What trouble is Mark Zuckerberg in?

The evening show has begun at the Soapstone Comedy Club. Actually, it’s always night there. The club is a space in Horizon Worlds, the Meta metaverse’s flagship app where users can watch and perform comedy in virtual reality. “It’s hard to stand in the middle of a stage to make jokes when you don’t have legs,” jokes one artist, pointing to his floating avatar, before putting down the virtual microphone and floating off stage. A night out in VR doesn’t have the same vibe as a real bar, though it does make for real dizziness and nausea.

It’s been almost a year since Mark Zuckerberg ad that his company would change its name and move from Facebook to Meta to reflect his commitment to the metaverse and, no doubt, to escape a toxic public image. Many weren’t sure what that word meant, but given that the company’s value had hit an all-time high of $1.1 trillion and its core business of social media advertising was seething thanks to a boom fueled by Due to the pandemic, investors were willing to allow the experiment.


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The vanguard

Goal, one year after the announcement

A year later, things have taken on another aspect. The metaverse, on which so much has been bet, remains unproven and unpopular. October 16th, The Wall Street Journal reported that according to internal Meta documents, the number of users had decreased since the spring. At the same time, there are signs that users and advertisers alike are abandoning the social networks that pay Meta’s bills. Since the rebranding, the company’s share price has fallen by 60%, destroying more than half a trillion dollars of market value (see chart 1). Earnings forecasts for 2023 have fallen by 50%, according to data from Bloomberg. Meta’s next results, due Oct. 26, represent an “existential quarter,” says Mark Shmulik of brokerage Bernstein.

What has failed? Meta’s share sale began in February, after the company reported the first drop in daily users for Facebook, its first and largest social network. After 18 years of uninterrupted growth, it lost 1 million of them between January and March (see figure 2). Since then it has recovered and added 39 million new users, and the users of the Meta “family of applications” have not stopped growing, which includes Instagram and WhatsApp.

mark zuckerberg

mark zuckerberg

Andrew CABALLERO-REYNOLDS / AFP

However, new users are increasingly coming from poor countries and are therefore less valuable to advertisers. Last year, Frances Haugen, a former Meta executive turned whistleblower, revealed that, in Facebook’s five most valuable markets, the registration of accounts for those under 18 years of age had fallen by a quarter in a year. Meta has been quick to launch a new short-form video product, Reels, to stem the bleeding into TikTok and other new rivals.

If users falter, so do advertisers. In the second quarter, Meta’s revenues fell in year-on-year terms for the first time in its history (see chart 3). Inflation, interest rates and the war have played a role. However, the advertising business has definitely changed with Apple’s new rules. Such rules make it more difficult for apps to track users’ online activity, which in turn makes it more difficult to serve them relevant ads and test whether they work. Meta has said Apple’s changes will cost it $10 billion in lost revenue this year. Companies are moving their ads to what advertisers call the end of the funnel: the points where the consumer is close to making a purchase (one of the big beneficiaries has been Amazon, which offers customers ads based on recent searches).

Market capitalization

Market capitalization

The Economist

Meta is better equipped than many of her rivals to overcome those obstacles. According to the company, Reels already accounts for more than 20% of the time spent on Instagram and earns more money than Stories (Instagram’s blockbuster feature) at the same stage of its introduction. Heavy investment in artificial intelligence is helping Meta develop “probabilistic” advertising models that replace the lost signal with Apple’s changes. Advantage+, a recent advertising product from Meta, uses artificial intelligence to help advertisers develop and place ads.

A more complicated ad business is helping to broaden Meta’s competitive edge, Shmulik says: The real victims are smaller rivals like Snap, whose share price has fallen nearly 90% in the past 12 months. Still, Meta’s ad franchise is likely permanently damaged. In addition, the company is struggling to rebuild its advertising business without its former architect, Sheryl Sandberg, who left the company last month.

Active Daily Users

Active Daily Users

The Economist

All of this should be enough to make investors nervous. The fact that Meta is simultaneously making a colossal bet on the metaverse threatens to push her confidence to a breaking point. Reality Labs, the company’s metaverse division, has so far racked up losses of $27 billion. Meta has sold more than 17 million Quest 2 VR headsets, mostly at or below cost, data company IDC estimates. It’s also been a big recruiter, announcing 10,000 new metaverse-related jobs in Europe last year. The pace of hardware development continues: On October 11, the company unveiled a more advanced Quest Pro headset, and Zuckerberg showed off a hardware prototype that includes a neural-interfaced wristband. Quest 3 and Quest Pro 2 are already underway.

It’s unclear when, or if, the metaverse will take off. Until now, the main use of Quest is to play. Fitness is a growing niche, although Meta’s attempt to buy Within (a VR fitness app maker) has been blocked by antitrust regulators. Quest Pro is aimed at businesses; On the occasion of its launch, Meta announced this month a partnership with Microsoft, which will provide virtual reality versions of applications such as Teams and Office. A Quest for Business subscription will be available next year.


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However, the social uses of VR, which Zuckerberg is most excited about and where Meta should have the most advantage, remain unpopular. In February, Meta reported that only 300,000 people had used Horizon Worlds; the company has not said anything since. According to a leaked internal memo, even company employees needed to be convinced to use it (“If we don’t like it, how can we expect our users to like it?”).

Zuckerberg is far from the only one who sees potential in virtual reality. Apple is expected to release its first headset in the first half of next year, and Sony is expected to launch its latest headset designed for gaming on the PlayStation console. If virtual reality goggles become the new personal computers, as Zuckerberg has predicted, Meta will have a sizable first-mover advantage. Quest 2 sales accounted for 88% of global VR headset sales in the first half of this year, according to IDC. Quest Pro are the most advanced virtual reality goggles out there. Meta’s hiring frenzy means it has a good chunk of the best talent in VR, says IDC’s Jitesh Ubrani. If Meta manages to control and monetize a successful virtual reality platform, as Apple and Google control their operating systems for smartphones, the company will be in possession of a gold mine (Meta already takes up to 47.5% of purchases from Horizon Worlds).

The unusual structure of Meta

The question is the moment. Meta’s unusual structure gives Zuckerberg complete control. The company’s board of directors proved ineffective in dealing with Facebook’s privacy and misinformation scandals. Now, instead of calling for caution, he has allowed a less-than-perfect CEO to gamble billions on the metaverse. In May, Zuckerberg admitted as much when he told the news website Protocol: “If people invest in our company, we want it to be profitable for them… But I also feel a responsibility to join as well… [Meta] It’s a controlled company, so I can make more of these kinds of decisions than most companies would.”

However, the more Meta’s core business falters, the less willing investors will be to give Zuckerberg’s metaversal plans the benefit of the doubt. A company can only spend so much on a new idea if investors are willing to fund it. They might be willing to do so if “the profitability of their core business is on a solid footing,” says Shmulik. Therein lies the difficulty of Meta. “The core doesn’t have a solid foundation right now.”

Income

Revenue Variation

The Economist

To calm investors’ nerves, Meta is holding back a little on expenses. He expects his total spending this year to be about $7.5 billion lower than forecast at the end of last year. He has scrapped some projects, such as a smart watch that was in development, and increased the price of the Quest 2 by $100. He also plans to reduce his workforce.

Meta executives compare the current struggles with those of ten years ago, when the company managed the transition from its social network to mobile. Moving a billion Facebook users from desktop to phone was no easy feat, and what made things even more complicated was that Zuckerberg was slow to realize the importance of mobile. That experience may have influenced his approach in relation to the metaverse. Meta’s new virtual reality technology, he said on Oct. 11, was for those “who would rather arrive early than arrive late and gracefully.” The risk, as investors grow impatient, is that Meta has made the move too soon this time.

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What trouble is Mark Zuckerberg in?