Virtual Land - Pros / Cons
Have you bought virtual land yet? While this may sound like a comical question today, this is about to become a much more serious conversation at the investment committee level for many of the smartest investment groups in 2022.
To highlight the evolution of thought around some of the more frontier industries, lets summarize how each of the following "red hot" investment sectors have progressed over the past decade:
Gaming: a shift from “it’s only for kids and anti-social people” > “it’s just a hits driven business” > “ok maybe, but how big can it really be” > “show me every gaming deal, I’m in.” In 1977, Milton Bradley, the famous American board game manufacturer of the late 90s said Video Games would just be a passing fad (The Tampa Times). Milton Bradley folded in 1998.
Blockchain: a quick shift from “it’s a scam” > “ok, but not mass adoption” > “wait, how many people own Bitcoin and Ethereum?” > “maybe just fintech use cases” > “if it has a token or even the slightest user traction, it’s way oversubscribed on an uncapped note.”
NFTs: a recent shift over the last few years from “don’t be ridiculous” > “they paid what amount for just a jpeg?” > “I might as well own a few” > “when are you doing your NFT drop?”. While skepticism still remains, the market will sort this out.
Metaverse: since the renaming of Facebook to Meta (October 28, 2021), the momentum for anything “metaverse” has surged. The progression has gone something like: “does the metaverse = the internet” > “yea but that’s what gaming is doing” > “so Ready Player One could actually happen, got it.” – the metaverse is an ill-defined term that we tried to define in a past note (read here), but it is on almost every pitch deck these days - and most of the time it’s misused for terms like “virtual world” or just a “video game”.
Virtual land: as people have begun to grasp the general concept of the “metaverse” and it’s potential, this has led to interest in virtual land. Within a week of increased interest in “meta” and “metaverse”, two of the largest virtual land sellers, Decentraland and Sandbox, began growing in interest. We quickly went from “no way I’m buying virtual land” to “ok wait, maybe”. We believe that virtual land is about to enter the asset allocation strategies for some of the largest investment groups in the world within the next 12 months. At the intersection of gaming x blockchain, these trends are becoming easier to identify than ever before.
Below is a breakdown of the benefits of virtual land and some of the current pitfalls that need to be addressed by gaming universes.
Reasons to invest in virtual land:
Development: unlike traditional real estate, virtual real estate is software. The cost to build on top of virtual land is significantly less expensive than in the real world (i.e. a $100m commercial building could cost maybe $1-50k for a software developer). Also, the time to build on that land will take days/weeks (maybe a few months), which is likely 80-99% faster than traditional real estate development (whether residential or commercial). What can be built is limited by the platform developer (not permits or zoning laws), but virtual real estate will be duplicable, have near zero input costs, and only require the time and imagination of (software) developers. Imagine bringing iterative development to construction - software real estate will eat the virtual world.
Traffic: in a virtual world, the laws of physics do not necessarily apply and you could have millions of people in one parcel of land from around the world (given that you only need an internet connection to “get there”). This allows for an incredibly high volume of participants that could generate income for the property.
Income generation: a plethora of business models could exist on a piece of virtual land that are not subject to the normal constraints in the real world (power lines, utilities, zoning, etc). This opens up immense opportunities for a wide variety of monetization strategies.
Pivots / changes: given its digital nature, the owner of this virtual land could quickly pivot or change the business model of that piece of land at a moment's notice. For example, it could be a stadium on Mondays, a casino on Tuesdays, and a residential apartment on Wednesdays. Depending on what the platform allows, it could be all three at once. This opens up immense opportunities for a piece of virtual land to be much more valuable and malleable than traditional real estate has ever been able to achieve.
Transferability: in the real world, the sale of real estate is a lengthy, expensive, and arduous process. In the virtual world, it is instantaneous to a third party digital wallet. This ease of transferability is a significant leap forward and a major benefit for land owners in virtual worlds.
Reasons to avoid virtual real estate:
Infinite supply: virtual land is potentially infinite. The lack of scarcity of land across most gaming worlds is a key risk when evaluating this as an investable asset. Additionally, very few virtual worlds (game developers) have indicated a verbal (much less, contractual) agreement to hold to a predetermined land supply. This creates a major risk when evaluating the supply/demand dynamics that drive the land’s economic value.
Cost of Travel: in virtual worlds, travel often does not cost anything (time/resources/effort), though in some worlds it does. For example, the rise of urbanization is predicated on the fact that proximity matters. If I could teleport anywhere in the world, then I could live anywhere. When evaluating virtual land, the concept of “travel needs to cost something” will likely be a key driver of economic value. Many gaming worlds solve for this with an original “spawn point”, which means that proximity to that starting nexus can organically grow in value as the world grows. With a cost of movement in virtual worlds, proximity can be a driver of scarcity even in worlds with infinite land.
Price discovery: in virtual worlds, the land income should drive the land price. That said, it’s quite challenging in most virtual worlds to forecast future cash flow, which leads to a structural issue for price discovery. As a result, these virtual land markets will experience incredible volatility, which will keep many investment groups away for the time being.
Very early: just like when the voyagers landed in the “New World” back in the 1400s, each new virtual world is a completely new landscape. It’s quite challenging to know if anyone is around, will come join you, or if you are just the largest land owner of a virtual world no one cares to visit. The same can be said of many frontier tech investments, but virtual land has a unique set of real-world analogies.
Takeaway: virtual land has a very significant role to play in the future of gaming platforms, economies, and worlds. The key risks today are around infinite supply and the cost of travel. Further clarity on these two key aspects will become a major focus for game developers over the next 9-18 months as they seek to further attract players and build thriving and sustainable economies.