a metaverse is actually a collection of technologies. Some of these technologies, such as artificial intelligence and Internet of Things, are maturing fast, while others, such as cryptocurrencies and virtual reality, are still in nascent form. Together, they are the constituents of an alternate economy, similar to the real one and populated by avatars.

Microsoft staked its place early in the virtual economy. Its Xbox gaming platform already consists of multiple mini-gaming metaverses that transport players to a new place and time each time they are switched on. The company also unveiled HoloLens, its mixed reality foray, back in 2016 and has released subsequent iterations to the initial demo. 

Microsoft's enterprise workforce products, such as Teams, have witnessed a surge in sales during the pandemic, when remote meetings and virtual hangouts became common. A move into the so-called enterprise metaverse may be a natural progression for the Redmond, Washington-based giant.

The Business Opportunity for Microsoft

Given the popularity of its Xbox gaming platform, one could argue that Microsoft already generates profits from the metaverse theme. Those figures could multiply in the future.  

Meta's announcement of its pivot was followed by a flurry of media commentary analyzing its prospects. One of the pieces, by a writer, pointed to the fact that there was "no absolute killer application of these virtual reality and augmented reality technologies." Zuckerberg further poured cold water onto the prospect of profits from the company's $10 billion investment into creating a metaverse by saying that its investment would not "be profitable for us any time in the near future."

With its business-focused use cases, Microsoft may be standing on firmer ground. The company reported successive quarters of profits on the back of its products for the remote work market. It also provided a glimpse of the future earlier this year, when it unveiled the Microsoft Mesh app for its HoloLens devices. The impressive demo showcases virtual presence in business settings that enables teams spread across several geographies to collaborate through avatars.

The use cases for Microsoft's metaverse are manifold and range from profits in gaming platforms to remote work and productivity software in the near term to entertainment experiences from its VR platforms in the future. The head of its Xbox gaming unit has already discussed his unit's mixed reality future, one in which the world "blends between real and physical and virtual." Elaborating on the concept, he said that it would mean the "volumetric world mixed with something like Xbox Live with A.I. components around you, avatars and some of them real world."

Future profits from metaverse for Microsoft may also be substantial. According to Bloomberg Intelligence, the market size for Metaverse is expected to be $800 billion by 2024. The company is already a top holding in Roundhill Ball Metaverse ETF (META), a fund focused on companies involved in creating a metaverse.