The Metaverse Reality Check

It has been twelve months since Facebook changed its name to Meta and its focus to the metaverse. At the time I wrote a Eureka Report piece about the shift. I clearly stated that this was a company trying to wedge a technology into its own needs for growth, and that this could lead to a dramatic decline in the stock. Since then, the Meta share price has declined more than 70 per cent.

Now, it’s time for a corporate check in on Meta, which, in financial terms, can no longer be regarded as part of the big tech cohort.

Metaverse Goes Mainstream

To be fair, the shift has garnered an extraordinary focus on the metaverse and did take the term mainstream. When a top 10 company like Facebook changes its name, it is going to generate attention. When one of the fastest growing companies in recorded history changes direction, it is imperative we pay attention and analyse the move. A Google search of the term now has 141 million results, a more than a 100-fold increase on a year ago. No one builds a (once) trillion-dollar enterprise by being a fool.

Accordingly, the metaverse has become a term that most people are aware of, but what it actually means is very different to different people. Those involved in media, business and the technology sector are giving the concept lots of attention. Write a post about it in LinkedIn and you’ll immediately be spammed in your direct messages from a number of Virtual Reality / Metaverse specialists who seem desperate to find a business to embrace their technology.

Personally, I’ve done a huge amount of radio and TV interviews demystifying it. I am also asked to cover the concept every time I do a keynote speech, not because there is any particular need for the industry or business I am talking to have a strategy around it, but because they don’t understand it. They want to know what the fuss is all about, and ensure they’re not falling behind like many corporations did in other epochs of digital disruption. But once I’ve taken them through the technology, and the current day use cases (more below), the overriding sentiment is typically, let’s wait and see, or often, disappointment. It seems Meta investors feel the same way. 

The Market Hates Meta

So far, the share market hates it. Meta has lost investors more than $700 billion since its peak. That’s not a typo. After its quarterly profit announcement last week, the stock endured a 25 per cent price decline. As a quarter-on-quarter comparison revenue was down 4 per cent while profit was down a whopping 52 per cent as Zuckerberg chases the metaverse dream. And it isn’t just the capital investment being made in the metaverse which is thwarting profits - their actual revenue per advertisement impression also declined by 18 per cent.

Reality Labs, the firm’s metaverse division, made a $3.7 billion loss over the past three months, while the company said it anticipated these losses would “grow significantly year over year” in 2023. The investment it is still looking to make on the Metaverse play is around $15-20 billion per annum. This would be tolerable, and even laudable as a strategic play if there were indications from consumers it had legs (pun intended), but all indications from consumers are that they hate it as much as investors do.

Currently the household penetration of VR goggles is meagre, at best. Only 0.03 per cent of Facebook users (currently 3.7 billion across their family of apps) have the hardware required to be able to log into their metaverse. Transitioning a firm and an entire eco-system which has very low barriers to entry to a high barrier service is clearly part of the problem. It is very difficult to imagine 3.7 billion people going from ‘free access’ to having to invest $600 to $1500-plus into a single purpose device (MetaQuest VR goggles) to log into Facebook Horizons. While it can be argued that accessing Meta already requires a computer or smart phone, these devices are utility platforms with an almost unlimited number of use cases. The metaverse, as far as I can tell only has three.

Metaverse Use Case Reality

While Meta wants to own what it thinks will be the future of social interaction, the metaverse is not where this will occur. To be sure, it will become an incredibly interesting and large business, just not very social in nature. The use cases are actually quite clear and already filled with highly capable incumbents.

Gaming & Entertainment: Video gaming is no small industry with an expected revenue of over $200 billion in 2022. It’s already larger than Hollywood and filled with significant competitors including Sony, Microsoft, Nintendo, Tencent, Electronic Arts and Epic Games, all of which used virtual and mixed reality and have large and loyal gaming populations. While many of these games have a multiplayer component, they aren’t social by nature. This sector will continue to morph into the metaverse. We can expect movies making to enter this space, especially as video streaming eats into distribution networks. 

Training: While pilots have long used simulated reality for flying training, VR is now starting to be used for surgeons and other professions which require physical dexterity and risk reduction during the training process. Eventually trade schools will use metaverse-style applications.

CAD 2.0: I was recently at Rio Tinto and took a virtual tour of a mine which was to be constructed. It felt incredibly real, so much so that I continued to duck my head while walking around. We can expect the metaverse to be used as a pre-production tool before anything of significant size is built. Think factories, warehouses, hotels and even our homes. Again, this space is well occupied by incumbents like AutoDesk and not particularly social in nature.

The Emperor Has No Clothes

The metaverse has clear applications - it’s just that socialising doesn’t appear to be one of them, at least not yet. Meta has a problem because it doesn’t own or control any of the hardware users access services on. The Meta Portal device has already been discontinued and I don’t know anyone with a pair of their RayBan spy glasses. (Meta won’t disclose sales). And now that Apple, Google and governments are shutting down the data Facebook can extract from them, Meta is trying to solve this issue by getting users into a piece of hardware it owns – the Meta Quest 2 goggles. The issue is that Meta is solving an internal problem rather than facing up to the fact that consumers don’t want that product.

After a massive investment of more than $70 billion to date in developing metaverse hardware and applications, they currently have 200,000 users. That’s a little over 2 customers per employee.

Zuckerberg has no clothes on. As investors, we should be thinking less about the technology and more about how Zuckerberg got to now. Every single move he has made has worked since 2004 – expansions, pivots, acquisitions, and “me too” features as he copied Snapchat after they rejected his acquisition offer.

He’s dodged a number of bullets his platforms were used for including election interference, insurrection uprisings, facilitating things like teenage depression and even ethnic cleansing in Myanmar.

But he has total control of the firm, can never be sacked, and doesn’t seem to listen to the market. If we ought be careful of anything when it comes to investing, it’s when the captain of the ship thinks they can’t turn in a wrong direction and they don’t have any co-pilots they’ll listen to.