HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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November 4, 2021

The Facebook Meta(morph) & Zuck’s Agency to Adapt

This Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government and be a god on Earth. Tim Sweeney, CEO, Epic Games

As a Facebook shareholder, I stopped reading media reports about the company or its billionaire founder Mark Zuckerburg some time ago, which has enabled me to focus on what the company and Zuck do rather than what other media organisations think about what they do. And last week they did rather a lot. So isolating from the physical world due to the curse of Covid, I decided to dive into the metaverse and immerse myself in Zuck’s view of the future. Why has he decided to metamorphose Facebook into Meta? Was it all just the latest twist in his organisation’s evil plot to manipulate the world for his enrichment? Or could there be some merit in listening to the considered view of a man who can veritably claim to be a feudal lord (if not a monarch) of the internet?

Like any feudal overlord, Zuck is easy not to like. Like all successful people, he has made enemies. In n his case, these include all the traditional forms of media and advertising whose cosy rent taking models he has turned upside down over the past decade and a half. However, his enemies’ interpretation of Zuck’s metamorphosis into Meta as a PR stunt similar to Phillip Morris becoming Altria reveals little knowledge that the world is moving relentlessly into an unknowable decentralised future that challenges everyone, including Facebook, err sorry, Meta. Furthermore, a future where only the resilient and adaptable might survive. In my opinion, Zuck knows more about this version of the future and is more resilient and adaptable to it than the rest of us.

Another recent intellectual whim of mine has taken me to consider the work of the Santa Fe Institue and its framework of Complexity Theory. This theory suggests we should consider our financial and economic world an unknowable complex adaptive system more similar to a biological system, such as an ant colony, than the well-oiled machines of classical economics or double-entry bookkeeping. The significant implication of this approach is that success over the long term goes not to the profit or value maximisers but the most resilient and adaptable entities.

So, for example, think about the world up until about 65m years ago. Dinosaurs had evolved to rule over everything and had done so seemingly forever. They then had their famous meteor moment, which gave the small mammals previously hiding their call option moment. We humans appeared a few minutes ago after the long haul of trial and error of the following 64m years. It was a long tail event with a unique return profile based on our ancestors’ resilience and an out of the money call option on the future. The rest, as they say, is history.

Zuck is not cool or likeable, but he has built one of the most successful businesses of all time. Across the leading platforms of FB, Instagram and WhatsApp, there are some five billion monthly active users. Let’s repeat that, five billion. Zuck also takes his role of head of capital allocation seriously. The acquisition of Instagram for $1bn in 2012 is simply the most value accretive M&A deal in the history of M&A deals. Insta today accrues revenue of $22bn pa, yes revenue, and it is growing.

Sitting behind this is the most successful advertising platform ever created, which over the past five years has delivered 35% operating margins with top-line growth rates of between 25 and 30%. While this represents a tax on the internet, more than 3 million businesses advertise through FB every year, 70% outside the USA. Most of them probably would not exist today if it weren’t for the extraordinary effectiveness of this medium to find customers.

In my analogy of human evolution, the media see Facebook suffocating with its fellow FAANG dinosaurs in the poisonous air of government regulation and customer demands for privacy and security. This is undoubtedly one of the possible futures. However, unlike the dinosaurs, Zuck (believe it or not) is aware of himself. And from what we know of how he considers the future, he is very thoughtful and visionary. In 2015, leaked memos show that Zuck believed that VR/AR (a now-outdated term for the metaverse) would be the next major computing platform after mobile.

So after watching 90 minutes of excruciating Zuck style dad dancing around Meta’s metaverse mockups, what are we to make of it all? My first observation is that the metaverse has been alive and well for many years, and Zuck is somewhere between being fashionably late or having missed the boat.

The metaverse is the next evolutionary stage of the internet and is also known as Web3. One of the early champions of Web3 is Packy McCormick, whose excellent essay The value Chain of the Open Metaverse from January this year is well worth reading. He says:

Part of the magic is that money is built directly into Web3 protocols. Bitcoin and Ethereum, the two main protocols on which Web3 is built, both have mechanisms for rewarding contributors baked directly into the code. If the same were true for Web 1.0, Tim Berners-Lee would be worth a hell of a lot more than $10 million.

He goes on to say:

Web 2.0 (mid-2000s to present) emerged as entrepreneurs recognised the holes in Web 1.0 and built products to fill them in, and capture the value in the process. These companies didn’t just capture state, they aggregated it, building up huge troves of valuable user data. They made it so that anyone could participate and build a presence — think about how easy it is to set up a Facebook page versus coding a website. They wrapped existing protocols in frictionless user interfaces and created de facto products where no protocols existed 

In essence, the Web2 winners centralised the decentralised nature of Web1 for our benefit and created networks that initially attracted us and then extracted from us, creating both monopolies and resentment.

One clear message coming from Zuck is that he appreciates this and knows that the game is up. He and his organisation’s days of centralised power are coming to an end. It will soon be a case of adapting to Web3 or dying. While none of us knows, it does appear likely that certain specific protocols will characterise the metaverse.  These are likely to include: baked in monetary value, interoperable architecture, and algorithms that replace intermediaries. We will own our money and data without permission as sovereign individuals both in the metaverse and physical world, as they merge into one. This is how decentralised evolutionary adaptation happens.

The metaverse is most notably apparent today to the world of online gamers and in the realms of companies like Unity, Epic Games and Roblox. This world, unbelievably popular among younger people. is spawning an appreciation for digital assets, de-fi and NFTs. All somewhat bubbly and speculative, but also valuable signposts for where the puck is going next. Zuck and his avatar friends did not mention digital assets and cryptocurrencies much in their 90-minute tour of the metaverse. However, ask a Central Banker why they are on standby to launch Central Bank Digital Currencies, and they will tell you because Facebook threatened them with Libra, which became Diem and well, we aren’t sure, but whatever form it is in, it isn’t dead. Imagine you are a Central Bank, and you consider WhatsApp with its own permissionless transmission and settlement rails?

So Facebook, universally disliked by all right-thinking people led by a man who can do nothing right, is changing its name to Meta. The metaverse it is pinning its future on is not a magical theme park where we will fly around on Meta owned unicorns. It is a new decentralised, open and interoperable version of the internet that is already emerging. Meta will probably do what it does best, connect people and help them interact, oh yes and really annoy people as well.

Meta’s journey will remain controversial, and of course, there is no guarantee how it will turn out. However, I think Facebook, and now Meta is more mammal than dinosaur, it is very resilient. Its much-hated leader has more mandated agency to adapt to its new environment than any living creature other than Elon Musk. You have been warned.

Jeremy

Ealing

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