Strategist's Corner Episode 2 - Exploring Web 3.0 and the Metaverse

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  • 27 mins 44 secs
MFS Global Investment Strategist Rob Almeida and Research Analyst CV Rao break down two hot topics inside the technology sector, Web.3.0 and the Metaverse, as well as how they represent disruptors for a range of industries and the capital markets as a whole. MFS Strategist's Corner is also available wherever you get your podcasts.
Channel: MFS Investment Management

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Rob Almeida:

Welcome to the Strategist’s Corner podcast from MFS Investment Management. I am Rob Almeida, Global Investment Strategist and Portfolio Manager. 

Our theme of today’s episode is “Web 3.0 and the Metaverse”, where we will be exploring these two related, but separate concepts, and how they may represent disruptors to the capital markets and what that means for investors.

Disclosure:

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only, and should not be relied upon as a recommendation to purchase any security, or as a solicitation or investment advice from the advisor. No forecast can be guaranteed. Past performance is no guarantee of future results.

Rob Almeida:

For our conversation today, I am happily joined by CV Rao, a member of the MFS Global Research Platform who specializes in deeply understanding trends across the technology sector and how those trends potentially affect other sectors and industries across the global equity and fixed income markets.

Rob Almeida (00:01):

Well CV, welcome to the podcast. Thank you for joining us.

CV Rao (00:05):

Great. Hey, thanks for the opportunity. Nice seeing you actually. Hopefully I'll see you soon in the office in real life.

Rob Almeida (00:10):

I feels like it's trending that way. And actually that's a potentially a podcast for another day. I've been reading about original antigenic sin and I know you've been talking, but we'll talk about that another time. Hopefully that doesn't postpone the back to work or back to normal. But anyway, you have a unique... Before we get into Web.0 metaverse, you've got a really unique function and role in the investment department. And before we get into that, maybe I just want to set the stage for the audience. Talk about your background right before MFS, your education. What did you do? How did you get here?

CV Rao (00:48):

Yeah. Again, thanks for the conversation. So, I was one of the more unusual hires at MFS. Nice way of saying I was old when they hired me. So as one of the experienced hires came in after actually working in the industry, several industries actually broadly, none of them related to investment management. So in that sense it was unusual.

CV Rao (01:29):

So I have an undergrad in computer science, graduate degree in physics. I have masters level work in biology. And I did all this before my CFA just before joining MFS, and I have an MBA too. So actually I like going to school, as you can tell. So that's a common theme. Work experience wise, I worked in consumer goods and in semiconductor industry in their M&A function corporate development before actually coming to Boston to do a long stint at a startup, at a tech startup. And I joined MFS right after that. Two months before the great financial crisis meltdown in 2008.

Rob Almeida (02:07):

So you mentioned 14 years ago. And I remember when you joined. And I guess when I think back to those days, you were a part of the tech team, in various roles, research analyst, investment analyst, and then you've transitioned into this role you have now. So maybe talk a little bit about your involvement with the tech team specifically, but I guess more with an emphasis on the value or what you've been trying to accomplish for all MFS investors in the last four or five years.

CV Rao (02:36):

Yeah, no, no, that's right. So for most of those 14 years, I was equity analyst in the global tech team. About, I think, four years ago now, I transitioned to this new role where I look at disruptive themes across sectors globally. That's kind of how I'd like to think about it. I look at any technology-based disruptions or actually nowadays actually, even if they're not based, not rooted in technology. If you think about the role for me, the analyst and PMs at MFS have very deep knowledge of the sectors they invest in. Right? But all of us can use some help looking at things that are coming down the road, particularly if they're coming from geographies or sectors where you don't get visibility, you don't have visibility to.

CV Rao (03:35):

So if you cover one sector and disruption to your sector is coming from another sector, it's hard to get visibility to that. So that is kind of my primary function. So whether it is electric vehicles or what we're going to talk about today in terms of web 3.0 and metaverse and a slew of other things, right? So things that actually affect multiple sectors, multiple geographies, that's my mandate. And around those themes, I look for both opportunities as well as risks to our current holdings. So that's kind of the overall kind of the best way of kind of describing the role for me.

Rob Almeida (04:08):

Which makes sense in particular, just how fast technology and science is creating risk, creating disruption, creating opportunities. And so the analyst will go to you as an expert within that science, and then you come back with your findings and is this science really disruptive, the commercial application, so on and so forth?

CV Rao (04:28):

Yeah, that's right. Yeah. So, I mean, for example, like I mentioned electric vehicles something similar and closer to today, like we worked in climate change, which is a global theme, right? So I mean it's not tech-related, but there's a lot of technology that's being developed to mitigate the risk. So that provides us with a lot of opportunity and also a lot of risks to some of our holdings, if they're not doing the right thing. So it helps us understand that and actually kind of educate our sales and the investors around me, basically to help the team kind of stay ahead of these trends and themes. That's kind of the basis for the role.

Rob Almeida (05:07):

Yep. Makes sense. So, which is probably a good transition for our topic today, which you delivered in a recent global tech meeting titled Web 3.0 and metaverse. And I guess what was, not to jump the line so to speak, but what my biggest takeaway from is I maybe was conflating the two. And what you talked about is how they're actually two different things. But before we get into that, maybe just give us the set the stage, if you will, from what was Web 1.0, 2.0, and where are we in this Web 3.0, and what is it?

CV Rao (05:45):

Right. So like I said, I'm old. So I actually remember when web... That would be the common theme all through the podcast. So when I was actually a computer science student in my undergrad, what we call Web 1.0, the original internet was kind of taking shape. I could see it happen from my undergrad dorm, effectively, so I was there at the very beginning. So just to kind of give some context to kind of where we are headed here. When we think of about Web 1.0 or the original internet, it was all about it was a repository for information. You put information there, you search for it, you navigated to it. You consumed information. You kind of got information by going to different servers, different web pages, mostly reading.

CV Rao (06:34):

That's pretty much your interaction. It was limited to that. Then to simplify things, Web 2.0 comes along and it's kind of that line is fuzzy, right? I couldn't tell you when the transition happened, roughly. It took a long time as these transitions happening. Sometimes we are in the middle of them, and we don't realize. But Web 2.0 if you think about what happens today, it's about transactions. It's about not only consumption of information, it's also about creation of information. So it's about social interactions. So when you're on Facebook or sorry, or any of these social websites, you're actually putting in information. You're not just consuming information, you're transacting, you're buying things. All these things run on centralized platforms. Like we are well aware of a lot of the largest names in tech are run on these platforms.

CV Rao (07:22):

Media and entertainment has moved online from the previous platforms. So Web 2.0 is kind of like all these things that I mentioned, as opposed to just consumption of information. Advertising, for example, is driven off of the information we create on the web, right? That's a big part of the economics of the web and why it's free. There's a saying, if you don't know who the customer is, you are, right? You are the product basically. So the information you create is basically used to drive advertising. So that's Web 2.0 today. And so we've come a long way. A lot of these models obviously took a long time to build. A lot of them were disruptive to existing models. The disruption still continues. Some of them kind of died along the way. We saw so much startup activity in the space, pets.com to fun.com. Hundreds, if not thousands of these startups. And the Web 2.0 Is now matured. And we kind of have what we have today.

Rob Almeida (08:24):

And so how would you describe Web 3.0 in that transition and maybe where are we? We're not there, but we're somewhere in between. Like it's not web 2.5, but directionally we're there.

CV Rao (08:41):

Right. Again, this is another transition that we are going through. And again, if you ask me this, if you had this podcast five years from now, 10 years from, no, we wouldn't know when this happened. We're right in the middle of it, probably. It's definitely very early days, like you said, right. It's definitely very early days. It's taking shape all around us and like anything new it'll kind of be in fits and starts. Some of the people who built business in web 2.0, don't believe that there's anything called Web 3.0, and that comes from self motivation where their business are going to be disrupted by Web 3.0. So just kind of stepping back and thinking about what the fundamental principles of Web 3.0 could be, first it's a decentralized model, as opposed to a centralized model that we are used to with all the platforms that we interact with today.

CV Rao (09:32):

And just for some context and to make it easy for us to understand, if you think about, I know, again, like I said, late nineties, there was a music distribution app called Napster. I don't know if you're familiar with that, but if you remember that, it was peer-to-peer.

Rob Almeida (09:47):

I'm old, too.

CV Rao (09:48):

Yeah, there you go. It's peer-to-peer, right. I mean, all the music was uploaded to all these servers all over the place in mostly college dorms. They used computers that belong to colleges. They used the bandwidth that belonged to colleges. So think of Web 3.0 in a very simple way from a technology and architecture perspective, a peer to peer decentralized version that is matured and moved on from where we were when we had Napster. So right now security is built into it.

CV Rao (10:21):

Transaction and payments are built into it. There's going to be reliability. There's going to be administrative function, but more importantly to differentiate it from Web 2.0, there's one crucial difference. That is there's actually going to be a mechanism where if you're a user on a social network or any of these places where you create data, or you leave trails based on your search, for example, on a search engine, you actually get a function - a way to own that data. You own your own data.

CV Rao (10:50):

So that fundamentally changes how your data is used, whether to monetize through advertising or whether to market to you, any number of ways, right. That fundamental change because you actually have control if it's implemented this way and if it evolves this way to kind of take control of your own narrative. And that gives a consumer in the future power to kind of control what is done with their own data. So that'll be a fundamental building block of Web 3.0. So all these things together kind of are taking Web 2.0 into what would be the next stage and next evolutionary step.

Rob Almeida (11:30):

So you also shared something in that tech meeting that I referenced earlier surrounding the percentage of companies that existed or survived or excelled in Web 2.0, they weren't around in Web 0.0. I think it was two thirds or 70, 75%.

CV Rao (12:26):

That's right. That's right. Yeah.

Rob Almeida (12:27):

It... go ahead.

CV Rao (12:29):

Yeah. No, no. So that's a great stat, right. And that's precisely why we do what we do today. I mean, like I said, this is very early. And that stat 75% of the companies in Web 2.0, didn't exist in Web 1.0. Some of it is simply because there was so much disruption, which basically which comes with risks for existing business models. But also it comes with a massive opportunity for new business models and to re-platform dis intermediate, and that's exactly what happened. We've seen retail move online. E-commerce particularly coming out of COVID, it's accelerated rapidly. That entire ecosystem didn't exist. Payments are online now.

CV Rao (13:08):

So 75% of everything that we take for granted today or think are interact with on Web 2.0, didn't exist in Web 1.0. And all this happened over the last 20 years gradually, and the opportunity set and the risk as we transition to the next model is going to be along the same scale. And that's the reason we want to pay attention now as investors to kind of make sure that we are positioned properly as the transition takes place. And we don't end up on the wrong side.

Rob Almeida (13:38):

Yeah. And what's so interesting to me is that it is just consistent with what we've seen over the last 100 years. Right. Whether it was S-curves and cars, electricity, radios, desktops, et cetera, everything goes through an S-curve. And I guess maybe when we think about the internet, it isn't one S-curve. Web 0.0 had its own S-curve. Web 2.0 had its own S-curve and perhaps Web 3.0, has its own S-curve.

CV Rao (14:03):

Yeah, absolutely. I dream of S-curves. This is my life. I'm not joking. And that spans from utilities, energy, EV, like name it, climate change, literally I dream, I live S-curves. Right. And yeah, and for me, that's definitely a great framework to think about, you know, where that adoption is coming from, how fast it's ramping up the middle portion of the S-curve, when it's going to plateau out, because the opportunities are different at different parts of the curve and what we want to pay or where we want to be are different. So, that's absolutely right. And in web 3.0, It's going to be the same thing. There's going numerous S-curves that all come together to kind of define what this is going to be in 10 years from now, or 15 years from now. But along the way, there's going to be a lot of investment, a lot of disruption, lot of money made and money lost, and we absolutely need to stay on top of it.

Rob Almeida (14:51):

Yeah. Yeah. Capital that gets destroyed and capital that grows. So maybe along those lines, talk a little bit about metaverse. And I like the way you described it, at least it was educational for me in your meeting was it's a part of Web 3.0, is that accurate?

CV Rao (15:07):

Yeah, yeah, I just modify it slightly. Like I said, web 3.0 is you should think of it as a framework/infrastructure that's decentralized that sits at the very bottom. Right. So metaverse can be an application, like many other things on web 3.0 so that's the foundational way of thinking about it. You can build a metaverse on Web 3.0, so Web 3.0 is not metaverse. Metaverse is not Web 3.0, but metaverse is an application on Web 3.0. So just to kind of give you some context to where I'm coming from, again, like I said, this will be the theme in the whole podcast, being an older person doesn't really help you understand metaverse. In fact, I went into it very - with a lot of skepticism because of everything that this is supposed to promise, right?

CV Rao (15:54):

Shopping, education, entertainment, on and on. I can't even, real estate, not the real real estate, but fake real estate. So all these things, when you kind of put it in your head as a person, whose kind of context is anchored into the current way the world works, it's really hard to get your hands around. So it was very helpful to have a 13 year old and a 15 year old who live in that world. And they're perfectly comfortable. In fact, you don't even realize that your kids are spending time in this new context already. It's just that we don't know, right. There are lots of these already existing. So just to kind of put a definition around it, what's a metaverse? This is for lack of any other way of thinking. It's a virtual world that's independent of a user, meaning it doesn't matter whether you log in or log out, it exists and continues to play like a movie behind the scenes.

CV Rao (16:43):

It's persistent is the word - technical term that they use, but it's always there and it's persistent. It's immersive, meaning you can use a virtual reality or a augmented reality headset to interact with it, and it's a shared world. So that's kind of like how I think about it. There are several of these already, right? Mostly from in the context of gaming. That's why it's so kind of like kid-centric these days. I don't think there are too many too, too many adults spending time on these, but kids are definitely there.

CV Rao (17:15):

Coming out of it, coming after all this work was done. Right. And I came out of it, we'll talk a little more about it, but I went into it open-minded but skeptical, but I came out of it thinking, oh, this is something real. This is something that's going to be an opportunity. And this is something that whether a 50 year old likes it or not, doesn't really matter. It's about the next generation. And so I came out a lot more bullish than I went in is kind of what I'm trying to say.

Rob Almeida (17:43):

Right. No, that's interesting. Maybe back to your comments about the companies that didn't exist in web 0.0, but existed in Web 2.0. If we apply that to the metaverse and I realize the future has no facts, but just early, early days, some of your conversations with investors about science, risk to name a few - what are broad strokes, some industries or areas that are potential maybe winners in a metaverse and losers as well.

CV Rao (18:10):

Yeah. So actually we didn't talk about that in the context of Web 2.0, Web 3.0. So let's do that for a quick second.

Rob Almeida (18:17):

Yep. Okay.

CV Rao (18:17):

And then we'll have the same conversation about the metaverse all together. Right. Because some of them actually overlap for obvious reasons. So if you think about just Web 3.0, just to start there, winners and losers definitely we can categorize them as such, or we can even categorize some of them as being more likely to to be disrupted than others. Right. So let's start on the disruption of the negative side of the ledger for lack of better word. And let's think through the current models that exist, social and search, for example, cloud, these are all built on centralized platforms. If the platform itself is going be decentralized, you're going to see disruption there.

CV Rao (18:56):

And they also, like we said, social and search monetize based on user data. They don't create any data. It's your data, it's my data that they're using to target you for advertising or to sell things or sell you to the marketing departments of large brand companies and so on. So if the foundation is going to change, you know that they're going to see disruption, how they're going to deal with it, whether they'll be relevant in the future in the new model is up to them and how they respond to it. So it's both an opportunity and a risk, right. There are both sides to that. And then if you think about Web 3.0, what else changes?

CV Rao (19:33):

 If you think about services companies, whenever there is a lot of change, they have a lot more work to do. So IT services companies, which is a big complex. If you think about next generation software, whenever software re-platforms, we've gone through four or five of these changes in the last 40 years, a lot of the older models get disrupted, but at the same time, there's a lot of opportunity for new models. Right? So let me jump back to some of the more models that might be disrupted.

CV Rao (20:28):

If you think about financials and media distribution platforms, financials, there's a risk of disintermediation. Do I need to go to a bank to borrow when this model exists? Or can I go to one of those distributed finance platforms that are being stood up? Media distribution, same thing. Do I need to consume my music from an existing music service? Or are there going to be alternate music services built where music creators, the content creators get paid more of the economics basically disrupting the current model where most of the economics are kept with the platform. Right? So we have to think through all these. And payments, of course, like I said, payments is built into Web 3.0, so payments has been a great space, fantastic space for a lot of innovation. But if payments are built into the platform itself, then will transactions move away from the current networks to this new platform and take away the volume?

CV Rao (21:21):

So we need to think through all this. So that's Web 3.0. Now, if you think about metaverse - some things overlap. Like I said, on the winner side semi's same thing, more computer required, more storage required. That's all beneficial to semi's. But also we said all the current development in the metaverse comes from in the context of gaming. So it originates in gaming. The current metaverse that exist are rooted in gaming. So if you think about esports gaming, they probably are going to be beneficiaries. And same thing for services, right? More things to fix, more things to migrate, more things to do. So, that's the context of the winners. Now, if you think about disruption possible losers or change, where change is going to be the most relevant, let's start with the retail. Just kind of put a fence around it.

CV Rao (22:09):

If you think about what E-commerce did to bricks and mortar, this will be E-commerce on steroids. So think about retail in virtual stores in a metaverse where people can actually go into the Metaverse, try on clothes and do other things. And then the retail stores in the metaverse will be built on a piece of virtual real estate that has value. Right. So now real estate, when you think about, that's why I said real, real estate was virtual real estate. There's already land being bought and sold on these platforms.

Rob Almeida (22:39):

Yeah, right.

CV Rao (22:40):

We talked about social and search. Again in a metaverse it's all graphical interactions as opposed to text interaction. So, that's going to change the way those businesses have to monetize. Think about education and training. I'll just stop there. Like, think about live entertainment, education training, where my kids, I didn't know, they have attended, or actually maybe seen recordings of virtual concerts on these small gaming-based metaverses. I had no clue.

CV Rao (23:07):

I was asking them about who was Marshmallow. And I had no clue that it was a rapper. And my 13 year old said he didn't watch it, but he knows it's a rapper. I would never know that, right. So there's lots of new things coming on and think about what we're doing right now, zoom. Is this the best possible way of all of us sitting here and talking to each other, or is there a better model in the metaverse? I think that's going to fundamentally change. So anyway, that was a long answer, but I just wanted to cover a few areas.

Rob Almeida (23:33):

No, it's just so interesting. We think about the production of capital goods. So maybe the collaboration it takes to build a car, and you can't really do that on Zoom, but if you're doing that in a metaverse or everyone's wearing goggles, the engineers, so to speak are in a defacto room, and you're trying on for lack of a better term, different parts. And the potential of collaboration seems so much greater.

CV Rao (23:56):

Right, right. Definitely not sitting across from a camera and just staring at each other on these squares on the screen. Right. So we can definitely do better. Those are coming in already. And definitely like the example that you picked is very interesting. So if you can add tactile sense, right. And actually being able to, we've seen these in movies, science fiction movies, but if you're able to turn a part, if you're going to... We already model auto parts and all these parts in 3D. So bringing them, making them intractable, kind of making them, putting them in the context of interaction and collaboration between teams that are not in the same place, people are already working on that. And like I said, I went in very skeptical. Then you start thinking about all the ways this can actually make things better away from just the gaming and esports and concerts and other stuff that the kids want to do - buy avatars or something like that. So away from all that there is real business to business, real world use cases that can drive adoption.

Rob Almeida (24:50):

And as you were talking, I guess what stuck out to me the whole time is that how the more things seemingly change, the more they don't. Or in other words, the one consistent pattern that you talked when you were referencing semis as a for instance or even the consultant companies, the IT consulting firms, there's always second and third derivative ways to backdoor into a sector, right. So it's the pickaxes and shovel ways. So while perhaps identifying the primary provider of a service in Web 3.0 or the metaverse is going to be really, really hard to do, and some firms are perhaps really good at that. There's other investible, better shop ratio, investible ways to get there.

CV Rao (25:36):

Yeah, no doubt. I mean, that's the entire point, right? if you kind of just take a step back and think through how much merger M&A activity and actually investment activity, some companies are even changing their names to make them relevant to this theme. Right. And these are multiple billions of dollars, tens of billions of dollars being invested today. So the way I think about it and the way I'm looking at it, and having seen so many other disruptions and transitions, yeah, if you think about the ideal web 3.0 or ideal way in fully imagined form of the metaverse, it's 10 years out, easy, five if not 10, maybe 10 plus years out. Right. But the journey from here to there is fraught with both risk and with a lot of opportunity.

CV Rao (26:23):

And a lot of the companies, meaningful caps are investing ahead of this theme, and we need to understand why they're doing this. Where are they going? What does it mean to their economics returns and all those things today that we look at in when we invest in companies. And these investments and the moves that they're making will have a meaningful effect on fundamentals for these companies. So it's maybe 10 years out, but the changes and the implications drive stocks today. So it's important for us to stay active in the space and kind of understand ahead of the actual realization of these themes.

Rob Almeida (27:03):

Right, right. Well, I think we could talk about this for hours longer but let me stop it here. And thank you so much for your time today. Obviously, it's early days and there's so much to come. And when I reflect on your comments, what hasn't changed and investing is always about is it's a discounting mechanism of future cash flows. And so, as science changes things, it's really still ultimately about those that have the commercial application of the science, if you will, who has the ability to monetize the science and who doesn't.

CV Rao (27:41):

Yeah, no, absolutely. We're seeing the discount very early sometimes, maybe too early sometimes. Right. But we have to live, that is the reality in the market today. And sometimes we make that call it's too early to discount this trend or not. So the only way to do that is actually understand the underlying trend and have a kind of really deep understanding of what's going on and what's changing. Anyway, and thanks for the conversation. Thanks for the time and opportunity.

Rob Almeida (28:07):

Yeah. No, thank you. And you're definitely going to be back. So appreciate it very much.

 

Rob Almeida:

Thank you so much CV for taking the time today to help us better understand what is meant by Web 3.0 and the metaverse, and how they potentially have far-reaching effects across the investable universe.

Also, thank you to all our listeners for tuning in to this conversation. We will be back with another Strategist Corner episode very soon.

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