For Facebook, It’s Metaverse Or Bust
Wednesday’s earnings results make the future the present.
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After Meta (Facebook) missed on earnings, lost some users, and dropped more than $200 billion in market cap this week, analysts and journalists focused on the pivot. The company had poured billions into ‘Reality Labs’ — its division working to combine virtual reality, augmented reality, and 2D screens into a vague concept called the ‘metaverse’ — and that had come at a cost. “Meta spent $10 billion on the metaverse in 2021,” The New York Times wrote, “dragging down profit.”
Now, the inevitable calls are coming for Meta to focus on its legacy business and deprioritize its abstract future. “They made a classic strategic error in changing the name of the company to a thing that is not even in existence yet,” Ritholtz Wealth CEO Josh Brown said Thursday. But counter to the narrative, the company’s poor earnings results show it should do just the opposite.
Meta’s legacy Facebook business has hit a ceiling. Facebook’s daily active user count dropped in the fourth quarter of 2021 and it fell short on monthly active user expectations as well. The company expects to bring in less revenue than anticipated in the first quarter this year, and it faces growing threats from Apple, TikTok, and regulators. This is not a business you want to prioritize. It’s one you preserve long enough to give yourself runway to focus on what’s next.
When Mark Zuckerberg renamed Facebook to Meta in the heat of the Francis Haugen leaks last fall, many assumed it was a head fake to get people talking about the company’s innovation vs. its scandals. That might’ve been so. But Meta also spent billions last year to make its virtual and augmented reality aspiration a physical reality. It lost $3.3 billion in this pursuit in the fourth quarter last year alone. If the company believes the Metaverse will be the future, and the money indicates it does, then it needs to run toward it now that its legacy business is flagging. The last thing it can do is retreat.
Meta’s moment today is reminiscent of Microsoft’s when it was deciding between Windows and the cloud. Microsoft was running a great business with Windows, a desktop operating system, but it had a chance at running a longer-term, more sustainable business if it enabled companies to build applications for the browser (aka: cloud computing). Helping developers build for the browser would hurt Windows, since cloud applications could run on a Mac or any device with a web connection — not just a Windows machine. But Microsoft saw the opportunity and went ahead, even when many of its own customers, attached to the old ways, said they would never move to the cloud (they did).
The Metaverse is more abstract than cloud computing and may never materialize. (Meta’s Oculus VR app, for instance, topped iOS App Store on Christmas and it’s dropped to No. 176 today.) But now that Mark Zuckerberg has tied the company’s future to the concept, it can’t afford for it not to work. Like Microsoft, Meta has an opportunity to shape its future. Its effort and execution will influence whether we’ll spend time in the mixed reality-future it envisions. And even better, virtual and augmented reality’s growth do not conflict with its core product. So there’s no business logic to hold back now.
For Meta’s reinvention to work, the key barrier — as it was for Microsoft — will be culture. The New York Times this week published a story that featured anecdotes from aggrieved employees objecting to the metaverse pivot, including some who management encouraged to reinterview for other jobs within the company so they could work on products it cared about. “Workers were expected to adopt a positive attitude toward innovation or leave,” the Times said, citing one employee, “and some who disagreed with the new mission have departed.”
Those who object to the move are thinking short-term. Meta could simply focus on building for the 3.59 billion people using its apps each month, and that mass of people would keep its business strong for many years to come. The history of tech, though, is filled with companies who got comfortable with their flagship businesses and simply floated off to irrelevance. Before this week, the metaverse was a long-term project. Now that Facebook’s flagship business has topped off, it’s metaverse or bust.
I stopped by CNBC Closing Bell today to discuss the Meta stock drop.
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News Briefs
How the FTC Is Reshaping the Antitrust Argument Against Tech Giants (Wall Street Journal)
The Federal Trade Commission, tasked with regulating the tech giants, is changing tactics. Instead of focusing on these companies as monopolies, it’s looking at them as monopsonies, or markets where one buyer has all the leverage. Amazon has control over companies that sell on its site, for instance, and the FTC is arguing that it’s abusing that power. Monopoly is a tough argument when the product is technically free, and the monopsony argument might be easier. That said, the FTC is still resource-constrained and is facing a struggle to get anything meaningful done.
Apple avoided the Washington techlash for years. Now it’s at the center of the bull’s eye. (Washington Post)
Apple was once the ‘good’ tech giant looking out for the common person’s interests. Now, it’s at the center of the tech regulation push in Washington as legislators zero in on its App Store fees and onerous rules. Today, the Senate Judiciary Committee pushed forward legislation that would force Apple and Google to let people sideload apps onto their phones and install alternative app stores. This moment marks quite a shift for Apple, and a surprising one for the folks in Cupertino.
What Else I’m Reading
People keep getting injured in virtual reality. Sen. Jon Ossoff had millions in Apple stock before he put it in a trust. IBM CEO caught up in age discrimination lawsuit. Something doesn’t smell right at CNN. The FBI wants U.S. Olympians to bring burner phones to Beijing. Farewell, Tom Brady. A mountaineer is trying to climb Mt. Everest solo, in winter, without supplemental oxygen.
Quote Of The Week
“Software is this weird space where you can spend basically nothing and create a billion dollars of value, or spend a billion dollars and create basically no value.”
— Google software engineer François Chollet
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