Facebook in Race Against Time to Turn ‘Metaverse’ Into Success

News Analysis

Meta, formerly known as Facebook, is staking its future on the success of its virtual reality platform. But the project is bleeding money so fast, it raises the question of how long the company can keep it going.

About a year ago, Meta was the fifth-most valuable publicly traded company in the world, trailing only Apple, Microsoft, Alphabet, and Amazon. Today, it’s No. 25, behind Home Depot.

Meta has seen measures of its financial health decline across the board. Revenue dropped by more than 4 percent in the third quarter, year-over-year. Administrative expenses went up, while profit was halved.

The company has acknowledged that it went on too much of a hiring spree in recent years, announcing layoffs of 11,000 employees and a hiring freeze until March.

But the largest factor appears to be the financial drain of Meta’s virtual reality (VR) division, Reality Labs, which has accumulated an operating loss of more than $21 billion over the past two years, including more than $3.6 billion lost in the third quarter of 2022 alone (pdf).

Meta CEO Mark Zuckerberg told investors he expects those losses to continue piling up, with the company expecting it to take years for the VR effort to mature.

“I appreciate the patience. And I think that those who are patient and invest with us will end up being rewarded,” Zuckerberg said during the third-quarter earnings call (pdf).

The question is whether Meta can keep afloat until that payoff comes—if it comes.

Meta’s business model is largely based on monetizing information of users on its Facebook and Instagram platforms—serving them targeted ads. Its information gathering, however, has been significantly constrained by a new feature of the Apple operating system that now allows mobile users to easily block apps from monitoring their activity.

Meanwhile, younger users have been more attracted to short video platforms such as TikTok. Meta only last year has started to play catch-up with its Facebook Reels feature, an apparent TikTok copycat.

While Facebook user count has continued to increase, the growth is coming from non-American markets, where Meta is only able to capture a fraction of the advertising revenue per user it enjoys in North America.

The company has tried to reinvent itself, renaming itself to Meta from Facebook last year and focusing primarily on the VR division, which is responsible for producing Meta’s VR hardware—headsets and controllers—as well as the apps and virtual space—the “metaverse,” as Zuckerberg calls it.

Zuckerberg has enthusiastically promoted the metaverse, arguing that in the future, much of people’s work and leisure will take place in his virtual world. He’s pledged to invest $150 billion over a decade into the project.

So far, however, the results have been mixed.

Meta’s VR headsets have enjoyed largely positive reviews and solid sales. The Quest 2 model shipped some 6 million to 7 million units last year and currently sells for around $400. The newest addition, the Quest Pro, offers improved graphics and controls, but for around $1,500.

On the other hand, Meta’s virtual environment platform, called Horizon Worlds, has been met with a cold reception and even mockery. Meta claims some 200,000 monthly active users, less than half of what it expected by the end of the year. Online videos show simplistic graphics and “worlds” that are either empty or populated by a handful of users.

One of the most common criticisms has been that the avatars people control to interact with the environment and each other don’t have legs. Zuckerberg promised new avatars with legs “later next year.”

Users have also complained that the virtual world doesn’t do a good enough job of helping them figure out what to do there.

There are indications that Meta may be preparing its metaverse to be more of an office. It has secured a partnership with Microsoft to ensure the integration of its Office apps into the virtual world. Also, Meta’s new pricy headset appears designed to let users set up a functional workspace in the virtual environment, with floating screens and avatar-to-avatar meetings with co-workers.

Some have reported enjoying the virtual office. Others have doubted whether workers have any appetite for more virtual meetings after several years of videoconferences during the COVID-19 lockdowns.

A focus on the virtual workspace, however, suggests that Meta could focus on marketing it directly to corporations. That would allow it to grow its user base by employer mandate.

Moving activities to the metaverse still presents several obstacles.

The majority of VR users experience something akin to motion sickness after spending some time with the headset on. Women and older people appear to be more susceptible. The sensation seems to diminish with repeated exposure, but for many, it persists, some surveys indicate.

Then there are the privacy concerns.

VR headsets and controllers use multiple cameras to scan the user’s face, body, and environment, allowing the system to collect a treasure trove of exceedingly personal data, down to the tracking of eye movement. It isn’t yet clear how far that kind of data can go in predicting or even influencing user behavior.

Some users have expressed concern over handing such data to Meta, particularly since the company has a poor track record of upholding user privacy. The company has repeatedly apologized for its handling of privacy issues.

While Zuckerberg seems fully committed to the effort, he still needs to make investors happy along the way.

With the economy bracing for a recession, Meta may see its advertising revenues shrink, making it harder to explain to stockholders why sinking billions into the metaverse is a good idea. However, Zuckerberg seems confident that all he needs is a bit more time, which could be the one thing he’s running short on.