Meta investors panic as Zuckerberg doubles down on Metaverse

Meta (NASDAQ: META) reported its second consecutive quarter of falling revenue while its profits fell by more than one-half, thanks to a record nine-figure loss in its Metaverse division.

Figures released on October 26 show Meta generated revenue of $27.7 billion in the three months ending September 30, a 4% decline from the same period last year. A nearly one-fifth rise in costs and expenses pushed operating income down 46% to $5.66 billion, while profit slid 52% to just under $4.4 billion.

While the financial figures were grim, Meta was able to report its second consecutive quarter of modest growth (+3%) in daily active users (DAUs) at its aging Facebook platform following Q4 2021’s first-ever DAU negative growth. The ‘Family daily active people’ category—which tracks users across Facebook, Instagram, Messenger, and WhatsApp—was up 4% year-on-year.

But it’s Meta’s costs and expenses that furrowed analysts’ brows, hitting a record $22 billion in Q3, $2 billion higher than in the second quarter of this year. Research and development claimed the largest slice (33%) of this total, up from 22% in Q3 2021. Capital expenditures more than doubled year-on-year to $9.5 billion and are around $9 billion higher for the year-to-date to $22.8 billion.

Which leads us to Meta’s ‘Reality Labs’ segment, the division that contains Meta boss Mark Zuckerberg’s big bad bet on a proprietary Metaverse. Reality Labs’ revenue came at a new all-time low of $285 million—a mere 1% of Q3’s overall revenue—down from $558 million in Q3 2021 and $452 million in Q2 2022.

Meanwhile, the $4 billion (+24%) in technology and staffing costs associated with building out the fledgling Reality Labs resulted in a divisional operating loss of $3.67 billion, a billion worse than in Q3 2021 and around $900 million worse than Q2 2022.

Even as Reality Labs’ YTD losses approach $10 billion, there’s no end in sight. Meta Chief Financial Officer David Wehner (who transitions to chief strategy officer next week) said the company expects Reality Labs’ 2023 operating losses “will grow significantly year-over-year” due to costs associated with the planned launch of the consumer-focused version of Meta’s Quest virtual reality (VR) headset.

Investors rightly panicked, sending Meta shares down sharply in after-hours trading. The shares opened Thursday by falling more than one-quarter and closed the day below $98, less than one-third of their value when the year began and barely one-quarter of their August 2021 peak.

The four platforms of the apocalypse

Speaking to analysts, Zuckerberg was his usual ‘everything is going exactly according to plan’ self, although he cautioned that “it’s not clear that the economy has stabilized yet.” (It’s precisely this kind of piercing insight that makes analysts tune in to these calls.) Accordingly, Meta plans to focus its investments on “a small number of high-priority growth areas,” including “our future vision for the Metaverse.”

Zuck said Reality Labs’ expenses “will increase meaningfully again in 2023,” but after that, Zuck expects to “pace” future investment in this segment to try to get back to positive growth in overall operating income.

Zuck acknowledged investors’ concerns regarding his Metaverse fixation, saying, “I get that a lot of people might disagree with this investment…but from what I can tell, I think that this is going to be a very important thing, and I think it would be a mistake for us to not focus on any of these areas.” Zuck later added that “I think that those who are patient and invest with us will end up being rewarded.”

Zuck explained that there are “four major platforms” in Meta’s Metaverse development pipeline. First, there’s the “social metaverse platform,” the current iteration of which is Horizon and its widely mocked avatars. (Meta was forced to issue a disclaimer regarding the ‘legs’ video it released at this month’s Connect conference to clarify that the legs Zuck’s avatar used to jump and down were actually animation produced by motion capture tech, not VR-based tracking.)

The second platform is VR, which Zuck divides into consumer-focused and work-focused segments. Meta just started shipping its high-end ($1,500) Quest Pro headset, and Zuck said, “work in the Metaverse is a big theme for Quest Pro.”

Some 200 million people buy new computers each year, and Zuck’s goal for Quest Pro is “to enable more and more of these people to get their work done in virtual and mixed reality eventually even better than they could on PCs. And to deliver a great work and productivity experience.”

Zuck said building the Metaverse is “a massive undertaking,” and that apparently doesn’t include the Herculean task of convincing staff that donning a bulky VR headset will make the work hours just fly by. The increased productivity will surely come once staff get over their crippling vertigo and stop vomiting into their trash baskets every five minutes.

Platform #3 comprises augmented reality (AR), and Zuck described the internal situation as “some kind of basic things that we need to get right, some integration of things, some figuring out how to manufacture things and where we are making progress on that. And I would say a bunch of that is that there are some things that are going better than I expected, some things that seem like they might take a bit longer.” Are we clear? No? Clearly, you weren’t wearing Meta’s Word-Salad (WR) headset.

The final platform involves “neural interfaces,” which Zuck defines as “how do you basically control the computing platform.” Referencing Meta’s AR glasses (which are nowhere near shipping), Zuck keenly observes that, if you’re walking down the street, “you are not going to have controllers with that, you are not going to want to have your hands kind of like hovering in the air, and you are not always going to want to talk to the thing…sometimes you are going to want something that’s more private…having a discrete way to basically communicate with the device is going to be critical.”

Trust me, I’m lying

Much of the investors’ ire generated by Wednesday’s report has to do with the perception that Zuck has grown bored with maintaining his fading social media empire and, having (a) made all the money he’ll ever need and (b) designed a share structure that grants him absolute control over Meta, is now almost singularly focused on building a more favorable legacy than ‘the megalomaniac that broke democracy.’

Zuck adopts a messianic tone whenever he’s discussing his Metaverse ambitions, claiming without irony that “our work here is going to be of historic importance.” It’s like he just watched Matt Damon’s infamous ‘fortune favors the brave’ commercial for the first time and now wants to ensure his place in that hallowed (fake) museum of plucky pioneers.

Zuck also seems to forget—or simply doesn’t care—that not everyone shares his enthusiasm when he says his new Metaverse hardware/software combo features “sensors that can help map your facial expressions and emotions to the avatar that you have … you can start to experience that with Quest Pro, which is out now.”

So, the man who pioneered invasive data mining of your online activity that’s later sold to the highest bidder now wants to digitally decode your facial expressions and emotions, and we’re supposed to believe that it’s about creating a better avatar? As Zuck put it, “it’s just not clear if we weren’t driving this forward than anyone else would be.” Possibly because not everyone wants to go down in history as the guy who perfected the digital panopticon.

If you can’t beat ’em, screw ’em

Zuck also hasn’t yet explained how his Metaverse will handle payments after his dream of an in-house stablecoin went down in flames. Of course, given the billions that Zuck is spending largely out of public view, there’s always the possibility that his Libra/Diem project could one day resurface like Godzilla rising from Tokyo Bay.

As it applies to Zuck’s former bread-and-butter, a Metaverse-based social network has the capacity to reduce social media trolling by imposing micro-fees for posting and responding to others’ posts, as well as the ability for users to earn fees for posting engaging content. But absent some kind of scalable, low-cost solution, you’re just recreating the existing networks with the added bonus of some troll publicly punching your avatar in the face because your post triggered them.

There’s also the issue of Zuck’s Metaverse being a proprietary VR recreation of the existing digital silos on which the Web2 giants have grown so fat. A proper Metaverse would allow users to establish their own digital identity independent of any one platform, with users deciding with whom they choose to share their data (and charge for access if they so choose).

Small wonder then that Zuck saw fit to add Meta’s name to the membership of the Crypto Open Patent Alliance (COPA), the allegedly pro-innovation club whose other members include Jack Dorsey’s BlockMicroStrategyCoinbaseKraken, Blockstream and more.

Belying COPA’s allegedly noble aims, the sum total of the group’s activity to date has been to sue Dr. Craig Wright in a bid to refute his court-recognized claim to authorship of the Bitcoin white paper. The reality behind COPA is that its members fear that Wright’s burgeoning patent portfolio could spell trouble for aspiring monopolies/oligopolies, be they blockchain- or metaverse-based.

(COPA is believed to have started as an internal project by developers at Blockstream, some of whose principals helped hobble the original Bitcoin protocol to boost the appeal of their own ‘Layer 2’ solutions to BTC’s scaling woes notably the failed Lightning Network. But lawsuits cost money, so some digital sugar daddies with armies of lawyers on retainer were quickly identified and indoctrinated.)

Still, look on the bright side. Shortly after Zuck bought Instagram, he sought to maximally monetize his new toy by cramming it full of advertising. Annoyed Instagram users promptly decamped to the new rising star, TikTok, in whose image Zuck is now trying to remold Instagram.

The lesson seems clear. Unable to defy his base instincts, Zuck showed the world what it didn’t want, sending them off in search of a better way. If past is prologue, Zuck’s Metaverse could prove similarly educational, assuming he’s still pushing it a year from now.

Watch: The BSV Global Blockchain Convention presentation, Masters of the Metaverse

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