Meta has been out there with its Reality labs to take us into a virtual fantasy world–metaverse. Its adventure has been costing billions without showing the possibility of profitable waves of creative destruction. Hence, Wall Street has been in despair with Meta’s stock. To calm down, in Novoember 2022, Meta announced a plan to pay off 11,000 workers or 13% of staff count (ref. WSJ). Upon losing as high as 75% market value, does Meta faces Metaverse reality?
After briefly touching a $1 trillion valuation in June 2021, the market capitalization of Facebook’s parent company has been in free fall. The underlying cause has been the rise of TikTok in its social networking space and the growing loss in its metaverse reality labs. Meta’s dream of a metaverse appears far from reality in redefining our social interaction over the Internet.
While studying as an undergraduate student, Mark Zuckerberg launched The Facebook on February 4, 2004. He developed this social networking service in association with college roommates and fellow Harvard University students, in particular Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes. Within a very short span of time, it grew as the most popular platform for people to connect and share their moments, whether as photos, greetings, or news. Hence, advertisement-based revenue ramped up, making it a highly valuable company. It took just ten years, far less than any other multinational company, to emerge as the global monopoly. Consequentially, it became one of the Big Five American information technology companies, alongside Alphabet, Amazon, Apple, and Microsoft.
Meta’s astronomical rise due to scale, scope, and network externality effects in smartphone space
Meta’s success so far has been in its Facebook. The active users of Facebook rose from 1 million in 2004 to over a billion in 2012—an astronomical rise indeed. Due to software-centric services, Facebook benefited from economies of scale in the supply side. Its marginal cost in accommodating additional users has been negligible, close to zero. Instead of developing physical network facilities, Facebook got a free ride over the network developed by international carriers and national network service providers. Besides, the growing performance and cost reduction of mobile internet and smartphones led to empowering millions of new customers to be Facebook users. Hence, Facebook needed only a cloud facility for hosting applications and users’ data, resulting in the highly low-cost option of offering services to a growing customer base.
To increase the attractiveness of social networking, Facebook also focused on taking advantage of scope. Hence, it embarked on adding features like messenger and WhatsApp, even through costly acquisition. By adding features facilitating communication among friends, such as sharing photos and providing likes and comments, Facebook achieved a very high demand-side economy of scale—a positive network externality effect. Hence, within ten years, Facebook subscriptions appeared indispensable for remaining in contact with friends and families and making new friends. The use of Facebook became so popular that it turned out to be the most used application over the mobile internet using smartphones in many developing countries.
As people started spending time socializing with their smartphones over Facebook, advertisers found it an attractive place to promote their products. Hence, Facebook’s advertising revenue started skyrocketing, reaching $117 billion in 2021 (Statista) from virtually zero in 2010.
Fall of profitability—Meta faces metaverse reality
According to Reuter, in April 2022, speculation started surfacing that Facebook-owner Meta Platforms would be reporting its slowest quarterly ad revenue growth in a decade. For the first time since going public in 2007, Meta reported a decline in the first quarter revenue of 2022. To make it worse, the decline continued in the 2nd quarter, increasing from 1% to 4%.
The underlying cause of the revenue drop has been advertisers making Facebook unfriend. On the other hand, Reality Labs pursuing the mission of taking us into the virtual world, has been suffering from growing loss. In the first quarter of 2022 alone, Reality Labs, Meta’s virtual reality division, lost $3.672 billion. Meta’s CEO, Mark Zuckerberg, justified the growing loss of Reality labs by saying that the 2030s will be “exciting.”
Reality labs have been on the mission of developing technology gears to enable us to socialize in virtual and augmented reality space. Yes, exploiting such a possibility costs capital expenditure for R&D. As there is a possibility of recreating how we socialize and communicate over the Internet, growing R&D costs will keep eroding the profitability. Hence, Meta’s profitability has a reason to suffer. But why has Facebook been suffering from advertisement revenue fall?
Meta faces metaverse reality as TikTok rises as a creative destruction force
Upon taking advantage of economies of scale, scope, and externality effects of software and network-centric social communication, Facebook emerged as a monopoly. Even the US congress became concerned with the market power of Facebook. Hence, after a 16-month investigation into competitive practices, the House Judiciary subcommittee on antitrust came up with a vital suggestion. It opined that congress takes up changes to antitrust laws to deal with the monopoly power of Facebook. Surprisingly, the solution came from US’s tech rival China. Instead of laws, the global competition out of innovation has started taking a toll on Facebook’s monopoly power.
TikTok, a Chinese-owned video-sharing platform, landed its billionth user in 2021, four years after its global launch. It took half the time Facebook, YouTube, or Instagram took to attain this height and three years faster than WhatsApp. Hence, it’s not surprising that in December 2021, it was named the world’s most giant unicorn with a valuation of $353bn – up from $80bn a year earlier (Source: Guardian). Consequentially, TikTok is predicted to triple worldwide ad revenues in 2022 to $11.6bn, more than the $10.44bn for Snapchat and Twitter combined.
What is the secret sauce behind TikTok’s rise? Facebook rose due to the ease of exchanging messages, preferences, and photos. In those days, mobile phones were far inferior to what we have today, and internet bandwidth was low and costly. But that option was far better than sending e-mails and SMSs and making phone calls. But over the years, feature phones have become smartphones, and mobile internet has been getting better and cheaper. Hence, the option of sharing videos, preferred by youngsters, started becoming feasible. As Facebook kept enjoying a monopoly, new entrant TikTok took advantage by offering easy-to-add effects like music to videos and uploading them. AI-based content personalization also added momentum.
Meta’s adventure in the metaverse to cause creative destruction
There is no denying that TikTok’s platform for easy editing and sharing has been growing as a creative destruction force to Facebook. Although Facebook did not pay adequate attention to uplifting its social media platform in fending off competitors’ innovations, its parent company Meta has been after another wave of creative destruction.
Meta would like to take users in virtual and augmented reality environments to give a far better alternative to our existing means of meeting, greeting, communicating, and socializing. It’s called metaverse. In 1992, Neal Stephenson coined the term metaverse in his science fiction novel Snow Crash. In this fictional scenario, as programmable avatars, humans interact with each other and software agents in a three-dimensional virtual space that uses the real-world metaphor. Facebook and others have extended it further with the option of augmenting reality in the virtual space.
But unlike in the past, Facebook has faced the hardware technology barrier to turn this idea into real-life applications. Multiple technologies are needed to realize the envisioned scenario, starting from the head-mounted display to hepatic interfaces. And all those pieces and digital assets from various providers need to feed together seamlessly. Hence, there is a need for standardization. Besides, critical technologies are far from mature and face significant uncertainty.
For example, sensory conflict, eye movement, and postural instability contribute to motion sickness experienced during head-mounted display-based virtual reality (HMD VR). Hence, all those technologies are helpful for limited purposes and applications for short-term usage. But to have meetings and socialization for an extended period, they have a long way to go. But unlike in the past, Meta primarily relies on its R&D, costing billions, to overcome the technology barrier.
Meta faces metaverse reality due to hardcore technology barriers and uncertainties
On the one hand, TikTok has been eroding Facebook’s advertisement revenue. On the other hand, Meta’s investment in Reality Labs’ R&D has been growing, leading to increasing losses. Since 2019, Meta has pumped over $36 billion (as of Sept 2022) into Reality Labs to deal with the technology barrier. As high as 21% of Meta’s employees, 17,000 in 2022, work for the venture of the metaverse. Despite some progress, there is no clear indication that Meta’s metaverse to reach the inflection point to cause destruction to existing means of virtual meeting and greeting, whether offered by Facebook, TikTok, or Zoom. Hence, Meta faces the metaverse reality of causing creative destruction to whom.
In retrospect, incumbent monopolies like Facebook are supposed to face the reality of Kodak moment. But due to the growing realization of the power of reinvention as a creative destruction force, incumbents are cautious to avoid disruptive innovation effects. Hence, instead of waiting for the burn, they are after buying, burying, and self-recreating. Despite some successes, Facebook failed to detect the uprising of TikTok and buried it during its infancy. On the other hand, its recreation journey as a metaverse is caught in the hard reality of technological advancement and uncertainty. But Apple, Sony, and a few others succeeded in recreation by overcoming the technology barrier. Like them, will Meta succeed? If not, will Meta face metaverse reality as a self-creative destruction force?